COMMON LUCK INVESTMENT LTD. v. CHEUNG KAM CHUEN

FACV No. 22 of 1998

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 22 OF 1998 (CIVIL)

(ON APPEAL FROM CACV No. 16 OF 1998)

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J U D G M E N T

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Chief Justice Li:

1. I agree with the judgment of Mr Justice Litton PJ.

Mr Justice Litton PJ:

Introduction

2. This appeal concerns a mortgage of land in the New Territories, Lot No. 4170A in Demarcation District 116 Yuen Long. It consisted of agricultural land with a two-storeyed house, pig-sties and chicken sheds upon it. The registered owner was Mr Cheung Siu Ming, now deceased, and the property in question was his family home.

3. On 19 May 1964 Mr Cheung executed a mortgage by which he, as the mortgagor, in consideration of $5,000 lent to him by the Canton Trust and Commercial Bank Limited, assigned the property to the bank for securing the repayment one year later of the principal sum together with interest thereon at the rate of $18 per month. The mortgagor defaulted in repayment on the due date (19 May 1965) but the bank took no steps to take possession of the property. That might have been because, at about that time, the bank went into liquidation. So the mortgagor continued living there.

4. On 8 July 1977 the bank (in liquidation) acting by the Official Receiver as the liquidator assigned to Common Luck Investment Limited the property in question. There were a total of 12 lots of land, including the property in question, sold for a total of $121,000. The mortgagor continued to live with his family on the property. On 2 December 1991 the property was resumed by the government for the purpose of road building and ownership of the property reverted to the government. Compensation in the sum of $517,492.80 was assessed to be payable to the owner by reason of the resumption. Common Luck claimed to be entitled as the last registered owner to that money and brought proceedings against the government but the mortgagor intervened. Eventually the court, by order dated 13 December 1994, directed that the issues as between Common Luck and the mortgagor be tried, Common Luck being the plaintiff and the mortgagor the defendant. The trial took place before Deputy Judge Whaley in October 1997. On 3 December 1997 judgment was given in favour of the mortgagor. The judge made two declarations:

(1) That the mortgagor had acquired a good possessory title to the property prior to and at the time of its resumption by the government;

(2) the mortgagor was entitled to the compensation payable by the government consequent upon such resumption.

5. The costs of the proceedings were awarded to the mortgagor.

6. Common Luck appealed against that judgment to the Court of Appeal (Godfrey, Leong and Rogers JJA) who, by their judgment dated 28 May 1998, dismissed the appeal with costs. On 22 September 1998 the Court of Appeal granted leave to Common Luck to appeal to this Court. Hence the matter now before us.

The proceedings in the courts below

7. The mortgage was in Form B as set out in the Schedule to the New Territories Ordinance, Cap. 97, and was governed by the provisions of that Ordinance. This was common ground before the judge. The trial judge found that when the mortgagor failed to repay the loan on 18 May 1965 the bank was entitled to "quietly enter into the whole and enjoy the property without interruption by any person", pursuant to s.25(1)(c), with the result that, from that time onwards the mortgagor ceased to have any possessory rights or any other interest in relation to the property.

8. The judge then turned to the provisions of the Limitation Ordinance, Cap. 347, as applicable in 1965 and in particular to the provisions of s.7(2) which states:

"7(2) No action shall be brought by any ... person to recover any land after the expiration of 20 years from the date on which the right of action accrued to him or, if it first accrued to some person through whom he claims, to that person ....."

9. The judge concluded that the mortgagor's continued occupation of the property was "adverse possession" in terms of s.13(1) of the Limitation Ordinance as his "occupation and use of the land was extensive ... and at all times inconsistent with the enjoyment of the land by the bank and latterly the plaintiff". The result was that upon the expiration of 20 years (18 May 1985) from the date when the repayment of the mortgage loan fell due the mortgagor acquired a possessory title to the property and hence was entitled to the compensation money, to the exclusion of Common Luck, when the property was ultimately resumed by the government.

10. The judge's conclusion has two startling effects:

(1) From 18 May 1965 onwards, the mortgagor was, though the registered owner until July 1977, a squatter in his own home.

(2) The mortgagor's equity of redemption was extinguished, not by the mortgagee bank realising its security nor by any order of a court for foreclosure, but by the mere act of failing to repay the loan on the due date.

11. Common Luck's appeal against Deputy Judge Whaley's judgment was dismissed by the Court of Appeal in an ex tempore judgment, without examination of the legal effect of a New Territories Form B mortgage. In the only judgment of that court, given by Godfrey JA, with which the other two Justices of Appeal agreed, no reference was made to the provisions of the New Territories Ordinance which lays down covenants deemed to be included in every Form B mortgage, or of the normal legal incidents of a transaction coming within the rubric of a mortgage. The Court of Appeal's conclusion is comprised in three sentences as follows:

"The bank had a legal title to the land, and it was that legal title which it sold through the Official Receiver to the plaintiff. The plaintiff ... is plainly a person claiming through the bank. That being so, since the right of action to recover the land from the defendant first accrued to the bank on 19 May 1965, the title of the bank (and of the plaintiff as a person claiming through it) was extinguished by 19 May 1985."

12. The Court of Appeal took the view that the moment the mortgagor defaulted in repayment, all rights of property vested in him were forfeited to the mortgagee: A view of the law which has not prevailed even in the harsh climate of the old Common Law Courts for nearly 3 centuries.

The mortgage

13. As mentioned earlier, the mortgage was made in Form B set out in the Schedule to the New Territories Ordinance. The provisions of s.25(1) and (2) govern that mortgage, in these terms:

"25. (1) In a conveyance by way of mortgage (when it is the intention of the parties that the mortgagee shall not enter into possession until default is made in payment of the mortgage money) made in Form B in the Schedule the following covenants by the mortgagor with the mortgagee shall be deemed to be included -

(a) that the mortgagor will on the stated day pay to the mortgagee the stated mortgage money, and will, so long as the mortgage money or any part thereof remains due, pay to the mortgagee interest thereon by equal monthly payments at the stated rate on the stated day of each month;

(b) that the Crown lease, licence or grant under which the property conveyed is held is at the date of the conveyance good, valid and subsisting, and that the rent thereby reserved and the lessee's covenants therein contained have been paid and performed up to the date of the conveyance; and the mortgagor has at the said date power to assign the property conveyed in manner therein expressed free from incumbrances except as therein mentioned;

(c) that the property conveyed may after default in payment of the moneys intended to be secured by the mortgage be quietly entered into, held and enjoyed by the mortgagee without any interruption by any person;

(d) that the mortgagor and every person claiming any estate or interest in the property conveyed will at all times at the cost of the mortgagor execute and do all such assurances and things for further or better assuring all or any of the property conveyed unto the mortgagee as by him shall be reasonably required;

(e) that the mortgagor (until the mortgagee enters into possession of the property conveyed) will pay all rents payable in respect of the property conveyed, and will perform and observe all covenants and conditions, so far as they relate to the property conveyed, contained in the Crown lease, licence or grant under which the property conveyed is held, and will indemnify the mortgagee against the non-payment of the said rent and non-performance and non-observance of the said covenants and conditions so far as aforesaid.

(2) The following proviso shall be deemed to be included: that if the mortgagor on the stated day pays to the mortgagee the stated mortgage money with interest in the meantime at the stated rate, the mortgagee will at any time thereafter at the request and cost of the mortgagor release the property to the mortgagor as in this Ordinance is provided."

14. "Mortgage" is defined in s.2 of the Ordinance as including any "charge on any land for securing money, or moneys worth ...." Plainly, in relation to a Form B mortgage, the legislature was not intending to use the expression mortgage in an unusual sense. The classic definition of a mortgage is that given by Lord Lindley in Santley v. Wilde [1899] 2 Ch 474 and adopted by Lord Halsbury in Noakes & Co. Ltd. v. Rice [1902] AC 24 at 28:

"A mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt, or the discharge of some other obligation for which it is given. This is the idea of a mortgage; and the security is redeemable on the payment or discharge of such debt or obligation any provision to the contrary notwithstanding.... Any provision inserted to prevent redemption on payment on performance of the debt or obligation for which the security was given is what is meant by a clog or fetter on the equity of redemption, and is therefore void."

15. It must be assumed that when the legislature enacted s.25(1) and (2) of the New Territories Ordinance, it had these principles in mind. An instrument not containing these basic characteristics cannot be termed a mortgage.

16. A right to redeem is an inseparable incident of a mortgage. It cannot be taken away by an express agreement of the parties. Although originally at common law the mortgagor forfeited his estate when he defaulted, and it became the absolute property of the mortgagee, from earliest times the courts of equity have intervened and held that until foreclosure by order of the court, or sale by the mortgagee in realizing his security, the mortgagor has an equitable right to redeem: By offering to pay the principal, interest and costs he can have his property re-assigned to him. The mortgagor's equitable right to redeem is, in the eyes of the law, an equitable estate.

17. The New Territories Ordinance was first enacted in 1910, by which time the two streams of jurisprudence, common law and equity, had merged for nearly forty years. It is inconceivable that the Hong Kong legislature could have intended to introduce, by enacting 25(1)(c), the harsh rule of the old common law without the mitigating effect of equity: Particularly bearing in mind the fact that as early as 1733 by the Mortgage Act of that year (7 Geo. 2, c.20) the Courts of Common Law were required, in any action for recovery of a mortgage debt, or for possession of mortgaged land, to give effect to the mortgagor's right of redemption and re-conveyance in much the same way as a court of equity would have done: See generally the judgment of Lord Selborne LC in Heath v. Pugh [1881] 6 QBD 345 at 359.

18. These are basic propositions and seem not to have been considered by the Court of Appeal.

Section 25(1)(c) New Territories Ordinance

19. There is nothing unusual in a covenant, such as that provided for in s.25(1)(c), which empowers the mortgagee, after default in repayment, to enter into and take possession of the mortgaged property. This could be, for instance, to facilitate the mortgagee in realizing his security, or to recoup the mortgage loan by taking the rents, if the property be let. But, until the mortgagee has exercised that right, the mortgagor remains in lawful possession of the property. As Lord Selborne LC said in Heath v. Pugh at 359:

"The possession of the mortgaged land by the mortgagor, during the subsistence of the security, and while the mortgagee did not choose to take possession, was held (at law as well as in equity) to be 'at the will', or by the 'sufferance', or 'permission' of the mortgagee, under a 'tacit agreement' which the mortgagee might determine at his pleasure. It was the nature of the transaction that the mortgagor should continue in possession. His possession was rightful and not by wrong."

20. The mere fact of default does not convert the mortgagor into a trespasser, as the courts below in effect had found. Nothing in s.25(1)(c) of the New Territories Ordinance can be construed as having such an effect. If the mortgagee never, in fact, exercised its rights under s.25(1)(c) to enter into the property, "quietly" or otherwise, then the mortgagor's right of possession remained intact.

21. Before us Mr K.M. Chong, counsel for the respondent, makes in effect two submissions: (1) The statutory scheme under the New Territories Ordinance makes no provisions for proceedings for foreclosure; this, he submits, emphasizes the point that the mortgagor's right of redemption is a mere contractual right, not an equitable interest; once the time for repayment of the mortgage loan was past, the contractual right was extinguished; the mortgagor's continued possession of the property was therefore adverse to that of the bank mortgagee. (2) Assuming Common Luck's main contention to be correct, and the mortgagor's equity was not extinguished by the default in repayment, then his possession of the property after 18 May 1965 was that of a tenant at will; and by the operation of section 12(1) of the Limitation Ordinance such tenancy is "deemed to be determined at the expiration of a period of one year from the commencement thereof"; hence the bank's "right of action" accrued a year later; upon the expiration of 20 years (18 May 1986) the mortgagor acquired a possessory title: In short, the judge had reached the right conclusion, though for the wrong reason.

22. As to point (1), the effect of the argument is to strip a Form B mortgage of one of its main ingredients as a mortgage: the equity of redemption: a right regarded in the eyes of equity as an equitable estate. Mr Chong's argument is plainly unsound.

23. As to point (2), the implied licence of the mortgagor to remain on the property is simply that: an implied licence. The mortgagor's right of possession flows from the mortgage itself. There is no need to create a fictitious tenancy at will to justify his right of possession.

24. It follows that the conclusion in the courts below that the mortgagor was in adverse possession of the property as from 19 May 1965 was wrong.

Sale by the bank

25. The sale of the property by the bank, through the liquidator, to Common Luck on 8 July 1977 was in Form A as set out in the Schedule to the New Territories Ordinance. The judge found that it was a sale by the bank as mortgagee under the provisions of s.30 of the Ordinance, which, as relevant, states:

"30. A mortgagee and any person entitled to give a receipt for the mortgage money, where the mortgage is made in accordance with Form B in the Schedule, shall have the following powers to the like extent as if they had been conferred by the mortgage deed but not further -

(a) where the mortgage money has become due, to sell and convey the mortgaged property, subject to prior charges, estates and interests (if any) to which the mortgaged property is subject, but free from all other estates, interests and rights to which the mortgage had priority, in such manner and subject to such conditions, not being at variance with the provisions of this Ordinance, as he thinks fit, with power to vary any contract for sale, buy in at any auction, and rescind any contract for sale, and to re-sell without being answerable for any loss occasioned thereby:

Provided that a mortgage shall not exercise the power of sale unless and until notice requiring payment of the mortgage money has been served on the mortgagor, or on one of the several mortgagors, or left on the mortgaged premises, and default has been made in payment of the mortgage money or part thereof for one month after such service, or some interest under the mortgage is in arrear and unpaid for one month after becoming due, or there has been a breach of some provision contained in the mortgage deed or in this Ordinance other than a covenant for payment of the mortgage money and interest;"

26. The judge, in finding that the sale by the liquidator was pursuant to s.30(a), noted in passing (but not necessarily accepting) the evidence of the mortgagor and his son to the effect that no notice had been given to them as provided for in the proviso to s.30(a). The judge concluded that s.31 precluded any challenge to Common Luck's title on the ground that the power of sale was improperly exercised. Section 31 states:

"31. When a sale is made under a power of sale conferred by this Ordinance, the title of the purchaser shall not be impeached by reason that no case had arisen to authorize the sale or that due notice was not given or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorized, improper or irregular exercise of the power of sale shall have his remedy in damages against the person exercising the power."

27. The effect of the judge's findings in this regard is that, by the bank mortgagee realizing its security, the equity of redemption was extinguished. All property rights passed to Common Luck as the purchaser.

28. No challenge was apparently made to these findings in the Court of Appeal.

29. In any case, nothing in fact turns on this point. As mentioned earlier, the mortgagor continued to live with his family on the property. No demand for possession was, apparently, ever made by Common Luck as the new registered owner. As a matter of inference and of commonsense it would seem that the mortgagor was permitted to remain there as Common Luck's licensee. But assuming that, somehow, the mortgagor should thereafter be regarded as a squatter and was in adverse possession vis-a-vis Common Luck, he would nevertheless not have acquired a possessory title by the time the government resumed the property in December 1991.

Conclusion

30. The courts below were plainly in error when they found that the mortgagor was in adverse possession vis-a-vis the bank when he defaulted in repayment on 18 May 1965.

31. The right to compensation is a statutory right, governed as at 2 December 1991 by the Crown Lands Resumption Ordinance, Cap. 124. Under that Ordinance, the right to compensation vested in the former owner and "any person having an estate or interest in the land immediately before reversion": see s.6(1)(a). Such possessory rights as the mortgagor might have had, in December 1991, was terminable at any time by Common Luck; it was never argued in the courts below that such "interest" counted for anything under s.6(1)(a) of the Crown Lands Resumption Ordinance. Unless the mortgagor had a possessory title, as the judge had erroneously found, he did not qualify for compensation. It follows that the only party entitled to the compensation money was Common Luck as the registered owner of the land.

32. I have, in this judgment, dealt with the main issues raised on this appeal. It is unnecessary to deal with peripheral issues sought to be raised in this Court by counsel for the respondent, focussing upon the judge's findings of fact.

33. I would allow the appeal, set aside the judgments in the courts below and enter judgment for Common Luck, with costs here and below. The respondent's own costs should be taxed in accordance with the Legal Aid Regulations.

Mr Justice Ching PJ:

34. I agree with Mr Justice Litton PJ's judgment and I have nothing to add.

Mr Justice Bokhary PJ:

35. I, too, would allow the appeal in the terms proposed by Mr Justice Litton PJ. As to the law of mortgages in general and the effect of this mortgage in particular, I have nothing to add to what my brother Litton has so clearly stated.

36. But there is one issue of fact on which I feel it right to say a word. The respondent was Mr Cheung Siu Ming ("the deceased") and is now his estate, which his son Mr Cheung Kam Chuen has been appointed to represent in these proceedings. Even now the respondent disputes the very existence of the mortgage which lies at the heart of this case. Lest those interested in the estate doubt that the issue has received due consideration in this Court, I will explain why I uphold the judge's finding of fact that the mortgage in question had indeed been entered into.

37. The land in question is Lot No. 4170A in Demarcation District 116 in Yuen Long ("the Lot"). It had been assigned to the deceased as a gift by his father-in-law. That was on 1 December 1962. Shortly afterwards the deceased and his family started living on the Lot and farming it.

38. On 3 May 1963 the deceased mortgaged the Lot to the now notorious Canton Trust and Commercial Bank ("the Bank") to secure a loan of $2,000 from the Bank repayable on 2 November 1963. He repaid this loan, and this mortgage was redeemed on 1 April 1964.

39. Then on 19 May 1964 there was registered in the New Territories Administration's land register a memorial, signed by the deceased and by two persons on behalf of the Bank, showing that he had again mortgaged the Lot to it. This time, the memorial showed, it was by a mortgage dated 19 May 1964 to secure a loan of $5,000 repayable on 18 May 1965.

40. The deceased denied that he had mortgaged the Lot to the Bank a second time. But the judge found as a fact that he had done so. This finding of fact was challenged in the Court of Appeal. After noting the challenge, Godfrey JA (with whom the other members of the Court of Appeal agreed) said that it was unnecessary to go further into the question. But by upholding the judge's decision in the respondent's favour on the basis of adverse possession, the Court of Appeal necessarily proceeded on the footing that the mortgage in question had indeed been entered into. Therefore the existence of the 1964 mortgage comes to this Court, in at least that sense, as a concurrent finding of fact.

41. In this Court the respondent contends - by reliance on the contents of its printed case - that the judge had placed the onus on the deceased to prove that he had not entered into the 1964 mortgage, and that the judge was wrong to do so. What the judge said was this: "The Defendant has not discharged the onus of satisfying me on a balance of probabilities that his signature to this Memorial was irregularly obtained and that he did not execute such mortgage in favour of the Bank in 1964". Taken in isolation, this passage may be thought to suggest that the judge had indeed placed the onus on the deceased to prove that he had not entered into the 1964 mortgage. But when one looks at the matter in context, it becomes clear that the onus which the judge placed on the deceased was confined to proving that his signature on the 1964 memorial had been irregularly obtained.

42. The circumstances were these. No 1964 mortgage has been located. But it has to be remembered that the Bank had collapsed so as to go into liquidation in 1965. And in the confusion if not chaos inherent to such an upheaval, the failure to locate such a document does not suggest nearly as strongly as it might in normal circumstances that the document never existed.

43. As for the deceased's evidence denying that he had mortgaged the Lot to the Bank a second time, the unfortunate fact of the matter is that he had suffered a stroke some years before giving evidence. And the consequences of the stroke included an adverse effect on his memory. The judge found nothing in the deceased's demeanour to cause him to suspect the deceased's sincerity. At the same time, however, the judge did not feel able to treat his recollection as reliable.

44. So the judge proceeded on the inherent probabilities as he saw them. First there was the deceased's signature on the 1964 memorial. As to that the deceased said that he had in connection with the 1963 mortgage signed a number of documents at the Bank's request. And he expressed the belief that some dishonest employee of the Bank had duped him into signing the 1964 memorial and then used that document to misappropriate $5,000 as purportedly having been loaned to him. Such fraud was the matter - and the only matter - in respect of which the judge placed the onus of proof on the deceased. Quite clearly such fraud was a matter for the deceased to prove. And equally clearly he had failed to prove it. The deceased's memory as to whether he had signed the 1964 memorial was unreliable. And there was no evidence, as opposed to mere speculation, that anyone had duped him into signing the same.

45. The judge therefore proceeded - and rightly - on the basis that the deceased had duly signed the 1964 memorial. On that basis the judge treated this memorial as cogent evidence that the mortgage of which it was a memorial had been duly executed. That, in my view, accords with the inherent probabilities. Accordingly I would affirm the judge's finding of primary fact that the deceased had indeed on 19 May 1964 mortgaged the Lot to the Bank again, this time for $5,000 repayable on 18 May 1965. I have already explained that in a sense that finding comes to this Court as a concurrent finding of fact. But I feel bound to say that I would be disposed to affirm the judge's finding in this regard even if it did not enjoy the support of the intermediate appellate court.

46. All the learned judges in the courts below were firmly of the view that the law entitled the respondent to succeed even though the 1964 mortgage had been entered into. They will of course understand that I mean no discourtesy to them when, without adding anything of my own in that regard, I simply concur in my brother Litton's reasons for being unable to share that view of the law's effect.

Sir Daryl Dawson NPJ:

47. I agree.

Chief Justice Li:

48. The Court, being unanimous allows the appeal, set aside the judgments in the courts below and enter judgment for Common Luck with costs here and below. The respondent's own costs should be taxed in accordance with the Legal Aid Regulations.