CREDIT ONE FINANCE LTD v. LOK PAK FUNG

HCA 1486/2022 and
HCMP 831/2024

(Heard Together)

[2025] HKCFI 270

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1486 OF 2022

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AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 831 OF 2024

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J U D G M E N T

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A.  INTRODUCTION

1.  This is an appeal by Zhong Chaoxia (“Wife”) against the decision of Master Patrick Siu dated 3 April 2024, dismissing the Wife’s application by summons dated 20 November 2023 to join into HCA 1486/2022 (the “Mortgage Action”) to set aside the Writ of Possession (as defined below). The procedural history of this case is, in summary, as follows:

(1)  From November 2022 to November 2023, the Plaintiff in the Mortgage Action (“Credit One”) commenced the Mortgage Action against the Defendant (“Husband”); duly obtained judgment in default (“Default Judgment”) against the Husband dated 21 April 2023, which includes an order for possession of the property known as Flat B6, 9/F, Tower 3, St Martin (雲滙), Phase 1 of St Martin Development, 12 Fo Chun Road, Pak Shek Kok, Tai Po, Hong Kong (“Property”); proceeded with enforcement by Writ of Possession & Fieri Facias Combined dated 21 August 2023 (“Writ of Possession”); and obtained possession of the Property through court bailiffs.

(2)  In November 2023, the Wife took out the summons to join into the Mortgage Action to set aside the Writ of Possession (“Joinder Application”). The Wife sought to be joined into the Mortgage Action for the purposes of setting aside the Writ of Possession, premised upon the assertion that the Husband held the Property (or part of it) on trust for the benefit of the Wife (“Wife’s Alleged Beneficial Ownership”). In the same summons, the Wife also applied to stay the enforcement of the Writ of Possession.

(3)  Also in November 2023, the Wife caused the notice entitled “擬繼續進行附屬濟助申請通知書經核證真實副本” dated 28 November 2023 (“Notice”) to be registered against the Property in the Land Registry. In the Notice, the Wife purportedly sought orders against the Husband for, inter alia, transfer and/or settlement of the Property.

(4)  As the bailiff had already delivered possession of the Property to Credit One’s solicitors, it is not in dispute that the stay application was overtaken by events. What remained for determination was the Joinder Application.

(5)  On 3 April 2024, Master Patrick Siu dismissed the Joinder Application, on the basis that Credit One has a superior right to possession of the Property over the Wife as a matter of law.

(6)  However, up to present date, the Wife has caused the Notice to remain registered against the Property in the Land Registry, impeding Credit One’s attempts to exercise its right to sell the Property. In May 2024, Credit One applied by the Originating Summons in HCMP 831/2024 (“OS”) for vacation of registration of the Notice.

(7)  In June 2024, the Wife appealed against the Master’s decision out of time.[1]

2.  To put it simply, Credit One’s position is that the substantive Appeal should be dismissed as a matter of law:

(1)  As a matter of undisputed fact, Credit One through subrogation exercises the rights of an acquisition mortgage (ie a mortgage used to initially acquire the Property) up to the sum of HK$3.5 million odd (Section B below).

(2)  Even if it is assumed for present purposes that the Wife’s Alleged Beneficial Ownership exists, it is well-established as a matter of law (and undisputed) that the rights of an acquisition mortgage take priority over a beneficial owner (Section C below).

(3)  Therefore, the Wife simply cannot demonstrate any arguable claim to possession superior to Credit One’s right to possession – at most the Wife may have a claim to proceeds of sale beyond HK$3.5 million odd. The appropriate order to make is to refuse any application to joinder and leave it to the alleged beneficial owner to commence a separate monetary claim (Section D below).

B.  CREDIT ONE THROUGH SUBROGATION EXERCISES RIGHTS OF ACQUISITION MORTGAGE

3.  The following undisputed factual background is taken from the Skeleton Submissions of Credit One:

(1)  On 27 April 2020, the Property was acquired by the Husband from the property developer, and the Property was assigned to the Husband in his sole name.

(2)  The Husband’s acquisition of the Property was funded by a mortgage loan obtained from Standard Chartered Bank (Hong Kong) Ltd (“SCB”), secured by: (a) an all-moneys Equitable Mortgage dated 14 June 2019 over the Husband’s interest under a pre-sale pending completion of the property development; and (b) an all-moneys Mortgage dated 27 April 2020 over the Property upon assignment to the Husband (collectively the “SCB Mortgage”).

(3)  Subsequently, on 26 October 2021, the Husband obtained another mortgage loan from Konew Capital International Limited (“Konew” and “Konew Mortgage”).

(4)  On 23 February 2022, the Husband further obtained a HK$6 million loan from Credit One (“Credit One Loan”), secured by a mortgage over the Property (“Credit One Mortgage”).

(5)  The Credit One Loan was used to settle the redemption monies for the SCB Mortgage (under which there was an outstanding debt of HK$3,597,820.68 at the time) and the Konew Mortgage. As a matter of fact, Credit One made payments to SCB and Konew directly, discharging both mortgages.

4.  The aforesaid undisputed facts give rise to the most classic and well-established scenario for application of the doctrine of subrogation. As held in Kingsway Finance Ltd v Wang Qingyi [2015] 1 HKLRD 260 at §17, per Cheung CJHC (as he then was):[2]

“What is the basis of the doctrine of subrogation? It is simply that, where A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor…It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and, for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged, in whole or in part, by the money so provided by him, but of course only to the extent to which his money has, in fact, discharged their claims.” (Emphasis Supplied)

5.  Simply put, Credit One, having advanced loan monies to the Husband which were used to pay off SCB and discharge the SCB Mortgage, is entitled to be subrogated to the rights of the SCB Mortgage, at least up to the amount of HK$3.5 million odd.

6.  In particular, this Appeal does not involve any contractual right to subrogation. Rather, it is concerned with the equitable remedy of subrogation, which is based on the doctrine of unjust enrichment, rather than parties’ agreement or common intention.

7.  Applying these principles to the indisputable facts, the requirements of unjust enrichment for the purposes of equitable subrogation are clearly satisfied (see Kingsway Finance, Ibid at 268, §20[3]):

(1)  The Wife was enriched. It is indisputable that the Wife (assuming the Wife’s Alleged Beneficial Ownership is true for present purposes) was relieved of the financial burden of the SCB Mortgage.

(2)  The enrichment was at the expense of Credit One. It is indisputable that Credit One paid to discharge the SCB Mortgage.

(3)  The enrichment was unjust. In the specific context of equitable subrogation, “the factor that renders the enrichment unjust is the non-fulfilment of the lender’s expectation as to the security, forming the basis of its decision to advance funds”. In considering whether the lender got what it bargained for, the bargain is to be interpreted in the “wider sense of the envisaged transaction”: see Kingsway Finance, Ibid at 268, §19.[4] As unequivocally reflected in the contemporaneous documentation, what Credit One bargained for is a mortgage over an unencumbered property.

8.  Insofar that the Wife argues that what Credit One bargained for is a matter of factual dispute, such argument is premised on purely speculative submissions/assertions which ignore what is consistently and repeatedly set out in the contemporaneous documentary evidence. In particular, the mortgage document itself and other contemporaneous documents:

Source	Quote / Description
Credit One Mortgage dated 23 February 2022
Recital (A)	“The Borrower is the registered and beneficial owner and is otherwise in possession of the Property …”
Clause 3.01(a)	“the Borrower as Beneficial Owner HEREBY CHARGES the Property to the Lender SUBJECT as is more particularly specified in the First Schedule …”
First Schedule	“Exceptions and reservations, etc. : Subject to the exceptions and reservations as respectively set out in the Government Grant hereinafter defined and the Assignment.”
Clause 7.01(b)	“the Borrower has good right and title to charge the Property in manner aforesaid free from all incumbrances save as may be specified herein”
Other documentary evidence
WhatsApp messages between the Husband and Credit One dated 22 January 2022	“清掉銀行一按嗎？ 係”
Authorization Letter dated 23 February 2022	The Husband confirmed that the Credit One Loan was used to settle the redemption monies for the SCB Mortgage and the Konew Mortgage.
Receipt on Discharge of a Charge dated 23 February 2022	“The Lender, [SCB] acknowledges receipt of all moneys secured by the annexed Mortgage … and the Equitable Mortgage …”
Receipt on Discharge of a Charge dated 23 February 2022	“[Konew] (“the Lender”) hereby acknowledges receipt of all moneys secured by the annexed [Konew Mortgage] …”
Land search record	Discharge of the Equitable Mortgage in favour of SCB dated 14 June 2019 and the Mortgage in favour of SCB dated 27 April 2020.

9.  As submitted by Credit One, the strongest possible evidence as to the terms of the bargain must be the transaction document itself, ie the Credit One Mortgage, which excludes any encumbrances. The rest of the documentary evidence also confirms that part and parcel of the wider transaction is to discharge the SCB Mortgage (and the Konew Mortgage). The transaction which Credit One entered into was undisputedly a bargain with the beneficial owner of the Property for a mortgage over the Property free of any and all encumbrances.

10.  To analyse the question using slightly different terminology and from a slightly different angle, Lord Hoffman in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 at 234DE said this: “This does not of course mean that questions of intention may not be highly relevant to the question of whether or not enrichment has been unjust”. His Lordship immediately went on to give an example: “I would certainly not wish to question the proposition of Oliver J in Paul v Speirway Ltd [1976] Ch 220 that, as against a borrower, subrogation to security will not be available where the transaction was intended merely to create an unsecured loan”.

11.  This is not difficult to understand. If the transaction document points clearly to an intention merely to create an unsecured loan, then subrogation to security will not be available even if the loan advanced is used to repay a prior secured debt, as the enrichment is not unjust. The present case is the reverse situation. As analysed above, the transaction document shows unequivocally that Credit One had intended to be a secured creditor with a mortgage over the Property free from any and all encumbrances, it would therefore be wholly unjust that upon payment by Credit One to discharge the SCB Mortgage, Credit One somehow became a completely unsecured creditor.

12.  The Wife seeks to argue that there is no unfairness to Credit One because even if no equitable subrogation arises in favour of Credit One, yet by the fact of Credit One having repaid SCB to discharge the SCB Mortgage, Credit One has thereby gained an equitable interest in the property corresponding to the amount of payment made by Credit One. However, such interest is subsequent to the Wife’s beneficial interest in the Property.

13.  Such argument is not understood. As submitted by Credit One, if Credit One is not subrogated to the rights of SCB under the SCB Mortgage, Credit One can only fall back on Credit One’s own mortgage. If the Credit One Mortgage is subsequent to the Wife’s Alleged Beneficial Ownership of the Property, Credit One is effectively an unsecured creditor. In any event, there is no doctrinal basis to suggest that the equitable interest suggested by the Wife exists. It is no more than a bare allegation by the Wife, not supported by any authority.

14.  For completeness, the Wife’s reliance on the equitable maxims such as “clean hands” is rejected. What is said to be the unclean conduct is the alleged constructive notice on the part of Credit One. However:

(1)  As held in Orb a.r.l. v Ruhan [2016] EWHC 850 (Comm) (15 April 2016) at §100 per Popplewell J, in order to bar the relief, there must be misconduct which has “an immediate and necessary relation to the equity sued for”.

(2)  This principle was applied in the subrogation context in Day v Tiuta International Ltd [2014] EWCA Civ 1246 (30 September 2014) at §§65-68 per Gloster LJ.

(3)  In the present case, precisely because Credit One was subrogated to the rights of an acquisition mortgagee which ignores all beneficial interests (see Section C below), Credit One need not be concerned about beneficial interest. So far as its right to possession is concerned, there is no element of Credit One cutting in line that shocks the conscience of the court. Even if Credit One has actual/constructive notice of the Wife’s Alleged Beneficial Ownership, it does not matter, because such notice has no bearing on the equity sued for.

C.  RIGHTS OF ACQUISITION MORTGAGE TAKE PRIORITY OVER A BENEFICIAL OWNER

15.  As pointed out above, the SCB Mortgage was an “acquisition mortgage”, which funded the Husband’s acquisition and purchase of the Property.

16.  Significantly, as a matter of well-established legal principle not disputed by the Wife, an acquisition mortgagee always has priority over the legal as well as beneficial owners. As succinctly summarised by the learned authors of Goo & Lee on Land Law in Hong Kong (5^th ed., 2022) at §13-146:

“Even where the beneficial owner does not know that the mortgage has been taken to finance the purchase of the mortgaged property, if the purchase of the mortgaged property is wholly or partly funded by the mortgage, the mortgagee will still have priority. This is because when the property is acquired, the legal owner of the mortgaged property owns nothing more than an ‘equity of redemption’. The beneficial owners likewise cannot own more than an ‘equity of redemption’. There is no scintilla temporis between the completion of the purchase and the creation of the mortgage. This means that such a mortgagee will always have priority over the legal as well as the equitable owners. …” (Emphasis Added)

17.  The above principle is never disputed by the Wife, whether at the hearing below or before this court.

18.  In other words, even if it is assumed for present purposes that the Wife’s Alleged Beneficial Ownership exists, it cannot be disputed that:

(1)  The SCB Mortgage, being an acquisition mortgage, has priority over the Wife’s Alleged Beneficial Ownership (assuming it exists).

(2)  Credit One, through subrogation, enjoys the rights under the SCB Mortgage (at least up to HK$3.5 million odd).

(3)  As a mortgagee with priority (via subrogation to the SCB Mortgage), Credit One therefore has a superior right to possession of the Property over the Wife.

D.  JOINDER APPLICATION MUST BE DISMISSED AS WIFE CANNOT DEMONSTRATE ANY CLAIM TO POSSESSION SUPERIOR TO CREDIT ONE’S RIGHT TO POSSESSION

19.  To entitle a person not a party to an action to intervene and to be joined as a party, the rule requires that the would-be intervener should have some interest which is directly related or connected with the subject-matter of the action: see Hong Kong Civil Procedure 2025, Practice Note 15/6/8.

20.  In particular, in actions for possession of land like the present case, to justify an order for joinder (whether under RHC Order 15, rule 6 or rule 10), the intended defendant would usually be required to show that he has a bona fide independent claim to be in possession of the property: see Hong Kong Civil Procedure 2025, Practice Note 88/5/7.

21.  From the foregoing, I agree that this court should exercise its discretion on the Joinder Application as follows:

(1)  Based on the straightforward application of well-established legal principles of subrogation (Section B above) and priority of acquisition mortgages (Section C above) to the undisputed facts of the present case, Credit One indisputably has a right to possession over the Property superior to the Wife for up to HK$3.5 million odd (see paragraph 18 above).

(2)  Any right of the Wife to possession over the Property (even assuming the Wife’s Alleged Beneficial Ownership exists) is overridden by Credit One’s indisputable superior right to possession. The Wife therefore has no basis whatsoever to set aside the Writ of Possession.

(3)  As any attempt by the Wife to set aside the Writ of Possession would inevitably fail, there is no prejudice to her to dismiss the Joinder Application.

(4)  After refusal of joinder, the Wife’s Alleged Beneficial Ownership can still be asserted through the Wife commencing separate proceedings against Credit One claiming priority over sales proceeds of the Property (beyond the undisputed HK$3.5 million odd).

E.  SUMMARY DISPOSAL OF THE OS

22.  Both parties agree that the result under the OS should follow the result in HCA 1486/2022. The Wife accepts that if her appeal is dismissed, both the Notice and the Notice of Appeal dated 11 June 2024 should be vacated or removed from the Land Registry.

F.  COSTS

23.  Both parties agree that the costs of the appeal and of the OS should follow the event.

G.  DISPOSITION

24.  In HCA 1486/2022, I make the following order:

(1)  The appeal by Notice of Appeal filed herein on 11 June 2024 by the Intended 2^nd Defendant (“Notice of Appeal”) be dismissed;

(2)  The Notice of Appeal recorded under the “deeds pending registration” section of the land register of the property known as Flat B6 on 9^th Floor of Tower 3, St Martin, Phase 1 of St Martin Development, No. 12 Fo Chun Road, Tai Po, New Territories, Hong Kong (“Property”) (bearing Memorial No.24080101880036) be vacated, discharged, cancelled and/or removed from the “deeds pending registration” section of the land register of the Property;

(3)  The Intended 2^nd Defendant do, within 14 days from the date of service of this Order, procure that the Notice of Appeal and any and all references to or notations of the Notice of Appeal be vacated, discharged, cancelled or removed from the “deeds pending registration” section of the land register of the Property;

(4)  There be liberty to apply;

(5)  The costs of and occasioned by the Appeal (including all costs reserved, if any) be paid by the Intended 2^nd Defendant to the Plaintiff, such costs are to be taxed if not agreed; and

(6)  The Intended 2^nd Defendant’s own costs be taxed in accordance with the Legal Aid Regulations.

25.  In HCMP 831/2024, I make the following order:

(1)  The registration of the “擬繼續進行附屬濟助申請通知書經核證真實副本” dated 28 November 2023 in FCMC 13557 of 2023 registered in the Land Registry by Memorial No.23113001340017 (“Notice”) be vacated forthwith;

(2)  The Defendant do, within 14 days from the date of service of this Order, procure that the Notice and any and all references to or notations of the Notice be vacated, discharged, cancelled or removed from the Land Registry;

(3)  There be liberty to apply;

(4)  The costs of and occasioned by these proceedings (including all costs reserved, if any) be paid by the Defendant to the Plaintiff, such costs are to be taxed if not agreed; and

(5)  The Defendant’s own costs be taxed in accordance with the Legal Aid Regulations.

26.  Lastly, I express my gratitude to Counsel on both sides for their helpful assistance in this matter.