NATIONAL RESOURCES CAPITAL LTD. v. TSANG KIN MAN

DCCJ 3175/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3175 OF 2002

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Reasons for Decision

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1. This is an application by the Plaintiff for a judgment in default of defence under Order 83A, rule 4 of the Rules of the District Court. In the inter-parte summons, the Plaintiff asks for:

(a) A judgment in the sum of $118,599.32 and interest;

(b) A declaration that the Plaintiff is entitled to a charge on the balance of the consideration or purchase money for the sale of the Property (after deduction and payment of any premium payable to the Hong Kong Housing Authority under the Housing Ordinance and any redemption money payable to the mortgagee/chargee under the existing Mortgage/Legal charge of the Property) as from 30 October 2001;

(c) Costs of this action.

2. The summons was first heard by a Master who adjourned the case for hearing of argument before a judge. The Defendant has not appeared throughout the proceedings and at the hearing of this application. At the commencement of this hearing, the Plaintiff withdrew its application for money judgments and only sought for the declaratory judgment.

The Plaintiff's case

3. The Plaintiff's case is quite straightforward. The Plaintiff is and was at the material times carrying on business as a licensed money lender. By a Deed of Loan dated 30 October 2001, the Plaintiff lent a loan of $100,000 at an interest rate of 42% per annum to be repaid by 18 monthly installments of $7,582 commencing from 30 November 2001 until full and final payment.

4. Clause 5(a) of the Deed of Loan provides:

"As security for repayment of the Debt, the Borrower as Beneficial Owner hereby assigns and agrees to assign to the Lender all his/her/their right and interest to and in the balance of the consideration or purchase money for the sale of the Property more particularly described in the Second Schedule hereto ("Property") (after deduction and payment of any premium payable to the Hong Kong Housing Authority Under the Housing Ordinance and any redemption money payable to the mortgagee/chargee under the existing Mortgage/Legal Charge of the Property) and any money whatsoever accrued to the Borrower, in the Borrower's capacity as vendor, assignor or transferor, from the purchaser, assignee or transferee of the Property subject to the provisos contained in Clause 5(b) and (9c) hereof.

5. Prior to the signing of the Deed of Loan, the property had been charged to the Hang Seng Finance Limited. The loan was made by the Plaintiff to the Defendant on 30 October 2001. The Defendant had only repaid $7,582. The Writ of Summons against the Defendant was issued on 24 May 2002. The Defendant was adjudged bankrupt on 3 June 2002. The inter-parte summons for a default judgment was taken out on 24 June 2002. The Plaintiff now asks for a declaration that it has an equitable charge of the sale proceeds of the property.

6. The Plaintiff has not informed the Official Receiver of the present proceedings. The Defendant has named the Plaintiff as a secured creditor in the Statement of Affairs.

7. Three issues arise from this application. (1) Whether the Plaintiff requires the leave of the Court of First Instance to continue with the present proceedings? (2) Whether the Plaintiff has a charge on the Defendant's property? (3) Whether this court should exercise its discretion to make a declaration? The first two issues are circular questions and can be dealt with together first.

Whether leave of the Court of First Instance is required?

8. S. 12 of the Bankruptcy Ordinance provides:

(1) On the making of a bankruptcy order the Official Receiver shall thereby constituted receiver of the property of the bankrupt, and thereafter, except as directed by this Ordinance, no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt, nor shall proceed with or commence any action or other legal proceedings, unless with the leave of the court and on such terms as the court may impose.

(2) This section shall not affect the power of any secured creditor to realize or otherwise deal with his security.

9. The Plaintiff's solicitor argues that since the Plaintiff is a secured creditor, it does not require leave of the Court of First Instance to continue with the present proceedings. Regrettably, the Plaintiff's solicitor cannot advance any useful arguments or assist the court with any useful authorities. The case of Palmer and Carey (1926), the only case cited by the Plaintiff's solicitor, with respect cannot assist the court at all.

10. A "secured creditor" is defined in S. 2 of the Bankruptcy Ordinance as a person holding a mortgage, charge or lien on the property of the debtor or any part thereof, as a security for a debt due to him from the debtor. To decide whether the Plaintiff is a secured creditor, it has to be decided first whether the Plaintiff has a mortgage, charge or lien on the property of the Defendant. The Plaintiff does not argue that it has a mortgage or lien. It only argues that it has an equitable charge. Hence to decide whether the Plaintiff is a secured creditor, the court has to decide whether the Plaintiff has a charge on the Defendant's property first. And that is the effect of the declaration that the Defendant is asking for.

11. A charge "represents an agreement between creditor and debtor by which a particular asset or class of assets is appropriated to the satisfaction of the debt, so that the creditor is entitled to look to the asset and its proceeds to discharge the indebtedness, in priority to the claims of unsecured creditors and junior incumbrancers" (see page 14, Legal Problems of Credit and Security, Second Edition, by Professor R.M. Goode). A legal charge of real property can be created by statute but a charge of personal property must be equitable.

12. The purported charge claimed by the Plaintiff appears to be a strange one. The Plaintiff did not seek to charge on the real property of the Defendant referred to in the schedule to the Deed of Loan, i.e. the property obtained from Housing Authority. Rather it only sought to charge on the balance of the proceeds from the sale of the property, after deduction of the premium to be paid to the Housing Authority and the redemption money to be paid to the Hang Seng Finance Limted.

13. The strange arrangement for the security, when looked at with the background that the property in question was sold by the Housing Authority under the Home Ownership Scheme, will become easily discernible. The property of the Defendant was acquired from the Housing Authority in 1993 under the Housing Ordinance. It may be helpful at this juncture to set out the relevant provisions of the Housing Ordinance.

The Housing Ordinance

14. Under paragraph 1 of the Schedule to the Ordinance, the owner of the property is not permitted to alienate, convey, charge or part with possession or the property or enter into agreement to do so unless 10 years have elapsed from the date of acquisition and a premium has been paid to the Housing Authority.

15. S. 17B of the Ordinance provides that such an agreement to alienate, etc. shall be void.

16. S. 27A further makes it an offence for any person who purports to create a mortgage of or otherwise charge land or to assign or otherwise alienate land or to enter into an agreement for the land acquired under the Ordinance.

17. The effect of these provisions under the Housing Ordinance is that the Plaintiff is not legally entitled to have a charge on the property in question without the written consent of the Housing Authority. It appears to me that the Plaintiff, to get round the legal restriction, therefore purported to create a charge, not on the property, but on the sale proceeds of the property upon its sale.

18. The first obvious question is whether the ingenuity of the Plaintiff has given rise to a security interest in law.

Is there a charge?

19. It is now settled law that an agreement to pay a debt out of a specified fund, or to hold a fund on trust to discharge a debt, may amount to a charge. Yet in the present case the balance in the proceeds from sale of the property after payment of premium to the Housing Authority and payment of redemption money to the chargee of the land was non-existent and unascertainable when the Deed of Loan was signed. It is a contingent, intangible and future thing. The situation remains the same as the property has not yet been sold.

20. It has been suggested that a charge can be created over intangible and future property. An example is a charge on the book debt of a company. The law in this area is not entirely clear. While it has long been accepted that a fixed charge may be created over existing debts, the appropriateness of such a charge over future debts is a matter of some doubt (see page 4020 of Law of Loans and Borrowing, by Robert Burgess, Sweet and Maxwell). The position in relation to an individual is even more dubious.

21. A book debt is commonly viewed as an asset of a company. It is also a specified and identifiable asset. The chargee can enforce his rights. On the other hand the balance in the proceeds from sale of a real property of an individual is an entirely different thing. Such a balance, if any, after repayment of premium to the Housing Authority and the redemption money, cannot ordinarily be said to be a property or asset of an individual. In my view it is simply too remote. When the Deed of Loan was signed, no guarantee was made as to sale of the property and there was no guarantee that there would be a credit balance upon sale of the property. The Plaintiff has simply no right to enforce the purported security.

22. In our system of law, non-possessory securities, i.e. mortgages and equitable charges, are subject to a high degree of statutory control, which requires the registration of security interests as a means of providing third parties with notice of them. Where the debtor is a company, security interests in the form of a charge must be registered under S. 80 of the Companies Ordinance. Where a security is given by an individual as the Defendant in the present case, the security is required to be registered with the Registrar of the High Court in accordance with S. 8 and 9 the Bills of Sale Ordinance and shall be void for non-compliance. The registration is for the protection of third party. Yet the term "bill of sale" under the Bills of Sale Ordinance only applies to "documents" relating to "personal chattels". The purported charge in the present case is over intangible property and therefore is not a "personal chattel". It is hence unregistrable with the Registrar of the High Court for the notice of third parties.

23. I notice that the Deed of Loan has been registered by the Plaintiff in the Land Registry. The registration of the Deed of Loan is inconsistent with the argument of the Plaintiff that no charge has been created in the real property under the Home Ownership Scheme. According to this argument of the Plaintiff, the registration of the Deed of Loan must be wrongful since the purported charge does not relate to any interest in land. If the purported charge is unregistrable in any public registers, a third party would have no means to discover this security in order to protect his interest. Although the Deed of Loan is registered in the Land Registry, yet the wrongful registration does not elevate the rights of the Plaintiff. The purported charge remains unregistrable. In my view, the court should be slow to find the creation of a charge of which third party would have no means to discover from our system of registration.

24. Moreover, I feel that the purported charge contended by the Plaintiff is "conceptually impossible". I cannot see how the Plaintiff can create a charge on the proceeds of sale of a real property when the Plaintiff is legally forbidden to and therefore cannot create any security interest in the real property.

25. I think whether the Plaintiff has created a charge in the present case is a matter of construction of the Deed of Loan. On the true construction of this document, I find that the covenant by the Defendant in this document did not create a charge.

26. In any event, I find that the arrangement between the Plaintiff and the Defendant a sham. It is clearly a circumvention of the restriction imposed by the Housing Ordinance. The loan agreement, in so far as the purported security is concerned, is against public policy and therefore void.

27. For the above reasons, I think the Plaintiff has not created any charge or security interest in the property, real or personal, of the Defendant. The Plaintiff is not a secured creditor. The fact that the Plaintiff is named as a secured creditor in the Statement of Affairs filled in by the bankrupt Defendant is neither here nor there. The Plaintiff therefore requires leave of the Court of First Instance sitting in its bankruptcy jurisdiction to proceed with the present proceedings.

Whether a declaration should be made?

28. For the above reasons, if a declaratory order has to be made, I would have declared that no charge has been created by the Deed of Loan. But for two reasons, I do not make an order for declaration. Firstly, I have no jurisdiction to do so before leave of the Court of First Instance is obtained to proceed with the present proceedings. Secondly, I would not exercise my discretion to make the order.

29. A most important feature of the declaratory judgment is that it is a discretionary remedy. It is an equitable remedy and a person who seeks a declaration must come to court with clean hands.

30. I have found that the arrangement between the Plaintiff and the Defendant is a sham to circumvent the prohibition imposed by the Housing Ordinance. The Plaintiff does not have clean hands.

31. Moreover, the jurisdiction of the court to make a declaration of right is confined to declaring contested legal rights, subsisting or future, of the parties represented in the litigation before it ( see Para 15/16/1 Hong Kong Civil Procedures ). It is a rule of practice that, although not a rule of law, a declaration will not be granted when a judgment is obtained by consent or in default without a trial. More so, if there is no real dispute in the case. No doubt the paramount duty of the court is to do justice. But insofar as the Plaintiff and the Defendant are concerned, there is no dispute in existence. And at the hearing, I did not have the benefit of arguments from all interested parties.

32. Here specific relief, other than a declaration, is not claimed. The court must be more cautious. Obviously the Plaintiff is trying to establish its priority in the property of the bankrupt Defendant. Disputes may arise from the competition between the Plaintiff and the Official Receiver, and with the chargee of the property, Hang Seng Finance Limited. Both the Official Receiver and Hang Seng Finance Limited are not joined as a party in the proceedings and are therefore deprived of a right to contest. The action taken by the Plaintiff is taking unfair advantage of the absence of interested parties who should have a right to contest in the case. Even though the Plaintiff may be genuinely anxious about its rights, but as Bailhache J. said in Guaranty Trust Co of New York v Hannay and Co [1915] "a declaration would not be made merely because the person asking for it feared that at some time or other he might be liable to an action, and desired to put an end to a position of uncertainty or of suspense and anxiety" (see page 146 of The Declaratory Judgment by Zamir & Woolf, 3rd Edition).

Conclusion

33. For these reasons, the application by the Plaintiff is dismissed. There be no order as to costs.