BANK OF CHINA (HONG KONG) LTD (SUCCESSOR CORPORATION TO THE KWANGTUNG PROVINCIAL BANK) v. YIP FUNG AND OTHERS

HCMP 1211/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1211 OF 2010

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D E C I S I O N

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I.  INTRODUCTION

1.  Hung Tat Warehouse, Transportation and Shipping Limited (“Hung Tat”) was a customer of the Kwangtung Provincial Bank (“KPB”). Pursuant to the Bank of China (Hong Kong) Limited (Merger) Ordinance Cap 1167, KPB was transferred to and vested in Po Sang Bank Limited (“PSB”) to the intent that PSB should succeed to KPB as if in all aspects PSB were the same person in law as KPB.  On 1 October 2001, PSB changed its name to the Bank of China (Hong Kong) Limited (“BOC”).  On 24 February 2010, Hung Tat was wound up by the court in HCCW 736/2009.

2.  The 1^st defendant Yip Fung (“Yip”) was the former registered owner of an industrial property known as Flat A, 11^th Floor, Fu Hop Factory Building, Nos 209-211 Wai Yip Street, Kowloon (“Kwun Tong Property”).  The Kwun Tong Property used to be the registered office of Hung Tat.  Yip was the former director and shareholder of Hung Fat.

3.  The 2^nd defendant Chung Mei Han Anne (“Chung”) was/is the registered owner of a domestic property known as Flat G, 39^th floor, Block 1 and Car Parking Space No P163, ground floor, La Cité Noble, No 1 Ngan O Road, Tsueng Kwan O, Sai Kung, New Territories (“Sai Kung Property”).  Chung purchased the relevant flat on 12 November 1999 for HK$2,444,000.00 and the relevant car park on 28 March 2002 for HK$258,400.00. Chung was the former director, company secretary and shareholder of Hung Tat.  By a Declaration of Trust dated 5 January 2004, Chung declared she held 10,200 shares of Hung Fat in her name on trust for Yip as beneficial owner.

4.  Earnest Enterprises Limited (“EEL”) was the purchaser from Yip and is the registered owner of the Kwun Tong Property.  On 9 November 2012, leave was granted for EEL to join the present action (“Mortgagee Action”) as the 3^rd defendant.  On 23 July 2013, EEL filed a summons to seek the following reliefs (“Subrogation Summons”):

(a) a declaration that EEL was entitled to the rights of BOC under the Mortgage referred to in paragraphs 7(b) and 9 below for the amount of HK$1,980,157.89 that EEL had paid to BOC or for such amount as deemed just by the court;

(b) an order that BOC do deliver all the title deeds of the Sai Kung Property to EEL until the sum in (a) above was paid in full by Chung to EEL or until further order of the court;

(c) costs of the Subrogation Summons be paid by Chung to EEL;

(d) liberty to apply.

5.  On 23 July 2013, EEL filed the 2^nd affirmation of their solicitor Lo Chi Hang Lonnie (“Mr Lo”) in support of the Subrogation Summons (“Lo 2^nd Aff”).  On 12 August 2013, Chung filed her affirmation in opposition (“Chung Aff”).  The Subrogation Summons came before me for hearing on 19 November 2013 (“Hearing”). Chung appeared in person and was not legally represented.

6.  For proper understanding of the Subrogation Summons, it is necessary for me to set out the background that led to EEL’s application.

II.  BACKGROUND

7.  In consideration of the following, KPB granted and/or made available general banking facilities (including overdraft, term loan and mortgage loan) in favour of the Borrower:

(a) a Charge dated 22 April 1998 (“Charge”) by Hung Tat as requesting party and Yip as mortgagor;

(b) a Mortgage dated 25 February 2008 (“Mortgage”) by Hung Tat as requesting party and Chung as mortgagor;

(c) five facility letters dated 10 July 1997, 5 February 2008, 6 February 2009, 18 May 2009 and 18 December 2009 executed by Hung Tat;

(d) three deeds of guarantee dated 21 February 2008, 13 February 2009 and 22 May 2009 executed by Yip.

8.  The Charge was an all-monies mortgage whereby Yip charged the Kwun Tong Property to KPB as security for banking facilities granted to Hung Tat which were repayable on demand together with interests on all sums advanced and all costs, charges and expenses.

9.  The Mortgage was an all-monies mortgage whereby Chung charged the Sai Kung Property to KPB as security for banking facilities granted to Hung Tat which were repayable on demand together with interests on all sums advanced and all costs, charges and expenses.

10.  On 20 May 2010, a sealed copy charging order absolute dated 10 May 2010 in favour of Standard Chartered Bank (Hong Kong) Limited (“SCB”) in DCCJ 751/2010 (“SCB Charging Order”) was registered against the Kwun Tong Property.

11.  On 19 August 2010, a sealed copy charging order absolute dated 16 August 2010 in favour of BOC Credit Card (International) Limited (“BOC Credit Card”) in DCCJ 1992/2010 (“BOC Charging Order”) was registered against the Kwun Tong Property.

12.  Hung Tat defaulted in repayment of outstanding banking facilities granted by KPB/BOC as and when the same fell due.  By letters of demand all dated 26 May 2010 to Yip and Chung respectively, BOC by their solicitors demanded them to pay all debts due and payable by Hung Tat to BOC.  But Yip and Chung failed and/or refused to settle such indebtedness.

13.  On 24 June 2010, BOC (as successor to KPB) commenced the Mortgagee Action against Yip and Chung for an order that Yip do deliver up vacant possession of the Kwun Tong Property and Chung do deliver up vacant possession of the Sai Kung Property, and a further order for payment of all monies and interest (including interest at the contractual rate(s)) due and owing by Hung Tat as borrower and Yip as mortgagor under the Charge, by Hung Tat as borrower and Chung as mortgagor under the Mortgage and by Yip under the Guarantees.

14.  On 6 July 2010, a provisional agreement for sale and purchase in respect of the Kwun Tong Property was made between Yip as vendor and EEL as purchaser (“KT PASP”) for the sale and purchase of the Kwun Tong Property at a price of HK$4,100,000.00, and completion was scheduled to take place on 6 October 2010 when Yip would assign the Kwun Tong Property to EEL with vacant possession and free from incumbrances.

15.  The KT PASP was signed by Chung on Yip’s behalf as his authorised agent pursuant to an authorisation letter dated 30 June 2010.  A deposit in the sum of HK$200,000.00 was paid by EEL to Yip’s solicitors at the time of the execution of the KT PASP.

16.  On 19 July 2012, Yip’s solicitors sent the draft formal agreement for sale and purchase (“FASP”) in respect of the Kwun Tong Property to EEL’s solicitors.

17.  On 20 July 2010, a further deposit in the sum of HK$210,000.00 was paid by EEL to Yip’s solicitors pursuant to the KT PASP.  On the same day, Yip’s solicitors sent fresh engrossment of the draft FASP to EEL’s solicitors.

18.  On 22 July 2010, EEL’s solicitors sent the signed FASP to Yip’s solicitors for Yip’s signature and return within seven days.

19.  On the same day, Yip’s solicitors informed EEL’s solicitors by letter that Yip had left Hong Kong due to some emergency and was unlikely to return to Hong Kong until 31 August 2010, hence Yip would not be able to sign the FASP within seven days.  But Yip’s solicitors confirmed that the PASP remained binding.

20.  On 16 August 2010, Yip’s solicitors sent the title deeds and documents in respect of the Kwun Tong Property (“KT Title Deeds”) to EEL’s solicitors for approval. On 20 August 2010, EEL’s solicitors raised requisitions over the KT Title Deeds, including a request for production of documentary evidence to prove that the SCB and BOC Charging Orders would be duly discharged/vacated before completion.  On 22 September 2010, EEL’s solicitors wrote to Yip’s solicitors to chase for a reply.

21.  According to the Chung Aff, she informed BOC in September 2010 that she would pay HK$1,200,000.00 in part payment of the indebtedness claimed by BOC under the Mortgagee Action. She claimed that BOC insisted on payment by cashier order, so she purchased a cashier order for such amount on 29 September 2009 from her own monies and gave the same to BOC.

22.  On 30 September 2010, Yip’s solicitors answered the requisitions raised, including a proposal that upon completion Yip shall split an appropriate part of the balance of the purchase price in favour of SCB and BOC Credit Card to enable discharge of the SCB and BOC Charging Orders against their undertakings to send to Yip’s solicitors sealed copy orders for discharge in due course, and Yip’s solicitors would in turn provide similar undertaking to EEL’s solicitors.

23.  On 30 September 2010, Yip’s solicitors wrote to EEL’s solicitors for extension of the completion date under the KT PASP to   December 2010. By their letter dated 6 October 2010, EEL’s solicitors indicated EEL’s willingness to so extend time, and raised a number of requisitions, including:

(a)   whether the balance of the purchase price would be sufficient to discharge the Charge, the SCB Charging Order and the BOC Charging Order;

(b)   what was the outstanding amount of principal and interest payable to BOC for discharge of the Charge;

(c)   a request that the Charge, the SCB Charging Order and the BOC Charging Order be discharged no later than the date of completion.

24.  Shortly before 6 December 2010, Yip again requested to extend the completion date for the sale and purchase of the Kwun Tong Property to 16 December 2010.[1]  On 15 December 2010, Yip further requested extension of the completion date to 17 January 2011 to which EEL agreed.  On 13 January 2011, Yip’s solicitors by letter to EEL’s solicitors confirmed further extension of the completion date to 17 February 2011.[2]  On 16 February 2011, Yip’s solicitors by letter to EEL’s solicitors confirmed further postponement of the completion date to 17 March 2011.[3]  On 14 March 2011, Yip’s solicitors by letter to EEL’s solicitors confirmed another postponement of the completion date to 18 April 2011.[4]  On 18 April 2011, EEL’s solicitors confirmed another postponement of the completion date to 18 May 2011 by letter to Yip’s solicitors.

25.  According to the affirmation of Lam Sun Sun filed by BOC on 1 April 2011 in support of the Mortgagee Action, the total amount of principal and interest outstanding and payable by Yip and Chung was HK$4,031,576.36:

	Principal (HK$)	Interest (HK$)	Amount (HK$)
Overdraft	486,064.19	56,729/69
Term Loan (1)	262,223.26	37,511.71
Term Loan (2)	205,336.86	25,371.75
Term Loan (3)	183,151.83	48,572.30
Term Loan under Special Loan Guarantee Scheme (4)	769,075.25	101,011.92
Term Loan under Special Loan Guarantee Scheme (5)	1,643,570.57	202,957.03
Late Payment charges			10,000.00
	3,549,421.96	472,154.40	10,000.00

Interest would be charged (subject to fluctuation) on the principal sum of the overdraft at the rate of 15% pa and on the term loans at the rate of 11% pa from 2 April 2011 to payment.

26.  On 18 May 2011, EEL’s solicitors complained to Yip’s solicitors about Yip’s failure to answer the requisitions raised, and EEL thereby exercised their right to extend the completion date to seven working days after Yip answered all requisitions to EEL’s satisfaction.  On the same day, Yip’s solicitors wrote to EEL’s solicitors to request the return of the KT Title Deeds.  Also on the same day, Yip’s solicitors by letter to EEL’s solicitors confirmed another postponement of the completion date to 20 June 2011.[5]

27.  On 20 June 2011, EEL’s solicitors wrote to Yip’s solicitors to state that since Yip still failed to reply to the requisitions raised in their letter dated 6 October 2010, EEL therefore exercised their right to extend the date of completion to seven working days after Yip answered all requisitions to their satisfaction.

28.  On 27 June 2011, Chung filed her affirmation in opposition in the Mortgagee Action.  For present purpose, I am assured by Mr Cheung, counsel for EEL, that for the purpose of the Subrogation Summons, EEL would not seek to dispute such affirmation in opposition by Chung since Chung would still be entitled to rely on such affirmation to resist the claim against her in the Mortgagee Action even if I were to allow EEL to subrogate the rights of BOC under the Mortgage as sought in the Subrogation Summons.

29.  By a letter dated 22 July 2011 to Yip’s solicitors, EEL’s solicitors demanded that completion of the KT PASP should take place on 12 August 2011 conditional upon receipt of the Discharge/Release relating to the Charge and the SCB and BOC Charging Orders.

30.  On 11 August 2011, Yip’s solicitors wrote to EEL’s solicitors to say they were not in a position to give an undertaking to send the Discharge/Release of the SCB and BOC Charging Orders and/or the Charge.

31.  According to Mr Lo’s affirmation filed on 6 November 2012 (“Lo 1^st Aff”) in the Mortgagee Action, EEL claimed that in breach of the KT PASP Yip failed to (a) answer the requisitions raised, (b) provide the requested documents confirming the discharge/release of the SCB and BOC Charging Orders and the Charge, and/or (c) complete the sale and purchase of the Kwun Tong Property.  Yip also did not return the initial and further deposits in the total sum of HK$410,000.00 to EEL.

32.  On 3 November 2011, EEL commenced HCMP 2207/2011 against Yip inter alia for specific performance of the KT PASP, and further or alternatively, for damages (“SP Action”).

33.  On 22 November 2011, EEL filed the affirmation of their director Leung Che Shing Edison in support of EEL’s claim in the SP Action.

34.  On 3 February 2012, Yip (who was then legally represented) filed Chung’s affirmation in opposition to EEL’s claim in the SP Action.  But on 1 March 2012, Yip filed Notice to Act in Person in the SP Action.

35.  On 13 March 2012, judgment was entered in favour of BOC against Yip in the Mortgagee Action for (a) payment of the sum of HK$4,031,576.36 together with further interest on the sum of HK$486,064.19 at the rate of 15% pa and on the sums of HK$262,223.26, HK$205,336.86, HK$183,151.83, HK$769,075.25 and HK$1,643,570.57 at the rate of 11% pa to the date thereof and thereafter interest on the sum of HK$3,549,421.96 at judgment rate until payment, (b) delivery up of vacant possession of the Kwun Tong Property, and (c) costs on full indemnity basis assessed at HK$28,750.00 (“KT Money/Possession Order”).

36.  On 13 March 2012, Master J Wong directed that the Mortgagee Action be continued against Chung as if they had been begun by the issue of a Writ of Summons on 24 June 2010, and that service on and notice of intention to defend by Chung do stand.  The learned master also gave directions for filing pleadings and Timetabling Questionnaires, and for issuing a case management summons as between the BOC and Chung (where appropriate).

37.  By the order of DHCJ Sakhrani dated 26 July 2012 in the SP Action, judgment was entered for specific performance of the KT PASP, and Yip was ordered to execute an assignment in the form annexed to the Order for assigning the Kwun Tong Property to EEL (“Assignment”), to deliver the Title Deeds and vacant possession of the Kwun Tong Property to EEL, and to pay damages to be assessed by a master.  The balance of the purchase price of the Kwun Tong Property in the sum of HK$3,960,000.00 was ordered to be paid to EEL’s solicitors (instead of Yip) upon their undertaking to use the same to pay off the existing encumbrances on the Kwun Tong Property (including the Charge and the SCB and BOC Charging Orders) and to pay the surplus (if any) into court.

38.  On 6 August 2012, EEL paid the balance of the purchase price in respect of the Kwun Tong Property in the sum of HK$3,690,000.00 to their solicitors.

39.  By their letter dated 17 August 2012, EEL’s solicitors demanded Yip to execute the Assignment within 14 days, but Yip failed to do so.  Owing to such failure, on 5 September 2012 EEL issued a summons in the SP Action for an order that the Assignment be executed by the senior partner of EEL’s solicitors on behalf of Yip, and such summons was supported by Mr Lo’s affirmation filed on the same day.  On 24 September 2012, DHCJ Sakhrani made an order in the SP Action that the Assignment be executed by the senior partner of EEL’s solicitors on Yip’s behalf.

40.  On 2 November 2012, EEL applied by summons to be joined as the 3^rd defendant in the Mortgagee Action (“Joinder Summons”). EEL filed the Lo 1^st Aff on 6 November 2012 in support of such summons. Mr Lo claimed that all Yip’s rights/interests in the Kwun Tong Property (including the equity of redemption) would be assigned to EEL, and EEL as assignee would be entitled to redeem the Charge.  Mr Lo claimed he was advised by BOC’s solicitors that (a) BOC as mortgagee had no objection to discharge the Charge upon payment of the outstanding principal and interest secured by the Charge together with their legal costs, and (b) vacant possession of the Kwun Tong Property had already been obtained by BOC pursuant to the KT Money/Possession Order dated 13 March 2012.

41.  By their letter dated 8 November 2012 to EEL’s solicitors, Chung’s solicitors confirmed that Chung had no objection to the reliefs sought in the Joinder Summons.

42.  As explained above, on 9 November 2012, Master Ho granted leave for EEL to be joined as the 3^rd defendant in the Mortgagee Action, and gave liberty to BOC to amend the originating summons to add EEL as the 3^rd defendant.  Master Ho further ordered inter alia that:

“3. Upon compliance of the following conditions, [BOC] (subject and without prejudice to the due exercise of any power of sale for the time being vested in [BOC]) do deliver to [EEL] vacant possession of [the Kwun Tong Property] and release to EEL the security constituted by the [Charge] as hereinafter mentioned and deliver the [KT Title Deeds] to [EEL]:-

i. [EEL] shall pay [BOC] the money ordered to be paid under para.1 of the order made by [the KT Money/Possession Order] in this action against [Yip] and all other moneys (if any) secured to [BOC] by the Charge of [the Kwun Tong Property] registered in the Land Registry ……

ii. [EEL] shall pay costs to [BOC] at an agreed lump sum of HK$130,000.”

43.  By a letter dated 9 November 2012 to BOC’s solicitors, EEL’s solicitors requested BOC to provide them with the KT Title Deeds and to inform them of the amount payable on discharge/release of the Charge on the Kwun Tong Property on 20 November 2012.  EEL also indicated they shall pay off all the existing encumbrances on that day.

44.  On 12 November 2012, SCB’s solicitors wrote to inform EEL’s solicitors that the amount for redemption of the SCB Charging Order as at 20 November 2012 was HK$943,123.70.

45.  On 13 November 2012, the originating summons in the Mortgagee Action was amended to join EEL as the 3^rd defendant.

46.  BOC’s solicitors replied by letter dated 15 November 2012 to inform EEL’s solicitors that the outstanding indebtedness in respect of the Kwun Tong Property calculated up to 20 November 2012 was HK$4,720,832.73 (subject to confirmation).

47.  On 19 November 2012, BOC Credit Card’s solicitors wrote to inform EEL’s solicitors that the amounts for redemption of the BOC Charging Order as at 20 November 2012 were HK$223,793.70 and CNY29,892.47 (or HK$37,539.21).

48.  By their letter dated 20 November 2012 to BOC’s solicitors, EEL’s solicitors enclosed a cheque in the sum of HK$4,720,832.73 in settlement of the outstanding indebtedness in respect of the Kwun Tong Property calculated up to 20 November 2012 together with a cheque in the sum of HK$130,000.00 in settlement of BOC’s costs and disbursements for the Mortgagee Action including those for obtaining the Discharge/Release in respect of the Kwun Tong Property. Both cheques were dated 20 November 2012 and drawn on the client account of EEL’s solicitors.

49.  By their letter dated 20 November 2012 to SCB’s solicitors, EEL’s solicitors enclosed a cheque in the sum of HK$943,123.70 being the outstanding balance under the SCB Charging Order, and a cheque in the sum of HK$24,868.55 being costs and disbursements in relation to the legal action that resulted in the SCB Charging Order including those for obtaining the Discharge Order in respect of the Kwun Tong Property.  Both cheques were dated 20 November 2012 and drawn on the client account of EEL’s solicitors.

50.  By their letter dated 20 November 2012 to BOC Credit Card’s solicitors, EEL’s solicitors enclosed a cheque in the sum of HK$245,202.91 being the outstanding balance under the BOC Charging Order, and a cheque in the sum of HK$16,130.00 being costs and disbursements in relation to the legal action that resulted in the BOC Charging Order including those for obtaining the Discharge Order.  Both cheques were dated 20 November 2012 and drawn on the client account of EEL’s solicitors.

51.  By a letter dated 27 November 2012, BOC’s solicitors sent inter alia the original Receipt on Discharge annexed to the Charge to EEL’s solicitors.

52.  By a letter dated 11 December 2012 to BOC’s solicitors, EEL’s solicitors indicated EEL’s intention to subrogate BOC’s interests under the Mortgage in respect of the Sai Kung Property against Chung.  EEL demanded that the Mortgage should not be released without their consent.

53.  By two letters respectively dated 12 December 2012 and 14 January 2013 to EEL’s solicitors, BOC’s solicitors sought to clarify the legal basis of EEL’s alleged right of subrogation.  But by their letter dated 15 January 2013 to BOC’s solicitors, EEL’s solicitors offered no further explanation as to the basis of their claim for subrogation.

54.  By a letter dated 17 June 2013 to BOC’s solicitors, Chung’s solicitors requested provision of the title deeds of the Sai Kung Property for redemption of such property.

55.  By a letter dated 28 June 2013 to EEL’s solicitors, BOC’s solicitors informed them of Chung’s request for discharge of the Mortgage, and asked EEL to clarify their stance. EEL’s solicitors replied by letter dated 9 July 2013 to say they were in the course of taking instructions from EEL.

56.  On 16 July 2013, BOC issued a summons for an order that upon Yip having settled the indebtedness claimed by BOC against Yip and Chung, and upon Chung having applied for discharge of the Mortgage of the Sai Kung Property, leave be granted for BOC to wholly discontinue the Mortgagee Action against Chung with no order as to costs of such action and of the application (“Discontinuation Summons”).

57.  On the same day, BOC filed the affirmation by their Risk Management Department’s asset recovery manager Lam Chiu Man (“Mr Lam”) in support of the Discontinuation Summons (“Lam 1^st Aff”).  The Lam 1^st Aff claimed that after receiving the amount paid in settlement of the outstanding indebtedness in respect of the Kwun Tong Property, BOC had no further claim in respect of the Charge against the Kwun Tong Property, the Mortgage against the Sai Kung Property and the Guarantees against Yip in respect of the cause of action in the Mortgagee Action.  Accordingly, BOC was minded to discharge the Mortgage in respect of the Sai Kung Property and wholly discontinue the Mortgagee Action against Chung.  Mr Lam referred to the issue of subrogation raised in correspondence between BOC’s and EEL’s solicitors, and advised that EEL failed to take any step after 15 January 2013 to enforce or pursue their claim for subrogation.  The Lam 1^st Aff also alluded to Chung’s demand for discharge of Mortgage.

58.  As regards EEL, the Lam 1^st Aff claimed that BOC was not in a position to determine whether EEL was entitled to subrogate to BOC’s interests in the Mortgage against the Sai Kung Property (and if so to what extent) and whether Chung was entitled to discharge the Mortgage without being subject to the alleged subrogation by EEL. Since BOC had no further role in the Mortgagee Action, they therefore applied under the Discontinuation Summons to discontinue the Mortgagee Action against Chung, and it would be for EEL to satisfy the court they were entitled to claim for subrogation and to apply for necessary order or direction.

59.  As explained above, on 23 July 2013, EEL filed the Subrogation Summons and the Lo 2^nd Aff in support.  Mr Lo confirmed that EEL through their solicitors had paid the sum of HK$4,850,832.73 to BOC, the sum of HK$261,332.91 to BOC Credit Card, and the sum of HK$967,992.25 to SCB respectively to discharge the Charge and the BOC and SCB Charging Orders in respect of the Kwun Tong Property partly out of the purchase price of HK$4,100,000.00 held by EEL’s solicitors pursuant to the Order of DHCJ Sakhrani dated 26 July 2012 in the SP Action. Since such purchase price was not enough to pay off the Charge on the Kwun Tong Property (after payments to SCB and BOC Credit Card), EEL had to bear and pay to BOC a sum of HK$1,980,157.89 in order to legally protect their beneficial interest in the Kwun Tong Property.  The Lo 2^nd Aff went on to say that since the joint and several liabilities and indebtedness of Hung Tat as borrower and Chung as mortgagor to BOC under the Mortgage were paid off in full by EEL to the extent of HK$1,980,157.89, EEL by operation of equity had acquired by way of subrogation the rights of BOC under the Mortgage and was therefore entitled to possession of the title deeds and documents of the Sai Kung Property (“SK Title Deeds”) secured by the Mortgage.

60.  On 25 July 2013, Chung filed Notice to Act in Person.  On 26 July 2013, Master J Wong gave case managements directions for filing/serving affidavits in opposition and reply, and adjourned the Subrogation Summons to be heard before a judge in chambers.  He also excused the attendance of BOC at the adjourned hearing.  On the same day, the learned master also adjourned the Discontinuation Summons sine die pending the determination of the Subrogation Summons.

61.  On 12 August 2013, Chung filed the Chung Aff to oppose the Subrogation Summons.  She claimed that on 25 February 2006 she as registered owner charged the Sai Kung Property in favour of BOC pursuant to the Mortgage.  In September 2010, she informed BOC she would pay HK$1,200,000.00 in part payment of the indebtedness claimed under the Mortgagee Action.  Since BOC insisted on payment by cashier order, she purchased a cashier order in the sum of HK$1,200,000.00 on 29 September 2010 from her own monies and gave the same to BOC. In early July 2012, her boss Yip told her he no longer had any further say over the Kwun Tong Property, and asked her to deliver up possession of such property to BOC for auction.  On 27 July 2012, two staff members of BOC’s solicitors came to take possession of the Kwun Tong Property, so Chung left such property.

III. LEGAL PRINCIPLES

62.  Under common law, the equity of the surety, subject to the paramount right of the creditor to be paid, is to have the creditor’s powers applied to produce an equitable result as between all persons liable.  The aim is to ensure that the person primarily liable should bear the whole burden in relief of others, or if there is a deficiency that it should fall equally upon those with secondary liability.  These rights of a surety do not depend upon any contract involving the principal debtor or the sureties.  Such rights depend upon equitable principles of readjusting the unequal placing of burdens upon persons or properties all equally liable at all.[6]

63.  The surety who has discharged the principal debtor’s obligation can be indemnified to the extent of any amount he has paid in reduction of the guaranteed debt. Consequently, in the case of co-sureties, whether their liability is joint, several or joint and several, each co-surety may recover the exact amount each will have paid.[7] The position of contribution between co-sureties is further discussed in paragraph 72 below.

64.  It is also relevant to consider section 15 of the Law Amendment (Reform and Consolidation) Ordinance Cap 23 (“LARCO”) which provides as follows:

“(1) Every person who, being surety for the debt or duty of another or being liable with another for any debt or duty, pays such debt or performs such duty, shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other security which is held by the creditor in respect of such debt or duty, whether such judgment, specialty, or other security is or is not deemed at law to have been satisfied by the payment of the debt or performance of the duty.

(2) Such person shall be entitled to stand in the place of the creditor, to use all the remedies, and, if need be and upon a proper indemnity, to use the name of the creditor, in any action or other proceeding at law or in equity, in order to obtain from the principal debtor or any co-surety, co-contractor or co-debtor, as the case may be, indemnification for the advances made and loss sustained by the person who has so paid such debt or performed such duty, and such payment or performance so made by such surety shall not be a bar to any such action or other proceeding by him.

(3) No co-surety, co-contractor, or co-debtor, shall be entitled to recover from any other co-surety, co-contractor, or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, such last mentioned person is justly liable.”

65.  Such provision is the same as section 5 of the Mercantile Law Amendment Act 1856 in the United Kingdom.  Under the latter section, a surety who pays the debt is entitled to have assigned to him any judgment or security held by the creditor, and to the creditor’s remedies and upon a proper indemnity to use creditor’s name in any action or other proceedings in order to obtain an indemnity from the principal debtor.  The section also gives such rights to co-debtors such as co-sureties.  But a surety cannot enforce the right of subrogation embodied in the section until payment or performance.  A surety can bring an action for specific performance of the statutory right to an assignment or damages.[8]

IV.  DISCUSSION

66.  There is no question that on 20 November 2012 the outstanding indebtedness owed by Hung Tat as borrower (and principal debtor) to BOC (which was also the indebtedness owed by Yip as mortgagor under the Charge) was settled and paid.  As a result, the outstanding indebtedness owed by Chung as mortgagor to BOC under the Mortgage (being also the outstanding indebtedness owed by Hung Tat as borrower to BOC) was also settled and paid.

67.  A person who charges his property to secure the debt of another is treated as a surety of the person whose debt is secured.[9]  Hence, on the basis of the terms and provisions of the Charge and the Mortgage, Yip and Chung were co-sureties of Hung Tat whose indebtedness due to BOC was secured, and each of Yip and Chung was a “surety for the debt or duty of another or being liable with another for any debt or duty” within the meaning of section 15(1) of LARCO.

68.  Section 15(1) of LARCO provides that every person being a surety as aforesaid who pays such debt or performs such duty “shall be entitled to be assigned to him, every …… other security which is held by the creditor in respect of such debt or duty”.  According to the terms and provisions of the Mortgage, it appeared that BOC as creditor held the Mortgage as security for the indebtedness of Hung Tat.  The payment of the sum of HK$4,850,832.73 (comprising the sums of HK$4,720,832.73 and HK$130,000.00)[10] to BOC on 20 November 2010 came partly from the purchase price of the Kwun Tong Property and partly from further top up payment by EEL.

69.  In effect, such payments were made by Yip (who was the legal recipient of the sale proceeds of the Kwun Tong Property which, pursuant to the Order of DHCJ Sakhrani dated 26 July 2012 in the SP Action, was used to pay off the existing encumbrances on the Kwun Tong Property upon completion of the sale to EEL) or on Yip’s behalf (ie further top up payment made by EEL to BOC to settle the indebtedness of the principal debtor Hung Tat on behalf of Yip) to secure the discharge/release the Charge.  Such top up payment by EEL to pay off Hung Tat’s indebtedness owing to BOC was reasonably necessary in order for EEL to acquire the Kwun Tong Property free from encumbrances upon completion of the sale and purchase as prescribed in the KT PASP.

70.  If a surety pays with the aid of a stranger, the two will be considered as one person and entitled between them to contribution against the co-surety.[11]  In such circumstances, for the purpose of determining the question of contribution against Chung as co-surety, Yip (who had made payment to settle Hung Tat’s indebtedness due to BOC with the aid of a stranger EEL) together with EEL would be considered as one person who in turn was entitled to claim contribution against Chung as co-surety.

71.  In my view, EEL was entitled to be subrogated to the security held by BOC (ie the Mortgage over the Sai Kung Property). However, EEL could only be indemnified to the extent of any amount they had paid in reduction of the indebtedness of Hung Tat. So should there be any cap in the value of such subrogation rights?

72.  Rowlatt on Principal and Surety states as follows:[12]

“Where a co-surety pays the debt, or more than his proportion of it and the principal is insolvent, the co-surety is entitled to contribution from his fellow co-sureties to equalize the burden. It makes no difference whether the co-sureties are bound jointly or severally or jointly and severally. Nor does it matter whether the co-sureties are bound by the same instrument or by separate instruments, whether in the same sum or different sums, whether at the same time or different times. Nor does it matter whether the surety paying the debt knows of the existence of any other sureties, since the rule of contribution does not depend upon agreement, express or implied, but upon an equity arising from the mere fact of the existence of co-sureties for the same debt owed to the same creditor. Nor is it material that one surety agreed to become bound before another surety. The right to contribution arises only where the co-sureties guarantee the same debt.

The underlying principle of equity is that the creditor’s remedies against the co-sureties should be applied so as to apportion the burden rateably. If the remedies have been applied otherwise, the court will, by employing the remedies of the creditor or otherwise, correct the inequity as between the co-sureties.

Where any of the co-sureties are insolvent, the contributions of the others are proportionately increased.” (my emphasis)

73.  The focus of the equity between co-sureties is to “equalise the burden”. In the present case, Hung Tat had been wound up, so Yip/EEL was entitled to contribution from Chung to equalise the burden.  There is no dispute that on 20 November 2012, EEL on behalf of Yip paid a total sum of HK$6,080,157.89 comprising of the following sums to secure the purchase of the Kwun Tong Property free from encumbrances:

(a)   HK$4,850,832.73 paid to BOC to discharge/release the Charge;[13]

(b)   HK$967,992.25 paid to SCB to discharge the SCB Charging Order;[14]

(c)   HK$261,332.91 paid to BOC Credit Card to discharge the BOC Charging Order.[15]

The ratio in respect of the payments made to BOC, SCB and BOC Credit out of the total sum of HK$6,080,157.89 was 80%, 16% and 4% respectively.

74.  Since all the payments in (a), (b) and (c) above were made on 20 November 2012, the rateable share of the purchase price of the Kwun Tong Property attributable to payments made to BOC was HK$4,100,000.00 x 80% = HK$3,280,000.00, which must be regarded as payment by Yip since as purchaser he was legally entitled to the purchase price. EEL made additional top up payment on behalf of Yip in the sum of HK$4,850,832.73 – HK$3,280,000.00 = HK$1,570,832.73. But whether these payments were made by Yip or by him with the aid of EEL, the total sum of HK$4,850,832.73 paid to BOC must be attributable as having been paid by Yip with the aid of a stranger.

75.  The only evidence before me was that Chung had paid HK$1,200,000.00 towards the indebtedness owed by Hung Tat to BOC. Thus, the total amount paid by Yip/EEL and Chung as co-sureties for the indebtedness of Hung Tat as principal debtor is HK$6,050,832.73 (ie HK$4,850,832.73 + HK$1,200,000.00) and their respective rateable share is HK$3,025,416.37 (ie HK$6,050,832.73 ÷ 2).  The deficiency yet unpaid by Chung in respect of her rateable burden is HK$3,025,416.37 – HK$1,200,000.00 = HK$1,825,416.37 which equates the excess Yip/EEL paid over and above Yip’s rateable burden of HK$4,850,832.73 – HK$3,025,416.37 = HK$1,825,416.37.  However, out of such excess sum, EEL was only out of pocket as to HK$1,570,832.73 since the balance of HK$254,583.64 came from the purchase price.

76.  In the course of the Hearing, Mr Cheung conceded that the sum of HK$1,570,832.73 and not the amount of HK$1,980,157.89 stated in the Subrogation Summons[16] was the proper cap in respect of the value of the subrogation rights. In light of the above analysis, I agree.  However, it must be made clear that such subrogation of the rights of BOC under the Mortgage does not impact on the defences that Chung may marshal against the claimant in the Mortgage Action, and the aforesaid discussion should not be seen to be any definitive finding in respect of the dispute between the claimant (whether BOC and/or EEL) and Chung.

77.  At the Hearing, Chung opposed the Subrogation Summons on two main grounds:

(a)   Chung said she did not know EEL or how they made payments to pay off the indebtedness due to BOC, SCB and/or BOC Credit to discharge/release the Charge, the SCB Charging Order and the BOC Charging Order. However, since the surety’s right of contribution is based on equitable principles founded upon the right of the surety to contribution from his co-surety for the same debt owed to the same creditor in order to equalise the burden, I do not consider that the surety’s remedy is dependent upon the co-surety’s knowledge of the payment situation.[17]

(b)   Chung claimed that only BOC and no other party would be entitled to claim against her under the Mortgage. This argument misses the point that all outstanding indebtedness due to BOC had been settled, and whilst BOC might have a viable cause of action at the commencement of the Mortgagee Action they no longer had a cause of action against her upon receipt of full payment of the outstanding indebtedness. As explained above, the payments made by Yip/EEL gave rise to a right of contribution between co-sureties based on equitable principles and not on contract.

V.  CONCLUSION

78.  In the circumstances, I grant a declaration that EEL is entitled to be subrogated to the rights of BOC under the Mortgage made amongst BOC as mortgagee/lender, Hung Tat as requesting party/borrower and Chung as mortgagor for the sum of HK$1,570,832.73 that they had paid to BOC together with interest (“Subrogated Rights”).[18]

79.  I also order that:

(a)   BOC do deliver the SK Title Deeds to EEL who shall keep them in safe custody until the earlier of (i) further order of the court or (ii) until payment of any amount due and payable to EEL pursuant to the Subrogated Rights either as agreed between EEL and Chung or as may be found by the court;

(b)   should Chung comply with (ii) above, EEL shall within 14 days thereafter deliver up the SK Title Deeds to Chung;

(c)   liberty to apply.

80.  There is no reason why costs should not follow event.  I therefore grant a costs order nisi that Chung shall pay EEL’s costs of the Subrogation Summons (including all costs reserved if any) to be taxed if not agreed.

81.  My clerk will inform Chung that if she so requires a court translator will be arranged to verbally translate this Decision into the punti language for her at the High Court Building at a mutually convenient date and time.