GOLDEN CONNECTION FINANCE LTD v. CHAN TAT MAN SIMON AND ANOTHER

HCMP 3400/2016

[2019] HKCFI 1932

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3400 OF 2016

________________

________________

________________

______________

JUDGMENT

______________

1.  The plaintiff (“P”) applies by Originating Summons pursuant to Order 88, rule 5A of the Rules of the High Court (“RHC”) for an order for sale of the ⅓ equal undivided share held by the 1^st defendant (“D1”) in a residential property (the “Property”).

2.  P’s application is based on a charging order absolute made in other proceedings, by which D1’s ⅓ interest in the Property was charged with the payment of sums owing to P.

3.  D1 did not acknowledge service of these proceedings and did not appear before me [1].

4.  The 2^nd defendant (“D2”) is D1’s sister, and a co-owner of the Property, who opposes P’s application.

5.  At the hearing before me, P was represented by Mr Joshua Choy and D2 was represented by Mr Duncan Ho.

BACKGROUND FACTS

6.  The relevant facts appear from the parties’ affidavit evidence.  

7.  The Property is located in Sai Kung, New Territories, and there is constructed thereon a three-storey village-type house (the “House”) with each storey comprising approximately 700 square feet.

8.  The Property was solely owned by the father of D1 and D2 until his death in 2014, leaving a will bequeathing his assets to D1, D2 and their mother (the “Mother”).  By an assent dated 25 October 2014 (the “Assent”) and registered at the Land Registry, D1, D2 and the Mother became tenants in common of the Property in equal shares.  The Mother passed away in December 2016 and D2 was granted probate of her estate as sole executrix, but the Mother’s ⅓ share in the Property has not yet been distributed.

9.  P submitted a valuation report valuing the Property at HK$16,000,000 as at 1 February 2018, and on this basis contended that the value of D1’s ⅓ share was HK$5,333,000.

10.  On 6 June 2016, P obtained judgment against D1 in HCA 422/2016, which proceedings were based on a loan from P to D1.  On 9 August 2016, P obtained a charging order absolute (the “Charging Order”) in those proceedings by which D1’s ⅓ interest in the Property was charged with the payment of HK$2,500,000 plus interest and costs.  It is P’s case that at the date of the hearing before me, D1’s outstanding indebtedness to P covered by the Charging Order stood at HK$5,103,931.51.

11.  D1’s ⅓ share in the Property is subject also to charging orders registered shortly prior to P’s, in favour of Nice Profit Enterprise Limited (“Nice Profit”).  It is P’s position that Nice Profit’s charging orders have priority over the Charging Order, that the proceeds of any sale would be applied first in favour of Nice Profit with the remainder to P, and that the combined value of D1’s debts to Nice Profit and P would exceed the sale proceeds of D1’s ⅓ share in the Property [2].

12.  P’s Originating Summons herein was issued on 6 December 2016.  On 28 April 2017 an order was made for substituted service on D1, pursuant to which service was effected by posting to the Property (D1’s usual or last known address) and advertisement in a local newspaper.

13.  D2’s evidence is that she received notice of P’s application for sale pursuant to a Notice to Occupants dated 21 February 2018.  D2 subsequently applied to be added as a defendant to these proceedings for the purpose of opposing the order sought, which addition was effected by order dated 18 May 2018.

D2’S BASIS FOR OPPOSING THE SALE

14.  The basis for D2’s opposition to the application is set out in her affidavit evidence and arguments levelled on her behalf.  The main points made are as follows:

(1)   D2 and her family have been residing in the House for 24 years.  It is currently occupied by D2 and her immediate family, as wellas the immediate family of D1 (but not D1 himself).  The order for sale sought would force D2 into a position of co-ownership with a stranger (ie the purchaser of D1’s ⅓ share), with all co-owners entitled to possession of the whole of the Property.  This would cause substantial hardship to D2 and her family.

(2)   The government grant of the property (the “Grant”) contains a restriction on alienation (Special Condition 5), which inter alia: (a) prohibits partition of the lot; and (b) prohibits assignment save to (i) a person descended through the male line from an 1898 resident of an established village in Hong Kong or (ii) another person on payment of additional premium determined by the District Lands Officer (“DLO”).

(3)   In 2016, D2 and the Mother made inquiries for mortgages over the Property and were informed that the restriction on alienation would first have to be removed.  An application was made to the DLO for removal of the restriction on alienation, which led to an informal indication by telephone that the premium for so doing would be around HK$8,000,000.  Soon afterwards in August 2016, D1 moved out of the Property without notice to D2 or the Mother, and has since been out of contact.

(4)   In October 2016, the DLO indicated by letter that there had been a breach of the restriction on alienation by reason of the Assent.  An application for retrospective consent to the Assent was required, and accordingly, the application for removal of the restriction on alienation was closed.  In July 2017, D2 applied to the DLO for retrospective consent to the Assent, but this had not been resolved as at the date of the hearing before me.

(5)   D2 believes that due to property price movements, the premium currently required for removal of the restriction on alienation would greatly exceed HK$8,000,000.  Both D2 and the Mother’s estate lack sufficient funds to pay their respective ⅓ shares of any such premium.  The effect is that following any sale of D1’s ⅓ share in the Property, D2 would have difficulty in applying for either sale of her share of the Property or partition, and would be left as a co-owner with the purchaser of D1’s ⅓ share.  This would be unworkable and cause undue hardship. 

(6)   Further, having lived in the Property for 24 years, D2 has no desire to sell the Property or her share(s) therein, and wishes to continue to live there with her family.  If she were to limit the pool of purchasers of her ⅓ share to an indigenous villager in order to avoid additional premium, this would likely substantially reduce the purchase price.  As a daughter of an indigenous villager she cannot benefit from the Small House Policy, and would be unable to buy a similar home without paying additional premium.  Accordingly, if effectively forced to sell, D2 would be unable to buy another property of similar size and standard with the sale proceeds.  This would cause great hardship and prejudice to D2 and her family.

15.  In responsive evidence, P says that in respect of the intended sale of D1’s ⅓ share, P undertakes to bear any premium payable in the event that the purchaser is not an indigenous villager, on the condition that the proceeds of sale are first applied to reimburse P for this.  The purchaser of the ⅓ share would then be entitled to apply for partition of the Property under the Partition Ordinance (Cap 352), which P currently lacks locus to do.

16.  P argues that partition should be feasible, and gives evidence as to the apparent characteristics of the House.  P says that it appears that the House is already divided into two separate units, namely, one unit comprising the ground floor (“G/F”) and 1^st floor (“1/F”), and another unit comprising the 2^ndfloor (“2/F”).  P relies on the presence of two letterboxes outside theentrance to the G/F, and two separate entrances.  P argues that after partition, D2 and her family could occupy the 1/F and 2/F, such that their way of life would be largely unaffected. 

17.  This is disputed by D2, who gives reply evidence as to the existing layout and usages of the House.  According to D2, the G/F is mainly used by herself, her husband, their two children and a domestic helper, whilst D1’s wife and child mainly use the 2/F. There are common storage areas and a study on the 1/F which are used by the whole family, as is the roof.  D2 argues that partition is unworkable including because: (i) the values of each floor would obviously be different including due to differing views andthe presence of balconies on 1/F and 2/F; (ii) the common areas of the House cannot practically be partitioned, most obviously the roof and staircase; (iii) Special Condition 5(d) of the Grant expressly prohibits partition of the Property; (iv) Special Condition 5(e) of the Grant provides that the grantee shall not assign or create an undivided share or interest in the lot without entering into a Deed of Mutual Covenant (“DMC”), which would be unworkable if D2 is forced into co-ownership with a stranger.

LEGAL PRINCIPLES

18.  Proceedings for the enforcement of a charging order by sale of the charged property are governed by Order 88, rule 5A (see Order 50, rule 9A).  Section 20B(3) of the High Court Ordinance (Cap 4) provides that subject to the provisions of that ordinance, a charge imposed by a charging order shall have the like effect and shall be enforceable in the same manner as an equitable charge created by the debtor by writing under his hand.

19.  The applicable principles are discussed in Hong Kong Civil Procedure 2019 at §§50/9A/18 and 88/5A/2–3.

20.  In Union Finance Ltd v Leung Wai Ling [2000] 2 HKC 821, cited by Mr Choy, Chung J reasoned at 823G – 824C that the Court has a discretion whether to make a charging order absolute or to enforce a charging order by sale, but the discretion must be exercised judicially.  There is authority that a judgment creditor is prima facie entitled to enforce his judgment by a charging order unless the debtor establishes some good reason to the contrary.  When a judgment creditor applies for an order for sale pursuant to a charging order, the parties’ competing interests must be carefully weighed.  Indeed, section 20B(4) of the High Court Ordinance empowers the court to direct service of copies of the relevant documents on any interested person.  Having said this, there must be a good reason to justify the Court on the one hand granting a charging order and on the other refusing to enforce it.  Whilst the amount of judgment debt is a relevant factor in the weighing exercise, the Court considers also other matters such as the debtor’s conduct.

21.  However, Union Finance did not concern jointly owned property, nor the present scenario of opposition to a sale order by a co-owner of the relevant property.  Mr Ho submitted, and Mr Choy accepted, that P was unable to identify any Hong Kong authority in which an order had been made under Order 88, rule 5A for the sale of a share of jointly owned property[3].

22.  Though there does not appear to be any Hong Kong case which directly sets out the principles applicable in the current scenario, there are a number of authorities which contain relevant comments. 

23.  At §88/5A/3 Hong Kong Civil Procedure 2019 states:

“ … charging orders may be, and frequently are, made on the beneficial interest in land (usually a jointly occupied home) of a beneficial joint tenant or tenant in common. Such charging orders are also enforceable by an order for sale. However, a sale of the charged beneficial interest is often not practicable. Further, the realisable value of, e.g. the half share in a house or land is usually very much less than half the value of the entirety of the house or land. Therefore it is rare for such charging orders to be enforced by a sale of the charged beneficial share. …”

24.  In Chan Ching Kit Katherine v Lam Sik Shi & another HCMP 2239/2000, 24 June 2002, unreported, the plaintiff had obtained a charging order absolute over the 1^st defendant’s half share in a property, which property was held by the 1^st and 2^nd defendants as tenants in common in equal shares.  The plaintiff sought an order for sale of the entire property, pursuant to the Partition Ordinance.  The main point considered by Kwan J (as she then was) was whether the plaintiff had locus to seek such an order under the Partition Ordinance.  The learned Judge considered in detail the provisions and history of the Partition Ordinance, and concluded that the beneficiary of a charging order was not a “person interested” in the property for the purposes of that ordinance, and was not therefore eligible to apply for an order for sale thereunder.  For present purposes, two aspects of the judgment are noteworthy: 

(1)   At §2, the learned Judge referred to the possibility of sale under Order 88, rule 5A, and stated that: “… a sale of the charged beneficial interest of a co-owner is often not practicable and is rarely ordered by the court”, citing the dicta at §23 above in the then current edition of Hong Kong Civil Procedure.  This comment appears to have been made by way of explanation as to why the plaintiff in that case proceeded under the Partition Ordinance rather than seeking an order for sale of the charged half-share under Order 88, rule 5A.

(2)   In the course of her analysis of the Partition Ordinance, Kwan J set out at §38 the characteristics of the interest held by the beneficiary of a charging order: “…it is important to bear in mind the characteristics of an equitable charge in land. This is a form of security whereby property is appropriated for the discharge of a debt or other obligation, ‘but which does not pass either an absolute or a special property in the subject of the security to the creditor, nor any right to possession.  In the event of non-payment of the debt, the creditor's right of realisation is by judicial process’ … An equitable chargee in land does not have a right to foreclosure …”.[4]

25.  In Chan Chui Mee v Mak Chi Choi [2009] 1 HKLRD 343, the plaintiff (W) sought a declaration that a property registered in the sole name of the 1^stdefendant (H, her ex-husband) was in part beneficially owned by her.  In separate proceedings against H, a creditor (the 2^nd defendant) had obtained a charging order over the property, followed by an order for possession and sale of the property under Order 88, rule 5A.

26.  The principal issue considered by Johnson Lam J (as he then was) was the existence and extent of W’s beneficial interest in the property.  The learned Judge concluded that H and W were beneficial co-owners in equal shares, and so declared.  Notably for present purposes, the Judge considered that the consequence of this finding was that the charging order which had been obtained by the creditor could not be enforced.  See:

(1)   §14, where the Judge held that under section 20A of the High Court Ordinance a charging order can only be imposed on the beneficial interest of a debtor; and if there are other beneficial owners in the property, a chargee has no right to possession and cannot seek an order for sale (citing Chan Ching Kit Katherine (supra) and Fortis Bank Asia HK v Yu Kam Hoi Herman [2004] 2 HKC 314). 

(2)   §100, where the Judge held that in light of the findings made “It follows that the [creditor] cannot enforce the charging orderby an order for possession and sale” [5].

27.  In Melco Crown Gaming (Macau) Limited v Wong Yam Tak & another HCA 238/2013, 29 January 2016, unreported, the plaintiff had obtained a charging order nisi over a property registered in the defendant’s sole name.  Deputy High Court Judge Kent Yee considered: (i) the plaintiff’s application to make absolute the said charging order; and (ii) an application by the intervener (the defendant’s ex-wife) to discharge the charging order on the basis that she was the sole beneficial owner of the property.

28.  The learned Judge first determined that on the evidence the defendant and intervener were joint beneficial owners in equal shares (§41).  The Judge went on to conclude that in the exercise of his discretion, and striking a balance between the interests of the judgment creditor and the wife, the charging order should be made absolute over the defendant’s half share of the property (§§48 – 59).

29.  On the latter point, it was an important part of the Judge’s reasoning that such a charging order would not cause serious hardship to the wife because: (i) since the wife was an equal beneficial owner, the plaintiff could hardly proceed to commence Order 88 proceedings to obtain an order for sale of the property, but could at the most apply for the appointment of a receiver to receive income or profit from the property (§57, citing Chan Chui Mee (supra), Chan Ching Kit Katherine (supra), and Fortis Bank (supra)); (ii) hence it was most likely that the charging order would simply remain a security over the defendant’s half share of the property whilst the wife could still remain in exclusive occupation (§58). 

30.  In light of the above, I proceed on the basis that I have a discretion whether to make the order for sale sought.  In the exercise of that discretion, I should balance the interests and prima facie entitlement of P as a judgment creditor against any substantial prejudice which would be suffered by D2 as a co-owner of the Property as a result of an order for sale.  I should not decline an order for sale unless there is good reason to do so.

31.  I also take into to account that there are some dicta in the authorities which express reluctance as to the practicality of making orders for sale in respect of part-shares of property, discussed further below.

EXERCISE OF DISCRETION

32.  Having considered the evidence, authorities and arguments, I exercise my discretion against making the order sought by P, for the following principal reasons:

(1)   The order for sale sought, once effected, would render D2 a co-owner with an unknown third party.  On the facts of this case, I consider that this would occasion undue hardship and prejudice to D2.

(2)   D2 would be placed into unity of ownership and possession with the said third party, which situation would require to be resolved either by agreement or further court proceedings.  I consider that there are a number of substantial complications and uncertainties in this regard. 

(3)   P argues that the Property can subsequently be partitioned under the Partition Ordinance.  However, Special Condition 5 of the Grant expressly prohibits partition.  There is at least some uncertainty as to whether, and the terms upon which, consent from the DLO for partition would be given.  This may well require the payment of additional premium by D2 and the Mother’s estate, and D2’s evidence is that they lack sufficient funds. Further, I accept D2’s evidence that there are at least potential practical complications in respect of partition, and its effects on the current usages of the Property: see above.

(4)   An alternative to partition is that D2 subsequently sells her interests in the Property.  However, this would also require the DLO’s consent, and unless the buyer is an indigenous villager, would again likely require payment of a substantial premium [6].  I accept D2’s argument that there is, at the least, a serious risk that D2 may end up unable to purchase accommodation of a comparable or acceptable standard: see above.  I also do not think that D2—who bears no fault in respect of D1’s relevant debt to P—should in such circumstances be forced against her will to sell her interest in the Property and run the risk of serious prejudice to her interests.

(5)   P’s offer to bear premium (§15 above) appears to miss the point.  That offer addresses the premium payable on the initial sale of D1’s ⅓ share.  It does not address the subsequent issue of premium which may be payable by D2 after being placed into co-ownership with a third party, in order to resolve the co-ownership thereby arising.  The same applies to Mr Choy’s submission that the sale of D1’s ⅓ share could be restricted to sale to an indigenous villager, to avoid payment of premium[7].

(6)   As noted above, it appears that pursuant to Special Condition 5(e) of the Grant, D2 would be required to enter into a DMC with a new co-owner. However, this may prove difficult to agree including due to the complications referred to at §§17(i) and (ii) above.  I do not think that D2 should be placed in this position. 

(7)   Taking the above factors cumulatively, I consider that the ordersought entails a serious risk of substantial prejudice and hardship to D2—an innocent party—which outweighs the interest of P in presently enforcing its debt against D1.  I have carefully weighed and balanced the parties’ competing interests, but consider that there are good reasons to decline the order sought by P notwithstanding its status as a judgment creditor of D1.

33.  In so concluding, I refer by broad comparison to the reasoning of Reyes J in Fortis Bank Asia HK v Yu Kam Hoi Herman (supra) at §§77 – 82.  The learned Judge there considered (obiter dicta) whether he would have exercised his discretion to make an order for sale under the Partition Ordinance, if he had concluded that the bank had locus to apply for such an order.

34.  The Judge indicated that he would not have made an order for sale having regard to the following: (i) the defendants’ long-term occupation of the property; (ii) the potentially precarious nature of the bank’s interest under a charging order—the bank knew or ought to have known that since an order for sale was discretionary, the defendants’ interests as actual occupants would be relevant; (iii) it would be inequitable for the defendants to be turned out of their residence simply in order to enable the bank to sell the property and realise the value of their brother’s share, where they had no involvement in the transactions leading to his default; the learned Judge did not “see why the ordered daily existence of Herman and Franco should be disturbed merely as a result of Joseph’s wrongs and simply to enable the Bank to recoup some of its losses incurred as a result of extending credit to Joseph”; (iv) given their financial means, the Judge doubted that the defendants would be able to acquire a similar property as a replacement.

35.  I accept—as submitted by Mr Choy—that the scenario and legal issues in Fortis Bank are not precisely the same as the present case.  For example, the order sought in Fortis Bank was for sale of the entire property rather than only a part share.  Notwithstanding these points of distinction, I consider that the facts of this case as canvassed above give rise to concerns as to hardship to D2 which are similar to those cited in Fortis Bank and are in any event pertinent to the exercise of my discretion.

36.  I am further fortified in this conclusion by the apparent absence of any Hong Kong authority supporting an order for sale under Order 88, rule 5A of a part share of jointly owned property, and by the dicta in the existing authorities suggestive of—at the least—some degree of reluctance in this regard: see §§23 – 29 above [8].

37.  Mr Choy argues strenuously that the potential prejudice or hardship suffered by D2 is simply a feature of her limited rights in the Property as a co-owner, who is by nature subject to the risk that other co-owners may sell their interests or otherwise have them transferred to third parties.

38.  Whilst there is some force in this point, I am not persuaded that it is sufficient to tip the balance in P’s favour.  The result of this line of argument, if followed to its logical conclusion, is that the prejudice toa co-owner of the nature relied on by D2 would be irrelevant to the Court’s discretion; but Mr Choy accepts that such prejudice is a relevant factor to be taken into account.  I accept that the limited nature of D2’s rights is relevant as a discretionary matter, and have taken this into account in conducting the balancing exercise referred to above.  I also consider that as a practical matter, there are important differences between co-ownership with a family member and co-ownership with a stranger.

39.  Further, it is important to also consider and weigh against this line of argument, the limited nature of P’s own rights under the charging order: compare Fortis Bank (supra) at §§41 and 80, Chan Ching Kit Katherine (supra) at §38.  P’s loan to D1 was — apparently — not supported by security over the Property, and P was presumably content to advance funds without the benefit of such security.  When it obtained the Charging Order, P knew or should have known that its enforcement by sale was a discretionary matter which would consider also the interests of co-owners.

40.  As to any argument that the Court should not make a charging order and then decline to enforce it by sale, this is answered by the fact that D2 was not before the Court and was not heard when the Charging Order was made.

CONCLUSION AND DISPOSITION

41.  For the above reasons, I dismiss P’s application.

42.  I consider that costs should follow the event, and make an order nisi that D2’s costs of these proceedings be paid by P, to be taxed if not agreed.