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

DCCJ201/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 201 OF 2011

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DECISION

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1.  This is an application of the plaintiff for leave to appeal against my Judgment dated 13 December 2011 whereby I determined the defendants’ Order 14A application in favour of the defendants and dismissed the plaintiff’s claim with costs. In this Decision, I shall adopt those abbreviations used in the Judgment.

2.  Prior to this hearing, the defendants without leave filed and served an Affirmation of Wong Pui Huin Rosemary dated 26 January 2012 to oppose the present application. Exhibited to the said affirmation are a copy of the legal charge in favour of Kwong On Bank Limited and a copy of its release by its successor DBS Bank (Hong Kong) Limited. Mr Cheung for the defendants explained that those documents were necessary to deal with a contention in the plaintiff’s skeleton submissions. After Ms Wu, counsel for the plaintiff, appearing for the first time, clarified the relevant contention, Mr Cheung indicated that the defendants would not apply for leave to adduce the new evidence and would not rely on the same.  

3.  The governing principles for this application are not in dispute. The plaintiff has to satisfy this court that its appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard: section 63A(2) of the District Court Ordinance, Cap. 336. A reasonable prospect means a prospect which is more than “fanciful” without having to be “probable”: SMSE v KL [2009] 4 HKLRD 125 at §17 per Le Pichon JA.

4.  Both Ms Wu and Mr Cheung made detailed and helpful submissions on the draft grounds of appeal filed by the plaintiff. The plaintiff also filed a 14-page document entitled “Statement setting out reasons for leave to appeal to Court of Appeal”. A number of authorities were referred to. I remind myself that this is not the appeal proper and without disrespect to counsel’s industry, I intend to be brief in this Decision.

5.  The undisputed background facts were sufficiently set out in §§7-32 of the Judgment and I do not intend to repeat them here. In the Judgment, I dealt with the following two questions: (a) whether the Requisition was meritorious and if so (b) whether it was satisfactorily and adequately answered by the defendants’ solicitors. In resolving these questions, I bore in mind the relevant legal principles set out in §§33-38 of the Judgment.

6.  My conclusion is that the Requisition was not meritorious and in any event the defendants have satisfactorily and adequately answered the requisition.

7.  It is common ground that there was no documentary or direct evidence that the equitable charge was discharged before the scheduled date of completion and that the defendants had to show and give good title to the Property to the plaintiff.   

8.  An equitable charge is an encumbrance: Active Keen Industries Limited v Fok Chi Keong [1994] 1 HKLR 396 at §54 per Litton JA (as he then was).

9.  Mr Cheung submitted that on a fair evaluation of the particular facts of this case, the plaintiff should conclude that it would not be at risk of a successful assertion against it of the equitable charge by the chargee, namely, Wayfoong. I came to the same conclusion in the Judgment by adopting Mr Cheung’s analysis, which I found to have provided a full answer to the plaintiff’s contention.

10.  First, Mr Cheung relied on the transaction history relating to the Property. The equitable charge, being for all moneys, was created by the Deed dated 25^th April 1991, which was registered on 24^th June 1991. Subsequently, Mr Leung, the chargor, was able to charge the Property for all moneys in favour of Kwong On Bank Limited by way of a legal charge dated 19 August 1997 (“the Kwong On Charge”). The Release of the Kwong On Charge dated 18 March 2010 was registered on 18 August 2010.

11.  Mr Leung sold the Property to the 1^st defendant by an agreement for sale and purchase dated 11^th February 2010. The 1^st defendant took out a mortgage with the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”) for all moneys (“the ICBC Mortgage”) in respect of the Property. The ICBC Mortgage was dated 18 March 2010.

12.  On these facts, Mr Cheung submitted that it would be contrary to commercial sense that the two commercial banks were willing to grant charges/mortgages for all monies in respect of the Property to Mr Leung and the 1^st defendant separately if their respective charge/mortgage was to rank behind the equitable charge, which covered all moneys. He submitted that the Kwong On Charge and the ICBC Mortgage would be meaningless if they were to subject to the equitable charge. Thus, Mr Cheung submitted that the inescapable conclusion must be that the equitable charge had been duly discharged.

13.  Mr Cheung referred this court to Active Keen Industries v Fok Chi Keong, unreported, HCMP 3761/1992, 31.12.1992, Mexon Holdings Ltd v Silver Bay International Ltd. (2000) 3 HKCFAR 109 and Jumbo Gold Investment Ltd v. Yuen Cheong Leung & Anor. [1999] 3 HKLRD 825. On these authorities, Mr Cheung submitted that conveyancing lawyers should not magnify non-existent difficulties and should look at the situation from the standpoint of a willing vendor and purchaser both possessed of reasonably robust common sense. He further highlighted that this court should be best guided by the commercial reality as to whether there is any real risk of problems in title.

14.  Ms Wu submitted that the Kwong On Charge and the ICBC Mortgage could not be cogent evidence of the discharge of the equitable charge. She submitted that there could be plausible explanations as to why these two banks agreed to enter into such transactions despite the subsistence of the equitable charge.

15.  For the Kwong On Charge, Ms Wu submitted that there might be other collateral securities including a personal guarantee of Mr Leung to secure the indebtedness of Forever Metalware Factory, which was secured by the equitable charge.

16.  For the ICBC Mortgage, Ms Wu submitted that ICBC might have satisfied itself after due diligence that the value of the Property was sufficient to cover both the liabilities of Forever Metalware Factory under the Deed and the 1^st defendant under the ICBC Mortgage or ICBC might simply be prepared to take the risk out of commercial consideration.

17.  I am not convinced that these were real possibilities in the commercial world. I accept that the Kwong On Charge and the ICBC Mortgage would have little commercial value if they were to subject to the equitable charge covering unlimited liabilities. I believe it is highly unlikely that any of the two commercial banks would have entered into such transactions if the equitable charge had not yet been released/discharged.

18.  In the premises, I am not persuaded that I erred in my conclusion in paragraph 13 of the Judgment: The reasonable conclusion is that the equitable charge was discharged before the legal charge in favour of Kwong On Bank Limited and the mortgage in favour of ICBC. I am still of the view that there is compelling circumstantial evidence pointing to the de facto release of the equitable charge even in the absence of a release properly executed by Wayfoong. In passing, I would add that Ms Wu submitted that the equitable charge should be discharged at least by a simple receipt: Emmet and Farrand on Title Vol.2 at §25.222 at p.25/124.

19.  I further reached the conclusion that even if the equitable charge was not yet discharged, it was beyond reasonable doubt that Wayfoong was unable to enforce the equitable charge and hence successfully assert against the plaintiff of the equitable charge by reason of the time bar.

20.  In the Judgment, I relied on section 19(1) of the Limitation Ordinance, Cap. 347 (“LO”) as urged upon to me by Mr Cheung. I accepted that any enforcement action arising from the equitable charge should be commenced within 12 years after the date of its creation and so it was time-barred after 25^th April 2003.  

21.  The limitation point was first raised albeit not very precisely in the last letter of the defendants’ solicitors dated 17 November 2010. The plaintiff did not deal with this issue. It was raised again by Mr Cheung in his Supplemental Skeleton Submission only made available to this court shortly before the first hearing. Mr Wang, former counsel for the plaintiff, understandably complained about the lateness of the document but when I asked him if he needed any time to deal with the document, he replied that he felt comfortable to proceed and needed no adjournment.

22.  Unfortunately there was no debate about the applicable limitation period. It was merely submitted on behalf of the plaintiff that in answering the Requisition, the defendants’ solicitors failed to explain to the plaintiff how the limitation period would apply. I do not agree that the defendants’ solicitors were obliged to do so.

23.  As Ms Wu rightly pointed out, since the equitable charge was created by the Deed prior to 1^st July 1991, section 38A of the LO applies and the applicable limitation period should be 20 years. It follows that the equitable charge, if still subsisting, could not be enforced only until after 24^th April 2011 and was not time-barred before the scheduled completion date. Mr Cheung accepted that Ms Wu was correct on this point.

24.  Lastly, it was submitted on behalf of the plaintiff that in reaching the “reasonable conclusion”, this court might have incorrectly prayed in aid as fortification the evidence of Wayfoong agreeing to release the Deed and hence the equitable charge. The agreement only came subsequent to the scheduled date of completion. In this regard, I was referred to §32 of the Judgment.

25.  In the said paragraph, I set out the fact highlighted to me by Mr Wang during his oral submission. The said Wayfoong agreement was not expressly referred to in any document before this court except the Amended Statement of Claim, which the plaintiff was refused leave to file. I found it necessary to refer to this fact in the Judgment since the contention of the plaintiff was that the vendor had in fact a good title but failed to show a good title: §39 of the Judgment.

26.  This court was well aware of the fact that the said Wayfoong agreement only came after the completion date:§§32, 39 and 47 of the Judgment and nothing in the Judgment shows that I was ever mistaken about this.

27.  In my assessment of the merit of the Requisition, no mention was made about the said Wayfoong agreement at all. This court relied on the analysis of Mr Cheung, which did not ever refer to the said Wayfoong agreement.

28.  Ms Wu explained that the basis of this contention was that but for the limitation point and the said Wayfoong agreement, this court would not have come to the conclusion in the Judgment. I cannot agree and I see no merit in this contention.

29.  It is clear in the Judgment that I relied heavily on the limitation point in reaching the conclusion that the Requisition was unmeritorious having regard to the MEPC test. In the absence of the time bar, the crucial question is whether there was a reasonable chance that the equitable charge was still valid and subsisting despite the Kwong On Charge and the ICBC Mortgage before the date of completion. 

30.  Though in my view the reasonable conclusion remains to be that the equitable charge should have been discharged/released before the Kwong On Charge and the ICBC Mortgage given the compelling circumstantial evidence, I cannot say that a different conclusion must be regarded as perverse bearing in mind the high standard of proof. I cannot say that the plaintiff’s appeal has no reasonable prospect of success. I accordingly accept the plaintiff’s application and grant leave to appeal.

31.  I also order that costs of and incidental to this application be in the cause of the appeal with certificate for counsel.