張秀琼及另一人 v. 利星行信貸有限公司

HCMP 2721/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2721 OF 2012

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J U D G M E N T

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1.  By an Originating Summons dated 30 November 2012, the 1^st Plaintiff, Madam 張秀琼 (“Madam Cheung”), applies for an order to set aside the sale and purchase of a property known as 111 Pik Uk, Lot No. 297 in D.D. No. 223, Sai Kung, New Territories (“Property”) by the Defendant, Lei Shing Hong Credit Limited (利星行信貸有限公司) (“Defendant”), to Johnson Winnie and Wong Hon Chun Edmond (together “the Purchasers”) pursuant to a provisional sale and purchase agreement dated 5 November 2012 (“PSPA”), which was later superseded by an agreement dated 15 November 2012.

2.  Yi Lok Limited (formerly known as Tricon Trusty Limited) was joined as the 2^nd Plaintiff by order made on 18 March 2013. At the hearing, the 2^nd Plaintiff was represented by Madam Cheung, leave having been granted by Master Hui on 2 September 2013.

3.  The background fact relevant to the application is not in dispute. 

Background fact

4.  The 2^nd Plaintiff is the registered owner of the Property. According to the annual return filed at the Companies Registry on 28 August 2013, Madam Cheung is the sole shareholder and director of the 2^nd Plaintiff.

5.  There is no evidence to suggest that apart from holding the Property, the 2^nd Plaintiff has any other asset or business.

6.  By a first legal charge dated 30 April 2010 executed by the 2^nd Plaintiff in favour of the Defendant, the Property was charged as security for “all monies” owed by the 2^nd Plaintiff and Madam Cheung to the Defendant (“Legal Charge”).

7.  The Property was also subject to a second legal charge dated 22 October 2010 in favour of Eco Finance Limited as security for “all monies” owed.

8.  By a consent order dated 29 February 2012 made in HCA 55/2011, which were proceedings commenced by the Defendant against the 2^nd Plaintiff and Madam Cheung, it was ordered, inter alia, that:

(1) the Defendant do recover against the 2^nd Plaintiff and Madam Cheung jointly and severally the sum of $9,255,419.15 secured by the Legal Charge together with interest on the sum at judgment rate from 1 March 2012 until full payment thereof;

(2) the 2^nd Plaintiff do within 30 days deliver vacant possession of the Property to the Defendant; and

(3) upon the 2^nd Plaintiff and Madam Cheung paying the money ordered to be paid and all other money (if any) secured by the Legal Charge, the Defendant “subject and without prejudice to the due exercise of any power of sale for the time being vested in it” do redeliver to the 2^nd Plaintiff possession of the Property and release the security constituted by the Legal Charge as the 2^nd Plaintiff may agree or as directed by the Court.

9.  Despite the consent order, neither the 2^nd Plaintiff nor Madam Cheung made any payment to the Defendant. It was only until the end of August or early September 2012 that Madam Cheung attended the Defendant’s solicitors to enquire about the amount required for redeeming the Property. Madam Cheung was told by the Defendant’s solicitors that the amount owed was $9,685,480.23, which comprised of judgment debt of $9,255,419.15 and interest of $430,061.08 (from 1 March 2012 and 28 September 2012). Madam Cheung was also told that she had to pay the legal costs and disbursements in the amounts of $60,000 and $16,461.50 respectively. Based on such information, Madam Cheung gave 3 cheques, drawn in favour of the Defendant’s solicitors for the aforesaid amounts, all of which were post-dated to 28 September 2012.

10.  However, on 20 September 2012, Madam Cheung requested the Defendant’s solicitors not to present the cheques for payment and said that she would exchange those cheques with cashier orders.

11.  As it turned out, the Defendant did not tender any cashier order to the Defendant and the judgment debt remained due and owing. The Defendant’s solicitors later informed Madam Cheung that the Property would be sold and required her to remove any belongings she might have left there.

12.  The Defendant instructed Chatersince Surveyors Limited (“Chartersince”) to sell the Property by public auction. At the first public auction held on 26 September 2012, the Property was put to sale at the upset price of $12,500,000, which was also the reserved bottom price.  No one bid for the Property.  At the second auction held on 24 October 2012, the Property was put to sale at the upset price of $12,000,000, which was also the reserved bottom price. Again, no one bid for the Property.  The Defendant was present at both auctions. This is confirmed by Madam Cheung at the hearing.   

13.  Prior to each of the 2 public auctions, the Property together with the upset prices and details of the auction were advertised in 2 Chinese newspapers for a period of 7 days.   

14.  As the Property could not be sold at the public auctions, the Defendant engaged an estate agent to sell the Property, which managed to secure the agreement of the Purchasers to purchase the Property at $12,000,000 and the PSPA dated 5 November 2012 was signed.

15.  Prior to signing the PSPA, the Defendant engaged Prudential Surveyors (Hong Kong) Limited to assess the value of the Property, which assessed the market value of the Property as at 6 November 2012 (being the date of the report) at $12,000,000. Another valuation report was obtained by the Defendant from A.G. Wilkinson & Associates (Surveyors) Limited (“AG Wilkinson”), which assessed the market value of the Property as at 15 September 2012 at $12,000,000.  It is the Defendant’s case that it entered into the PSPA on the basis of these valuations. This is not challenged by the Plaintiffs.

Plaintiffs’ contentions

16.  The Plaintiffs contend that the sale and purchase of the Property by the Defendant to the Purchasers should be set aside for the following reasons:

(1) The procedure whereby the Defendant sold the Property was very unreasonable and illegal as the sale was not conducted openly but was effected through a private and secretive arrangement made by the Defendant.

(2) The Property was sold at a gross undervalue, as there was sale of a similar property in the vicinity for $15,600,000.

(3) Prior to the Defendant entering into the PSPA, Madam Cheung had already informed the Defendant’s solicitors that she had secured a buyer who was willing to acquire all the shares in the 2^nd Plaintiff for $15,500,000, and that she would redeem the Property after completing such sale. However, the Defendant’s solicitors failed to provide any response, whereupon the buyer became reluctant to proceed with the acquisition.

17.  Subject to the above contentions, Madam Cheung accepts that by reason of the Share Charge and the Plaintiffs’ default in paying the debt owed, the Defendant has the right to sell the Property.  

18.  Both parties have adduced expert evidence on the market value of the Property:

(1) The Plaintiffs’ expert is Ms Joannau Wing Fan Chan, senior director of BMI Appraisals Limited, who assessed the market value of the Property as at 15 November 2012 at $15,000,000.

(2) The Defendant’s expert is Mr Chu Chung Ying of AG Wilkinson, who adopted the report prepared by Sr. Ruby W.N. Kwan, formerly a valuation manager of the same company, who assessed the market value of the Property as at 15 September 2012 at $12,000,000.

Applicable principles

19.  As the Defendant has the power to realise the Property to repay the debt secured by the Legal Charge, it stands in the same position as a mortgagee. The general nature of a mortgagee’s rights and duties are described in Fisher and Lightwood’s Law of Mortgage, 13^th ed., para. 30.22 as follows:

“The power of sale is given to the mortgagee for his own benefit, to enable him the better to realise his debt. Accordingly, his own interests come before those of the mortgagor. The mortgagee is not a trustee of his own power of sale for the mortgagor and nor is he under a general duty of care to the mortgagor. He can, therefore, act in his own interests in deciding whether or not to exercise his power of sale. If the mortgagee does decide to exercise his power of sale, he can likewise act in his own interest in deciding when to exercise it, subject to his duty to obtain the best price reasonably obtainable. He is entitled to sell even though a sale (or the time, or the terms, of the sale) may be disadvantageous to the mortgagor.

However, while the mortgagee may look to his own interests, he must nevertheless pay some regard to the interests of the mortgagor. Thus, the mortgagee owes a general duty in equity to the mortgagor and to others with an interest in the equity of redemption (including subsequent incumbrancers) to act in good faith and to use his powers for proper purposes. In so far as consistent with the mortgagee’s right to put his own interests first, the mortgagee must act fairly towards the mortgagor. Where their interests conflict, he is not entitled to act in a manner which unfairly prejudices or wilfully and recklessly sacrifices the interests of the mortgagor.”

20.  The duty to obtain the best price reasonably obtainable for the mortgaged property at the time will normally equate with the current market value (Fisher and Lightwood’s Law of Mortgage, op cit, para. 30.23). This duty was described in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 at 968, which was applied by Lord Templeman in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 (PC), at 1356F-G, in this way:

“both on principle and authority, that the mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it.”

21.  A mortgagee will not breach its duty to the mortgagor if, in the exercise of its power to sell the mortgaged property, it exercises its judgement reasonably. Where the judgement involves assessing the market value of mortgaged property, the mortgagee will have acted reasonably if its assessment falls within an acceptable margin of error (Fisher and Lightwood’s Law of Mortgage, op cit, para. 30.23; Michael v Miller [2004] EWCA 282).

22.  A mortgagee, who is selling, need not consult the mortgagor nor subsequent incumbrancers and does not limit his freedom of action by electing to keep them informed of the progress of negotiations (Fisher and Lightwood’s Law of Mortgage, op cit, para. 30.23).

23.  Lastly, the burden of proof is on the mortgagor, or other person seeking to set aside the sale, to prove breach of duty by the mortgagee (Fisher and Lightwood’s Law of Mortgage, op cit, para. 30.23; Haddington Island Quarry Co Ltd v Hudson [1911] AC 722 (PC) at 727).  

Merits of Plaintiffs’ contentions

24.  With the above principles in mind, I turn to consider the Plaintiffs’ contentions.

25.  I have no hesitation in rejecting the Plaintiffs’ assertion that the procedure through which the Defendant sold the Property was secretive, unreasonable or illegal. As the Plaintiffs accept, prior to selling the Property to the Purchasers, the Defendant had put the Property for sale in public auctions for 2 consecutive months and, on each occasion, the details of the Property and the auctions had been advertised in advance. It was only after the Property could not be sold by public auctions that the Defendant resorted to selling the Property by private agreement.

26.  In my view, the manner in which the Defendant attempted to sell the Property, which involved 2 public auctions followed by a sale through agent, was reasonable and proper.

27.  As for the Plaintiffs’ suggestion that the Property was sold at a gross undervalue, it must be rejected for the following reasons.

28.  First, while it is true a property located in the vicinity was sold at $15,600,000 pursuant to a sale and purchase agreement dated 19 March 2012, there is no evidence to suggest that there was any buyer who was willing to purchase the Property at a similar price in September 2012. Indeed, the fact that the Property was put for sale in 2 public auctions and no one bid for the Property at the respective set prices of $12,000,000 and $12,500,000 is sufficient to refute any suggestion that the Property could be sold at the price suggested by the Plaintiffs.

29.  Secondly, as stated above, before proceeding to sell the Property by private agreement to the Purchasers at $12,000,000, the Defendant had obtained professional opinions from 2 surveyors including AG Wilkinson, which confirmed that the market price of the Property as at 15 September 2012 was $12,000,000. It was reasonable for the Defendant to rely on these professional opinions as indication of the market price of the Property and sold the Property at such price.

30.  Thirdly, although Madam Cheung asserts that she had secured the agreement of a buyer (whose identity has never been identified) who was willing to purchase the Property by acquiring all the shares in the 2^nd Plaintiff for $15,500,000, and that such buyer was present in the second auction, she is unable to put forward any credible explanation as to why that buyer did not bid for the Property in the auction. It is inconceivable that such buyer, if present in the auction, would refrain from biding for the Property at the set price of $12,000,000, and would insist on buying the Property by acquiring the 2^nd Plaintiff, as Madam Cheung asserts. This is particularly so when the 2^nd Plaintiff was at that time also indebted to Eco Finance Limited, which debt was secured by a second legal charge created over the Property.

31.  As to the Plaintiffs’ assertion that Madam Cheung had informed the Defendant’s solicitors of the existence of the potential buyer and requested the Defendant’s solicitor to provide the requisite information for her to complete the sale but the Defendant failed to provide any response, this is denied by the Defendant’s solicitor in her 2^nd Affirmation filed in these proceedings. In light of the apparent importance of the matter, as Madam Cheung suggests, it is surprising that the Plaintiffs have not been able to adduce any document in support of their assertions. I prefer the evidence of the Defendant’s solicitors and do not accept Madam Cheung’s assertions.

32.  In any event, I do not think this is a valid ground to set aside the sale and purchase of the Property by the Defendant to the Purchasers. As the authorities discussed in §§19 to 22 above show, the mortgagee is entitled to exercise the power of sale in the way it considers appropriate. There is no duty for the mortgagee to consult the mortgagor, let alone keep it informed of the progress of sale.  

33.  For the above reasons, I am not satisfied that the Plaintiffs have discharged the burden of showing that the sale of the Property by the Defendant to the Purchasers was improper or that the Defendant has acted in breach of its duty owed to the 2^nd Plaintiff.

34.  In light of the above conclusion, it is not necessary to consider the different opinions of the experts on the valuation of the Property at the time the Defendant exercised its power of sale. In any event, I do not consider the opinion of Ms Chan supports the Plaintiffs’ case that the sale of the Property to the Purchasers at $12,000,000 was at a gross undervalue for the following reasons.

35.  First, Ms Chan’s opinion that the Property had a market value of $15,000,000 was based on a valuation date of 15 November 2012, which was 2 months after the Defendant had put the Property for sale. As there is no dispute that the Defendant decided to sell the Property in mid-September 2012, the relevant time for assessing whether the price at which the Property was sold was reasonable should be mid-September 2012, rather than 15 November 2012.

36.  Secondly, Ms Chan accepts under cross-examination that between 15 September 2012 and 15 November 2012, the general price index for residential properties rose by about 4%. She further accepts that if the relevant valuation date is 15 September 2012, her valuation should be adjusted downwards by 4% and becomes $14,400,000.

37.  Thirdly, Ms Chan only used 4 comparables in assessing the market value of the Property, all of which are village houses located in D.D. 223, being Lot No. 299, 280, 258 and 243. The unit rates (HK$/sq.ft.) of these 4 comparables were $5,517, $7,336, $5,854 and $6,881 respectively.

(1) Under cross-examination, Ms Chan accepts that in fact, there were 5 other transactions involving sale and purchase of village houses located in D.D. 223, being Lot No. 239, 152, 286, 306 and 153 the unit rates of which were $4,161, $4,803, $5,400, $3,214 and $2,333 respectively.

(2) There is no dispute that the last 2 transactions (with unit rates of $3,214 and $2,333) should not be used as comparables as the unit rates were too low and out of line with the other comparables.

(3) Ms Chan is unable to recall why she did not take into account the first 3 comparables (collectively “Other Comparables”) in assessing the market value of the Property. Ms Chan surmises that the reasons for not taking into account the Other Comparables were probably because the unit rates were too low and the transactions were not close in time to the valuation date.

(4) However, the latter reason cannot be a valid reason, as the dates of the sale and purchase agreements of the Other Comparables were 27 August 2012, 15 June 2012 and 14 March 2012, whereas the sale and purchase agreements of the 4 comparables used by Ms Chan were 19 March 2012, 6 November 2012, 2 January 2013 and 20 February 2013. I do not accept the former reason to be a valid reason for disregarding the Other Comparables as it assumes, without any objective basis, that the unit rates of the village houses in the vicinity must command a higher level of unit rates.   

(5) As the unit rates of the Other Comparables were much lower than the 4 comparables used by Ms Chan in assessing the market value of the Property, it is inevitable that the valuation she arrived at was much higher than that assessed by the 2 surveyors engaged by the Defendant and the value assessed by the Defendant’s expert, Mr Chu.    

38.  The above analysis demonstrates the artificiality of the market value assessed by the parties’ experts which were determined ex post facto and, to a large extent, were influenced by the difference in professional judgement of the surveyors both in choosing the comparables and in making adjustments to the unit rates of the comparables. I do not think the mere fact that Ms Chan has come to a higher valuation for the Property is sufficient to show that the Defendant has failed to discharge its duty to sell the Property at the price reasonably obtainable at the time.

39.  For the reasons set out above, the Originating Summons is dismissed. I make an order nisi that the Plaintiffs shall pay the costs of and occasioned by the Originating Summons including all costs reserved to the Defendant with a certificate for counsel.