XCHRX WING HANG BANK, LTD. v. TSANG SZE YIN AND OTHERS

HCMP 1689/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1689 OF 1998

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J U D G M E N T

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The 3rd Defendant's application

1. On 23 December 1998, the bailiff served on Madam Shing Oi Woon ("Madam Shing") at Flat F, 3rd Floor, Fu Ho Building, 5 Kau Yuk Road, Yuen Long ("the premises") a "Notice to Occupiers" stating that pursuant to a Writ of Possession issued in HCMP No. 1689 of 1998 ("the mortgage proceedings"), possession of the premises was to be delivered to the Plaintiff bank ("the bank") on or before 30 December 1998. According to Madam Shing, this was the first that she had heard of the mortgage proceedings and indeed, of the bank's interest in the premises.

2. The mortgage proceedings had been brought by the bank on the basis of a legal charge dated 16 May 1997 ("the charge") granted over the premises by the 1st and 2nd Defendants ("the Defendants") and registered in the Land Registry on 23 June 1997. When the Defendants (who had defaulted in making the mortgage repayments) failed to appear at the hearing on 29 July 1998, Master Ho gave Judgment for the bank and, inter alia, made an Order for possession of the premises in its favour.

3. Madam Shing was then not a party to the mortgage proceedings. After receiving the Notice to Occupiers mentioned above, she obtained legal aid and was granted leave to intervene in the mortgage proceedings by consent, so that she is now named as 3rd Defendant. She claims a beneficial interest in the premises by virtue of a resulting trust and asserts that the bank was sufficiently on notice of such interest to be bound by it. The bank denies that she has any such interest and also denies that it was on notice of her claim when it took the legal charge on the premises.

4. Consent to Madam Shing's intervention was given subject to the Plaintiff's right to contest her alleged entitlement to an interest in the premises. Accordingly, Madam Shing issued a summons dated 15 July 1999 seeking to set aside Master Ho's said Order. Mr Neal Clough, appearing on Madam Shing's behalf, made it clear that he was not then (and was not, on the present appeal) seeking a substantive determination of her asserted rights. He had taken the view (perhaps on analogy with default judgments under Order 13) that it was first necessary for Master Ho's Judgment, the Order for possession and the subsequent Writ of Possession to be set aside to enable Madam Shing to have her substantive claim determined. It was on this basis that the application was argued before Master Ho and before me.

5. Master Ho dismissed the summons so that, unless overturned, Madam Shing is precluded from pursuing her attempt at establishing her claimed beneficial interest in the premises.

6. Given the effect of the proceedings before the Master, I permitted the abovementioned approach to continue to be adopted before me. However, in my view, the three-stage procedure (involving (i) intervention, (ii) setting aside the judgment and orders, and (iii) determination of the parties' substantive rights) adopted in the present case is unnecessary. Only stages (i) and (iii) are required. There is no need for stage (ii) since the intervener is in any case not bound by the judgment against the Defendants. Madam Shing is only concerned with setting aside the order for possession as against herself and, as appears from the line of authorities cited below, the judgment and orders obtained against the Defendants in any event remain in place.

The Plaintiff's procedural objection

7. Mr Yeung resisted Madam Shing's application to set aside on two grounds. He submitted that what the Court was seized of (at this stage (ii)) was an application to set aside a default judgment and, that like any other Defendant seeking to set aside such a judgment, Madam Shing had to meet the requirements established by the Courts in the context of Order 13 rule 9. In particular, since the judgment had been regularly obtained, Madam Shing was required in the first place to explain to the Court's satisfaction why a default judgment was allowed to be entered and secondly, to establish that her claim to remain in possession was not merely arguable but had a real prospect of success, applying Alpine Bulk Transport Co Inc v Saudi Eagle Shipping Co Inc, The Saudi Eagle [1986] 2 Lloyd's Rep 221 at 223; and Premier Fashion Wears Ltd v Li Hung Chung [1994] 1 HKLR 377. Mr Yeung submitted that Madam Shing's application falls short on both grounds.

8. The principles mentioned above are of course well-known and are frequently applied in the context of setting aside default judgments where the defendant making the application is a defendant named on the Writ who has been regularly served. However, in the present case, Madam Shing was neither named as a party to the Originating Summons nor was she purportedly served with those proceedings, whether regularly or otherwise. In my judgment, in such circumstances, the default judgment principles referred to above are inapplicable.

9. A line of authorities shows that in cases like the present, the proper approach is for the person claiming the right to remain in possession to apply to be joined as a defendant and to have his claim tried as between himself and the purchaser or mortgagee claiming possession. The substantive rights are determined in the context of the intervener's application to set aside the order for possession as against himself (but not in respect of any other defendants against whom judgment may have been properly entered) : Minet v Johnson (1890) 6 TLR 417, Berton v Alliance Economic Investment Co [1922] 1 KB 742 at 759, Leicester Permanent Building Society v Shearley [1951] Ch 90, In re Wykeham Terrace [1971] Ch 204, McPhail v Persons Unknown [1973] Ch 447.

10. Those authorities do not suggest that the occupier may be denied the right to contest the entitlement of the purchaser or mortgagee unless he can first explain why he did not intervene before judgment was entered (against other defendants), or unless he can first satisfy the court that he has a real prospect of success in upholding his claim to an interest in the property entitling him to remain in possession.

11. The onus rests on the plaintiff claiming possession. He must generally establish his right against all occupiers who assert an adverse claim to possession and who are, or who seek to be, made parties with a view to establishing such claim. This is reflected, for instance, in Order 13 of the High Court Rules in relation to actions begun by Writ. A plaintiff may enter default judgment under O 13 r 4(1) against a defendant where a claim for possession of land is involved. However, under O 13 r 4(5), such judgment "shall not be enforced against any defendant unless and until judgment for possession of the land has been entered against all the defendants."

12. The bank in the present case seeks to enforce an order for possession of the flat presently occupied by Madam Shing. Before it can be allowed to do so, Madam Shing is at least prima facie entitled to be joined as a defendant for her claim to a beneficial interest in the property, allegedly binding on the bank, to be tested. Only if she fails and the bank secures judgment for possession, not only against the Defendants, but also against Madam Shing, should the bank be permitted to enforce such order.

The Plaintiff's objection on the merits

13. It follows from my rejection of the applicability of the default judgment cases that I also reject any requirement that Madam Shing must show "a real prospect of success" in the Saudi Eagle sense.

14. Mr Yeung submitted in the alternative that as it was obvious, even at this stage, that Madam Shing's claim was doomed to fail, I should nonetheless refuse her application since a full hearing would be a waste of time. He submitted that if the test was not that of having to show a "real prospect of success", the proper test was akin to that for allowing a defendant unconditional leave to defend in Order 14 proceedings, namely, for Madam Shing to show that she had at least an arguable case that she was entitled to the claimed interest in the land.

15. Since, as explained above, this second stage of the procedure is strictly unnecessary, it is my view that there is no "threshold" test of any kind to be satisfied before the parties are allowed to have their substantive property rights determined.

16. However, having listened to the arguments, I have in any event come to the conclusion that a sufficient case has been disclosed on the merits so that a summary dismissal of Madam Shing's claim is not justified. I will indicate briefly what such evidence consists of but wish to stress that I am making no findings, but merely indicating why I do not consider the application unsustainable.

17. Two elements are essential if Madam Shing is to succeed. First, she must establish her equitable interest in the property and secondly, that such interest is not overridden by the bank's interest as registered mortgagee.

Madam Shing's alleged beneficial interest

18. According to Madam Shing, she started to cohabit with Yau Kwok Kwong ("Yau") in Guangzhou in 1958. Two sons and a daughter were born to them between 1961 and 1964.

19. The premises were acquired by Yau on 10 January 1982 and registered solely in his name. Madam Shing alleges that this was done "for the sake of convenience" and that she had contributed money towards its purchase, using money that she had brought to Hong Kong in 1981. She has, however, not provided any particulars or documentation in relation to such contributions.

20. Some two years later, in April 1984, Madam Shing acquired the flat adjacent to the premises known as Flat F, 3rd Floor and flat roof, Fu Ho Building, 5 Kau Yuk Road, Yuen Long ("the 2nd flat") which was registered solely in her name.

21. Thereafter, from about June 1984, Madam Shing and Yau started running what is described in the Business Registration Certificate as a "Home for the Aged" known as the Chik Sin Sanatorium. This sanatorium, according to Madam Shing, occupied the 2nd Flat. She claims that she worked "day and night" as a care worker or amah in the sanatorium without wages or holidays and, in this way, contributed to the family income which was used, inter alia, to make mortgage repayments in respect of the premises. Madam Shing relies on such contribution in kind as a basis for her claimed interest in the premises, alleging that it was the understanding between herself and Yau that she was thereby contributing to the family income and building up family assets, including the premises. Additionally, after 1991, when Yau went to work on the mainland, Madam Shing claims that she continued to live at the premises, paying all rates, water charges, electricity bills, management fees, maintenance charges and other outgoings.

22. Mr Yeung attacked this evidence as vague and unsubstantiated. However, it is a version consistent with the Business Registration Certificate and supported by Madam Shing's evidence on affirmation. Some receipted demand notes for the utilities have also been exhibited. If, after being tested, such evidence is accepted by the court, a resulting trust could be found to have arisen in Madam Shing's favour in respect of the premises. Such a resulting trust would rest on well-known equitable principles which do not require to be rehearsed here and I see no basis for rejecting this part of her case summarily.

The breakdown of the marriage

23. Madam Shing and Yau never went through a ceremony of marriage. However, it appears that some form of marriage by cohabitation and reputed union is recognized on the mainland since, on 16 December 1992, a Notarial Certificate of Relationship was issued by the Notarial Office of Guangzhou City certifying that Madam Shing is Yau's wife.

24. However, Madam Shing discovered that Yau had commenced a relationship with another woman in Guangzhou named Zeng Gui Fang and that they had registered their marriage on 22 May 1993, producing a son on 1 August 1996. Madam Shing's complaints appear to have led to Yau being charged with and convicted of bigamy by the People's Court of Hai Zhu District in Guangzhou on 25 December 1996. He was sentenced to be imprisoned until 24 November 1997.

Sale and mortgage of the premises

25. It is against this background that on 29 April 1997 a sale and purchase agreement was entered into between Yau and the 1st Defendant, who is his nephew. The purchase price was stated in the document to be $1.5 million, with completion to take place on 29 May 1997 and vacant possession given on completion.

26. This transaction was financed by the Plaintiff bank which, at the same time, issued each of the Defendants with credit cards. The legal charge was executed on 16 May 1997 between the bank and such Defendants as security for the funds advanced. In this transaction, Messrs Ng, Tam, Ko and Chan, a firm of solicitors, acted for Yau, as the vendor, the Defendants as purchasers and as the borrowers and mortgagors, as well as the bank as the mortgagee.

27. It appears that in October 1997, the Defendants began to default on the mortgage repayments. This led to the bank issuing the Originating Summons on 22 April 1998 claiming payment of the sums due, possession and sale. It was alleged that a total amount of some $1.14 million was then outstanding. As mentioned above, this led to Master Ho's judgment in favour of the bank against the Defendants and the Writ of Possession.

Notice

28. It was accepted by both Mr Yeung and Mr Clough for present purposes that the second element essential to Madam Shing's success may, at least arguably, be formulated as follows. She must be able to establish that when the legal charge was executed, the bank either knew that the premises were occupied by someone who may have an interest in the premises inconsistent with the rights asserted by the Defendants as mortgagors or, that despite having reason to make inquiry, the bank deliberately closed its eyes to the possibility of such a person being in occupation of the premises. Mr Yeung submits that this formulates the principle at its highest in favour of Madam Shing, on the basis of the Court of Appeal's decision in Wong Chim Ying v Cheng Kam Wing [1991] 2 HKLR 253.

29. The bank does not suggest that it made any actual inquiry as to who, if anyone, was in occupation of the premises when it agreed to the mortgage. Apparently, however, it initially hoped to establish by positive evidence that Madam Shing was not in occupation on the basis of what Yau had told the bank at a meeting held on 11 June 1999, namely, that Madam Shing had only resided there from early 1982 to 1984. Such evidence is obviously hearsay and probably inadmissible. It is in any event contradicted by a letter from the 1st Defendant's solicitors to Madam Shing dated 24 September 1998 alleging that she had been a trespasser in occupation of the premises since June 1997 and continued to be in occupation as at September 1998. While this may not be evidence that Madam Shing was in occupation in May 1997 when the legal charge was executed, it contradicts the bank's hearsay evidence and so makes its positive case of non-occupation, to say the least, disputable.

30. On the bank's negative case, Mr Yeung submitted that on the evidence as it stands, Madam Shing cannot demonstrate any basis for alleging that the bank had the requisite notice. He stresses that (i) the mortgagors in this case had produced a sale and purchase agreement which, on its face, showed that they were to get vacant possession of the premises; (ii) that the mortgagors were man and wife who were both parties to the legal charge and bound by it, so that the bank had no reason to suspect that it was involved in a case involving an unscrupulous husband mortgaging a property without his wife's knowledge or consent; (iii) that the bank allowed the mortgage monies to be drawn against a representation made in a letter from Messrs Ng, Tam, Ko and Chan dated 16 May 1997 to the bank that the legal charge had been executed by the mortgagors and borrowers and that "vacant possession of the [premises] shall be delivered to the Borrower upon completion".

31. Mr Clough, on the other hand, submitted that various pointers existed suggesting that the premises were not going to be occupied by the Defendants and that the bank was on notice of this. He argued that it was therefore at least arguable that the bank was on notice of a risk that others might be in occupation and had failed to make due inquiry. The matters relied on by Mr Clough include the following.

32. In the sale and purchase agreement dated 29 April 1997, the 1st Defendant gave as his address 152 Shung Ching San Tsuen, Tai Tong Road, Yuen Long ("the Tai Tong Road address"). That of course was different from the address of the premises. However, Mr Yeung submits, and I accept, in itself, that cannot be taken as evidence that the bank was on notice that the Defendants would be living elsewhere since it would have been perfectly reasonable for the bank to assume that the Defendants intended to move into the premises and to leave the Tai Tong Road address after completion of their purchase.

33. However, on 2 May 1997, three days later and two weeks before the legal charge was executed, the Defendants completed application forms for credit cards to be issued by the bank. The legal charge was subsequently to be available as security for debts of the Defendants, including debts incurred by them from the use of such cards. The home address given in the application form was an address at the Au Tau Police Married Quarters in Yuen Long, which was obviously different from the address of the premises. It was this home address that was ticked as the mailing address for the purposes of the credit card. In my view, this may arguably suggest that the premises were not to be occupied by the Defendants as they were indicating that their home addresses should be used for communications concerning the credit cards during the period of the validity of such cards, which might well have been for a year or more, considerably after completion.

34. On 8 May 1997, when the bank wrote to the Defendants to inform them that their application for a loan of $1.05 million secured by the legal charge had been approved, it was likewise addressed to them at the said Police Married Quarters, arguably reinforcing the view that the bank took them to be living in such quarters and leaving it open to question whether they intended to occupy the premises after completion.

35. After the Defendants fell into arrears, the bank's solicitors addressed their letters before action dated 10 March 1998 (i) to the 1st Defendant at the premises, but (ii) to the 2nd Defendant at the Tai Tong Road address. This suggests that the bank was under the impression that the Tai Tong Road address given by the 1st Defendant when he signed the sale and purchase agreement remained a valid address for the 2nd Defendant almost a year later. This may make it arguable that at the time the legal charge was executed, the bank in fact did not believe, as one might otherwise assume, that the Defendants would move out of that address and into the premises after completion. Why else, one might ask, should the bank continue to use the Tai Tong Road address for one of its letters before action a year later?

36. Further examination of the evidence in this judgment is not necessary. In my view, the matters touched on above suffice to show that a sufficiently live issue exists as to whether the bank was put on notice that someone other than the mortgagor Defendants might be in occupation of the premises when the legal charge was executed. Madam Shing should not be shut out summarily from seeking to make good her claim to an equitable interest in the flat binding on the bank.

Conclusion

37. In consequence, I will allow the appeal from Master Ho's order dismissing the summons to set aside. However, I wish to stress that this merely means that Madam Shing is to be permitted to fix an appointment for the substantive determination of her claimed rights as against the bank. This does not mean that the judgment against the 1st and 2nd Defendants is affected. If, after the substantive hearing, Madam Shing succeeds and the extent of her equitable interest binding on the bank is determined, the bank remains entitled to any right it may have to an interest in the property above and beyond the entitlement of Madam Shing.

38. I direct that Madam Shing do within 28 days from the date that this judgment is handed down, issue a summons before the Master seeking all directions necessary for the substantive hearing.

39. Although Madam Shing has succeeded on the appeal, my view, as expressed above, is that this second stage was an unnecessary part of the procedure so that costs should not follow the event. I will therefore order, by way of a costs order nisi, that the costs here and below be in the cause of the issue between Madam Shing and the bank.

40. The parties have liberty to apply generally in relation to the orders made here (including liberty to apply for their review or variation). Madam Shing's own costs of this application are to be taxed in accordance with the Legal Aid Regulations.