WINLAND FINANCE LTD v. GAIN HERO FINANCE LTD

CACV 186/2019

[2021] HKCA 576

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 186 OF 2019

(ON APPEAL FROM HCMP NO 2671 OF 2017)

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JUDGMENT

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Hon Lam VP:

1.  I have read the judgment of Yuen JA in draft and I respectfully agree with it.

Hon Yuen JA:

2.1.  This is the appeal of Winland Finance Ltd (“WF”) against the Judgment of DHCJ Keith Yeung SC (“the judge”) given on 21 March 2019 (“the Judgment”) in HCMP1980/2017 and HCMP2671/2017 which were heard together.

2.2.  In HCMP1980/2017, the plaintiff was Gain Hero Finance Ltd (“GH”) and the defendant was WF.  In HCMP 2671/2017, the plaintiff was WF and the defendant was GH. 

2.3.  Both these companies (and indeed, a number of other finance companies) had lent money to one Tang Shung Ching Sabin (“Tang”).

Background

3.  Tang was the registered owner of a flat and car parking space (“the Property”) in a development in Kowloon.  The development had been constructed under a government housing scheme for civil servants.  As such, the Property was held subject to a condition which has been referred to as a “non-alienation” clause, which prohibited Tang from assigning, mortgaging, charging, or otherwise parting with possession of the Property or any interest therein, or entering into any agreement to do so, without the previous written consent of the Financial Secretary Incorporated (“FSI”). Generally, such consent would only be given upon payment of a premium to FSI. 

4.  In 2004, upon his acquisition of the Property, Tang had given a Legal Charge over the Property in favour of FSI, which legal charge was duly registered in the Land Registry.

5.  Subsequently, from 2013-2014, Tang borrowed money from at least 5 finance companies, including WF and GH, pursuant to various loan agreements.

Registration in the Land Registry of loan agreements

6.  It is notable that at least some of these loan agreements were registered in the Land Registry.

United Asia Loan Agreement

7.1.  In October 2013, Tang signed a Loan Agreement with United Asia Finance Ltd for a loan of $200,000¹, which was registered against the Property in the Land Registry in November 2013. 

7.2.  The only reference to the Property in the United Asia Loan Agreement was that Tang agreed not to sell or create or enter into any charge lien or other incumbrance over the Property or otherwise dispose of the Property until full repayment², and the stated security for repayment was the appointment of the lender as his attorney to “receive the payment of the purchase price” payable on completion in any sale by Tang of the Property³. However, the First Schedule of the Loan Agreement stated the “form of security for the loan” as “Nil”.

Alright Finance Loan Agreement

8.  Two months later in December 2013, Tang entered into a Loan Agreement with Alright Finance Services Ltd.  The terms of this Loan Agreement are not before this court, but it was also registered in the Land Registry.

Charging Order

9.1.  In April 2014, a Charging Order nisi was obtained by one Rise Honest International Ltd⁴ against Tang, which order was registered against the Property in the Land Registry the same month.  In May 2014, the Charging Order was made absolute, and this order was registered in the Land Registry in June 2014.

9.2.  However the Charging Order was discharged on 3 July 2014, the discharge being registered on 15 July 2014.  Nothing is known about the circumstances in which the Charging Order was obtained and discharged, and I shall say no more about it.

WF Loan Agreement

10.1.  WF’s evidence was that in June 2014, Tang approached WF for a loan of $2.2 million.  Tang signed a Loan Agreement with WF, and delivered the title deeds of the Property to WF. 

10.2.  The WF Loan Agreement, which was made on 23 July 2014, stated that the purpose of the loan was in part to enable Tang to make repayment of the loan from United Asia as well as loans from three other different finance companies, with Tang to receive the balance of the loan.

10.3.  Clause 9 of the WF Loan Agreement was entitled “Security for Repayment”.  The following parts of this clause are significant:

“9.1.  In consideration of the Facility advanced by the Lender [WF] under this Agreement and as security for repayment of all the indebtedness owed by the Borrower [Tang], the Borrower as Beneficial Owner hereby assigns and agrees to assign to the Lender all his ... right and interest (“Assigned Rights”) to and in the balance of the consideration or purchase money for the sale of the Property ... (after deduction and payment of any premium payable to the Government ... for removal of the restriction against alienation of the Property ... and any redemption money payable to the mortgagee/chargee under the existing Mortgage/Legal Charge of the Property) and any money accrued or payable to the Borrower in the Borrower’s capacity as owner ... from the purchaser of the Property ...subject to the provisos contained in clauses 9.4 and 9.3 hereof ....

9.2.  Upon the full payment to the Lender of all the indebtedness owed by the Borrower to the Lender, the Lender shall at the request and cost of the Borrower reassign the Assigned Rights to the Borrower.

9.3.  If, for whatever reason, the assignment of the Assigned Rights mentioned in clause 9.1 hereof does not have the effect as such, the agreement to assign made by the Borrower under the said clause 9.1 shall operate to assign the Assigned Rights and there shall deem to be an effective assignment of the Assigned Rights as soon as the Borrower is in the position to make such an assignment ... .

9.4.  The Borrower hereby IRREVOCABLY NOMINATED AND APPOINTS the Lender to be the Borrower’s true and lawful attorney for the Borrower ... at any time or times during the continuance of this Agreement ...

(i)   to receive the balance of the consideration or purchase money for the sale of the Property (after deduction and payment of any premium payable to the Government ... for removal of the restriction against alienation of the Property ... and any redemption money payable to the mortgagee/chargee under the existing Mortgage/Legal Charge of the Property) ....

9.5.  The Borrower hereby covenants to the Lender that except with the written consent of the Lender, the Borrower shall not sell, charge, mortgage, dispose of or otherwise deal with the Property or any interest therein before the Borrower has fully settled all indebtedness under this Agreement.

9.7.  For the purpose of notifying the public of the Lender’s right to receive the consideration or purchase money for the sale of the Property and any other money as aforesaid, the parties hereto shall register this Agreement against the Property in the relevant Land Registry”.  (Emphasis added). 

10.4.  Pursuant to this Loan Agreement, WF transferred a sum of $2,149,400 to their then solicitors, part of which went to repay Tang’s creditors, with him receiving the balance.

10.5.  WF’s Loan Agreement was registered in the Land Registry on 17 September 2014.

Orchard Finance Loan Agreement

11.1.  Shortly afterwards, on 31 October 2014, Tang entered into yet another Loan Agreement, this time with Orchard Finance Ltd for a loan of $700,000⁵. 

11.2.  This Loan Agreement stated the “purpose” for registration in the Land Registry as follows.   Tang having covenanted in sub-para. 7(f) that he would not sell or create or enter into any charge, liens or other incumbrances over the Property or otherwise dispose of the Property until he has made full repayment of the loan from Orchard Finance, sub-para. 7(g) then stated:

“On happening of any event of default ... the Lender [Orchard Finance] may lodge this Agreement with the Land Registry of Hong Kong for registration for the purpose of notifying the public the aforesaid sub-paragraph (f)”. (Emphasis added).

11.3.  Five days later however, the Orchard Finance Loan Agreement was sent for registration in the Land Registry.  The materials before this court do not show what (if any) event of default had occurred during that period to purportedly justify registration of the Loan Agreement under sub-para. 7(g).

GH Loan Agreement

12.1.  On 27 November 2014, Tang entered into yet another Loan Agreement, this time with GH for a loan of $1 million.

12.2.  The terms of the GH Loan Agreement were similar to the United Asia Loan Agreement.  Tang agreed not to sell or create or enter into any charge lien or other incumbrance over the Property or otherwise dispose of the Property until full repayment⁶, and the security for repayment was the appointment of the lender as his attorney to “receive the payment of the balance of purchase price” payable on completion of the sale of the Property⁷.  Security for the loan was also stated to be “Nil”⁸.

12.3.  The GH Loan Agreement was registered in the Land Registry on 8 December 2014.

13.  Pausing here, it would be noted that by the end of 2014, a number of Loan Agreements had been registered against the Property in the Land Registry, the agreements stating various purported “purposes” for such registration.

GH’s Judgment and Charging Order

14.  On 8 June 2015, GH obtained judgment against Tang in HCA465/2015 in the sum of $1,130,684.93 with interest and costs.

15.1.  The turning point in this case came when GH applied for a Charging Order against the Property.  In an affirmation filed on 24 June 2015 in support of the application, GH’s solicitor stated that a land search (exhibited to the affirmation) had been conducted which showed that Tang “has other creditors”, viz. FSI, United Asia, WF and Orchard Finance.  The registered Loan Agreements were however not exhibited. 

15.2.  On 29 June 2015, Master Lo made a Charging Order nisi.  This was served on Tang only, as no directions were given for service on anyone else.

15.3.  At the hearing on 4 August 2015, Tang was absent. Master Chow made a Charging Order absolute against the Property.

15.4.  The Charging Order absolute was filed against the Property in the Land Registry on 24 August 2015.   The effect of this order will be discussed later in this Judgment⁹.

GH Order for Sale

16.1.  On 23 June 2016, GH commenced HCMP1608/2016 for an order (amongst others) for sale of the Property and for the sale proceeds to be distributed, under the Court’s direction.  The originating summons and affirmation in support were served on Tang only.

16.2.  On 25 January 2017, Master Lai raised a requisition regarding the position of Tang’s other creditors (as disclosed in the land search).

16.3.  On 17 February 2017, GH’s manager Man Wai Cheung Peter filed an affirmation stating the following:

“3. At the returnable date of the hearing of the said Application [for order of sale], Master R Lai ... raised requisitions that according to the land search record, there is several encumbrances¹⁰ ... registered against the defendant’s [Tang’s] property ... and the Learned Master required us to clarify if the said encumbrances is secured against the subject property. ...

4. [The respective United Asia, WF and Orchard Finance Loan Agreements were exhibited].

5. Upon perusal of the said Loan Agreements and upon receiving advice by my solicitors, I confirm that all the said Loan Agreements are not a loan in nature which the Defendant pledged and/or charged the said Property as collateral for the loan, and it should not be regarded as a secured debt owed to the above named financial institutions when giving the loans to the Defendant under the respective Loan Agreements. Given the nature of the said Loan Agreements are not documents related to land at all, they should absolutely not be registrable and the debt under the said Loan Agreements are thus not any kind of secured/charged against the said Property, i.e. those financial institutions are not secured creditors but only unsecured creditors, and they do not have any rankings before the plaintiff [GH]”.　(Emphasis added).

16.4.  Pausing here, it would be noted that the passage in §5 above (italicized) would have applied to GH itself before it obtained the Charging Order, because (as noted previously¹¹) the relevant terms of its Loan Agreement were nearly identical to those of United Asia.   

16.5.  On 13 March 2017, Master Lai gave GH an order for sale on the strength of the Charging Order absolute.  The master gave Tang 28 days to redeem the Property, failing which he should deliver up vacant possession and the title deeds¹² for the Property to be sold at a price of not less than $8 million.

16.6.  The master ordered that the proceeds of sale should be applied to payment of the following in this order:

(a)     the premium payable for lifting the non-alienation restriction;

(b)     Government rent, etc;

(c)     prior encumbrances ranking immediately before the Charging Order, if any;

(d)     costs and expenses of auctioneers and estate agents;

(e)     legal costs;

(f)     amounts due under the Charging Order absolute;

(g)     GH’s costs of the proceedings for an order for sale;

(h)     “any surplus be paid to the subsequent encumbrancer ranking immediately behind the Charging Order and if there is none, be paid to the Defendant [Tang]”.  (Emphasis added).

16.7.  The Order for Sale was registered in the Land Registry on 29 March 2017.

Agreement for Sale of Property

17.1.  On 24 July 2017, GH obtained an order for possession of the Property. 

17.2.  On 31 August 2017, an agreement for the sale of the Property was made at the price of $10.08 million.

17.3.  It is WF’s evidence that it was on 4 September 2017 that it was informed of the intended sale of the Property, which it considered to be at lower than the market value¹³.

Proceedings

18.1.  This led to the issue by GH of HCMP1980/2017 on 20 September 2017, and the issue by WF of HCMP2671/2017 on 5 December 2017, which the judge heard together.

18.2.  The judge identified 5 issues, as follows¹⁴:

(a)     Whether the parties to the WF Loan Agreement intended to create any interest in land registrable under the Land Registration Ordinance, Cap.128 (“LRO”) (Issue #1);

(b)     If the answer to Issue #1 is in the negative, whether the delivery of the title deeds by Tang to WF has created an equitable mortgage over the Property in favour of WF (Issue #2);

(c)     If the Court decides Issues #1 or #2 in the affirmative, whether the non-alienation covenants would annul the intended security to be created by the WF Loan Agreement or the delivery of the title deeds (Issue #3);

(d)     Alternative to Issue #3, whether the equitable assignment of the sale proceeds of the Property under the WF Loan Agreement could still take priority over the Charging Order Absolute in so far as such proceeds are concerned (Issue #4);

(e)     If the Court decides any of Issues #1, #2 or #3 in favour of WF, whether any security interest so created over the Property or its sale proceeds would still be annulled by public policy (Issue #5).      

The judge’s Judgment

19.  In a clear and thorough judgment, the judge held the following:

(a)    in respect of Issue #1, the parties to the WF Loan Agreement did not intend to create any interest in the Property registrable under the LRO, because the rights assigned by Tang to WF were only in relation to the proceeds of sale, as opposed to the land itself (§§38- 50);

(b)     in respect of Issue #2, the purpose of the delivery of title deeds should be considered together with and in light of (not separately from and inconsistently with) the underlying loan agreement.  Given the intention shown in the WF Loan Agreement, the delivery of the title deeds by Tang to WF did not create an equitable mortgage over the Property in favour of WF (§§51-56);

(c)    Issue #3 thus became academic (§57);

(d)    in respect of Issue #4, the Charging Order absolute created a charge on Tang’s beneficial interest in the Property itself, whereas WF’s interest was only in the future sale proceeds.  GH thus had priority (§§58-67);

(e)    by reason of (a), (b) and (c), Issue #5 was not engaged.     

Appeal

20.  In WF’s amended grounds of appeal, it contended that:

(1)     the judge failed to recognize that the question in controversy was not competing priorities between rival claimants of an interest in property, but whether the Charging Order could be permitted to prejudice WF’s earlier security created by Tang’s equitable assignment of future proceeds of sale;

(2)     the judge should have found that GH’s equity under the Charging Order was no different from WF’s equity as assignee of future proceeds of sale, and as those equities are equal, the first in time (being WF’s) should prevail;

(3)     the Charging Order should have been set aside or varied, as it ought never to have been granted because WF would be unduly prejudiced, and if necessary, leave to amend WF’s Originating Summons should be given to add such a claim.

Discussion

Ground (1)

21.1.  As for Ground (1), it would first be noted that the judge was keenly aware that the question in controversy was over priority to proceeds of sale.  The heading of the Judgment in respect of Issue #4 was explicitly “priority between [WF] and [GH] on the sales proceeds”.

21.2.  Insofar as Ground (1) suggests that the judge was wrong in his reasoning on Issue #4 in holding that GH’s interest in the Property “trumped” WF’s interest as assignee of the proceeds, this argument is similar to Ground (2).

Ground (2)

22.1.  It would first be noted both from the Notice of Appeal, and from the written submissions of counsel for WF¹⁵, that there is no appeal from the judge’s ruling on Issue #1 that the WF Loan Agreement did not create any interest in the Property. 

22.2.  As such, it should be pointed out that as the land is not affected, the WF Loan Agreement should not have been registered, irrespective of the “purpose” stated therein purporting to justify registration in the Land Registry.  In this regard, I agree with respect with Godfrey J’s judgment in Re Yasaki International Co Ltd ¹⁶ that an assignment of the proceeds of sale of land does not create an interest affecting land for the purposes of the LRO, and is thus not registrable.  Whilst the English legislation¹⁷ considered in the cases cited in support by Godfrey J (Re Rayleigh Weir Stadium¹⁸ and Thomas v Rose¹⁹) is different, s.2(1) LRO nevertheless clearly states that “land” refers to “any parcels of ground, tenements, or premises in Hong Kong”, thus excluding proceeds of sale. The common law definition²⁰ of “land” also does not include proceeds of sale.  

23.  In light of the evidence in this case that, even though the land was not affected, various finance companies²¹ have nevertheless managed to register their loan agreements in the Land Registry, it is hoped that the Registry will be alerted to this practice and take steps to rectify such misunderstanding, if not abuse, should there be similar attempts at registration in the future.

24.  Coming back to this appeal, there is also no appeal from the ruling on Issue #2 that the delivery of title deeds did not create an equitable mortgage over the Property.

25.1.  It follows from the judge’s ruling on Issues #1 and #2 above that WF’s interest in the proceeds of sale (as assignee) can be no better than Tang’s (its assignor).  Thus, WF’s interest in the proceeds must defer to those with security over the Property.  Thus, there can be (and there was) no dispute that FSI’s Legal Charge ranks higher than WF’s interest in the proceeds of sale.

25.2.  As far as GH is concerned, it is true that before it obtained the Charging Order, it was similar to WF in that it was no more than a creditor of Tang with no security over the Property.  However, its position changed when it obtained the Charging Order.

26.1.  Section 20B(3) High Court Ordinance Cap. 4 (“HCO”) provides:

“(3) ... a charge imposed by a charging order shall have the like effect and shall be enforceable in the same courts and in the same manner as an equitable charge by the debtor by writing under his hand”. (Emphasis added).

26.2.  Although a charging order does not involve a transfer of the legal or equitable ownership of the land²², it should be noted that the equitable charge referred to in the statute is not a charge over proceeds of sale only.  As explained by the editors of Cousins, The Law of Mortgages²³

“... the order, once made, provides the person with a money judgment or order [GH] with an enforceable security with proprietary attributes over the property of the judgment debtor [Tang]. Sir Christopher Staughton described the interest created as:

‘... a proprietary interest ... and so binding on third parties. A charging order does not give a right to possession or foreclosure, but it seems to be an assignment of some proprietary right, effected by the order of the court’”. (Emphasis added).

27.1.  WF’s written submissions state that “the Assignee [WF] accepts that the Charging Order does indeed create an interest in land for the purposes of the Land Registration Ordinance”²⁴.  However, WF submits that the question of who should have priority in the proceeds of sale

“has nothing to do with whether the claimant’s interest amounts to an interest in land for the purposes of the [LRO], and because [GH’s] interest under the Charging Order arose after [WF’s] interest under the Assignment and hence (bearing in mind the equitable nature of the interest created by the Charging Order) any rights to the proceeds of sale ... conferred upon [GH] by the Charging Order should be made subject to the rights conferred upon [WF] by the earlier Assignment”. (Emphasis as per original].

27.2.  I do not accept that submission as it ignores the difference in the class of assets.  GH’s interest was in a different class (an interest in the Property given by statute) from that of WF’s (an interest in future proceeds). 

27.3.  The enhanced status of a holder of a Charging Order is obvious.  He can enforce it by sale, or by the appointment of a receiver to receive rents²⁵. And if he applies to court for sale of the land, the debtor can only redeem the land if he makes full repayment of the debt²⁶.  The debtor cannot get any share of the proceeds for himself before the debt owed to the holder of the Charging Order is entirely satisfied.  

28.1.  It was argued on behalf of WF that the nature of the Charging Order is equitable.  That is so, but that only refers to the nature of the interest.  What is crucial is the class of the asset.  To compare GH’s interest in the land with WF’s interest in the proceeds is not comparing like with like, for they are not within the same class of assets.  Put another way, after GH obtained the Charging Order, WF could not enjoy any “equal equity” because WF’s security interest remained attached to the proceeds only. 

28.2.  Since Tang must defer to GH in his claim to proceeds, WF (as the assignee of Tang’s rights) cannot enjoy better rights than him.  The judge was clearly right when he held that, like Tang, WF can only get its hands on what is left after GH has satisfied its loan. 

Ground (3)

29.  As for Ground (3), s.20(3) HCO provides, where material, that:

“In deciding whether to make a charging order the Court of First Instance shall consider all the circumstances of the case and, in particular, any evidence before it as to –

(b) whether any other creditor²⁷ of the debtor would be likely to be unduly prejudiced by the making of the order”.

30.1.  An application for a charging order nisi is made ex parte.  Accordingly, the applicant has a duty to make full and frank disclosure to the court of all matters of which it (the applicant) had or should have had notice and which the court would need to consider before exercising its discretion whether or not to make a charging order having regard to s.20(3)(b).  In GH’s application²⁸ for a charging order, GH’s solicitor did state that a land search (exhibited to the affirmation) had been conducted which showed that Tang “has other creditors”, viz. FSI, United Asia, WF and Orchard Finance (although the registered Loan Agreements of the three finance companies were not exhibited and hence there was no evidence as to the extent of the loans). However, the master dealing with the application for a charging order nisi did not direct service of the application on these other creditors, nor did the master who later made the Charging Order absolute. 

30.2.  When Master Lai dealt with GH’s subsequent application for an order for sale, he raised a requisition in respect of the other finance companies’ loan agreements.  However, by that time, the Charging Order had been made, it was valid and binding, and its effect was that GH’s interest was in a different class of asset from that of the other finance companies (including WF).  The master was satisfied with GH’s answer to the requisition, and in my view he was correct to be so satisfied.

31.1.  WF may feel aggrieved that GH had “stolen a march” on it (and the other finance companies) by GH’s application for a charging order against the Property.  The masters who dealt with the application for charging order did not direct service of that application on WF (and the others), although their identities had been disclosed by GH.  That would have been the prudent course to take, to ensure that the court would have more information on the debtor’s financial position before deciding whether or not to make the Charging Order. 

31.2.  However, when WF later became aware of the charging order, it did not apply to set it aside.  And although WF raised many issues before the judge, it did not include the issue whether the Charging Order should have been made, or was liable to be set aside or discharged.  Even now, WF has not sought leave to adduce evidence that had it been aware that GH was applying for a charging order, WF would have taken steps to oppose it in reliance upon Tang’s financial position.  If WF had done so, the court would then consider all such relevant evidence, in particular whether Tang was insolvent²⁹ and how a charging order would impact upon the fair distribution of his assets.  If he had been insolvent, it would have been unlikely for the court to have given the Charging Order so as to place GH at an advantage over the other creditors who would otherwise obtain pari passu distribution. 

31.3.  However, the point was not argued before the judge, and there was and is no such evidence before the courts at either level.  As the issue had not been raised below, and in the absence of such crucial evidence, Ground (3) must also be dismissed³⁰. 

Order

32.  I would dismiss the appeal with costs.  The respondent may submit a statement of its costs for gross sum assessment within 14 days of this Judgment.  The appellant may submit its comments thereon within 14 days after receipt of the respondent’s statement of costs.  The court will then make a summary assessment on the papers.

Hon Chu JA:

33.  I agree with the judgment of Yuen JA.