XCHRX SHUI YEE LTD. v. ROCKWIN ENTERPRISES LTD. AND OTHERS

HCA527/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.527 OF 1995

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D E C I S I O N

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1. This is the plaintiff's appeal against the order of the Master made on 13 November 2000 discharging the Charging Order Nisi dated 22 September 2000.

Background

2. The background leading to the appeal, briefly stated, is this. The 1st defendant was the owner of 20 undivided shares in Inland Lot No. 3275 ("the 20 undivided shares") together with the exclusive right to possession of the Ground Floor of a building known as Rockwin Court erected on the said Lot. By a mortgage dated 31 December 1993, the 1st defendant mortgaged, inter alia, 1/5th of the 20 undivided shares together with the right to possession of the Ground Floor of Rockwin Court to the plaintiff. As a result of the 1st defendant's default under the mortgage, the plaintiff commenced the present action to recover the money due under the mortgage and for possession of the properties mortgaged.

3. The action was compromised by a Tomlin Order filed on 3 April 1995. Subsequently, the 1st defendant defaulted in repayment under the payment schedule annexed to the Tomlin Order. Money judgment was entered by consent against all the defendants on 7 June 1995. An order for the possession of the mortgaged property, including the Ground Floor of Rockwin Court, was also made by consent on 3 November 1995.

4. This was then followed by a number of litigations commenced by various parties to challenge the validity of the mortgage created by the 1st defendant in favour of the plaintiff. For present purpose, it is not necessary to go into the details of these litigations, suffice to note that, with the exception of one action, they are all outstanding.

5. On 22 September 2000, the plaintiff obtained a Charging Order Nisi in respect of 11 shares of the 20 undivided shares to enforce the outstanding judgment herein. Shortly before the hearing to make the Charging Order Nisi absolute, the 1st defendant filed affirmations stating that these 11 undivided shares had been assigned on 19 September 2000 to Mr Hui Po Yuen, a director of the 1st defendant. The application to make the Charging Order Nisi absolute was then adjourned for argument.

6. At the adjourned hearing on 13 November 2000, the plaintiff applied for the application to make the Charging Order Nisi absolute to be adjourned pending the determination of the plaintiff's application to set aside the assignment from the 1st defendant to Mr Hui under section 60 of the Conveyancing and Property Ordinance, Cap. 219 on the ground that the transaction was carried out with an intent to defraud the plaintiff. The adjournment was opposed by the 1st defendant. After hearing submissions, the Master discharged the Charging Order Nisi with no order as to costs. The plaintiff now appeals against the Order and seeks an order that the application for charging order absolute be adjourned pending the determination of the plaintiff's application under section 60 of the Conveyancing and Property Ordinance ("the s.60 Application").

Reasons for decision

7. The decision whether to adjourn the application for Charging Order Absolute pending the s.60 Application involves the exercise of judicial discretion. The starting point in the exercise of the discretion is that a Charging Order Nisi should not be adjourned sine dine but should be dismissed if there is no ground for making a Charging Order Absolute. It is for the 1st defendant to show cause and to satisfy the court that there is no ground for making the Charging Order Absolute.

8. In the present case, the question of whether there is ground for making the Charging Order Nisi absolute boils down to the validity of the assignment from the 1st defendant to its director. The plaintiff disputes the genuineness and validity of this assignment. If the plaintiff's challenge is right, then the beneficial interest of the 11 undivided shares remains with the 1st defendant, and the plaintiff is entitled to the Charging Order Nisi and also to make it absolute. On the other hand, if the assignment is a valid one, then the 1st defendant no longer had any beneficial interest after 19 September 2000 and the Charging Order Nisi will have to be discharged.

9. Accordingly, the master will have to resolve the issue of the validity of the assignment or to form a view on the matter before concluding whether the Charging Order Nisi should be discharged or be made absolute. By ordering the discharge of the Charging Order Nisi, the necessary implication is that the master considered that the validity of the assignment is not a live issue, such that she was satisfied that the 1st defendant did not have any beneficial interest in the remaining 11 undivided shares. The question is whether it is justified to arrive at that view.

10. The plaintiff's contention that the assignment by the 1st defendant to its director was designed to defraud the creditors of the 1st defendant is premised upon several matters. Firstly, the purchaser, being a director of the 1st defendant, must be aware of the outstanding judgment herein and the indebtedness of the 1st defendant. Secondly, it is too much of a coincidence that the transaction took place three days before the making of the Charging Order Nisi. Thirdly, the assignment was not preceded by any sale and purchase agreement. There was however a memorandum of sale, the date of which is the same as that of the assignment. Fourthly, the 11 undivided shares do not come with any right of possession. As a director of the 1st defendant, the purchaser must have knowledge of this. It is therefore highly questionable whether he would pay $500,000 to acquire the 11 undivided shares. Fifthly, the memorandum of sale and the assignment contain different descriptions as to the payment of the consideration. Sixthly, the assignment was only registered almost a month after 19 September 2000 while the memorandum of sale was neither stamped nor registered. In my view, these are not fanciful grounds. The circumstances surrounding the assignment do give cause for doubting the genuineness and validity of the transaction. The dispute therefore should not be disposed of summarily, but should be investigated.

11. In Rosseel NV v. Oriental Commercial and Shipping (UK) Ltd and Others (unreported), The Times, 11 October 1991, the English Court of Appeal held that where there was a dispute as to the beneficial ownership of the property subject to a charging order nisi, the court had power to order that the issue be tried and to adjourn the application to make the order nisi absolute until the issue was decided. The Court of Appeal further observed that where there was a real dispute, it was necessary in order to do justice that the issue be tried.

12. In opposing the appeal, Mr Lee for the 1st defendant argues that section 60 of the Conveyancing and Property Ordinance only renders a disposition caught by it viodable but not void. Accordingly, the assignment by the 1st defendant to Mr Hui remains valid until being set aside by an order of the court, which will only take effect as from the date of its pronouncement. Therefore, even if the plaintiff were to succeed in the s. 60 Application, the beneficial interest remains with Mr Hui up to the date of the court order, so that the 1st defendant would still have no beneficial interest on 22 September 2000 when the Charging Order Nisi was made. I do not accept this argument. As Mr Chan for the plaintiff submits, the effect of section 60 is to provide that the disposition shall be a valid one unless and until its validity is being successfully challenged. The plaintiff now challenges the disposition by the 1st defendant to its director and if it succeeds in the challenge, then the disposition will be avoided. The result will be that the beneficial ownership had not passed to the director by the assignment, so that it is subject to the Charging Order Nisi. If section 60 is to be read in the manner suggested by Mr Lee, then the very purpose of the section would be defeated in that the legitimate rights of the creditors can still be frustrated and defeated in the period before a fraudulent transaction is ordered to be set aside. That cannot be right.

13. Mr Lee further argues that by not discharging the Charging Order Nisi, the plaintiff will effectively be allowed to preserve the priority of the Charging Order notwithstanding that there is no sufficient ground for making the Charging Order absolute. There is, in my view, nothing objectionable for the plaintiff to preserve the priority of the Charging Order Nisi if the plaintiff were to succeed in the s. 60 Application. On the other hand, there is no question of preserving the priority if the plaintiff were to fail in its application.

14. For these reasons, the discretion of the court should be exercised in favour of an adjournment to enable the dispute as to the validity of the assignment to be fully litigated and argued. The appeal is therefore allowed. The order of the Master discharging the Charging Order Nisi is set aside. The application for making the Charging Order Nisi absolute is adjourned pending the determination of the s. 60 Application.

15. On the question of costs, the costs below should be in the cause of the Charging Order application. As to the costs of this appeal, costs should follow the event such that it should be to the plaintiff against the defendant, to be taxed if not agreed.