Catherwood Ltd v. Feng Jin Liang and Another
Read the full judgment text of HCA 1052/2014 on BabelCite. This High Court CFI judgment was delivered on 26 October 2018.
1. In this action, the plaintiff claims that the disposition of a property by the 1 st defendant to the 2 nd defendant by way of a mortgage was a disposition made with intent to defraud creditors, and should be declared void and of no effect and be set aside.
Cites 6 cases
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HCA 1052/2014 [2018] HKCFI 2383 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1052 OF 2014 ________________________
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_________________ J U D G M E N T _________________ Introduction 1.In this action, the plaintiff claims that the disposition of a property by the 1st defendant to the 2nd defendant by way of a mortgage was a disposition made with intent to defraud creditors, and should be declared void and of no effect and be set aside. 2.The plaintiff (“P”) is an investment holding company incorporated in the British Virgin Islands, and the 1st defendant (“D1”) is a debtor of P, and the 2nd defendant (“D2”) is a limited company incorporated in Hong Kong and a “money lender” as defined in the Money Lenders Ordinance, Cap 163. 3.The property concerned is a duplex apartment on the 41st and 42nd floor with flat roof of Tower 5, Island Harbourview, No 11, Hoi Fai Road, Kowloon (“Property”), and two car parking spaces (“Car parking Spaces”). 4.D1 was initially legally represented in this action. On about 15 September 2014, D1 filed a Notice to Act in Person. He was later adjudged bankrupt on 17 December 2014, and on 19 January 2016, D1’s defence in the present action was struck out by consent of the Trustees-in-Bankruptcy of D1’s estate (“Trustees”) , leaving D2 as the remaining active defendant[1]. 5.At the trial, Counsel Mr Norman Nip and Ms Prisca Cheung appeared for P and Mr Chan Chi Hung SC & Mr Derek JY Chan appeared for D2. D1 was absent. Background 6.On 17 February 2010, P entered into a loan agreement with P as lender and D1 as borrower (“Loan Agreement”), pursuant to which P was said to advance a loan of HK$57m to D1 on 18 February 2010 (“Loan”). 7.D1 failed to repay the HK$57m on or before the stipulated repayment date of 16 May 2010. On 27 September 2011, P issued an action against D1 to seek recovery of the Loan and interest under HCA 1651/2011 (“1651 Action”). Subsequently, P applied for summary judgment on 16 July 2012. On 26 March 2013, L Chan J handed down a decision granting summary judgment in favour of P (“1651 Judgment”)[2]. 8.The circumstances leading to the Loan were set out in the 1651 Judgment. 9.Briefly, it arose in the course of P’s acquisition of the shares of a BVI company referred to in the 1651 Judgment as BVI Landcome, which held 100% of a Mainland coal mining company referred to as Shanxi Landcome and which held contract rights for production and exploration in various coal mines in the Mainland. 10.In 2009, there were two groups of shareholders of BVI Landcome, one was a company referred to as Celadon in the 1651 Judgment which held 72.5% and the other group being D1 and his affiliates which later held the remaining 27.5% through a BVI company China Win Capital Limited. 11.In 2009, D1 was looking for an investor to take up Celadon’s shares and shareholder’s loans in BVI Landcome, and to inject additional capital. D1 approached one Mr Or, the chairman of a Hong Kong listed company in relation to the acquisition of Celadon’s shares. For the acquisition, D1 arranged for Celadon’s 72.5% shares to be first acquired by a BVI company China Group Oriental Limited owned by D1 (CGOL). Mr Or then acquired P as a vehicle for the acquisition of CGOL. 12.P and D1 entered into Heads of Agreement on about 23 January 2010 with D1 granting an option to P in relation to the acquisition of D1’s shares in CGOL at a consideration of HK$1,000,000,000 , which option was exercisable on or before 22 March 2010[3]. 13.P and D1 then entered into the two loan agreements, one was referred as as the “Spent Loan Agreement” and the other one was the Loan Agreement. D1 had alleged that the Loan under the Loan Agreement was partial advance by P/Mr Or to D1 for the acquisition of coal mines and setting up costs, and that there was an oral agreement between him and Mr Or that if P did exercise the option to acquire D1’s shares in CGOL, the Loan would not be repayable by D1 and that the Loan would be converted into or regarded as P’s investment in BVI Lancome. P disputed the alleged oral agreement. 14.P did exercise the option and on 22 March 2010, P and D1 executed the formal Agreement of Sale and Purchase of D1’s shares in CGOL and the transaction was completed. 15.Under the Loan Agreement, D1 agreed to repay the Loan on demand on or before 16 May 2010 with a provision that the repayment could be extended.[4] It was also stipulated that the Loan should be used by D1 for on-lending to BVI Landcome for the coal mining business, and there was a provision that D1 agreed to assign to P all interests in the loan made by D1 to BVI Landcome[5] . 16.Although the repayment due date fell on 16 May 2010, P did not issue a demand letter until around 19 September 2011 and only commenced the 1621 Action on 27 September 2011. 17.About 3 months before commencing the 1651 Action, on 20 June 2011, P had commenced another action HCA 1021/2011 against D1 in relation to the Agreement of Sale and Purchase of D1’s shares in CGOL (“1021 Action”)[6]. There was no information before this Court in relation to the outcome of the 1021 Action. In fact, it would later transpire that Celadon had also commenced an action under HCA 438/2100 on 16 March 2011 against D1 (“438 Action”) but this was not referred to in the 1651 Judgment. 18.Anyway, L Chan J analysed the evidence and reviewed the contemporaneous documentary evidence and came into the conclusion that it was not believable that D1 and Mr Or had entered into the alleged oral agreement in relation to the Loan. The Judge had further accepted P’s explanation for the delay in commencing the 1651 Action, namely that P had reasons to prefer to maintain a good relationship with D1 until June/July 2011, in that P was hoping that D1 would deliver on his guarantee in relation to BVI Landcome’s annual profits and also the coal mines were managed by D1 until late July 2011. 19.It was based on the above that the Judge gave final judgment to P for the sum of HK$57m 26 March 2013. Judgment was entered on the same day. 20.On 8 April 2013, D1 made a mortgage loan application to D2 through the referral of a Mr Lee Shun Fu (“Lee”) of mReferral Corporation (HK) Limited, trading as mReferral Mortgage Brokerage Services (“mReferral”). 21.On 15 April 2013, P obtained a charging order nisi in the 1651 Action (“Order Nisi”) against D1’s beneficial interest in the Property, for a sum of HK$65,170,520.54 being principal plus accrued interest due under the 1651 Judgment, together with further interest from 11 April 2013 and costs. 22.On 17 April 2013, D1 entered into a legal charge of the Property and the Car Parking Spaces in favour of D2 (“Mortgage”) to secure a loan of HK$15m from D2 under a loan agreement of the same date at an interest rate of 15.8% per anuum or HSBC prime rate + 10.8% per annum, whichever is higher (“Mortgage Loan”). The Mortgage Loan was repayable by monthly instalment of HK$197,500, the 1st of which was to be paid on 17 May 2013 and thereafter on the 17th day of each month. 23.On 19 April 2013, the Order Nisi was registered by P in the Land Registry against the Property. 24.On 22 April 2013 D1 filed a Notice of Appeal against the 1651 Judgment. 25.On 24 April 2013, the Mortgage was registered in the Land Registry against D1’s interest in the Property. 26.On 15 May 2013, the Order Nisi was made absolute (“Order Absolute”). The Order Absolute was registered at the Land Registry against D1’s interest in the Property on 7 June 2013. 27.According to P, it was at that juncture that P became aware of the Mortgage[7]. 28.D1’s appeal was eventually heard on 18 December 2013, and it was dismissed by the Court of Appeal the same day. Reasons were later handed down on 24 January 2014 under CACV 79/2003 (“CA Judgment”)[8]. 29.On 13 March 2014, P issued proceedings against D1 under HCMP 592/2014 to enforce the Order Absolute, namely for vacant possession of the Property and for an order for sale of the Property (“Enforcement Action”). 30.On 17 March 2014, P instructed solicitors to write to D2 to inform D2 that P had issued the Enforcement Action and requested information as to whether the Property had been recovered and sold by D2 and also inform them the indebtedness owed by D1 to D2 under the Mortgage[9]. 31.Thereafter, on 28 March 2014, D1 and D2 entered into a Deed of Surrender for D1 to surrender the Property to D2 due to D1’s default in repayment of the secured indebtedness (“Deed of Surrender”). 32.On 10 April 2014, P’s solicitors wrote again to D2 notifying D2 of the hearing date of the originating summons in the Enforcement Action was fixed on 10 June 2014. 33.On 22 April 2014, D1 entered into two provisional agreements for sale and purchase respectively of the two Car Parking Spaces, namely to sell one of the spaces M118 to a purchaser at a consideration of HK$1,000,000 and the other space M119 to a purchaser at a consideration of HK$1,010,000. The assignment for M118 was later executed by D1 on 28 May 2014 and the assignment for M119 was executed by D1 on 4 June 2014. 34.On 29 May 2014, out of the sale proceeds of M118, D1 had made partial repayment to D2 in the sum of HK$933,159 (HK$600,000 being applied towards the principal and HK$333,159 towards interests). On 4 June 2014, out of the sale proceeds of M119, D1 had made partial repayment to D2 in the sum of HK$628,879 (HK$600,000 being applied towards the principal and HK$28,879 towards interests) [10]. 35.On 30 May 2014, D2 instructed solicitors to reply informing P that D1 had already surrendered the keys to the Property to D2 and that D2 was placing the Property on the market for sale. Upon further enquiry from P’s solicitors, D2’s solicitors replied on 4 June 2014 that D1 surrendered the keys to D2 and D2 entered into possession and changed the lock of the Property on about 2 May 2014[11]. 36.On 12 June 2014, P issued the writ herein against both D1 and D2. 37.On 12 September 2014, P served a statutory demand on D1 in respect of the judgment debt. 38.Then, on 13 October 2014, P presented a bankruptcy petition against D1[12]. On 17 December 2014, a bankruptcy order was made against D1 (“Bankruptcy Order”), and the proof of debt was lodged on 22 January 2015 (“Proof of Debt”), and a memorandum to the Court of the resolutions passed at the creditors’ general meeting was filed on 29 January 2015. 39.It was P’s case in the present action that the Mortgage was executed by D1 with intent to defraud creditors and that at all material times, D2 had actual or constructive notice of D1’s intent to defraud creditors and/or lack of good faith or alternatively, D2 did not act in good faith in entering into the Mortgage with D1. 40.D2 denied the allegations of P, and counterclaimed for a declaration that the Mortgage was valid, subsisting and enforceable as against the Property with priority over the Order Absolute. The agreed disputed issues 41.According to the agreed Scott Schedule, there are 3 issues :
The legal principles 42.Section 60 CPO states as follows :-
43.The leading authority on s.60 CPO is the decision of the Court of Final Appeal in Tradepower (Holdings) Ltd v Tradepower (HK) Ltd[2010] 1 HKLRD 674. The case concerned a disposition of assets for no consideration made at the time when the disponor was insolvent. Much of the discussion focused on the proper formulation and application of the so-called rule in Freeman v Pope in Hong Kong. Having considered various authorities, Ribeiro PJ formulated the rule as follows at paragraph 88:-
44.Whether the requisite intent to defraud creditors is proved is a question of fact to be judged as a whole on the evidence available as to the surrounding circumstances: Skink Ltd (in liquidation) v Comtowell Ltd [1994] 2 HKC 286 at 291E-F per Godfrey JA; Cheung Ying Lun v Legal Way Ltd [2014] 1 HKLRD 106 at paragraphs 25-26 per Godfrey Lam J. 45.Further, as set out by Fok JA, as he then was and sitting as an additional Judge of the Court of First Instance, in New China Hong Group Ltd v Ng Kwai Kai Kenneth, HCA 519/2010, unrep, 11 February 2011:
46.Fok JA’s decision to strike out the s 60 CPO claim was subsequently upheld by the Court of Appeal in New China Hong Group Ltd v Ng Kwai Kai Kenneth [2011] 5 HKLRD 216 where it was held, amongst other things, that as the case fell outside the rule in Freeman v Pope, there was a need to establish an actual intent to defraud creditors and this had not been established in the case[14]. 47.There was no real dispute to the above general legal principles, and I now turn to consider the present case. The witnesses 48.P’s director Mr Yeung Kwok Kwong (“Yeung”) attended the trial for cross examination and gave evidence on behalf of P. 49.D2 called 3 witnesses, namely Andriy Tang Chun Fai, the former Relationship Manager of D2 between 1 June 2012 and 22 April 2014 (“Fai”) and Alan Ng Yiu Lun, Senior Credit Manager of D2 since 2009 (“Alan”), and also Lee Shun Fu, the present Mortgage & Loan Team Manager of mReferral (“Lee”), 50.P’s expert witness Mr Gilbert Yuen and D2’s expert witness Mr Keith Siu had prepared valuations reports in relation to the Property and the Car Parking Spaces. 51.Mr Yuen’s assessed the market value of the Property as at 17 April 2015 was HK$22,100,000 whereas Mr Siu’s was HK$20,500,000[15]. 52.They have agreed the market value of the two Car Parking Spaces as at 22 April 2014, to be HK$1,220,000 each, totalling HK$2,440,000[16]. They had also attended trial to clarify the value for a sale under repossession for the Car Parking Spaces. The preliminary issue on P’s pleadings 53.Mr Chan had submitted, relying on what was said by Fok JA in the New China Hong case, that it is not open to this Court to infer dishonesty from facts which had not been pleaded by P. 54.The facts relied on by P in inviting the Court to draw inference of D1’s intent to defraud creditors and/or lack of good faith were set out in paragraphs 8 and 10 of the SOC and paragraphs 14 and 15 of Yeung’s witness statement. Mr Chan summarised the matters pleaded by P as follows:
55.As set out in Mr Nip’s opening submissions, P relied on, amongst other matters, the following :-
56.The above matters were not pleaded by P and not referred to in paragraphs 14 and 15 of Yeung’s witness statement. Mr Chan thus submitted that P should not be allowed to raise unpleaded allegations which purportedly pointed to D1’s fraudulent intent. 57.Mr Nip however argued that evidence needed not be pleaded and that this Court is entitled to take into account the whole of the evidence in arriving at its factual findings, and further that the above matters only arose out of “late” discovery, ie audio recordings of telephone conversations between D1 and D2’s staff were only disclosed by D2 in D2’s supplemental list of documents after P had prepared its witness statement. 58.D2’s supplemental list of documents was filed on 22 March 2016 contemporaneously with the first round of witness statements and since then there had been two CMCs. Mr Chan thus submitted that P had had ample opportunity to amend its pleadings to rely on additional material facts if so advised and yet P had failed to do so and that P should not be allowed to rely on unpleaded matters at the trial. 59.Fok JA, as he then was, had made it clear in the New China case that it is not open to the court to infer dishonesty from facts which have not been pleaded or from facts which have been pleaded but are consistent with honesty. In fact, Fok JA had further observed that that it was an abuse of the court’s process to start a case without a solid foundation hoping that something would turn up in the course of the proceedings, for example at the stage of discovery or on cross-examination, or to stop time from running[17]. 60.Further as seen in Cheung Ying Lun case and further referred to below, even when the defendant did not appear, the plaintiff still had to prove his case based on his own pleaded facts. 61.As Mr Chan had submitted, D2 had had no opportunity to properly meet P’s case on the newly raised matters, in that D2 had no opportunity to gather or adduce evidence or to investigate, such as the circumstances of D1’s bankruptcy or to seek further discovery from P in relation to the bankruptcy proceedings. I accept that D2’s objection was not merely a technical one but one of substance and fairness. Having considered D2’s objections, I agree with Mr Chan’s submissions that the assessment of whether D1 had intent to defraud creditors should really be confined to the surrounding facts and circumstances as pleaded by P. 62.In any event, as seen later below, I do not find that the unpleaded matters would assist P. Issue 1- whether D1 had the intent to defraud creditors 63.The disposition P sought to set aside under s 70(1) of CPO was the Mortgage. It was common ground that the Mortgage was executed in consideration of the HK$15m loan and it was not a disposition of property unsupported by consideration. The question is whether at the time of executing the Mortgage, D1 had the relevant intent to defraud creditors. 64.D1’s defence was struck out on 19 January 2016 and D1 was absent throughout the trial. Thus, at the trial, D1 had no defence nor had he advanced any evidence to contradict P’s case. However, as said by G Lam J in the Cheung Ying Lun case, declarations are not readily granted by the court by consent or merely because there is no opposition[18]. Thus, even though there was no evidence from D1, the burden would still be on P to satisfy this Court that a proper inference can be drawn that there was an actual intent to defraud creditors on the available evidence before the Court. 65.Yeung’s factual evidence was not really challenged. In the closing submissions, the matters P relied on for Issue 1 were :
The 1651 Action and the 1651 Judgement 66.Mr Nip submitted that the Court should bear in mind the nature and result of the 1651 Action when it examines D1’s conduct in entering into the Mortgage, and that as found by L Chan J, the claim in the 1651 Action was a simple claim over an unpaid loan and that despite the elaborate and lengthy arguments advanced for D1, D1’s defence of there being an oral agreement between him and Mr Or was unbelievable. Further, as pointed out by the Court of Appeal, the Judge was plainly right and that D1 had not raised any believable defence. 67.Hence, Mr Nip submitted that this represented unanimous disapproval by 4 High Court Judges of the “unbelievable assertions invented by [D1] to dodge the debt due and owing to P”, and the subsequent entering into the Mortgage by D1 was a clear continuation of his efforts to “dodge” the enforcement action taken by P to recover the debt due and owing to P. 68.However, as pointed out by Mr Chan, it was not part of P’s pleaded case that D1 had knowingly advanced a false defence in the 1651 Action. I accept Mr Chan’s submissions that, even though D1’s allegation of oral agreement was found to be “unbelievable” in the 1651 Action, it would not necessarily follow that a litigant who unsuccessfully resisted a summary judgment application should automatically be deemed dishonest for a wholly different purpose and context. 69.Further, D1 was legally represented throughout the 1651 Action and had instructed both senior and junior counsel for the hearing for summary judgment and also for the appeal. D should have been aware that in the event that he was not successful in defending P’s application for summary judgment, he would have to pay the judgment debt immediately. There was no evidence that he had sought time to pay, and there was also no evidence that there was any application by him for stay of execution pending appeal. 70.It was 16 months after the due date for repayment of the Loan that the 1651 Action was issued in September 2011, and that it was not until 16 July 2012 that P applied for summary judgment and the hearing took place on 19 November 2012. The 1651 Judgment was handed down some 4 month later on 26 March 2013. 71.If D1 was indeed knowingly advancing a false defence to stall or to dodge the repayment of the Loan to P, one would have thought that D1 could also have taken steps earlier, say, soon after the issue of the writ in the 1651 Action in September 2011, by selling the Property and the Car Parking Spaces, and cashed out completely or seeking to “cash out” partially with a bank mortgage, rather than waiting until after the 1651 Judgment was handed down. Further, as seen later in this judgment, he had made partial repayments and had kept up with the interest payments of the Mortgage Loan for about a year, and such payments would in my view not be consistent with any cashing out or dodging repayment of a debt. Urgent entering into the Mortgage 72.D1 applied for the Mortgage Loan from D2 on about 8 April 2013 and executed the Mortgage on 17 April 2013 which was less than one month after the handing down of the 1651 Judgment. Mr Nip submitted that the proximity in time between the 1651 Judgment and the Mortgage strongly supported an inference that the entering into the Mortgage by D1 was influenced by an intention on his part to defeat the enforcement measures by P. 73.Mr Nip had referred to the following observations of G Lam J in Cheung Ying Lun and Legal Way Ltd [2014] 1 HKLRD 106:
74.However, in the above case, the proximity in time of the disposition and the judgment was not the only matter upon which the Judge relied for his decision. In that case, the plaintiff had obtained default judgment against the 1st defendant Legal Way and 7 days after the default judgment, Legal Way entered into a sale and purchase agreement to sell the subject property to the 2nd defendant. The agreement was only stamped and registered at the Land Registry about 3 weeks later and only one day before the execution and registration of the assignment. The plaintiff sought to set aside the sale under s 60 of CPO. 75.The Judge found that , amongst other things, it was not disputed nor explained by Legal Way why the sale was at a substantial undervalue, that Legal Way must have been aware of the default judgment and that the proximity in time between the default judgment and the sale and purchase agreement supported an inference that the sale was influenced by the Legal Way’s intention to defeat any enforcement measures and further it was unusual for a purchaser to have an agreement stamped and registered so late and Lam J found that it was more likely than not that this course was adopted so that the existence of the agreement would remain unknown until after the execution of the assignment, rendering it impossible for Ps to obtain an injunction to prevent completion of the sale. In any event, both defendants, although aware of the proceedings, did not turn up at the trial. Further, shortly before the trial, there was a notice of appointment of liquidator/provisional liquidator in respect of D1 was filed with the Companies Registry and enquiry indicated that it was a voluntary liquidation. 76.It was in light of all the above circumstances of that case that G Lam J held that on the facts, the inference properly to be drawn was that Legal Way had transferred the property to the 2nd defendant with intent to defraud D1’s creditors, in particular the plaintiffs, and the sale was set aside by the Judge. In particular, the sale was at a value of HK$2m whereas G Lam J found that the market value of the property concerned was in the region of HK$4.2m at around the time of the sale, and there was no explanation from the defendants to dispute the undervalue nor why the sale was at an undervalue. In the present case, it was disputed that the sale of the Car Parking Spaces was at an undervalue and as seen later in the judgment, even if there was an undervalue, such an undervalue was not substantial compared with the sale price in the Cheung Ying Lun case, and in any event in my view and as set out later, in the present case D2 had provided a reasonable explanation as to why D2 had agreed to the sale at the undervalue. 77.Further, even though in the present case, there was a request by D1 that there was to be no registration of the Mortgage there was no sufficient evidence that this was due to any concern that P might issue any injunction. As seen below, the reason why D1 asked for non registration was that the Mortgage Loan was intended to be for 28 days only. In any event, the period within which instruments to be registered after execution for the instruments and to be entitled to priority under s5 of the Land Registration Ordinance, Cap 128, is within one month after the time of execution. 78.In my view, the circumstances of the present care are different from that of the Cheung Ying Lun case. 79.I accept however that the evidence showed that at the time of the Mortgage that D1 urgently needed money. D1 made an application for the HK$15m from D2 on 8 April 2013 and obtained the amount on 18 April 2013 at a very high interest rate, much higher than the HSBC’s prime rate at the time. D1’s application dated 8 April 2013 for the Mortgage Loan sent through mReferral (“1st Application Form”)[20], D1’s application form dated 10 April 2013 sent direct to D1 (“2nd Application Form”)[21] and D2’s client case summary dated 8 April 2013 (“Case Summary”)[22] all indicated that D1 was requiring a short term or a “bridging loan” only and that he was intending to repay within 28 days, and it was for this reason that D1 had requested that there be no registration of the Mortgage and no need for any purchase of the fire insurance for the Property if the loan was fully repaid within 28 days[23]. 80.In fact on the day D1 signed the agreement for the Mortgage Loan, ie 17 April 2013, he had also signed a letter giving notice to D2 that he would make early repayment of the full sum of HK$15m on 15 May 2013 (“Early Repayment Notice”)[24]. Later, on 9 May 2013, D1 did make partial repayment, albeit at D2’s demand, of HK$5m by two HK$2.5m cashier orders issued respectively by Hang Seng Bank and HSBC and both dated 6 May 2013. D2 also paid the monthly interest of HK$197,500 on 17 May 2013, and after partial repayment of HK$5m, the monthly interest was reduced to HK$131,667[25]. Even though D1 did not make further repayment towards the principal, he had kept up with the monthly interest payments until 18 March 2014 and such interest payments ceased only after he was informed by P of the Enforcement Action. 81.It was not clear whether P had demanded payment of the judgment debt immediately after the handing down of the 1651 Judgment. P’s application for the Order Nisi was an ex parte application, and there was no sufficient evidence from P that D1 had known at the time of the execution of the Mortgage that P had applied for a charging order against the Property. The Order Nisi was only registered on 19 April 2013, after D1 had executed the Mortgage and obtained the HK$15m from D2. 82.Anyway, as stated by the learned authors of Butterworths Hong Kong Conveyancing and Property Law Handbook (Fourth Edition), in paragraph 60.06, after citing paragraph 88 of Trade Power :
83.The starting point is thus to examine whether D1 was insolvent at the time of the disposition, ie the Mortgage. However, in the present case, there was no information from P as to D1’s financial position at the time of D1 executing the Mortgage. This was notwithstanding that P should have conducted due diligence review of BVI Landcome and Shanxi Landcome prior to the acquisition of the shares of CGOL, and unlike the relationship between D2 and D1, which was purely that of a commercial lender and a customer, P and D1 (through the 27.5% held by China Win[26]) were shareholders of BVI Landcome after the execution of the Agreement for Sale and Purchase, and it was P’s own case that P was keen to maintain a good relationship with D1 as D1 was managing the coal mines until June/July 2011. 84.As set out earlier, upon completion of the sale and purchase of D1’s shares in CGOL, a cashier order for HK$700,000,000 was given to D1 on 22 March 2010. Prior to that, HK$100,000,000 was paid to D1 at time of signing the Heads of Agreement and HK$200,000,000 was paid to D1 under the Spent Loan Agreement referred to in the 1651 Judgment. In addition, there was also the Loan. Even though as seen in the 1651 Judgment/CA Judgment, it was D1’s case that out of the HK$2,000,000 he had to pay Celadon for the 75.5% shares acquired by CGOL and that $57m was on-lent to BVI Landcome, and also it would appear that D1 did not hold all of the shareholding in China Win, the amounts received by D1 in early 2010 should still be substantial. 85.D1 had provided a guarantee to P in relation to the net profits of BVI Landcome. The guaranteed profits and calculations of BVI Landcome were set out in Schedule 1 of the Agreement for Sale and Purchase. Again, the guaranteed net profits entitlement for 2010, 2011 and 2012 were of substantial amounts. There was no evidence before this Court as to whether these figures set out in Schedule 1 were met or not, save that in the Proof of Debt, P was claiming for the sum of RMB 1,000,000,000 under the Deed of Guarantee. 86.In any event, I accept the completion of the acquisition of D1’s shares in CGOL was in March 2010, which was some three years prior to the execution of the Mortgage. 87.The only known assets of D1 in Hong Kong appeared to be the Property and the Car Parking Spaces. The Land Registry records showed that D1 purchased the Property on 23 November 2007 for HK$11.3m with a mortgage loan from the Hong Kong Shanghai Bank but the mortgage loan was discharged on 12 November 2010, namely just under 3 years[27]. The Car Parking Spaces were purchased later, on 1 November 2011, each for HK$1,080,000, with no mortgage loan[28]. The evidence showed that the Property was for D1’s self occupation. 88.It was not clear as to when P became aware of the Property being held in D1’s name. P did not appear to be aware of the Car Parking Spaces, since no charging orders were registered against the same, not even after P found out about the Mortgage. 89.Anyway, in about March/April 2013, the Property and the Car Parking Spaces were valued to be about HK$20m-HK$23m[29]. 90.The Bankruptcy Order was not made against D1 until December 2014, some 20 months after the Mortgage. The Proof of Debt was filed and the Trustees were appointed around end of January 2015 and yet, over three years had gone by, no information had been provided by P as to whether or what investigations the Trustees had carried out or what assets or creditors they had uncovered. It appeared from a memorandum to the court of resolutions passed at a general meeting of creditors on 27 January 2015 that not only P but also BVI Landcome were creditors[30], but there was no evidence from P before this Court as to how the debt to BVI Landcome arose. 91.As pointed out by Mr Chan, it was likely that D1 was also indebted to his solicitors at the time of the Mortgage. In any event, D1 would have needed funds to pursue his appeal. As seen in a telephone conversation D1 had with Alan on 25 July 2014 (“25.07.14 Telephone Conversation”), D1 had explained to Alan that the HK$10m from D2 was used for legal fees and all the expenses, for which there were invoices etc[31]. Alan had confirmed during trial that this was what D1 had told him. 92.Anyway, as I have said earlier, there was no information from P as to D1’s financial situation at the time of the Mortgage. 93.As for evidence gleaned form D2’s documents, on the 1st Application Form, D1 stated that he was the managing director of an energy resources business with a monthly income of HK$1m, and provided the name of a company Regal Way International Investment Ltd with an office address at Star House in Kowloon. From searches conducted by D2, the Star House address was also the address of a company called Ahead Far East Limited. It was not clear as to what D1’s interests in these companies were, although he and his son appeared to be the two directors of Ahead Far East Limited from searches produced by D2. 94.Further, upon receiving D1’s application for a loan, D2 had obtained a credit search in relation to D1 from Transunion Limited on 11 April 2013 (“TU Search”), which revealed the following legal actions involving D1[32]:
95.Suffice to say at this stage, the TU Search did not reveal any debts of D1, or anything untoward save that there were the above 3 actions and D1 was given the “BB” Grade in the “Credit Score”. It would also seem to indicate that although there was a credit limit of HK$700,000 for a “revolving credit”, the amount used by D1 was HK$30,591. To summarise, there was no sufficient evidence that D1 was insolvent at the time of the entering into the Mortgage and the evidence from D2 showed that D1 was only applying for the Mortgage Loan for a short term of 28 days. As mentioned earlier, D1 had repaid HK$5m, after slightly over 3 weeks and he had kept up with the monthly interest payments until March 2014. Further, D1 had told Alan that that the HK$10m was used for legal costs and expenses and that there were invoices. 96.There was no sufficient information as to whether D1 owed any legal costs to his solicitors at the time or if so, how much or what other expenses D1 had used the $10m for, and also there were no invoices produced by D1 to D2 for verification of any legal costs or expenses. I accept however that D1 would likely have incurred legal costs for P’s summary judgment application and would likely have to incur further legal costs for his intended appeal, having instructed both senior and junior counsel throughout. Although it seemed unlikely that the legal costs would reach anywhere near HK$10m, the Case Summary indicated that D1 had needed the loan for the cash flow of his company. In the 25.07.14 Telephone Conversation, D1 had also mentioned other expenses. The urgent need for money would in my view be consistent with D1’s then stated use in the 25.07.14 Telephone Conversation even though D1 did not provide supporting invoices in the end. 97.Moreover, the actual partial repayment and the continuation of payment of monthly interest would not be in my view consistent with an intention to “dodge” P’s enforcement action. Also, it appeared that D1 had initially wanted to borrow only HK$12m for 28 days[33]. D1 had also requested that the “maximum” amount of the Mortgage Loan to be the same as the actual amount of the Loan even though it would appear that a maximum amount of HK$18m was stated by D2 on the 1st draft of the Mortgage[34]. 98.Having considered the evidence and circumstances at the time of execution of the Mortgage, I am of the view that the proximity in the timing of the Mortgage and the Judgment or D1’s urgent need for the Mortgage Loan would not necessarily entail any dishonest intent. D1’s non-disclosure of the true nature of the 1651 Action to D2 99.Mr Nip pointed out that in none of the telephone conversations that took place between D1 or his representative and D2’s staff that D1 had disclosed the true nature or status of the 1651 Action to D2. 100.This was one of P’s unpleaded matters. 101.Upon the discovery of the 3 actions in the TU Search, while the Mortgage Loan was pending approval, Fai was asked by Alan to telephone D1 to find out about the 3 actions. Fai had a telephone conversation with D1’s agent/representative Grace Fu (“Grace”) on 12 April 2013 (“12.04.13 Telephone Conversation”). Grace explained to Fai that the 438 Action issued by Celadon had already been settled and that D1 and P were in settlement negotiations in relation to the other two actions issued by P, namely the 1651 Action and the 1021 Action[35]. Grace had further told Fai that the actions would not affect D2, since they were talking about 28 days, meaning that the loan was for 28 days only. 102.Mr Nip had complained that Yeung was never asked about the 25.07.13 Telephone Conversation or any settlement negotiations during cross examination. 103.Mr Chan however pointed out that D2 had pleaded that between 12 April 2013 and 16 April 2013, D2 made verbal enquiries with mReferral as to the nature and status of the 1651 Action whereupon D2 was informed by mReferral that the action concerned contractual disputes in relation to shares and that the parties were undergoing settlement negotiations[36]. This was not admitted by P in the Reply, but there was no denial by P in the Reply and that D2 was only put to strict proof[37]. 104.Even though what was pleaded by D2 was that the enquiries were made with mReferral, the transcripts of the telephone conversations were disclosed in D2’s supplemental list of documents, as said earlier, in March 2016. Thus, P had had D2’s evidence for some time and there was no denial from P, nor was Yeung asked, about any settlement negotiations in examination in chief. 105.Anyway, on 23 April 2013, D2 received an email alert service from a property alert service called “eGuard Alerter” provided by Land Search Online Limited that the Order Nisi was registered against the Property on 19 April 2013. Fai tried to contact D1, and later a Mr Anthony Tang on behalf of D1 telephoned Fai and said, amongst other things, that D1 was willing to make early repayment of the Mortgage Loan to resolve the matter and reiterated that the dispute with P was in relation to certain company shareholding. 106.D2 also contacted its present solicitors on 23 April 2013 who then downloaded a copy of the 1651 Judgement from the Judiciary website and faxed it to D2. Fai then called Grace on the same day that due to the judgment, D2 had no alternative but to demand full repayment of the loan principal and interest. D2 decided to arrange for immediate registration of the Mortgage and this was then effected on 24 April 2013. 107.On 25 April 2013, Fai called Mr Anthony Tang again to enquire about repayment of the Mortgage Lan and D1 then requested a reduction on interest payable should D1 repay half of the principal or HK$5m by end of April and the remaining balance by 15 May 2013. Fai was told that D1 was appealing against the 1651 Judgment. 108.Then there was another telephone conversation which D2 had with D1 on 11 June 2013, when D2’s staff had called and told D1 that D2 had just learnt about there was litigation regarding the Property and D1 had responded that the litigation was some time ago and not recent, and when D2’s staff mentioned that there was the Order Absolute registered against the Property in June, D1 then told D2’s staff not to worry and that this was “normal”[38]. In so far as I could gather from this telephone conversation, it would appear that when D1 said “normal”, he could have meant that it was normal in that there would be the Order Absolute, after the Order Nisi, and that it was not a new litigation or a new charge. 109.Anyway, to summarise, what D1 had told D2 was that the 1651 Action concerned contractual disputes in relation to shares and that the parties were undergoing settlement negotiations and that he was appealing against the 1651 Judgment. 110.Even though P’s claim in the 1651 Action was found to be a simple claim based on the Loan, all along D1’s defence was that there was an oral agreement between him and Mr Or and that the Loan was to be regarded as an investment by P in BVI Landcome and not repayable by D1 upon exercise of the option to acquire D1’s shares in CGOL, and further D1’s case was that the HK$57m was on-lent to BVI Landcome. Indeed, D1’s Senior Counsel in the 1651 Action had tried to develop an argument by saying that the cause of action of the 1651 Action was not debt recovery but the defendant’s failure to execute the assignment of debt. Even though D1’s case about the oral agreement was found to be unbelievable at first instance, he had maintained his case on appeal. Thus, from D1’s point of view, his position at that time was that the nature of the 1651 Action was a dispute arising out of the agreement between him and P over the sale of his shares in CGOL. 111.Also, as mentioned earlier, P had not denied there were settlement negotiations between P and D1. In fact, notwithstanding the Order Absolute being registered in June 2013 and notwithstanding there being no stay of execution and the appeal being dismissed in December 2013, the fact was that P did not issue the Enforcement Action until March 2014. 112.Anyway, I do not find that what D1 told D2 about the nature of the 1651 Action and that there were on-going settlement negotiations between him and P would necessarily give rise to any dishonest intent. The Mortgage was to secure a personal benefit to D1 113.Mr Nip had submitted that the Mortgage clearly secured a personal benefit to D1 as D1 had received HK$15m and yet no part thereof was used to satisfy the 1651 Judgment and in the meantime, D1 remained in occupation of the Property until at least 2 May 2014 and as such, the cashing out of the Property was to secure a benefit to D1 rather than to repay the Loan to P. 114.Mr Nip had referred to what was held by Rigby J, as he then was, in Yee Sang Metal Supplies Co v Zee Chi-ling (t/a Tai Chong Building Contractor) & Yip Mouw-soung (t/a Shui Cheong Engineering Co) [1965] HKLR 874 at 878, that the test is whether the transaction was a “cloak to secure a benefit to the grantor” and a “contrivance resorted to for his own benefit”. 115.Mr Nip further referred to the following passage in Butterworths Hong Kong Conveyancing and Property Law Handbook (4th ed)at §60.06 as follows:-
116.Mr Chan on the other hand pointed out that the authorities cited by the learned authors of Butterworths in support of the above passage do not stand for the “sweeping” proposition that intent to defraud may be inferred as long as it is shown that the debtor somehow benefited from the disposition and in fact that the courts in those authorities were dealing with situations where the debtor in entering into the transaction had retained a benefit in the subject matter of the disposition for himself. 117.In particular, Mr Chan drew the Court’s attention to the following authorities referred to in Butterworths:
118.As pointed out by Mr Chan, any mortgage loan against a landed asset is to encumber the landed asset in exchange for cash, and also any disposition by a debtor for full value would mean that the debtor/disponor would receive the value/consideration, and, if Mr Nip’s argument was right, this would mean that because the disponor receives the benefit of the cash, or the consideration, this would give rise to an inference of wrongdoing such as intending to defraud creditors. 119.Mr Chan had referred to Goldfame Consultants Ltd v Tse Sai Ming, HCA 1065/2011 (unrep, 19 May 2016) where Recorder Coleman SC had said:
120.D1 and/or his family were only allowed to remain living in his home provided D1 continued to pay the monthly interest payment. Having considered the evidence, I agree with Mr Chan that the fact that the Mortgage allowed D1 to raise cash in exchange for granting D2 security over the Property is neutral at best. Surrender of the Property by D1 to D2 121.As mentioned earlier, after D1 was informed that P had issued the Enforcement Action, on 28 March 2014 D1 executed the Deed of Surrender. Alan’s evidence indicated that this was at the suggestion of D2, and that although D1 executed the Deed of Surrender, he did not actually vacate the Property until 2 May 2014. 122.Mr Nip submitted that the events surrounding the surrender of the Property corroborated P’s case that D1’s intent had always been to hinder or delay P’s recovery of the Loan and interest, and in particular when D1 found out that he could not stay in the Property for another 2 months after the execution of the Deed of Surrender before moving out, he had complained to one Gary Lam, a staff of D2, and Mr Nip had relied on the taped telephone conversation between D1 and Gary Lam on 4 April 2014 (“04.04.14 Telephone Conversation”)[41]. 123.During the 04.04.14 Telephone Conversation, Gary Lam was saying that D2 was not able to give D1 two months for delivering vacant possession and D1 was complaining that D2 did agree to give him two months or even longer subject to further discussion. In response Gary Lam had said that his solicitor had advised that the proper procedure was for the Property to be handed over by D2 at the time of executing the Deed of Surrender, otherwise the “下一家” (successor) would not recognise the Deed of Surrender and that “對方” (opposite party) could continue to seek sale of the property and that this would defeat the purpose of executing the Deed of Surrender which was to prevent the “opposite party” to seek the sale of the property[42]. Gary Lam had explained that it was not that D2 wanted to deceive D1 and that it was only to make sure that D2 could obtain the right to sell the Property. 124.It appeared from the above telephone conversation that D2, upon learning of the Enforcement Action, had wanted to have the right to sell the Property and that it would appear that D2 or its staff had initially agreed to allow D1 to remain in the Property for another two months or longer after executing the Deed, but after clarifying with D2’s solicitors, D2 was advised that this was not proper procedure and Gary Lam was asking D1 to vacate upon execution of the Deed of Surrender. 125.It was not disputed that D1 eventually vacated the Property on about 2 May 2014. Thus, D1 remained in occupation of the Property almost 5 weeks after executing the Deed of Surrender. 126.Alan had explained that D2 was of the view that it had priority over P and thus the right to conduct the sale of the Property and it was common for a mortgagee to negotiate with the mortgagor a surrender of a mortgaged property without having to go through the time and expense of legal proceedings. 127.I accept Alan’s evidence that the surrender was at the suggestion of D2, and that D2 was trying to negotiate with D1 for D1 to voluntarily executing the Deed of Surrender and vacating the Property. Having considered the circumstances surrounding the execution of the Deed of Surrender, I am unable to draw the inference that the whole surrender exercise by D1 was a continuation of his efforts to hinder and delay the enforcement measures of P. What the 04.04.14 Telephone Conversation showed was that D1 by agreeing to surrender to D2, he was negotiating with D2 the best terms for him out of the surrender, and the most it would show was that D1 was preferring to negotiating with D2 rather than with P at that time. This was understandable since by P issuing Enforcement Action, it was clear that the settlement negotiations, if any, between P and D1 would have broken down. Sale of the Car Parking Spaces at an undervalue 128.Both P’s and D2’s experts agreed in their joint statement that the market value of each of the Car Parking Spaces was HK$1.22m. They were sold for HK$1m and HK$1.01m respectively. Mr Nip submitted that the sale of the Car Parking Spaces at an undervalue not long after P had commenced the Enforcement Action was consistent with D1’s intention to put his assets beyond P’s reach. 129.D2’s expert Mr Keith Siu gave evidence that the repossession value of the Car Parking Spaces would be at 80% of the market value, namely HK$980,000 each. P’s own expert Mr Gilbert Yuen agreed that a 10% to 20% discount for a “forced-sale” or “sale under repossession” was not unusual in the industry practice and the discount could even be higher depending on, amongst other factors, the level of urgency, the market and the nature of the property, amongst other factors. 130.Mr Nip submitted that the “repossession value” was irrelevant since the Car Parking Spaces were not sold on a repossession basis, and also the expert evidence was ordered to be on the basis of an arms-length transaction between a willing buyer and a willing seller. 131.The Car Parking Spaces were subject to the Mortgage in D2’s favour. Even though the sale was not conducted by D2, it required D2’s consent. Alan’s evidence was that D2 had made online searches for comparable car parking spaces in the development before agreeing to the actual sale and according to Alan, the then transactions indicated the range to be in HK$1.1 to 1.2m and he had considered the sale prices in an expedited sale to be realistic and not unreasonable. He had explained during the trial that D2 would likely to obtain a forced-sale price if, instead of allowing D1 to find buyers, D2 were to commence legal proceedings and conducted sale as a mortgagee in possession. 132.The provisional agreements for sale and purchase for the Car Parking Spaces were signed on 22 April 2014. This was after the earlier mentioned telephone conversation between D1 and Gary Lam and no doubt D1 realised by then that he had to vacate the Property soon. 133.Also, as pointed out by Mr Chan, P never obtained any charging orders against the Car Parking Spaces, even though P must have known of their existence from the Mortgage. The sale of the Car Parking Spaces was long after the entering into of the Mortgage. I accept it would be part of the usual recourse by any mortgagee to realise the security and to reduce the secured debt. 134.The sale prices were respectively at about 18% and 17% discount of the agreed market price. Compared to the substantial discounts of the subject property in the Cheung Ying Lun case, or the sale prices of the subject properties in the Skink case, the undervalue of the Car Parking Spaces was much less, in particular, when the seller wanted to achieve a sale within a short time. It was clear that interest continued to accrue against D1 at the time at a very high interest rate, the sooner the Car Parking Spaces were realised, the sooner D1 would be able to discharge part of the principal of the loan and reduce the interest. In fact, D2 had negotiated with D1 that out of the sale of the Car Parking Spaces, D1 was to apply HK$1.2m towards partial repayment of the principal. I accept Alan’s evidence and explanation why he had agreed to the sale prices and that if D2 were to commence legal proceedings to recover the Car Parking Spaces and to sell as mortgagee, then this would be a “forced sale”. I find that there was a reasonable explanation from D2 for the undervalue. Having considered the then circumstances, I accept there was a genuine commercial rationale for D1 to expedite the sale and to accept a lower offer. Conclusion on Issue 1 135.In light of all the above, having considered the evidence as to the surrounding circumstances of the entering into the Mortgage, I am not satisfied that an inference of an actual intent to defraud creditors on the part of D1 can be properly drawn. I have therefore come to the view that s 60(1) of CPO is not engaged. However, in the event that it is found that such an inference can be drawn, I will also consider the other two issues. Issue 2 - whether D2 acted in good faith and without notice 136.If s 60(1) of CPO is engaged, the burden then lies on D2 to demonstrate under s 60(3) that it entered into the Mortgage in good faith and without notice of D1’s intention to defraud creditors. 137.There was a dispute between the parties as to whether “notice” in this context includes constructive notice. The law on “notice” 138.Mr Nip had referred the Court to the first instance decision of the case Lloyds Bank Ltd v Marcan & Others 1 WLR 339, where Pennycuick VC had said that “notice” must “plainly include constructive notice”[43]. In the case, after the bank issued a summons for possession of the property due to the first defendant’s default of payment in respect of his indebtedness, after the 1st hearing and before the 2nd hearing of the summons, the first defendant granted a lease of the property to his wife, the second defendant, for 20 years. The bank sought an order to set aside the lease. Pennycuick VC held that the first defendant in granting the lease, intended to defraud the bank within the meaning of s172 of the Law of Property Act 1925 , that the second defendant had actual notice of that intention and, accordingly, that the lease was voidable and the bank was entitled to possession[44]. The Court of Appeal later dismissed the appeal in Lloyds Bank Ltd v Marcan & Others [1973] 1 WLR 1387. 139.Mr Chan sought to argue that those comments made by Pennycuick VC in the Marcan case on constructive notice were obiter, as the decision was based on actual notice, and further ‘constructive notice’ was not considered at all on appeal. Also, the Marcan case was concerned with a difference statutory framework under the Law of Property Act 1925, where s 205(1)(xvii) of the Act expressly provided that ‘Notice’ included constructive notice, and that in Hong Kong, the statutory framework is different, in that there is no such express provision of the meaning of ‘notice’. 140.Our s 60 of CPO is based on s 172 (3) of the 1925 Act, which is the successor of section 5 of the Statute of Elizabeth. The Vice Chancellor, when saying that notice plainly included constructive notice, was discussing the two requirements of s 172(3), namely (1) being that the property must be “conveyed for valuable consideration and in good faith or upon good consideration and in good faith, and (2) the conveyance must be “to any person not having, at the time of the conveyance, notice of the intent to defraud creditors”. I do not read the Vice Chancellor’s comments in relation to notice plainly included constructive notice were made with any statutory provisions of the 1925 Act in mind, although I accept that the Vice Chancellor did later say in the judgment that Mrs Marcan would in any event have had constructive notice of Mr Marcan’s intent under section 199 of the 1925 Act[45]. 141.Mr Nip had also referred to the Hong Kong Court of Appeal judgment in Honour Finance Co Ltd and Poon Ting-chau and Another, [1990] 2 HKLRD 707. The facts of that case were that the plaintiff issued a writ against the 1st defendant (the husband) for an outstanding debt. Two weeks after the issue of the writ, the 1st defendant and the 2nd defendant (the wife) entered into an agreement for sale by the husband to the wife for a price at market value. The plaintiff obtained a default judgment within about a month, and obtained a charging order against the property. The plaintiff then issued a writ claiming an order declaring the assignment from the husband to the wife to be void under s 60 of CPO. By that time, the husband had absconded the jurisdiction. The wife contended at trial that the assignment to her was made for valuable consideration and in good faith without her having notice of the husband’s proven intention to defraud creditors. The judge dismissed the plaintiff’s action. On appeal, although the Court of Appeal held that the judge had misdirected himself on the incidence of the onus of proof of s 60(3), the Court upheld the judge’s decision, and dismissed the plaintiff’s appeal. 142.The relevant part relied on by Mr Nip was that part of the judgment of the judge, which was quoted by the Court of Appeal[46], in that the question which the judge had posed to himself was, whether, having the knowledge that the husband’s disposition of the property was designed to provide financial assistance to the husband, the wife did know further that his intention was to defraud his creditors or that even if she did not know, she was wilfully shutting her eyes to the obvious. The judge then went on to find that that she that there was no sufficient reason to reject the wife’s evidence that she did not in fact know of the husband’s intention to defraud his creditors and that there was no sufficient reason why he should come to the conclusion that she wilfully shut her eyes to that fact. 143.It was thus submitted by Mr Nip that the judge had approached the question of “notice” to include “constructive notice”. 144.Mr Chan had argued that the Court of Appeal felt capable of upholding the trial judge’s finding on absence of notice on the part of the wife, and that if the doctrine of constructive notice was applicable and the wife had some objective duty to make enquiries, her credibility and subjective knowledge could not have been determinative of the matter and that the Court of Appeal would have to remit the case for retrial. 145.In the Honour Finance case, the Court of Appeal had found it necessary in set out in extenso, the passage of the judgment in which the judge dealt with the issue as to whether the wife had notice of the husband’s fraudulent intent at the material time, in that whether she had actual knowledge and even if she had not, whether she was wilfully shutting her eyes to the obvious. The judge then found the wife had no knowledge nor did he think she wilfully shut her eyes to the obvious in the hope that she would not see. The fact that the Court of Appeal was able to dismiss the appeal based on the judge’s findings would in my view lend support to the judge’s approach in the matter was correct even though the judge misdirected himself on the burden of proof. 146.Having considered the above case, for the purpose of this judgment, I am prepared to accept that notice in s 60(3) of CPO includes constructive notice. D1 being a new customer of D2 147.It was not disputed that D1 was a new customer of D2 referred to D2 by mReferral, a joint venture of Midland Holdings Ltd and CK Hutchison Holdings Ltd, which provides mortgage loan referral services. Prior to mReferral’s introduction, D2 had not engaged in any business dealings with D1, this was confirmed by both Alan and Fai at the trial. It was also not disputed that there was no pre-existing relationship between mReferral and D1. 148.There was a memorandum signed by mReferral and D2 on 11 March 2013 on behalf of D2 which sets out the role of mReferral and the procedures for introduction of prospective clients[47]. Lee had explained during the trial that mReferral was only a middle man who would introduce a client to D2 for a commission, and that mReferral would not conduct checks on the ability of its clients to repay or verify the documents provided by them. Lee had confirmed that he had not double checked D1’s background or credentials. 149.I accept that under the provisions in clauses 2.2 and 2.5 of the above memorandum, the duty of carrying out any checks or verification of any information of any clients referred by mReferral should fall on D2. 150.Alan was promoted to be a senior credit manager in 2011 and by April 2013, he was experienced in this area and he confirmed that he had dealt with many different kinds of loan applications and that D2 was quite a sizeable moneylender in 2013. 151.Alan had explained that in a Mortgage Loan, D2 would look at the value of the property to be offered as security for a mortgage loan and not the ability to repay of the borrower. D2 would check the Land Registry record and so would D2’s solicitors, and mainly they would check to see whether the property was “clean” or not and to see whether there were any charging orders, and the solicitors would check the title deeds. He said his solicitors would also carry out a bankruptcy search. He would call for a credit report such as the TU Search, and he would obtain all information, such as the HKID card, rates demands, managements fees from the client. Unusual features of D1’s request for a loan 152.Mr Nip submitted that there were certain unusual features concerning D1’s request for a loan from D2, and D2 should have been on “heightened vigilence” in ensuring D1’s ability to repay the Mortgage Loan and that the Property was not subject to any encumbrances. 153.Firstly, the Property was previously subject to a mortgage with HSBC at the time of purchase by D1, which was discharged in late 2010. As the interest rate charged by money lenders is generally higher than that levied by the banks on mortgage loans, Mr Nip therefore asked why would D1 choose to borrow from a money lender and to incur substantially higher interest rate. 154.However, as explained by Alan, banks would not lend for short periods and generally approval for mortgage loans would take longer, and that money lenders in the business of mortgage loans would mainly look to the value of the property offered as security and would not require income proof from a client, unlike banks. 155.In fact, D1’s urgent entering into the Mortgage to obtain a loan was a factor P was relying on, and as said earlier, I accept that the evidence showed that at the time D1 urgently needed money for a short period. Thus, in my view, it would be understandable as to why D1 approached a money lender rather than a bank. 156.Mr Nip submitted that another unusual feature was that there was a special request from D1 to mReferral/D2 from the very beginning that there was to be no registration of the Mortgage. 157.On 8 April 2013, Lee had telephoned Fai and told Fai that there was a client who wanted to borrow HK$15m against a property worth about HK$20 odd but the problem was that the client requested for the mortgage not to be registered at the Land Registry and that he would repay after a month, and Lee asked Fai whether this was possible[48]. During this conversation, Lee had told Fai that the reason given by the client for the non registration request was that the client appeared to be in the process of arranging a public listing and that if the mortgage was registered then this might ruin the listing plan and also that the client only wanted a loan for one month. Fai had replied that it was possible and that this would need approval, and that previously there had been cases when repayment was made within 28 days, and D2 had retrieved the mortgage deed from solicitors and there would be no registration. 158.When Lee was asked during cross examination about the above conversation and D1’s request for non-registration, Lee admitted that he felt that this request was not a “normal” request, since normally for a moneylender, the procedure would be to arrange for registration as soon as possible at the Land Registry to protect its interest. Lee had also said it was Grace who told him about D1’s listing plans and that he was only repeating to Fai what Grace had told him. Lee further said during cross examination that he had never met D1 nor spoken to him and that he had only met Grace. Lee also confirmed that Grace had never told him that D1 owed P HK$57m or that D1 owed any creditors money, or that D1 wanted to borrow to pay his creditors. 159.When Fai was asked whether the non registration request was not normal, Fai had said he was in sales department and he would not know and that when he received the TU Search, he knew about the 3 actions but did not know the then status of the 3 actions. He confirmed he saw the word “DEBT” but said he was not sure whether it was P owed a debt to D1 or vice versa as he did not know the details. He then passed the information to Alan of the credit department and Alan told him to follow up with Grace. He later reported back to Alan what Grace had told him. 160.Fai confirmed the taped telephone conversations with Grace were when he spoke to her in the office and that they also had conversations when he was not in his office when she called him on his mobile phone. Fai also confirmed that the Case Summary was prepared by him and the date thereon was the date when the case file was opened. 161.As said earlier, the evidence indicated that at the time when D1 was making an application for the Mortgage Loan from D2, he needed funds urgently for a short time “bridging loan” only, and he had signed the Early Repayment Notice to D2 at the same time when executing the Mortgage, ie to repay on or before 15 May 2013[49]. As for the request not to register, the explanation given by D1 on the 1st Application Form was that he intended to repay within 28 days. D1 had in fact also requested that no fire insurance be taken out by D2 on the Property. Further, as mentioned earlier, under the Land Registration Ordinance, D2 did have 28 days to register the Mortgage and once registered within time, the Mortgage would have full priority from the date of the instrument. 162.I accept the evidence of Lee, Fai and Alan and found that the “unusual features” could be explained and would not have alerted D2 as to there was anything untoward or that D2 should have been on “heightened vigilence”. The TU Search 163.Mr Nip had criticised Alan’s evidence and that he was not a credible witness, in that after the TU Search had revealed the 3 actions against D1, D2 should be well aware of the nature of the 1651 Action being a debt recovery action by P against D1 and that D1 would potentially face enforcement actions by P. It was Mr Nip’s submission that Alan had shut his eyes to obvious “red flags” about the true nature of the 1651 Action and its potential impact on the “cleaniness” of the Property. 164.I accept what was submitted by Mr Nip, that Alan’s evidence that he did not understand the meaning of the word “DEBT” or the words “BREACH OF CONTRACT” as his English was not good did not sound credible, since Alan had joined D2 as a credit manager in 2009 and was promoted to be a senior credit manager in around 2011 and in particular, the word “DEBT” had appeared in D2’s standard loan agreement. 165.Notwithstanding that parts of Alan’s evidence were not satisfactory, this did not make him overall not a reliable witness. Alan did point out that the TU Search would not reflect the latest status of the 3 actions and that he would have to rely on the information provided by the client in relation to updated position of the 3 actions. Alan said he had asked Fai to ask, and was told that the 438 Action was settled and that the other two actions with P concerned contractual disputes over shareholding. He had trusted what Grace told Fai. Alan said he had also checked with solicitors who told him that the Property was “clean”. He said he did not know at the time that there was the 1651 Judgment. He also said he did not know at that time that court judgments are uploaded on the Legal Reference website and open to search by the public, and admitted that he did not know about checking the Legal Reference website but maintained he did ask his solicitors. 166.In his witness statement Alan had said he recalled that at the time Ms Kam of D2’s then solicitors Siao Wen & Leung (“SWL”) was contacted for legal advice as to whether the existing litigation against D1 had any impact on the mortgage loan application. During the trial, Alan had again said after receiving the TU Search, he did immediately call Ms Kam, and asked her to carry out a land search of the Property. 167.When he was asked by Mr Nip why he did not ask Grace for supporting documents that the 438 Action was settled. Alan was unable to give a response and only said the TU Search was not an update and he had asked his solicitor to check. He admitted he did not send Ms Kam a copy of the TU Search and at first he had said she would not know how to read it and then he said later he did not send it to Ms Kam because of privacy restrictions. 168.I accept Alan’s evidence on the face of the TU Search, there were no details of the 3 actions, save the cause of action and the parties’ names and D1’s Star House office address in each action, and there was no updated status as at 11 April 2013 (date of the TU Search) of the 3 actions which were all issued in 2011. 169.Anyway, although Alan said he did tell Ms Kam about the 3 actions, he admitted that he did not give her the action numbers nor did Ms Kam ask him for the action numbers. He had said there was a further search conducted at the Land Registry. According to Alan, Ms Kam reported back that the Property was “clean” and there were no charging orders registered against it. Also before drawdown, Mr Kam would do a further search at Land Registry and also the bankruptcy search. Alan said he had also arranged for a physical inspection of the Property to make sure there were no other third parties living there and to take photographs and to make sure there were no notices posted on the door of the Property for possession. He had further carried out a Directors Index Search at the Companies Registry. 170.As gathered from the documents and Alan’s evidence, the steps taken by D2 when D1 applied for the loan up to D2 being alerted of the Order Nisi included the following:
171.In his witness statement, Alan had pointed out that, in his experience in the moneylending industry, he understood that the step of performing a TU Search was not one which would ordinarily be taken by smaller moneylending businesses since the threshold was high for a moneylender or financial institution to become a subscriber. In fact, he understood that it was common for moneylenders not to perform any credit search for prospective mortgage lenders at all. He had also explained that in his experience, mortgage lenders such as D2 were particularly concerned about whether there was any pending litigation which might affect the applicant’s rights over the intended mortgage property and would therefore perform a full land search to see whether the property was “clean” or not. 172.Alan joined D2 in 2009 as a credit manager and as said earlier, he was promoted to a senior credit manager in about 2011 and thus, by the time of the Mortgage, he had had about 4 years of experience in the field. There was no contrary evidence from P to contradict what Alan had said, namely that the TU Search was not one which would ordinarily be obtained by small moneylenders and that mortgage loan lenders would particularly be concerned only if there were litigation affecting rights over the intended mortgage property and would thus perform full Land Registry search to see whether the property was “clean”. 173.Mr Nip submitted that from the information contained in the TU Search, D2 was well aware of the nature of the 1651 Action being a debt recovery action by P against D1, and that the latter would potentially face enforcement actions by P and that the Mortgage Loan and the Mortgage was a means by D1 to defraud its creditors. 174.There was no sufficient evidence to contradict Alan’s evidence that he did not know about checking the Legal Reference website. I accept that Alan and Fai had trusted Grace and simply accepted what she told them about the 3 actions and that they did not seek supporting documents. I accept parts of Alan’s evidence were not satisfactory, such as not knowing the meaning of the word “DEBT” or the words “BREACH OF CONTRACT”. Even if Alan was aware of the true nature of the 1651 Action being a debt recovery action by P against D1, this would not in my view necessarily mean that he/D2 was well aware that the Mortgage was a means by D1 to defraud his creditors. In any event, I accept Alan’s evidence that he did not know about checking the Legal Reference website and he was not aware of the 1651 Judgment when he approved the Mortgage Loan. I also accept Alan’s evidence that D2’s main concern was whether the Property was “clean” or not, and up until just prior to the execution of the Mortgage, D2 did instruct SWL to conduct updated Land Registry search and also the bankruptcy search. I am of the view that Alan had taken all the necessary steps he deemed appropriate to carry out a credit check of D1 and the “cleanliness” of the Property. Enquiries made by Fai with Grace on 12 April 2013 175.Fai is a university graduate and understands English. He had read the TU Search and understood the words “DEBT” and “BREACH OF CONTRACT”, and also the meaning of the word “plaintiff” on the TU Search. 176.As mentioned earlier, in the 12.04.13 Telephone Conversation, Fai did ask Grace about the 3 actions generally but did not specifically ask about the nature of the “DEBT”. When asked by Mr Nip, Fai had said it was not his responsibility to approve or vet a mortgage loan application, nor to decide what follow-up steps to take, and that he was a “front-line” relationship manager who was new at his job and that he was simply responsible for liaising with clients and would follow Alan’s instructions. 177.Mr Nip criticised Fai’s evidence and submitted that Fai’s emphasis of his lack of independent judgment was quite startling and that what was more startling was the complete lack of follow up by Fai, or subsequently Alan on the bare unsatisfactory answers provided by Grace to Fai. 178.Fai had explained that his job with D2 was his first job with a lending institution and that he was told to make enquiries from client, and he did ask Grace, and he then reported back to Alan who was the credit manager. He said he could not contact D1 direct and he must go through the agent. When asked whether he knew whether Alan had contacted the solicitor Ms Kam on 11 or 12 April 2013, he said he did not. Fai said after asking Grace, he then reported back to the credit department and then he was told by the credit department that Ms Kam was consulted and the matter could proceed. He denied that there was any information to cause him to suspect that D1 had intention to defraud. 179.Mr Nip had submitted that when Alan was asked why he did not follow up on the answers given by Grace, the answers given by Alan were unbelievable. 180.As I have said earlier, both Alan and Fai clearly accepted what Grace told them during the 12.04.13 Telephone Conversation. Even though they did not seek supporting documents from Grace, as said earlier, Alan took all necessary steps he considered appropriate and that up to the last minute, prior to the execution of the Mortgage, he instructed Ms Kam to conduct Land Registry search and the bankruptcy search. Purported legal advice from Ms Kam 181.I accept there was no recorded telephone conversation between Alan and Ms Kam after the TU Search in relation to the 3 actions. 182.There was a recorded telephone conversation between Ms Kam and another staff of D2, Edwina, later on 23 April 2013, which indicated that D2 had asked Ms Kam to conduct a Land Registry Search upon being alerted of the Order Nisi, and Ms Kam reported back and confirmed that there was the Order Nisi registered by P but she could not see from the search the amount of the charge. Ms Kam had advised Edwina not to worry, since the Order Nisi was dated 19 April 2013 and that the Mortgage was dated 17 April 2013, and therefore, D2 would have priority. There was no indication that Ms Kam had advised D2 or suggested a Legal Reference search or to obtain a copy of the writ in this telephone conversation. On the same day, D2 sought advice from their present solicitors who then obtained a copy of the 1651 Judgment for D2. 183.I accept that there was no sufficient evidence that Alan had sought proper legal advice from Ms Kam immediately upon receipt of the TU Search. Even if he had, there was no sufficient evidence that Ms Kam would have advised him to conduct a Legal Reference search. Industry/D2’s “usual practice” 184.Alan had said that many steps undertaken in D2’s loan approval process were in accordance with usual industry practice, although Alan accepted under cross examination that he had not conducted a survey of the practice in the industry and that his evidence of the “usual industry practice” was just his own opinion. There was however no evidence from P to contradict Alan’s evidence. 185.Alan had also in his witness statement referred to the various steps being undertaken by D2 as being in accordance with D2’s usual practice. 186.Mr Nip submitted that the fact that D2 had undertaken steps in accordance with its usual practice did not mean that those steps were adequate or reasonable in light of the TU search and the telephone conversations with Grace. 187.As pointed out by Mr Nip pointed out, neither D2’s internal “Loan Approval Process Chart”[50] nor the document entitled “行政部日常工作及程序”[51] had specified the guidelines of criteria which the credit committee or manager would follow in determining whether to approve a mortgage loan application and that neither document specified the types of checks which a credit manager ought to undertake in view of litigations revealed in a TU search against the borrower/mortgagor. 188.The lack of written internal guidelines was, in my view, neither here nor there. Although Alan did not seem to be able to provide a detailed answer as to what D2’s usual practice was, as I have said earlier, even if he was aware of the true nature of the 1651 Action, I accept his evidence that he did not know about the 1651 Judgement or that he could conduct a Legal Reference search. There was no sufficient evidence before this Court that it was the usual practice or industry practice for a mortgage loan lender to conduct a Legal Reference search. The lack of such a search would not necessarily mean that D2 wilfully ignored the “red flags”. As said earlier, I accept that Alan and Fai had accepted Grace’s explanations at face value and did not seek verification. D1 did sign a declaration to D2 that if he made any intentional or negligent misrepresentation and/or provide false information or omit to provide relevant information in connection with his application for the loan, he may incur civil and/or criminal liability[52]. In any event, this was a mortgage loan and nothing at the time of execution had indicated there was anything wrong in relation to the title of the Property and the Car Parking Spaces, so as to affect the security offered for the mortgage loan. Events after the Mortgage 189.P also relied on the post Mortgage events to demonstrate that D2 had notice of D1’s intention at the time of entering into the Mortgage, namely D2’s suggestion to D1 to surrender the Property and its consent to D1 selling the Car Parking Spaces at an undervalue also pointed to a lack of good faith on the part of D2 at all material times. 190.D2’s suggestion to D1 to surrender the Property and its consent to D1 selling the Car Parking Spaces at the prices mentioned earlier would in my view merely point to D2 wanting to look after its own interest at that time and was negotiating with D1 on the best way out. I do not find that this would indicate a lack of good faith on the part of D2. Issue 2 - Conclusion 191.As said earlier, there was no sufficient evidence that D1 was insolvent at the time of entering into the Mortgage. The Mortgage was executed at valuable consideration and having considered the evidence, I find that D2 did not have any actual notice of D1’s intent to defraud creditors, if an inference can be drawn that D1 had the actual intent to defraud creditors. I am further satisfied that D2 did not wilfully ignore any red flags, and had taken all reasonable steps to investigate and to carry out searches and inspection of the Property. In my view, D2 has discharged its burden and has satisfied this Court on a balance of probabilities that it had acted in good faith at the time of execution of the Mortgage, and that it did not have actual or constructive notice of D1’s intent to defraud creditors, if any. Issue 3- whether the Car Parking Spaces were sold at an undervalue 192.This issue has been dealt with earlier. Conclusion 193.Having considered all the evidence and the circumstances of this case, I have come to the conclusion that P’s claims are to be dismissed. I will allow D2’s counterclaim and grant a declaration that the Mortgage is valid, subsisting and enforceable as against the Property with priority over the Order Absolute and an order that the lis pendens registered in the Land Registry under memorial number 14061300980031 be vacated. 194.Costs to follow the event, to be taxed on party and party basis, if not agreed, with certificate for two counsel. This is an order nisi and shall be made absolute after 21 days.
Mr Norman Nip and Ms Prisca Cheung, instructed by Vincent T K Cheung Yap & Co, for the plaintiff The 1st defendant was not represented and did not appear Mr Chan Chi Hung SC and Mr Derek J Y Chan, instructed by Cheng Chan & Co, for the 2nd defendant [1] A2:250-252 [2] C1:68-99 [3] B:161-182 [4] See para 14, CA Judgment, C2:295 [5] See also para 14, supra [6] See para 84. C2:275 [7] See para 11, A1:57 [8] C2:291-300 [9] C2:301-302 [10] See para 49, A1:94 [11] C2:342 [12] B1:124 [13] At para 65 [14] See Holdings (1) - (3) of Headnote at pg 218 [15] A2:233 [16] A2:233 [17] See para 70, at pg 29 [18] At para 6, pg 109 [19] At para 27(3) [20] C1:109 [21] C1:152-159 [22] C1:110-111; the date 8 April 2013 was the date when the file was opened but D2’s evidence was that the Case Summary was finalised and the Mortgage Loan approved on 16 April 2013 [23] See C1:110 [24] C1:211 [25] C3:608-619 [26] Which could be subject to a share charge to P pursuant to the terms of the Agreement for Sale and Purchase [27] B:107-113 [28] B:114-123 [29] C1:103, C1:111 [30] C2:500 [31] See transcript at C4:928 [32] C1:140-144 [33] See C4:831 [34] C4:863 [35] See transcript at C4:859 [36] See para 14.6, A1:44 [37] See para 7, Reply, A1:50 [38] C4:887 [39] At 860-862 [40] At para 67 [41] C4:910-915 [42] At C4:912 [43] At pg 346C [44] See Headnote [45] At H, pg 347, and A-B, at 348 [46] At G-H, pg 640 [47] C1:58-67 [48] C4:826 [49] C1:211 [50] C2:394 [51] C3:577-584 [52] C1:157 |
Cases cited in this judgment