SMART EDGE LTD v. HG PROPERTY INVESTMENT HK LTD

HCMP 2146/2022

[2023] HKCFI 1059

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2146 OF 2022

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BETWEEN

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J U D G M E N T

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A. INTRODUCTION

1.  The Plaintiff (“Smart Edge”) is the sole legal and beneficial owner of the property known as all that piece or parcel of ground registered in the Land Registry as New Kowloon Inland Lot No.6314 together with the messuages, erections and building thereon known as Goldin Financial Global Centre, No.17 Kai Cheung Road, Kowloon, Hong Kong (“the Property”).

2.  By its Amended Originating Summons of 21st February 2023, Smart Edge seeks declarations that:

2.1 an agreement for sale and purchase dated 22nd September 2022 between the shareholders of Smart Edge (“the Shareholders”) and the Defendant (“HG”), and

2.2 the writ of summons and amended writ of summons filed by HG in HCA 1469/2022 (“the Writ” and “the Amended Writ” respectively),

are not instruments registrable on the Land Register of the Property under the Land Registration Ordinance (Cap.128), removal from the Land Register of the Property all references to the aforesaid instruments, and related relief.

B. THE BACKGROUND

3.  Save as otherwise indicated, the following is not in dispute.

4.  On 13th July 2020, Mr Cosimo Borrelli and Mr Ma Siu Ming Simon were appointed as the joint and several receivers and managers of the shares in and assets of Smart Edge (“the Receivers”).

5.  At all material times, the Shareholders (of Smart Edge) were Cheng Mei Holdings Limited (Receivers and Managers Appointed) and Goal Eagle Limited (Receivers and Managers Appointed). Between them, they owned the entirety of the issued shares of Smart Edge (“the Shares”). There were also loans and indebtedness due and owing by Smart Edge to the Shareholders (“the Loan”).

Earlier agreements and dealings with HGIL

6.  On 22nd December 2020, the Shareholders entered into an agreement with Hundred Gain International Holding Limited (“HGIL”) to sell the Shares and the Loan to HGIL. This agreement was terminated in February 2021 on the grounds that HGIL was unable to comply with certain conditions therein.

7.  On 12th May 2021, the Shareholders entered into another agreement to sell the Shares and the Loan to HGIL. This agreement was terminated in June 2021 on the grounds that HGIL was unable to comply with certain conditions therein.

8.  On 10th September 2021, the Shareholders entered into an amended version of the 12th May 2021 agreement to sell the Shares and the Loan to HGIL. On 29th October 2021, the parties executed a deed of amendment to extend the completion date on certain conditions. This agreement was terminated in November 2021 on the grounds that HGIL was unable to comply with those conditions.

9.  On 25th February 2022, the Shareholders entered into another agreement to sell the Shares and the Loan to HGIL. This agreement was terminated in April 2022 on the grounds that HGIL was unable to comply with certain conditions therein.

10.  On 16th May 2022, HGIL filed the writ of summons in HCA 576/2022 against the Shareholders, complaining of wrongful termination of the agreement of 25th February 2022. On behalf of HGIL, Messrs Winston & Strawn delivered a copy of the writ to the Land Registry for registration against the Property.

11.  On 30th June 2022, Smart Edge commenced proceedings in HCMP 823/2022 to remove the registration.

12.  On 4th July 2022, Messrs Weil, Gotshall & Mangers wrote to Messrs Winston & Strawn, warning them of the “potential serious repercussions” arising from the latter’s role in causing the writ in HCA 576/2022 to be registered on the Land Register for the Property.

13.  On 5th July 2022, Messrs Winston & Strawn wrote to the Land Registrar to withdraw the registration.

14.  On 15th July 2022, Messrs Khoo & Co, on behalf of HGIL, delivered another copy of the writ in HCA 576/2022 to the Land Registry for registration against the Property.

15.  On 20th September 2022, HCA 576/2022 and HCMP 823/2022 were settled. On the same day, Messrs Khoo & Co wrote to the Land Registry to acknowledge, on behalf of HGIL, that the writ in HCA 576/2022 was not an instrument registrable on the Land Register of the Property, and to withdraw the registration.

16.  On 21st September 2022, DHCJ Jonathan Chang SC made orders by consent in HCMP 823/2022 that the writ in HCA 576/2022 was not a lis pendens affecting the Property nor an instrument registrable on the Land Register of the Property, that the attempted registration be cancelled and forthwith removed from the Land Register of the Property, and that HGIL be retrained from registering any further instruments in respect of HCA 576/2022 on the Land Register of the Property.

Agreements and dealings with HG; the sale of the Property to Goldstone

17.  On 22nd September 2022, the Shareholders entered into an agreement to sell the Shares and Loan to HG (“the Agreement”). Under cl.4.1(d) of the Agreement, completion was conditional upon HG providing to the Shareholders, within 14 days, certain written confirmations from its financier.

18.  On 7th October 2022, the deadline for compliance with cl.4.1(d) of the Agreement, the Shareholders granted HG an extension of time of the deadline to 14th October 2022.

19.  On 1st November 2022, the Shareholders gave written notice to HG of termination of the Agreement on the grounds of HG’s failure to comply with cl.4.1(d).

20.  On 3rd November 2022, HG filed the Writ in HCA 1469/2022 (“the Action”). The defendants named at that stage were the Shareholders. On behalf of HG, Messrs ONC Lawyers delivered a copy of the Writ to the Land Registry for registration against the Property, which was allocated Memorial No.22110301180018.

21.  On 17th November 2022, Messrs Weil, Gotshall & Mangers wrote to Messrs ONC Lawyers, noting that the latter had acted for HGIL in HCMP 823/2022 and were therefore presumed to have knowledge that the Writ was not registrable.

22.  On 24th November 2022, Messrs ONC Lawyers wrote to the Land Registrar to cancel the registration of the Writ.

23.  On 25th November 2022, the Receivers entered into an agreement to sell the Property to Goldstone Asset (HKSAR) Limited.

24.  On 28th November 2022, Messrs Khoo & Co delivered to the Land Registry for registration against the Property:

24.1 a further copy of the Writ, which was allocated Memorial No.22112801030024; and

24.2 a copy of the Agreement, which was allocated Memorial No.22112801030019.

25.  On 16th December 2022, Smart Edge commenced the current proceedings against HG to remove the attempted registrations of the Writ and the Agreement from the Land Register of the Property.

26.  On 20th January 2023, HG filed the Amended Writ, adding Smart Edge as the 3rd Defendant in the Action.

27.  On 27th January 2023, Messrs Khoo & Co delivered a copy of the Amended Writ to the Land Registry for registration against the Property.

28.  The Writ, Amended Writ and the Agreement currently continue to appear in the “Deeds Pending Registration” section of the Land Register of the Property.

C. THE RELEVANT STATUTORY PROVISIONS

29.  Section 2(1) Land Registration Ordinance (Cap.128) (“LRO”) provides that:

“The Land Registry shall be a public office for the registration of deeds, conveyances, and other instruments in writing, and judgments; and all deeds, conveyances, and other instruments in writing, and all judgments, by which deeds, conveyances, and other instruments in writing, and judgments, any parcels of ground, tenements, or premises in Hong Kong may be affected, may be entered and registered in the said office in the prescribed manner.”

30.  Section 14 LRO provides that:

“The provisions of this Ordinance relating to judgments (subject to the provisions hereinafter contained) shall extend to lites pendentes.”

31.  Section 1A LRO defines a “lis pendens” as, inter alia:

“any action or proceeding pending in a court or tribunal that relates to land or any interest in or charge on land…”

D. THE PARTIES’ CASES

D1. Smart Edge’s case

32.  Mr Abraham Chan SC (appearing with Mr James Wood) for Smart Edge submitted that it is settled law that:

32.1 to be registrable under s.2(1) LRO, an agreement must create some legal or equitable interest in land, citing Anstalt Nybro v Hong Kong Resort Co Ltd [1980] HKLR 76 at 81;

32.2 only proceedings in which a claim to land or some interest in land is asserted may be registered under the LRO as a lis pendens, citing Thian’s Plastic Industrial Co Ltd and ors v Tin’s Chemical Industrial Co Ltd and anor [1970] HKLR 498 at 526-527, which was affirmed by the Full Court in Thian’s Plastic Industrial Co Ltd and ors (No.2) v Tin’s Chemical Industrial Co Ltd and anor [1971] HKLR 249 at 252 to 253;

32.3 proceedings relating to an agreement for the sale and purchase of shares in a company, even when that company owns an interest in land, do not constitute a lis pendens within the meaning of s.1A LRO as such proceedings do not relate to land or an interest in land, citing Health First Technology Ltd and anor v Chan Chi Cheung and ors [1993] 2 HKLR 473 at 474. This is the case even where the proceedings relate to the sale of shares in a company that owns an interest in land, and the purchaser seeks to indirectly acquire the property through the share acquisition: Good Profit Development Ltd v Leung Hoi [1993] 2 HKLR 176 at 183.

33.  Smart Edge’s case is that:

33.1 the Agreement is for the sale and purchase of the Shares and the Loan, and does not affect or create a legal or equitable interest in the Property;

33.2 the Action asserts no claim to, or proprietary interest in, the Property;

33.3 accordingly, neither the Agreement nor the Writ/Amended Writ are registrable against the Property.

34.  Smart Edge also says that HG is affiliated to HGIL, that there has been a history of failed attempts to register the writ in HCA 576/2022 against the Property such that HG and its lawyers should be well aware that the Agreement and the Writ/Amended Writ are not registrable in the Land Registry, and that HG’s conduct should be censured by way of indemnity costs.

D2. HG’s case

35.  Mr Edward Chan SC (appearing with Mr Jeffrey Tam) for HG does not dispute that the authorities as relied on by Smart Edge hold that an agreement for the sale and purchase of shares in a company, which in turn holds property, is not registrable in the Land Registry, or that actions challenging the title to such shares are not registrable in the Land Registry.

36.  However, and as reformulated by Mr Chan in his supplemental skeleton and oral submissions, the case for HG is that the Agreement is not merely a simple agreement for the sale and purchase of shares in Smart Edge; it is an agreement pursuant to which HG was to acquire an interest in the Property, and is therefore registrable. Specifically, under cl.11 of the Agreement, interpreted in the light of certain other clauses which were only referred to in oral submissions, the Agreement bound the Shareholders to deliver possession of the Property to HG.

37.  Mr Chan disputes that HG is affiliated to HGIL, and submits that in any event, this issue can at most go to costs; either the Agreement and the Writ/Amended Writ are registrable, or they are not – what position HGIL and its solicitors may have taken in the past does not bear on this issue. I agree that for present purposes, it is not necessary to consider the positions taken by HGIL and its solicitors.

E. THE AGREEMENT

38.  Mr Edward Chan’s argument hinged on cl.11 of the Agreement, which provided that:

“11. MATTERS SUBJECT TO WHICH THE PROPERTY IS MADE

11.1 The Property will be delivered to the Purchaser on Completion subject to and with the benefit of all rights, rights of way, water, light, drainage and other easements and quasi-easements and rights of adjoining owners (if any) and/or the Government adversely or beneficially affecting the Property. Without prejudice to the generality of the foregoing, the Property will be delivered to the Purchaser on Completion subject to and (where applicable) with the benefit of the deeds and documents specified in Schedule 7, and any modifications or variations thereof.

11.2 The Property will be delivered to the Purchaser on Completion subject to the terms and conditions herein contained and subject to the terms and conditions set out, reserved by and contained in the Government Grant and subject to all rights and liabilities affecting the same and to the payment of all future Government rent, property tax and premium (if any) and together with all rights of way, easements, rights, privileges and appurtenances enjoyed therewith.”

39.  The submission was that read in conjunction with certain other clauses of the Agreement, the Shareholders were bound to deliver possession, which was “tantamount to an assignment” since no reservation was being made by the Shareholders. The other clauses relied on were:

“8. TENANCIES.

8.1 The Property shall be delivered to the Purchaser subject to the existing tenancies and any lettings, tenancies and licences granted or to be granted or modified by the Vendor in accordance with Clause 8.10 hereof…

…

8.3 Subject to Clause 8.10 hereof, if the Property or any part(s) thereof shall be surrendered by any of the Tenants before Completion or if any of the Tenancies terminates for any reason before Completion, the Property or such part(s) thereof (as the case may be) shall be delivered with vacant possession on Completion and the Purchaser shall not raise any requisition or objection in relation thereto. In such event, the Purchaser shall accept vacant possession of the Property or such part(s) thereof so surrendered by the Tenant(s) and shall also accept such state and condition of the Property or such part(s) thereof so surrendered by the Tenant on “as is” basis. The Vendor is not required to remove any fittings, fixtures, equipment, furniture, chattels, goods, garbage or rubbish, if any, in the Property or such part(s) thereof so surrendered by the Tenant(s) and the Purchaser shall at his own costs and expenses lawfully remove such items.

…

8.10 The Vendor hereby expressly reserves its right and it is hereby declared that the Vendor shall be entitled to cause the Company to exercise any of the following rights in respect of the Property or any part or parts thereof (the Rights)[1] and to take all actions to perform, enforce or perfect any of the Rights at any time on or before Completion:

(a) …to renew, vary, modify or terminate the existing lettings or tenancies;

(b) to accept surrender of any existing lettings or tenancies;

(c) to grant new lettings, tenancies or licences; and

(d) to make binding offer in relation to the above…

8.11 (a) Such part or portion of the Property which continues to be subject to the Tenancies on the Completion Date or of which the Tenants fail to deliver vacant possession to the Vendor notwithstanding the termination or expiration of the Tenancies prior to Completion are hereinafter referred to as the Leased Premises.[2]

(b) Vacant possession of such part or portion of the Property (other than the Leased Premises) shall be delivered to the Purchaser on Completion. For the avoidance of doubt, the Vendor shall be entitled to remove or leave behind such fixtures, fittings, furniture, electrical appliances and/or chattels on or in the Property (the Tenants’ Chattels) on Completion, and the Purchaser shall not make any objection or claim any compensation in relation thereto. Vacant possession of the Property (other than the Leased Premises) shall be deemed to have been given by the Vendor to the Purchaser notwithstanding the existence of the Tenants’ Chattels…”

40.  It was said that cl.11, when understood in the light of these other clauses, showed that the Shareholders had an obligation to deliver vacant possession of the Property to HG, in other words, some right or interest in the Property.

41.  I do not agree.

41.1 The subject matter of the sale and purchase is the Shares and the Loan, which is dealt with in cl.2 of the Agreement.

41.2 Sale of the Shares would of course mean that HG would become the owner of Smart Edge. Smart Edge owned various items of property, including the Property. Read in context, cll.8 and 11 of the Agreement simply provided for the features of the Property as at the time of Completion, and which HG was to accept.

41.2.1 Cl.8 (in particular the parts relied on by HG) dealt with the situation as to tenancies which might or might not be existing at the time of Completion, various aspects thereof, and the Shareholders’ rights in relation thereto, and provided that HG was not to make complaint about these matters.

41.2.2 Cl.11[3] provided that the Property would be subject to various rights and liabilities at the time of Completion. Again, this was the state of affairs which HG was to accept.

41.2.3 Indeed, the entirety of cll.8 to 11 (that is, including cll.9 and 10) generally identified various features of the Property and that HG was to accept the same.

41.3 In this regard, I note that cll.8 and 11 of the Agreement refer in the passive voice to vacant possession of the Property being delivered to HG (and without reference as to who was to carry out the delivery), rather than any positive obligation on the part of the Shareholders to deliver vacant possession. This may be contrasted with cl.2.1, which provided that the Shareholders “shall sell” the Shares and “shall assign” the Loan.

41.4 Furthermore, cl.6, which prescribed in detail the parties’ obligations to be performed on completion, and which in cl.6.1(b)(i) itemised the things to be delivered by the Shareholder to HG on completion, did not refer to any obligation on the part of the Shareholders to deliver vacant possession of the Property.

41.5 The owner of the Property, namely, Smart Edge, is not even party to the Agreement. On what basis could the Shareholders confer on HG an interest in the Property when they themselves had no such interest?

41.6 I therefore do not agree that cl.11 of the Agreement, when read in conjunction with the parts of cl.8 highlighted by Mr Edward Chan,[4] imposed an obligation on the Shareholders to deliver vacant possession of the Property such that an interest in land was conferred on HG.

42.  On the point that Smart Edge is not party to the Agreement, Mr Edward Chan argued that the Shareholders’ act of entering into the Agreement would bind Smart Edge (citing In re Duomatic [1969] 2 Ch 365 at 373C-D). However, this could not amount to Smart Edge conferring any interest in the Property on the Shareholders. As Woo J said in Good Profit Development Ltd, 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 from the general principles enunciated in Salomon v. Salomon [1897] AC 22.

43.  Mr Chan also relied on the Vendor’s Warranties in Schedule 3 to the Agreement, pursuant to which the Shareholders warranted that they had the right, power and authority to enter into and perform the Agreement, and that the execution, delivery and performance by the Shareholders of the Agreement would not require them to obtain any consent or approval. I note that under cl.4.2(a), breach of the warranties would have entitled HG to cancel the transaction. HG might also have had other remedies for breach of warranty. However, none of this means that the warranties confer any interest in land on HG.

44.  Mr Chan further argued that pending completion, if the Shareholders had said that they would not deliver the Property, would they not have been in breach of the Agreement? It seems to me that even if, for argument’s sake, it could be said that the Shareholders had an obligation to procure Smart Edge to deliver vacant possession of the Property, so that an indication that they would not do this might amount to a breach of the Agreement, such an obligation would not have conferred any interest in land on Smart Edge in the first place.

45.  I therefore do not agree that the Agreement creates any legal or equitable interest in the Property on the part of HG, or that it is registrable under s.2(1) LRO.

F. THE ACTION

46.  It follows that the Action does not properly assert any claim to, or proprietary interest in, the Property, so as to make it registrable as a lis pendens.

47.  In this regard, in answer to the court’s question as to how HG’s “equitable lien over the Property” (as claimed in the Amended Writ) arose, Mr Edward Chan argued that the lien arose because HG paid a deposit and the Shareholders wrongly terminated the Agreement; this therefore gave rise to an equitable interest in the land.

48.  I do not follow this argument. HG paid a deposit in respect of the subject matter of the Agreement, namely, the Shares and Loan. If it acquired any lien as a result of paying the deposit, this could at most have operated in respect of the Shares and Loan, but not the Property.

49.  Mr Chan also relied on Fung Kan Wai & anor v Leung Shui Fat & ors [1999] 4 HKC 70 for the argument that HG acquired an equitable lien over the Property. Reference was made to 76C, where Nazareth VP cited Calgary and Edmonton Land Co Ltd v Dobinson [1974] 1 Ch 102 which held at 107G that “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 owners should be restrained from exercising his powers of disposition.” It was submitted that the only reason why a lien was not made out in that case was because the purchaser himself repudiated the contract.

50.  However, Fung Kan Wai was a case where the parties had entered into an agreement for the sale and purchase of part of a village-type house. The purchaser claimed a lien in respect of the deposits paid for the acquisition of the property. The case provides no authority for the proposition that a purchaser of shares of a company pursuant to an agreement with the shareholders (and to which the company is not party) can acquire a lien over the company’s land on payment of a deposit for the shares. The reason why the lien was not made out in Fung Kan Wai is irrelevant to the issues in the present case.

51.  A claim to a lien in respect of the shares of a company is not a claim to a proprietary interest in the company’s land: see LY Group Development Ltd v East Canton Ltd [2015] 4 HKLRD 84 at [49], [52], [61], [64] (To J). I do not agree with Mr Chan’s submission that To J wrongly applied Fung Kan Wai by failing to appreciate that the court in Fung Kan Wai held that there was no claim to a lien as the purchaser had repudiated the agreement. From the earlier part of the judgment (see [23] to [34]), To J considered the issue of whether the plaintiff could assert a purchaser’s lien when the contract was only for the purchaser of shares and not property. To J came to the view that the plaintiff could assert a purchaser’s lien in respect of the shares. Clearly, this was not a claim to a proprietary interest in the land, as he observed at [64].

52.  No submissions were made as to how the claim for an injunction to restrain Smart Edge (and the Shareholders) from disposing of the Property could constitute a lis pendens. As To J held in LY Group Development Ltd at [63], if a lien in respect of a deposit is not a proprietary interest in land, it simply defies logic to say that an injunction to enforce the lien turns it into a proprietary interest.

53.  As for the claim to specific performance of the Agreement, this cannot be a claim to an interest in land if the Agreement does not create any legal or equitable interest in the Property on the part of HG.

G. CONCLUSION; DISPOSITION

54.  I grant the relief sought at paragraphs 1 to 5 of the Amended Originating Summons, which essentially declare that the Agreement, Writ and Amended Writ are not registrable on the Land Register of the Property under the Land Registration Ordinance, require HG to procure the removal of references to the same from the Land Register of the Property, and restrain HG from delivering the Agreement, the Writ and the Amended Writ to the Land Registry for registration against the Land Register of the Property.

55.  I further make a costs order nisi that the costs of and occasioned by the Originating Summons (and Amended Originating Summons) herein should be paid by HG to Smart Edge, to be taxed if not agreed. At the hearing, Mr Abraham Chan indicated that he would seek costs on an indemnity basis against HG and that he would seek to file the 5th Affidavit of Cosimo Borrelli for this purpose; Mr Edward Chan indicated that he would wish to be heard on the matter and to file responsive evidence. I direct that the parties should take out any application for variation within 7 days and submit agreed proposed directions as to the disposal of such application(s) within 7 days thereafter. In the event of disagreement, the parties should endeavour to agree as much of the directions as possible, with their disagreements and the reasons therefor set out in a joint letter to the court within 7 days after the making of the application(s) for variation.