RE CHEUNG CHI WANG AND ANOTHER

HCMP 6097/2001

For reference

Application under Section 12A of the Conveyancing and Property Ordinance --- 3 stages --- criteria to be applied --- ex parte proceedings authorized --- comparison with Section 50 of the Law of Property Act 1925

HCMP 6097/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6097 OF 2001

(handed down in open court)

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REASONS FOR DECISION

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1. This is an application under Section 12A of the Conveyancing and Property Ordinance ["CPO"], which came into operation on 9 June 2000. The matter came before me by way of a call-over hearing on 20 December 2001. For reasons given by me orally and set out hereinbelow, I acceded to the request of the Applicants to adjourn the matter sine die with liberty to restore for another call-over hearing. Since the provision is relatively new in Hong Kong and there appears to be some uncertainty as to the procedures to be adopted regarding the same, I decided to hand down these reasons for decision in open court with some observations on the operation of the section in order to give some guidance to the profession.

2. Section 12A was introduced into Hong Kong under section 7 of the Statute Law (Miscellaneous Provisions) Ordinance, Ordinance No.32 of 2000. It reads as follows,

"(1) Where land is subject to any encumbrance, whether immediately realizable or payable or not, and the encumbrancer is out of the jurisdiction, cannot be found or is unknown, or if it is uncertain who the encumbrancer is, the court may, if it thinks fit, on the application of the party for the time being entitled to redeem the encumbrance, direct or allow payment into court of a sum of money sufficient to redeem the encumbrance and any interest thereon.

(2) Upon payment into court of the sum referred to in subsection (1), the court may, if it thinks fit, and either after or without any notice to the encumbrancer, as the court thinks fit, declare the land to be free from the encumbrance, and make any order for conveyance or vesting order as appropriate, and give directions for the retention and investment of the sum of money paid into court and for the payment or application of the income thereof, and for the payment of an amount certified by the court to be the reasonable costs of the applicant in making the application, such amount to be deducted from the sum of money paid into court.

(3) On application by the encumbrancer or any person entitled to the money or fund in court, the court may direct payment or transfer thereof to the persons entitled to receive or give a discharge for the same, and generally may give directions respecting the application or distribution of the capital or income thereof.

(4) In this section, "court" (法院) means the Court of First Instance unless the party to the application submits to the jurisdiction of the District Court."

3. Prior to that, our court did not have the power to declare a land to be free from an encumbrance on payment of sufficient money into court to meet the same together with interest and costs (see Godfrey J, as he then was, in Fung Kam Cheung v. Kwok Yiu Wing [1991] 1 HKC 321). In England, similar power had been vested in the court since 1881 in the form of Section 5 of the Conveyancing Act 1881. The object of that section, as observed by Sargant J in Re Wilberforce's Trusts [1915] 1 Ch 94 at p.102 was as follows,

"Prima facie, the object of the whole of Section 5 is not to disturb any vested or other rights more than necessary, but to enable a sale to be effected and the property to be transferred to the purchaser notwithstanding there may be on the land a liability for payment of a future sum which would, but for the provisions of the section, clearly have prevented the sale of the land free from incumbrance. Of course, a purchaser might think fit to take the land subject to the incumbrance, but the purchase of land subject to an incumbrance is not usually a desirable investment, and the object of the section was to enable the land to be conveyed to the purchaser so that he might get a full and complete title to it."

On the facts of that case, the money paid into court was invested and subsequently found to be inadequate to cover all the liability under the incumbrance. Sargant J held that the declaration granted thereunder did not relieve the vendors of the land from the obligation which they were under in respect of the incumbrance. In short, the declaration only freed the land from the incumbrance but not the personal obligations of the parties thereunder. At p.105, Sargant J held,

"In my opinion, the most equitable and proper construction to put upon this section is one which prevents it operating to a greater extent than is necessary to enable a good title to be given to the purchaser, and which leaves the whole of the proceeds of sale representing the land --- so far as they can be traced --- subject in case of need to the like burdens to which the land itself would have been subject if it had not been sold."

The objective of the provision was therefore to facilitate conveyancing of land which was subject to incumbrance.

4. Section 5 of the Conveyancing Act 1881 had subsequently been modified by Section 1 of the 1911 Conveyancing Act. The final version was Section 50 of the Law of Property Act 1925, which reads,

"(1) Where land subject to any incumbrance, whether immediately realisable or payable or not, is sold or exchanged by the court, or out of court, the court may, if it thinks fit, on the application of any party to the sale or exchange, direct or allow payment into court of such sum as is hereinafter mentioned, that is to say--

(a) in the case of an annual sum charged on the land, or of a capital sum charged on a determinable interest in the land, the sum to be paid into court shall be of such amount as, when invested in Government securities, the court considers will be sufficient, by means of the dividends thereof, to keep down or otherwise provide for that charge; and

(b) in any other case of capital money charged on the land, the sum to be paid into court shall be of an amount sufficient to meet the incumbrance and any interest due thereon;

but in either case there shall also be paid into court such additional amount as the court considers will be sufficient to meet the contingency of further costs, expenses and interests, and any other contingency, except depreciation of investments, not exceeding one-tenth part of the original amount to be paid in, unless the court for special reason thinks fit to require a larger additional amount.

(2) Thereupon, the court may, if it thinks fit, and either after or without any notice to the incumbrancer, as the court thinks fit, declare the land to be freed from the incumbrance, and make any order for conveyance, or vesting order, proper for giving effect to the sale or exchange, and give directions for the retention and investment of the money in court and for the payment or application of the income thereof.

(3) The court may declare all other land, if any, affected by the incumbrance (besides the land sold or exchanged) to be freed from the incumbrance, and this power may be exercised either after or without notice to the incumbrancer, and notwithstanding that on a previous occasion an order, relating to the same incumbrance, has been made by the court which was confined to the land then sold or exchanged.

(4) On any application under this section the court may, if it thinks fit, as respects any vendor or purchaser, dispense with the service of any notice which would otherwise be required to be served on the vendor or purchaser.

(5) After notice served on the persons interested in or entitled to the money or fund in court, the court may direct payment or transfer thereof to the persons entitled to receive or give a discharge for the same, and generally may give directions respecting the application or distribution of the capital or income thereof.

(6) This section applies to sales or exchanges whether made before or after the commencement of this Act, and to incumbrances whether created by statute or otherwise."

5. Section 203 of the Law of Property Act 1925 is also relevant. It provides,

"(1) Payment of money into court effectually exonerates therefrom the person making the payment.

(2) Subject to any rules of court to the contrary--

(a) Every application to the court under this Act shall, save as otherwise expressly provided, be by summons at chambers;

(b) On an application by a purchaser notice shall be served in the first instance on the vendor;

(c) On an application by a vendor notice shall be served in the first instance on the purchaser;

(d) On any application notice shall be served on such person, if any, as the court thinks fit.

(3) In this Act, unless the contrary intention appears, "the court" means the High Court . . . or the county court, where those courts respectively have jurisdiction.

(4) All matters within the jurisdiction of the High Court under this Act shall, save as otherwise expressly provided, and subject to the enactments for the time being in force with respect to the Supreme Court of Judicature, be assigned to the Chancery Division of the court.

(5) The court shall have full power and discretion to make such order as it thinks fit respecting the costs, charges and expenses of all or any of the parties to any application."

6. One can immediately see that although the nature of the power vested in the court by our Section 12A is similar to that granted to the court under Section 50 of the Law of Property Act ["LPA"], there are a number of differences. I would only highlight some of them.

7. Firstly, the English section is predicated upon a sale of the land concerned and the application is to be made by a party to the sale (see Section 50(1) of LPA). There is no such requirement in Section 12A. Hence, in Hong Kong the application could be made by the party entitled to redeem the encumbrance even without a sale.

8. Secondly, in Section 50(1) of LPA, the amount paid into court shall include an additional amount on account of contingency of further costs, expenses and interests. There is no specific reference in Section 12A to the same. However, the court in the exercise of its discretion under Section 12A(1) in directing the amount to be paid into court or under Section 12A(2) in deciding whether to grant a declaration could take such contingency into account in view of the objective of the section stated by Sargant J.

9. Thirdly, the power under Section 12A is predicated upon one of the following being established,

(a) the encumbrancer is out of the jurisdiction;

(b) the encumbrancer cannot be found;

(c) the encumbrancer is unknown; or

(d) it is uncertain who the encumbrancer is.

Further, both in Hong Kong and in England, the relevant section is only applicable when the land is subject to the encumbrance in question. Hence, if the evidence shows that the encumbrance has been released or discharged, the section does not apply. However, if there is a doubt as to whether the encumbrance exists, the section is applicable. In England, the power had been exercised in the context where the validity of the mortgage was subject to litigation and the mortgagor wanted to sell the property in the meantime, see Lidco Investments Ltd. v. Hale [1971] EGD 669. If it were construed otherwise, the section would be of little use to conveyancer.

It behoves an applicant to establish these with proper and sufficient evidence before he can ask the court to exercise its discretion under Section 12A. Further, before it can be shown that the encumbrancer cannot be found or is unknown or uncertain, the Applicants must take reasonable steps to find out who the encumbrancer is and to locate him. Evidence as to steps taken by the Applicants in this regard must generally be placed before the court.

10. Fourthly, although the wordings are slightly different, both Section12A(2) of CPO and Section 50(2) of LPA contemplate that the power of the court to make declaration to free the land from the encumbrance would be exercised only after the money has been paid into court (see In re Uplands Portmore Road [1948] WN 165). Hence, the first stage is to obtain direction or approval of the court regarding payment into court under Section 12A(1). Then, after money is paid into court pursuant to that direction, the court will consider the exercise of its discretion under Section 12A(2) at a second hearing.

11. Fifthly, it is also clear from the wording of Section 12A(2) that at the second stage, the power could be exercised "after or without any notice to the encumbrancer". Hence, the court has a discretion in deciding whether notice should be given to the encumbrancer. The position is the same in England. However, in the context of Section 12A, bearing in mind the situation under which the power could be exercised as set out in Paragraph 9 above, it is difficult to expect notice to be given to an encumbrancer who cannot be found, or who is unknown or whose identity is uncertain other than a general notice by advertisement in newspaper. Whether that is necessary is a matter for the discretion of the court to be exercised on the facts of each case.

12. Sixthly, under Section 50(4) of LPA, the court may dispense with service on the vendor or purchaser. That should be read in conjunction with Section 203 of LPA. There is no equivalent in Hong Kong. That distinction may be explained by the difference in terms of factual basis for the exercise of the discretion. As I said, the jurisdiction in Hong Kong does not predicate on a sale. On the other hand, the jurisdiction in Hong Kong is limited in scope as explained in Paragraph 9 above. Hence, Section 12A is probably not applicable in the situation in Lidco Investments v. Hale [1971] EGD 669, not because of the fact that there is a doubt as to the validity of the incumbrance, but rather because of the inability to show that the encumbrancer cannot be found, or was unknown or out of jurisdiction or his identity was uncertain.

13. Lastly, the matter would come back to court at the third stage when the encumbrancer or any person entitled to the money applies to the court for payment. Section 50(5) of LPA required notice to be given to all persons interested in or entitled to the money before the application can be entertained by the court. There is no such requirement in Section 12A(3) of CPO. However, I envisage that in the exercise of its discretion, if the court thinks that there are other parties who might have an interest in the money, the court would require notice to be given to such parties before deciding on how to exercise its discretion.

14. In the present case, the Applicants are the registered owners of Lot No.190 in Demarcation District No.18 in Tai Po ["the Property"]. The root of title of the Property is a Block Crown Lease of 27 March 1905. In the Schedule to the Block Crown Lease (although the exhibit to the affirmation is incomplete and did not show the relevant page of the schedule with regard to the lot, I was shown a complete copy at the hearing and I accepted the undertaking of the solicitor for the Applicants to file another affirmation to exhibit the complete copy), the Property was stated to be subject to a mortgage in favour of Cheung Iu Tsung Tso for $30 ["the Mortgage"] and the mortgagee was said to be in possession. It seems to me that the mortgage would probably be a Chinese customary mortgage under which the mortgagee entered into possession when the mortgage was created. The mortgagee had the use and occupation of the land in lieu of interest. That kind of mortgage was subsequently given statutory recognition as Form C mortgage under the New Territories Ordinance Section 30 (which has since been repealed). The mortgagee would remain in possession until redemption.

15. The Applicants entered into a contract for the sale of the Property on 28 July 2001. The purchasers were Cheung Yung Tai and Cheung Wai Keung Michael. Requisitions were raised in respect of the Mortgage. Initially, the solicitors for the Applicants replied by reference to Section 19 of the Limitation Ordinance. Solicitors for the purchasers asked for a declaration to be obtained from the court that the mortgage was no longer subsisting or capable of taking effect. The Applicants subsequently got a document dated 28 November 1994 made by Cheung Kwong Yu, a descendant in the Cheung Iu Tsung Tso, acknowledging that the mortgage had been discharged. The solicitors for the purchasers however said that the document was only an application to the Tai Po District Land Office and Cheung Kwong Yu was not shown to be the manager of the Tso.

16. It seems to me that the parties have overlooked the fact that the evidence suggested that the mortgage was a Chinese customary mortgage. Hence, if there is evidence showing that possession of the Property had been given back to the mortgagor or his successors, a reasonable inference is that the mortgage had been discharged. This inference could be reinforced by the lack of action on the part of the mortgagee to enforce the mortgage. Hence, on such material, the Property is no longer subject to the mortgage and Section 12A does not come into play.

17. Further, since the identity of the mortgagee is known to the Applicants, it cannot be said that it is a case where the mortgagee cannot be identified or is unknown. Neither can it be suggested that the mortgagee is out of jurisdiction. The evidence before me is not clear as to what steps have been taken by the Applicants to locate the manager of the Tso or to secure a person to be appointed to represent the Tso. Apparently, at least one member of the Tso had been found, viz. Cheung Kwong Yu. Hence, it is doubtful if the criteria for establishing the jurisdiction of the court under Section 12A could be met.

18. The Applicants commenced this application by way of an ex parte originating summons. Mr Vaughan, who appeared for the Applicants, relied upon Para.7/7/1 of the Hong Kong White Book and submitted that since there was no party to be served, proceedings could be brought by way of ex parte originating summons. In my view, that begs the question as to whether any other parties should be joined in proceedings under Section 12A. Paragraph 1 of Practice Direction 5.8 provides that ex-parte originating summons should only be used when they are authorized or required by the Rules or any statutory provision. The question is whether Section 12A authorizes the proceedings to be commenced by ex-parte originating summons. There is no express authorization in the section. Is authorization implied?

19. The English practice under Section 50 of LPA can be found in Atkin's Court Forms, Second Edition, Vol.34, 1988 issue, p.335, Para.17 and the relevant forms are Forms 30 to 33 at p.364 and 365. The originating summons appears to be an inter parte one. The defendant to the proceedings, according to Form 30, is the purchaser although I note that even under that inter parte form, the mortgagee is not made a party. However, as I have observed, there are distinctions between Section 12A and Section 50. In fact, Section 203 (2) of LPA requires proceedings to be served on the other party to the sale. Section 12A is not founded on a sale of the property and I see no reason why it is necessary to join the purchaser as a party to these proceedings in most cases. We do not have the equivalent of Section 203. Under Section 50(4), service on the purchaser could be dispensed with. I also note that in In re Uplands Portmore Road [1948] WN 165, the court also dispensed with service on the mortgagee.

20. Given the jurisdictional basis under Section12A, an applicant could only come to court when there are difficulties in joining the mortgagee as a party to the proceedings. If the court insists on the matter to be proceeded with on an inter parte basis by joining the mortgagee as a party, it would probably defeat the purpose of the section. One has to bear in mind that this section was enacted to address the problem identified by Godfrey J in Fung Kam Cheung v. Kwok Yiu Wing [1991] 1 HKC 321. There are many cases of old mortgages registered against the title of New Territories land the subsistence of which are doubtful. The mortgagee could not be traced or located and it is probable that he has died for some time. However, unlike the present case, it might be difficult for the owner to produce clear evidence as to the discharge of such mortgage. Although one can name the mortgagee as a defendant and proceed in the manner as the plaintiff did in Fung Kam Cheung, it is sometimes difficult to procure a person to represent the estate of the mortgagee. Although the appointment of Official Solicitor as representative is one possible solution, it is cumbersome and there is no guarantee that the Official Solicitor would agree to act beyond the acceptance of service of the proceedings. It would also be costly since the Official Solicitor may require an indemnity as to costs. Section 12A is to provide a practical solution. It is clear from the wordings of Section 12A(2) that it is envisaged that in a proper case, proceedings could be conducted without notice to the mortgagee.

21. Since the matter would be dealt with at three different stages as analysed above, I see no reason why initially proceedings could not be commenced by way of ex parte originating summons. In my judgment, by necessary implication from the rationale underlying this section, an applicant is authorized to commence proceedings by ex parte originating summons. In most cases, there would not be great difficulties at least at the first stage. In any event, when the court is seized with the matter, it can consider on the facts of the case before it whether to direct notice to be given to other parties. Upon notice being given, such party may apply to be joined in as a defendant to the proceedings if he deems fit.

22. Construed in this manner, Section 12A could be useful to a conveyancer faced with a stale mortgage registered against the property. It would be less costly than proceedings under the Fung Kam Cheung route and at the same time, the court still has the power to ensure necessary notice is given to interested parties in appropriate cases.

23. In the present case, given the uncertainties regarding the matters set out in Paragraphs 16 and 17 above, the Applicants need to reconsider whether it is appropriate to proceed under Section 12A. I therefore agree to adjourn the matter sine die with liberty to restore.