STATE CHINA FINANCE LTD v. LEUNG MAN WAI

DCMP 1985/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 1985 OF 2009

____________

D E C I S I O N

1.  Before me are two applications for interlocutory injunction.  The first one was taken out in DCMP 1985/2009 by Leung Man Wai, as the Defendant, originally by way of ex parte summons with notice to State China Finance Limited as the Plaintiff in that case.  The second one was taken out in newly commenced DCCJ 2213/2010 by Leung and his mother Sin Sau Ching, as the Plaintiffs, by way of inter partes summons against State China, as the Defendant.  I heard both applications together.

Background

2.  There is quite a bit of history behind these applications.

3.  In 1998, Leung and his then wife became the registered owners of the residential property in question at Yaumati/Mongkok, Kowloon, under the Home Ownership Scheme (“the Property”).  Upon their divorce, the Property was transferred to Leung so that he became the sole owner.

4.  State China is a licensed money lender.  In 2008, Leung and State China entered into an agreement whereby a loan of HK$200,000 was extended to Leung at an interest rate of 46.8% per annum.  The principal and interest were agreed to be repaid by 180 instalments of HK$2,852 each.

DCCJ 4170/2008

5.  Leung soon defaulted in repayment and the outstanding loan became due.  In September 2008, State China commenced action against Leung for the debt, i.e., DCCJ 4170/2008.  In November 2008, State China obtained judgment with costs against Leung pursuant to O.83A of the Rules of the District Court.

6.  On 19 December 2008, State China, as the judgment debtor, obtained a charging order nisi against the Property in respect of the judgment debt.  Upon Leung’s failure to show cause, the charging order was made absolute on 16 February 2009.

DCMP 1985/2009

7.  Since the imposition of the charging order, Leung had apparent made another 6 instalments of repayment until May 2009.  In July 2009, State China sought to enforce the charging order.  It commenced miscellaneous proceedings for an order for possession and sale, i.e., DCMP 1985/2009.  The order was granted on 13 October 2009 and was subsequently amended.

8.  Pursuant to the order, Leung had 28 days to pay State China the outstanding judgment debt in the sum of HK$281,615.97 together with interest at 46.8% per annum on the sum of HK$196,359 from 19 September 2009 and costs in the sum of HK$15,400.  Otherwise he should deliver vacant possession of the Property to State China for sale by public auction or private treaty.  The usual directions as to how State China might proceed with the sale were also given.

9.  The above deadline for payment passed and State China applied for possession of the Property.  The writ of possession was granted on 5 March 2010.  On 16 April 2010, State China executed the writ by obtaining possession of the Property through the bailiff.

10.  State China put the Property for sale.  A provisional sale and purchase agreement was entered into on 19 April 2010 and the formal agreement was entered into on 3 May 2010.  The price was HK$2.48 million, which was just above the reserve price fixed by the court.  Completion was due to take place on 18 June 2010.

11.  During the period between late May and mid June 2010, solicitors for Leung and his mother, Sin, were engaged in correspondence with the solicitors for State China in relation to the situation.  Allegations were made about State China’s ignoring of Leung’s repeated requests for information about the exact sum to be repaid and the beneficial interest of his mother, Sin, in the Property.  Eventually, on the day before the scheduled completion day, Leung and Sin took out an ex parte summons with notice to State China in DCMP 1985/20009.

12.  By the ex parte summons, Leung and Sin asked that:

(1) Sin be joined as a defendant;

(2) State China be restrained from completing the sale and purchase of the Property;

(3) the agreement for the sale and purchase of the Property be set aside or alternatively declared to be void and of no legal effect;

(4) State China do provide to Leung a sum for release of the charging order;

(5) the charging order be set aside;

(6) the costs of and occasioned by the application be to Leung.

13.  The parties’ legal representatives came before H H Judge S T Poon on the same day and managed to arrive at an interim order upon parties’ respective undertakings.  Leung through his counsel gave an undertaking to institute fresh proceedings against State China and to take out a summons for interlocutory injunction returnable on 30 June 2010 in this court within 7 days.  Meanwhile, State China through its solicitors gave an undertaking not to complete the sale and purchase of the Property on or before 30 June 2010.

14.  The application for injunction under paragraph (2) above was adjourned to be heard on the return day of the interlocutory summons to be filed in the new action.  Directions were given for the filing of affidavits for the purpose of the hearing.  Leung was given leave to withdraw paragraphs (1), (3), (4) and (5) above of the ex parte summons with costs reserved.  Costs of that hearing were also reserved.

DCCJ 2213/2010

15.  Pursuant to the above order, on 25 June 2010, Leung, now with Sin as a co-Plaintiff, commenced a fresh action against State China, i.e., DCCJ 2213/2010.  According to the general endorsement of claim, Sin claims to be the beneficial owner of the Property.  State China is said to have wrongfully obtained the charging order, possession and entered into agreement to sell the Property.  Leung and Sin now claim for:

(1) a declaration that the charging order is null and void and/or of no legal effect;

(2) a declaration that the order for sale is null and void and/or of no legal effect;

(3) damages for trespass of the property since 16 April 2010 (i.e., when the writ of possession was executed by the bailiff);

(4) an order that the registration of the sale and purchase agreement be vacated from the Land Registry;

(5) further and other relief;

(6) costs.

16.  On the same day, Leung and Sin took out an inter partes summons for an interlocutory injunction in identical terms as that being sought by the ex parte summons in DCMP 1985/2009 as mentioned above.  For such purpose, they also asked for abridgment of time for service of the summons and leave to rely on the affirmations filed in support of the ex parte summons in DCMP 1985/2009.

17.  That was how the adjourned application in DCMP 1985/2009 and the fresh application in DCCJ 2213/2010, both for the injunction in the same terms came before me.

The law

18.  The guidelines for granting interlocutory injunction are well established: see American Cyanamid Co v Ethicon Ltd [1975] AC 396; Hong Kong Civil Procedure 2010, Vol.1 at 29/1/9.

19.  It is no part of the court’s functions to try to resolve conflicts of factual evidence on affidavit at this interlocutory stage or to decide difficult questions of law which call for detailed argument and mature considerations.  These are matters for the trial.  What the court needs to be satisfied is that the claim and dispute must give rise to a serious question to be tried.

20.  The object of an interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. But this must be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated under the plaintiff’s undertaking in damages if the uncertainty were resolved in the defendant’s favour at the trial.  The court must determine where the balance of convenience lies.  In case of equal balance, whether the status quo needs to be preserved may become relevant.

Merits of the case

21.  Leung in DCMP 1985/2009 and Leung with Sin in DCCJ 2213/2010 put forward the following major contentions: (1) clog of the equity of redemption; and (2) the beneficial interest of Sin.  Counsel delivered extensive submissions in this respect; but at the end what I need to conclude is whether they give rise to serious questions to be tried.

Clog on the equity of redemption

22.  Leung has defaulted in repaying the loan since May 2009.  There can be no dispute that it was entirely his default that has led to the judgment debt, the charging order and the order for possession.  The order for possession was duly enforced by way of the writ of possession on 5 March 2010.  The dispute lies in what happened since then until State China contracted to sell the Property on 19 April 2010.

23.  According to Leung, he had repeatedly requested State China to provide the figure that he had to repay so as to secure the release of the Property.  However, State China either ignored or delayed in answering his requests.  By proceeding to enter into the provisional agreement to sell the Property on 19 April 2010, State China effectively denied his right to redeem the Property by repayment and to prevent the sale.

24.  Leung gave particulars of his requests.  These included his letter dated 29 March 2010 offering to repay the entire debt incurred up to date and asking about the amount.  By affirmation, Leung suggested that during that period, he had managed to borrow from a few friends about HK$400,000.  But he needed to know the actual sum to pay.

25.  Upon the execution of the writ of possession on 16 April 2010, Leung allegedly further telephoned a Mr Tang of State China with a view to repayment and release of the Property.  Contrary to his indication on the telephone, Tang did not reply until 19 April 2010.  The reply was that nothing could be done.  On 21 April 2010, Tang informed Leung of the signing of the provisional agreement for the sale of the Property.  When asked again on the telephone, a Ms Wong of China State suggested that besides the debt, an additional sum of about HK$160,000 needed to be paid to compensate the purchaser, if the sale was to be cancelled.  Leung was required to reply by 23 April 2010.

26.  State China’s side of the story is this: It is denied that State China has ever received the letter dated 29 March 2010 from Leung.  According to Tang, Leung telephoned him after the writ of possession has been executed and enquired about how to secure the release of the Property.  Tang had serious doubt as to Leung’s intention and ability to pay.  He asked and Leung confirmed that he did not really have any money.  Tang asked Leung to pay the outstanding debt and all the legal costs by noon on the following day, or else nothing could be done about the Property.  After the provisional sale and purchase agreement was entered into, Leung telephoned Ms Wong of State China.  Ms Wong informed Leung of the sale of the Property.  She also suggested that if Leung would settle the judgment debt and to pay a sum to compensate the purchaser in the sum of about HK$260,000 (for the return of the initial deposit and liquidated damages as well as estate agency fee) within a couple of days, State China might consider his request on discretionary basis.  However, Leung never came back on this matter.

27.  The dispute is factual which could not be resolved at this stage.  But it was contended on behalf of Leung that if his version is accepted, the conduct of State China amounted to a clog on Leung’s right to redeem the Property prior to sale.  There is no dispute that State China has not provided Leung with the up to date amount of the indebtedness since the order for possession.  For the purpose the hearing, Mr Siu for State China accepted that if Leung was required to repay the entire outstanding debt, his client would have the duty to inform the judgment debtor the sum accrued up to date so as to enable the debtor to repay the sum.

28.  Mrs Chan for Leung referred to Professor Gray, Elements of Land Law (5^th ed) at para.6.2.11.  The learned author wrote that the right to redeem was and still is an inseparable incident of any mortgage.  What the mortgagor can insist upon is that on redemption by payment, he gets his security back.  This principle was applied in Common Luck Investment Ltd v Cheung Kam Chuen [1999] 2 HKLRD 417 at 422F-423B where the final court held that the mortgagor’s right to redeem is an equitable estate.

29.  The loan to Leung was unsecured.  By the charging order in respect of the debt against the Property, State Chin obtained an equitable charge which was enforceable by proceedings for possession and order for sale.  It was submitted on behalf of Leung that as the court of equity protects a mortgagor from any clog on his right of redemption even when the date of redemption has passed, equity would equally protect a person like Leung who should be entitled to redeem the Property so long as this was before the sale of the Property.

30.  It should be noted that in Common Luck Investment, what the court held to amount to a clog or fetter on the equity of redemption was the express agreement between the parties to take away that right.  Such provision in the mortgage is void.  Even assuming that what Leung had after the charging order and before sale may be described as an equity of redemption, no other legal authority was submitted in support of the contention that the conduct of State China, as alleged by Leung, amounted to a clog of such right to redeem under the equity principles discussed.

31.  Mr Siu for State China also asked this court to consider the position of his client against the history of default of Leung.  Indeed, according to Leung, he used to work as a telephone engineer with low and unstable income.  He admitted that he has been unemployed since February 2010.  Mr Siu suggested that his client ought not to be blame for suspecting the genuineness of Leung’s offer to pay when he had to vacate from the Property.  He further questioned the lack of evidence to substantiate Leung’s claim of his ability to pay HK$400,000 by April 2010.  Unless otherwise directed by the court, his client was entitled to proceed with the sale pursuant to the order of the court.

32.  Leung created by his affirmation the impression that he was naive and inexperienced in dealing with the dire situation that he is in at the moment.  But he is a 30-year-old man.  This was not the first time he has borrowed and defaulted.  The land search reveals that in 2005, Leung was a judgment debtor to another bank and a charging order was imposed on the Property (DCMP 1515/2005).  The charge was apparently discharged only in March 2008.  In the present case, Leung defaulted on the repayment in the month following the obtaining of the HK$200,000 loan in July 2008.  Leung did not resume repayment until February 2009.  The dire situation as a result of his further default since May 2009 should came as no surprise to him.

33.  It is hard for Leung to expect sympathy.  Having said that, I am not prepared to conclude that the legal arguments discussed above raise no serious question to be tried.  The conflicts of factual evidence relevant to the legal arguments, as mentioned above, are also not for this court to resolve at this stage.  Whether Leung, in law and in fact, was the sole author of his predicament remains a matter to be tried.

Beneficial interest of Sin

34.  The reason for Leung’s mother, Sin, to intervene is that she is allegedly the beneficial owner of the Property.  She claims to have funded the purchase of the Property in 1998 as an investment and a temporary roof for her son.  Only that her son has been so incapable in securing a steady income for all these years that he has been living in the Property until what happened in the present case.

35.  Both she and Leung explained that with Leung’s low and unsteady income, there was simply no way that he managed to come up with the money to finance the purchase of the Property in 1998.  The Property was partly financed by a mortgage with the bank.  Sin produced copies of her bank passbook in 2007 that shows, according to her, entries of transfer of a monthly sum of HK$10,000 by way of standing instruction to Leung’s account for the purpose of mortgage repayment.  The bank records of Leung in 2004 are said to correspond with such entries.

36.  In support, reference was also made to the fact that upon Leung’s divorce from his ex-wife in 1999, the arrangement was such that the Property was transferred into the sole name of Leung.  His ex-wife made no claim of any interest in this former matrimonial home.

37.  Leung and Sin also explained that Sin did not come to be involved until now because Leung has concealed his credit history and the present problem with State China until May 2010.  She did not live at the Property.  The suggestion, it seems, is that she was also not aware of the court documents served on Leung at the Property.  According to Sin, upon revelation by Leung of what has happened, Sin instructed solicitors in late May 2010 with a view to salvaging the situation.

38.  The contention is that a trust results in favour of Sin beneficially by reason of her financial contributions over the years.  It is argued that as Leung has no beneficial interest in the Property, there was nothing for the charging order to be imposed on.  The charging order is therefore said to be null and void.  Consequentially, the enforcement of the charging order by possession fell away as well.  On the other hand, it is suggested on behalf of State China that the alleged beneficial interest of Sin is a recent fabrication.

39.  Considering the evidence of the background of Sin and Leung as well as that relating to the alleged financial contributions, I cannot say that the allegation of the mother and son is inherently implausible.  The conflict of evidence, as mentioned above, cannot be resolved at this stage.

40.  It is also contended that even assuming that Sin did fund the purchase and mortgage repayment of the Property, this could only be intended as her gift to Leung.  In this regard, Mr Siu submitted that the presumption of resulting trust is faced with the rival of the presumption of advancement or gift.  Mr Siu referred to Lee Tso Fong v Kwok Wai Sun, HCA 272/2005 (9 May 2008) at para.23.

41.  Leung and Siu have their version of the circumstances surrounding the acquisition of the Property.  On the contrary, State China relies on other evidence that, according to it, suggests that this was a gift to Leung.  For instance, this was a matrimonial home for Leung and his ex-wife.  The monthly transfer of money from Siu to Leung exceeded what was required for repaying the mortgage.  In all the past encumbrances, Leung was allowed to be named as the beneficial owner of the Property.  Instead of renouncing her status as one of the trustee, Leung’s ex-wife simply transferred the Property into his sole name upon their divorce.  Since then, the Property remained Leung’s home while Sin lives elsewhere.

42.  The presumption of resulting trust, like any other presumption, operates only in the absence of contrary evidence.  Existence of evidence to the contrary means that the finding of resulting trust needs to be based on proof by evidence and no longer presumption.  When State China relies on the presumption of advancement or gift, the same principle applies, in the light of contrary evidence of a resulting trust adduced by Leung and Sin.  In my view, this is also the effect of the paragraph in Lee Tso Fong that Mr Siu cited.

43.  The question is really whether the evidence supports a trust or a gift.  Reference to the presumptions, in my view, is unhelpful, if not potentially confusing.  As mentioned above, the conflicts of evidence in this respect cannot be resolved at this stage.

44.  Mr Siu further argued that if this was not a gift, the scheme of Siu to acquire beneficial interest in the Property by funding and having her son to apply to purchase the Property under the Home Ownership Scheme would be illegal.  The court will not lend its aid to them by recognising such a scheme and her beneficial interest.  Mr Siu referred to Tinsley v Milligan [1994] 1 AC 340.  As held by the English House of Lords in Tinsley, all depends on whether Leung and Sin have to plead the illegal transaction so as to found their cause of action in their claim in the present case.

45.  Mr Siu referred to the information issued by the Housing Authority in 1998 setting out the eligibility requirements of applicants to purchase properties in Charming Garden under the Home Ownership Scheme.  As expected, there was the test of the family means.  Mr Siu also referred to the restriction that during the 24 months preceding the application, the applicant and his family might not own or co-own any residential property.

46.  At this stage, the only evidence of the means of Leung and his family came from him and Sin.  The evidence is also that Sin lives in another property.  However no conclusion can therefore be drawn from such evidence that there was breach of the eligibility requirements applicable to Leung as mentioned above.  Whether they have to plead illegality to found their cause of action is not a matter to be resolved at the interlocutory stage.

Sale of the Property

47.  There is suggestion that the sale of the Property might not be a genuine one or that this was conducted at undervalue (notwithstanding its being above the reserve price fixed by the court).  If suffices for me to say, as I could only say at this stage, that such suggestion is mere speculation and not conclusive.

Conclusion

48.  I am satisfied that the contentions of the parties give rise to serious questions to be tried.

Adequacy of damages as compensation and balance of convenience

49.  Would damages be an adequate remedy to either party at the end of the day, if an interlocutory injunction is or is not granted?  The principles are summarised in Hong Kong Civil Procedure 2010 at 29/1/11-29/1/15.

50.  The complication in the present case is that the Property has been sold; only the sale is yet to be completed.  The completion date has been postponed by State China and the purchaser by consent until this court’s decision today.  Mr Siu submitted that if his client is restrained from proceeding with completion, his client would most certainly be faced with a claim by the purchaser for specific performance and/or damages.

51.  What Mr Siu anticipates is likely to happen, if the injunction is granted.  But realistically, I wonder whether State China would be saved from claim by the purchaser even without the injunction.  The reason is simple: The purchaser expects an assignment of the Property free from encumbrance on completion.  In view of the present litigation which goes to the title, I do not see how State China would manage to give a good title that it has contracted to give to the purchaser, even assuming that the purchaser is indeed prepared to complete.

52.  On 5 June 2010, Leung executed a declaration of trust in favour of Sin over the Property.  The unwritten equity existing by way of the alleged resulting trust started to take a written form.  The trust deed was registered at the Land Registry on 9 June 2010.  Pursuant to the Land Registration Ordinance, Cap.128, the interest created or evidenced by the trust deed ranks in priority according to the date of its execution.  Though this was dated after the agreement for the sale and purchase of the Property, the agreement happened to be registered on 8 June 2010, which was after 1 month of its execution.  According to the Ordinance, it ranks in priority according to its date of registration.  Mrs Chan therefore raised the issue of whether the trust deed, and therefore Sin’s interest (if proved), ranks prior to the equitable interest of the purchaser in any event.

53.  For the purpose of the reliefs sought in DCCJ 2213/2010, I wonder whether the purchaser ought to have been joined as a party.  It is not difficult to anticipate that this will happen, in the event of completion of the sale and purchase of the Property.  In that case, State China would be faced with the purchaser’s additional recourse for an indemnity.

54.  It therefore appears to me that whether an injunction is granted, chances are that State China will be faced with litigation commenced by the purchaser.  Chances are also that it will be a matter of damages of the categories recognised by the law in conveyancing dispute.

55.  From the perspective of Leung and Sin, Mr Siu pointed out that admittedly, the Property was not Sin’s residence.  Since the execution of the writ of possession, Leung has also vacated from the Property.  An injunction, if granted, does not amount to a leave to him to re-possess and to reside at the Property again.  These are, in my view, reasonable observations.

56.  Mr Siu submitted that in these circumstances, damages should be adequate compensation for Leung and Sin, if they turn out to have been wrongfully deprived of the Property.  I do not entirely agree.  Whilst the idea was to acquire the Property as an investment, the Property was indeed the home of her son.  There is no evidence of any change over the past decade.  There is no suggestion that but for this dispute, there would have already been plan to sell the Property for a profit, which is supposedly the starting point of any typical investment in property in Hong Kong.

Undertaking as to damages

57.  Mr Siu questioned the readiness and ability of Leung and Sin to fortify their undertaking as to damages for the purpose of their application.  This again relates to the history of Leung’s default and whether he and Sin are impecunious.  As mentioned above, Sin is over 60 years old and Leung is unemployed.

58.  However, there is no dispute that by their solicitors’ letter dated 12 June 2010, Leung and Sin also tendered a cheque for HK$417,979.30 to State China’s solicitors with a view to settling the outstanding debt.  By the same letter, Leung and Sin also undertook to reimburse the reasonable expenses incurred by the purchaser in the purchase of the Property and the cancellation of the purchase.  This was rejected and the cheque was returned.  In court, Mr Siu suggested that the current outstanding debt amounts to about HK$457,000.

59.  The Property was sold at HK$2.48 million.  As this is a property under the Home Ownership Scheme, premium would have to be paid upon the sale.  The premium, according to Mr Siu, would be about HK$1.41 million.  In other words, the balance of the sales proceeds would be in the region of HK$1 million.  State China would have expected to look to this net amount for satisfying the outstanding debt.

60.  However, if the repayment of the outstanding debt is somehow secured, the net balance of the proceeds of realising the Property could be looked to for satisfying any liability to pay damages, in the event that Leung and Sin fail in the dispute.  Of course, property prices fluctuate; but it cannot be said that their undertaking to pay damages is not credible or of no considerable worth.  Through their counsel, Leung and Sin are willing to give such undertaking.

Delay

61.  Mr Siu also criticised Leung and Sin for delay in action.  As mentioned above, Sin allegedly did not come to know what has happened until May 2010.  It was only in late May when she and Leung had legal advice.  Considering the steps they have taken through their solicitors since then until the taking out of the applications, I am prepared to refrain from drawing the conclusion that there was inordinate delay on the part of Leung and Sin.  In any event, by the time when they came to have legal advice, the Property has already been sold.

Conclusion

62.  Considering all the circumstances, I am prepared to grant the interlocutory injunction subject to condition and undertaking.

Order

63.  In respect of DCCJ 2213/2010, the application for abridgment of the time for service of the summons and for leave to rely on the affirmations of Leung and Sin in DCMP 1985/2009 is not contentious.  For the avoidance of doubt, I make an order in terms of those parts of the summons.

64.  In respect of the application for interlocutory injunction in DCCJ 2213/2010, upon the undertaking of Leung and Sin to pay damages in the event that the court finds that this order has wrongfully caused loss to State China or any other party; and on condition that they pay a sum of HK$457,000 into court by noon of 6 July 2010, there be an order that State China be restrained from completing the sale and purchase agreement dated 3 May 2010 in respect of the Property until the trial of DCCJ 2213/2010 or further order of the court with liberty to apply.

65.  In respect of DCMP 1985/2009, I grant an interlocutory injunction in the same terms with liberty to apply.

66.  As to the costs of and occasioned by the applications, both in DCCJ 2213/2010 and in DCMP 1985/2009 (which was reserved by H H Judge S T Poon), I make a nisi order that such costs shall be in the cause of DCCJ 2213/2010 with certificate for counsel.  In the absence of application in 14 days to vary, the costs order shall become absolute.