THE COMMERCIAL BANK OF HONG KONG LTD. V. WELLSTANDARD TEXTILES CO. LTD. AND ANOTHER

1991, No. MP 3785

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. This is an action for possession and other relief under a mortgage pursuant to O.88 of the Rules of the Supreme Court.

2. The facts reveal that a mortgage dated the 29th August 1991 was entered into by the 1st defendant as the borrower and the plaintiff as the lender, secured upon industrial premises situate at the 7th Floor Tower B, Hunghom Commercial Centre, Kowloon. The present proceedings were instituted as a result of the 1st defendant's default in payment under the mortgage.

3. The 1st defendant was wound up compulsorily on the 19th February 1992 on the grounds of insolvency. The Official Receiver who is the liquidator of the 1st defendant does not oppose the proceedings.

4. On the 19th February 1992 the 2nd defendant's application to be joined as a party was granted. A director of the 2nd defendant Mr Cheung Tsui Yee made his first affirmation on 5th February 1992 in which he deposed to the fact that an oral agreement, the date not being specified, was entered into with Mr Chiang Tsui Yan of the 1st defendant who is his brother whereby the 2nd defendant agreed to sell and assign to the 1st defendant the suit premises for $6.5 million. The 1st defendant paid the purchase price by two cheques dated the 29th August 1991 for $3,367,563.68 and $3,132,436.32. The 2nd defendant claims that reliance was placed on a representation by Mr Chiang Tsui Yan on behalf of the 1st defendant that the second cheque would be honoured and in fact it was not presented for payment until the 31st October 1991. It was upon the reliance placed by the 2nd defendant that this cheque would be honoured that the 2nd defendant continued to remain in occupation of the suit premises which it had occupied since 1985 and presumably intended to remain until the cheque was honoured.

5. In his second affirmation made on the 14th May 1993, Mr Cheung Tsui Yee explained that the second cheque was not presented for payment as the 1st defendant required to obtain banking facilities for this purpose. An assignment of the suit premises was executed by the 2nd defendant in favour of the 1st defendant on the 29th August 1991 and receipt of the full purchase price was acknowledged. When the second cheque was presented for payment on the 31st October 1991, it was dishonoured. The 2nd defendant claims that this sum is still unpaid.

6. Mr Cheung Tsui Yee also stated that the purchase price of $6,500,000 was only a rough figure for neither he nor the 1st defendant were aware of the exact amount of the redemption money that was owed by the 2nd defendant in respect of its mortgage with the Bank of Credit and Commerce on the date of completion. He was also informed by his then solicitors that the 1st defendant had paid the redemption money and all legal costs. It was as a result of the 1st defendant's representations that the 2nd defendant executed the assignment.

7. The 2nd defendant alleges that by virtue of the non-payment of the full purchase price it still occupies the suit premises as the original beneficial owner by virtue of the representation made by the 1st defendant with regard to payment. The 2nd defendant accordingly contends it has a proprietary interest in the suit premises and that the assignment to the 1st defendant is invalid.

8. In an affirmation in reply by Mr Lee, the marketing manager of the plaintiff, the plaintiff denies any knowledge of the allegations that have been made by the 2nd defendant with regard to the sale by the 2nd defendant to the 1st defendant and that the plaintiff only came to know of the existence of the 2nd defendant in September 1991 as a result of certain investigations that were being carried out by the Commercial Crime Bureau into the 1st defendant and Mr Cheung Tsui Yan. Officers of the plaintiff subsequently made investigations into the matter and ascertained that the 2nd defendant was occupying the mortgaged property.

9. In November 1991, Mr Cheung Tsui Yee approached Mr Lee to enquire whether the plaintiff would grant financial facilities so that the 2nd defendant could buy back the mortgaged property. This proposal was rejected.

10. Mr Kwok, counsel for the plaintiff submitted that the 2nd defendant is estopped by the receipt clause in the assignment that he has received full payment from the 1st defendant. Further, he contends that the plaintiff is a bona fide mortgagee for value without notice of the alleged non-payment so that the plaintiff's registered legal charge takes priority over the 2nd defendant's lien. He referred me to p.457 of Fisher and Lightwood's Law of Mortgage, 10th Edition that the priority of the incumbrance will depend on one or more of the following

considerations and cited the first two items set out on that page which read :

(1) Prima facie the legal estate gives priority over equitable incumbrances earlier in date, provided it has been acquired for value and without notice of the earlier incumbrance. Notice may be actual, constructive or statutory.

(2) Apart from the effect given to the legal estate, incumbrances rank in order of time in accordance with the maxim "qui prior est tempore, potior est jure".

Accordingly, he submitted that the 2nd defendant's right as an unpaid vendor is restricted to suing for the balance of the purchase price and that there is no remedy available against the property.

11. Miss Au Yeung, counsel for the 2nd defendant, submitted that the plaintiff might have had knowledge of the assignment from the 2nd to the 1st defendant and could therefore have been aware that the 2nd defendant was in possession of the premises. Here, she relied on a letter of the 20th August 1991 from the 2nd defendant's solicitors to the plaintiff's solicitors which refers to the residue of the balance of the purchase price being settled by the clients direct. She went on to say that the 2nd defendant's rights as an unpaid vendor were not lost by receipt of the cheque from the 1st defendant and that the 2nd defendant's equity was better than that of the plaintiff.

12. My attention was drawn by counsel to Rice v. Rice 2 Drewry, 73 where the vendor conveyed without receiving his purchase money. The receipt was endorsed on the deed and the title-deeds delivered to the purchaser. The purchaser made a mortgage by deposit and absconded. It was held as between the vendor's lien for his unpaid purchase money and the right of the mortgagee, that the possession of the title deeds and the fact of the endorsement of the receipt on the deed gave the mortgagee the better equity. At page 83, the Vice- Chancellor Sir R.T. Kindersley said :

"Indeed it appears to me that in all cases of contest between persons having equitable interests the conduct of the parties and all the circumstances must be taken into consideration, in order to determine which has the better equity."

I was also referred to Winter v. Lord Anson (1827)1 Simon & Stuart 434 where the headnote reads :

"By an agreement for the sale of an estate, the purchase money, with interest was to be secured by the bond of the purchaser, and was to remain so secured during the life of the vendor. The conveyance, which was afterwards executed, expressed that the purchase money had been paid and the vendor's receipt was indorsed upon it; but, in fact, only a part of the price had been paid, and the residue was secured by the purchaser's bond, conditioned for payment of the principal with interest, within twelve months after the death of the vendor; and of interest in the mean time. The vendor was held to have a lien on the estate for the amount of the bond."

Miss Au Yeung placed reliance upon this case, but the facts are very different from those in the instant proceedings. Miss Au Yeung also asserted that the 2nd defendant's lien would have arisen before the mortgage between the plaintiff and the 1st defendant and referred to s.44 of the Conveyancing and Property Ordinance that relates to the mortgage of the legal estate and to subsection (8) which provides :-

"(8) This section does not affect any mortgage, charge or lien arising under any Ordinance or by operation of law,"

Miss Au Yeung contended that the plaintiff could not take advantage of the receipt clause in the assignment for there was no representation by the 1st or 2nd defendant that the full purchase price had been paid before the assignment was executed. The plaintiff was therefore put on notice and was required to ascertain from the solicitors of the 1st and 2nd defendants whether the balance of the purchase price had been paid. As the 2nd defendant did not take the cheque as sufficient security, the 2nd defendant has a vendor's lien and in view of the fact that the plaintiff might have had knowledge that the full purchase price had not been paid, the plaintiff should take the property subject to the 2nd defendant's rights as an unpaid vendor.

13. However, I am unable to accept this submission for Mr Lee of the plaintiff in the affirmation of the 26th November 1992 specifically states that after making full enquiries, the plaintiff had no knowledge at the time of the mortgage that the 2nd defendant was an unpaid vendor which, in any event, upon the facts is denied by the plaintiff. A mere speculation that the plaintiff might have had knowledge is in any event clearly insufficient.

14. An analogy can be drawn between the facts of this case and White v. Wakefield (1835) 7 Sim.401 which was cited to me by Mr Kwok where the headnote reads in para.2:

"Where a vendor signs a receipt for the whole purchase-money but suffers the purchaser to retain part of it, and remains in possession of the estate as tenant to the purchaser, his possession is no notice to a subsequent purchaser or incumbrancer of his lien on the estate for the sum retained."

At pp.417 and 418 the Vice-Chancellor, Sir L Shadwell had this to say :

"Suppose, however, that it were otherwise, and that there had been a lien; then the question would be whether, if there were no actual notice to the annuitants, they would be bound by the lien, because their attorney had notice that the Plaintiff was in possession of the estate. The only fact of which they could have had notice was that the money was not paid. But as White had declared by the conveyance, in the most solemn manner, that he had received all the money, no man could be expected to inquire whether the purchase-money, had been paid; and, therefore, if there had been any lien, the case must have totally failed as against the annuitants."

15. The plaintiff upon the facts in this case is a bona fide mortgagee for value without notice and is entitled to rely on the provisions of s.18(1) of the Conveyancing and Property Ordinance. Accordingly, I am quite satisfied that the plaintiff is entitled to judgment in the terms sought in the originating summons.