Gain Hero Finance Ltd v. Winland Finance Ltd

HCMP 1980/2017 and
HCMP 2671/2017 (Heard Together)

[2019] HKCFI 771

HCMP 1980/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1980 OF 2017

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BETWEEN

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MISCELLANEOUS PROCEEDINGS NO 2671 OF 2017

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BETWEEN

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(Heard Together)

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D E C I S I O N

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The claims

1.This is the hearing of two Originating Summonses.  The one in HCMP 1980/2017 was taken out by Gain Hero Finance Limited (“Gain Hero”).  The one taken out by Winland Finance Limited (“Winland”) in HCMP 2671/2017 is in effect Winland’s counterclaim.

2.Gain Hero and Winland are, as their names suggest, both finance companies.  They are both creditors of Tang Shung Ching Sabin (the “Debtor”). The Debtor has been the registered owner of a property (the “Property”) situated within a development at Broadcast Drive called Lung Cheung Court (the “Development”).  Gain Hero has obtained a judgment against the Debtor and, in enforcement and execution thereof, obtained a charging order absolute over the Property (the “Charging Order Absolute”).  Winland is separately a creditor of the Debtor under a loan agreement dated 23 July 2014 (the “Winland Agreement”), which agreement, Winland claims, confers upon it certain interests in the Property or any proceeds of its sale.  Gain Hero disputes that, primarily on the bases that the Winland Agreement does not affect the Property, and that the material terms of the Winland Agreement are otherwise inconsistent with certain non-alienation clauses contained in the title documents of the Property.

3.This is hence a battle between Gain Hero and Winland for priority of their respective alleged interests over the Property.

The facts

4.The Development was originally constructed under a government-built housing scheme for certain classes of civil servants.  It is a sizable estate with 296 units.

5.The Development is on the Remaining Portion of New Kowloon Inland Lot No 5195 (the “Lot”).  The Lot is held by the Financial Secretary Incorporated (“FSI”, formerly known as the Colonial Treasurer Incorporated, “CTI”) as lessee pursuant to a Lease between it and the Queen dated 27 June 1969 (the “Lease”).

6.The copy of the Lease available is not entirely legible.  Doing the best one can, one finds therein the following material terms, that:

“ [The Lessee] will not use or permit to be used the said piece or parcel of ground or any part thereof or any building or any part of any building thereon for any purpose other than for private residential accommodation for occupation by Government officers on local terms of service and such other persons any may be approved in writing by the Governor. AND subject as hereinafter provided will not assign mortgage charge demise underlet or part with the possession of the said piece or parcel of ground or any part thereof … or any building thereon or any part of such building … without the consent in writing of the Governor.‌ … Provided Always that the said Lessee will be entitled on the completion of each separate block of flats as shown on the said plan to grant subleases of individual flats therein to Government officers on local terms of service and such other persons as may be approved in writing by the Governor ….”

The Lease also contains terms to the effect that the Governor could re-enter in certain specified circumstances.

7.By an underlease dated 14 May 1970, the CTI granted to one Tang Chung Leung an underlease over the Property for a specific term (“1970 Underlease”).  Clause 4 thereof provided for the right of re-entry “in the event of any breach non-observance or non-performance of the covenants on the parts of the Lessee”.  The First Schedule thereto set out “Lessee’s Covenants”, and Clause 14 thereof contained certain prohibitions against alienation. 

8.By a set of Particulars and Conditions of Extension of Lease Term of the Lot dated 4 July 1996, an extension of the term of the Lease was granted (the “1996 Extension”).

9.On 24 January 2002, an underlease of the Property was created between the FSI as underlessor and the Debtor as underlessee (the “2002 Underlease”).  As recorded in paragraph (4) of the Recital to the 2002 Underlease, the term of the 1970 Underlease “has been terminated on 23^rd day of January 2002”.  The Debtor has therefore become the new underlessee of the Property.

10.In respect of the 2002 Underlease:

(a)  Clause 2(iii) thereof provides that “the Lessee will at all times hereafter perform and observe the covenants particulars whereof are set forth in the First Schedule hereto”;

(b)  Clause 4(2) provides for re-entry “in the event of any breach non-observance or non-performance of the covenants on the part of the Lessee”;

(c)  Clause 14 of the First Schedule thereto contains the following restrictions against alienation:

“ Not to assign mortgage charge let sublet … or otherwise part with the possession of the [Property] or any part or parts thereof or any interest therein or enter into any agreement so to do without the previous written consent of the Lessor and the Chief Executive Provided that [certain exceptions are then set out]”.

11.By a modification letter dated 22 February 2002 (the “2002 Modifications”), certain terms of the Lease (as set forth in the First Schedule annexed to the 2002 Modifications) were modified or rendered void.  The replacing terms are then set forth in the Second Schedule annexed to the 2002 Modifications. The following terms of the 2002 Modifications are material:

(a)  Paragraphs (1) and (4) thereof, which explain how the modifications operate, that:

“ (1)  With effect from the date of this letter, the terms, conditions and covenants in the Lease and as set forth in the First Schedule annexed hereto shall be deemed to be and shall be void and of no effect and the Lease shall be deemed to include and be read and construed as if there were included therein in lieu of the terms, conditions and covenants set forth in the said First Schedule the terms, conditions and covenants set forth in the Second Schedule annexed hereto.

…

(4)  The proviso for re-entry on the breach, non-observance or non-performance of any of the provisions, covenants, stipulations, exceptions, reservations, powers and conditions contained in the Lease shall extend to the breach, non-observance or non-performance of any of the foregoing conditions and the substituted covenants set forth in the Second Schedule hereto.”

(b)  The terms set out in paragraph 6 of this Decision (on use restriction of the Lot and the Development, non-alienation, etc) are among those that are in the First Schedule. They have been rendered void ab initio;

(c)  Clauses (1), (2), (3) and (4) of the Second Schedule are some of the replacing terms, that (inter alia):

“ (1) (a)  Subject to the terms, conditions and covenants herein contained the said Lessee shall not use or permit or suffer to be used [the Lot] or any part thereof or any building or buildings erected or to be erected thereon or any part or parts of such building or buildings for any purpose other than private residential purposes;

…

(2)  Throughout the whole of the Lease Term but subject to Clause (3) hereof, the said Lessee (which expression shall for the purpose of this Clause exclude the [FSI] but not its assigns) shall not:

(a)  assign, underlet or part with the possession of or otherwise dispose of the Lot or any part thereof or any interest therein or any building or part of any building thereon (whether by way of direct or indirect reservation, the grant of any right of first refusal, option or power of attorney, or any other method, arrangement or document of any description) or enter into any agreement so to do; or

(b)  solicit or accept, whether directly or indirectly … any money, money’s worth or other valuable consideration of any description pursuant to any transaction, present or future, conditional or unconditional whereby the Lot or any part thereof or any interest therein … is or may be sold, assigned, underlet or otherwise disposed of or affected, or enter into any agreement so to do; or

(c)  mortgage or charge the Lot of any part thereof or any interest therein or any building or part of any building thereon or enter into any agreement so to do.

(3)  Clause (2) hereof shall not apply to the said Lessee … in respect of the Unit to which the premium mentioned in sub-clause (c) of this Clause relates but only if and when:-

…

(c)  the said Lessee shall have first paid to the Government the amount of premium in respect of his Unit which is a due proportion of an amount equal to two-thirds of either the existing use value of the Lot or, where the Lot is economically suitable for re-development at the relevant date, the full market land value of the Lot at the relevant date.

…

(4)  In the event that any of the Underlessees requests FSI to assign to such Underlessee the Unit to which the underlease of such Underlessee relates and such request is considered acceptable by FSI, FSI shall assign that Unit to such Underlessee (‘the Assignment’) subject to the provisions of the Lease as modified by these presents provided that:

(a)   such Underlessee shall at the same time execute a first legal charge (in a form approved by the Director) (‘the First Legal Charge’) of that Unit in favour of FSI for securing the compliance of the provision of Clause 3(c) hereof in respect of the Unit;”

12.On 13 June 2003, a Deed of Mutual Covenant over the Development was executed.  Clause 5 thereof provides that owners’ right to assign and mortgage their shares in the Development is:

“ [s]ubject to the provisions of the Government Lease and this Deed, the Estate Rules and the conditions contained in the assignment vesting in him an undivided share in the Estate...”

“Government Lease” is therein defined as meaning the Lease as extended by the 1996 Extension and modified by the 2002 Modifications.

13.On 25 November 2004, an assignment of the Property (the “FSI Assignment”) was executed by the FSI as assignor in favour of the Debtor as assignee.  Paragraphs A and C of the Recital of the FSI Assignment (the “Recital”) are in the following terms:

“ A.  The Assignee was the underlessee under an underlease registered in the Land Registry by Memorial No.8618034 …

…

C.  This Assignment is made pursuant to Clause (4) of the Second Schedule to the Modification Letter and the First Legal Charge referred to therein is going to be executed in favor of the Assignor by the Assignee immediately after the execution of this Assignment.”

14.Under Clause 4 of the FSI Assignment, the Debtor covenanted with the FSI that he would not alienate the Property unless certain premium payments have been made to the Government.  The effects of the restrictions are for all practical purposes the same as those contained in the 2002 Modifications (except that the references to “Lot” becomes “Property”).  I will refer to all those covenants as the “Non-Alienation Covenants”.

15.To secure the performance of the Non-Alienation Covenants, and as recited in paragraph C of the Recital, the Debtor was required to, and did on 25 November 2004, also enter into, as chargor, a legal charge in favor of the FSI as chargee (the “Legal Charge”).  Clause 2 is the material clause, which is in the following terms:

“ 2. In pursuance of the said agreement [to enter into the Legal Charge] and as security for the due performance of the Covenants the Chargor as beneficial owner charges the Property to the Chargee subject to the Deed of Mutual Covenant … Provided that upon payment to the Government of all sums and amounts hereinbefore covenanted to be paid by the Chargor the Chargee will at the request and cost of the Chargor duly discharge this security.”

16.Both the FSI Assignment and the Legal Charge have been registered.

17.According to the land search records, there were between November 2013 and June 2014 registered against the Property two loan agreements and one charging order absolute[1].  Their exact contents are not relevant here.  I will just call them “Prior Registered Encumbrances”.

18.Mr Ng Tze Ho (“Ng”) is a manager in the employ of Winland. He has filed two affirmations on behalf of Winland (one in HCMP 1980/2017 in opposition of Gain Hero’s claim, and one in HCMP 2671/2017 in support of Winland’s counterclaim, though the effects of both affirmations are practically the same).  According to his affirmation, in about June 2014, Winland was approached by the Debtor.  The Debtor wanted a loan of about HK$2 million (the “Loan”).  Ng said that the Debtor offered the Property as security.

19.Prior to the execution of the Winland Agreement, Winland requested the Debtor to deposit with it title deeds of the Property as security for the intended loan.  According to Ng (§§12 – 14 of his affirmation in HCMP 1980/2017):

“ 12.  As security for the repayment of the Loan, [Winland] is intended to obtain the maximum possible security on the Property subject to the Alienation Restriction.

13.  Prior to the execution of the [Winland Agreement], [Winland] requested the Debtor to deposit the title deeds of the Property with [Winland] as security and the following title deeds (‘Title Deeds’) were obtained by [Winland] from the Debtor:

a.  [the 1970 Underlease];

b.  [the 2002 Underlease]; and

c.  [the FSI Assignment].

14.  I personally collected the Title Deeds from the Debtor and delivered the same to Alan Ho & Co., who was instructed to keep the same for [Winland].”

20.On 23 July 2014, the Winland Agreement was signed.  The following terms are relevant:

(a)  It contains 4 paragraphs of “Important Notices” followed by 24 terms and conditions (“T&C”);

(b)  Paragraph 2 of the “Important Notices” provides, in italic, that:

“ in the event that the Borrower defaults in interest payment(s) and/or principal repayment(s) in accordance with the agreements and any security documents, the Lender will take mortgagee possession of the property(ies) charged and to enforce the Security Documents. Mortgagor(s) may lose the Secured Property being charged to the Lender and also liable for the sum not recouped.”

(c)  T&C 1.1 sets out the particulars of the Property;

(d)  T&C 2.1 names the Debtor as the borrower;

(e)  T&C 3.1 stipulates that the “Mortgagor” was the same as the Borrower;

(f)  T&C 6.1 sets out the amount of the Loan, which was HK$2.2 million;

(g)  T&C 7.1 set out the purpose of the Loan, which included repayment of some of the specific pre-existing debts of the Debtor[2];

(h)  T&C 9 bears the heading of “Security for repayment”:

“ 9.1  In consideration of the Facility advanced by the Lender under this Agreement and as security for repayment of all the indebtedness owed to the Lender by the Borrower, the Borrower as Beneficial Owner hereby assigns and agrees to assign to the Lender all his/her/their right and interest (‘Assigned Rights’) to and in the balance of the consideration or purchase money for the sale of the Property more particularly described herein (after deduction and payment of any premium payable to the Government of Hong Kong Special Administrative Region the amount provided for removal of the restriction against alienation of the Property contained in clause 4 of the assignment registered in the Land Registry by Memorial No. UB9403278[3] and any redemption money payable to the mortgagee/chargee under the existing Mortgage/Legal Charge of the Property) and any money whatsoever accrued or payable to the Borrower, in the Borrower’s capacity as owner, vendor, assignor, transferor or mortgagor, from the purchaser, assignee, transferee or mortgagee of the Property or any other person(s) subject to the provisos contained in clauses 9.4 and 9.3 hereof and the Borrower shall from time to time, as and when required by the Lender, give to his/her/their solicitors and/or the purchaser, assignee, transferee or mortgagee of the Property notice(s) as the Lender may require or, where appropriate, to give direction to such person(s) to release the said consideration or money to the Lender.

9.2  Upon full payment to the Lender of all the indebtedness owed by the Borrower to the Lender, the Lender shall at the request and cost of the Borrower resign the Assigned Rights to the Borrower.

9.3  If, for whatsoever reason, the assignment of the Assigned Rights mentioned in clause 9.1 hereof does not have the effect as such, the agreement to assign made by the Borrower under the said clause 9.1 shall operate to assign the Assigned Rights and there shall deem to be an effective assignment of the Assigned Rights as soon as the Borrower is in the position to make such an assignment and the Borrower hereby covenants to the Lender that the Borrower shall from time to time at the request of the Lender execute all such documents and do all such acts as may be necessary to perfect to give effect to the said assignment.

9.4  The Borrower hereby IRREVOCABLY NOMINATED AND APPOINTS the Lender to be the Borrower’s true and lawful attorney for the Borrower and in the Borrower’s name or in the name of the Lender as such attorney at any time or times during the continuance of this Agreement to do perform transact and effectuate all or any of the following acts, deeds, matters and things:

(i)  to receive the balance of the consideration or purchase money for the sale of the Property … and any money whatsoever accrued or payable to the Borrower, in the Borrower’s capacity as owner …

…

9.5  The Borrower hereby covenants to the Lender that except with the written consent of the Lender, the Borrower shall not sell, charge, mortgage, dispose of or otherwise deal with the Property or any interest therein before the Borrower has fully settled all indebtedness under the Agreement.”

21.According to Ng, the Loan (net of certain deductions) was effected by Winland by a cheque dated 23 July 2014 in the sum of HK$2,149,400.  So far, the Debtor has only repaid a total sum of HK$209,000.

22.On 17 September 2014, the Winland Agreement was registered.

23.On 8 June 2015, Gain Hero as unpaid creditor obtained the Judgment against the Debtor. We are not concerned with the details of the Judgment.

24.On 29 June 2015, in enforcement and execution of the Judgment, Gain Hero obtained a Charging Order Nisi against the Property.  It was registered on 15 July 2015.

25.On 4 August 2015, that Charging Order Nisi was made absolute.

26.The Charging Order Absolute was registered on 24 August 2015.

27.On 23 June 2016, on the strength of the Charging Order Absolute, Gain Hero took out an Originating Summons for an Order for sale of the Property.

28.On 13 March 2017, Master R Lai made an Order for sale of the Property (“Order for Sale”). Under the Order for Sale, the Property is permitted to be sold, but not at a price lower than HK$8 million. It further provides, in respect of the application of the proceeds of sale, that:

“ The money so raised by such of the Property be applied in the following manner and priorities:

(a)  for payment of premium (if any) of the Lands Department;

(b)  for discharge of all Government rent, taxes, rates and other outgoings due and affection the Property;

(c)  for payment to prior encumbrancer ranking immediately before the [Charging Order Absolute], if any;

…

(f)  for payment of such amount due and owing under the [Charging Order Absolute] ….”

29.Gain Hero obtained possession of the Property on 24 July 2017.

30.On 31 August 2017, an agreement was entered into for the sale and purchase of the Property.  The Debtor is the named vendor. The sale price was HK$10.08 million.  There is no dispute that that agreement was in fact caused to be entered into by Gain Hero in reliance upon the Order for Sale.  Gain Hero has further produced a valuation report suggesting that the sale price of HK$10.08 million was reasonable and at market price.

31.According to Ng, Winland was on 4 September 2017 informed by Gain Hero of the intended sale of the Property.

32.On 20 September 2017, Gain Hero took out the Originating Summons herein.  It seeks in gist:

(a)  a Declaration that the Winland Agreement was not registrable and has no effect on the title of the Property; and

(b)  an order that the registration of the Winland Agreement be vacated.

33.On 5 December 2017, Winland took out a separate Originating Summons in HCMP 2671/2017 and seeks, in effect as a counterclaim:

“ 1.  A declaration that [Winland] has priority over [Gain Hero] against the sale proceeds of [the Property];

2.  A declaration that [Gain Hero] holds the sale proceeds of the Property … on trust for [Winland], and in any event the amount of the Net Proceeds to be held on trust for [Winland] should not exceed HK$2,686,200 together with interest accrued at the rate of HK$39,600 per month since 23^rd July 2015;

3.  An order that [Gain Hero] do pay the sum as set out in paragraph 2 above to [Winland] forthwith.”

Gain Hero’s interests over the Property

34.Gain Hero has obtained and has the benefit of the Charging Order Absolute. This much is clear.

Winland’s interests over the Property — parties’ submissions

35.Mr Isaac Chan, counsel for Winland, summarizes his submissions as follows:

“ (1)  A valid charge over the Property has been created under the Winland Agreement, which was therefore registrable under the [Land Registration Ordinance (“LRO”)]. …

(2)  Alternatively, if the Court is of the view that no registrable interest is created under the Winland Agreement, [Winland] submits that (i) the deposit of title deeds of the Property by the Debtor with [Winland] has created an equitable mortgage over the Property which is unwritten and therefore unregistrable under the LRO, and/or (ii) the Winland Agreement still creates a valid assignment of the proceeds of sale of the Property which enjoys priority over the Charging Order [Absolute]. …”

36.Mr Lawrence Cheung, counsel for Gain Hero, summarizes his position as follows:

“ … the registration of the [Winland Agreement] should be vacated for being a personal loan. Even if it were an assignment of sale proceeds, the illegality connected therewith, i.e. the design to bypass the alienation restrictions and in breach of the public policy regarding housing for Government officers, should render the Loan Agreement void and of no legal effect.”

The issues

37.The issues as framed by Mr Chan, which I agree and am prepared to adopt with some minor modifications, are as follows (though Issues #3 and #5 are ultimately are not engaged in the light of my conclusions on the Issues #1, #2 and #4):

(a)  Whether the parties to the Winland Agreement intended to create any interest in land registrable under the LRO (“Issue #1”);

(b)  If the answer to Issue #1 is in the negative, whether the delivery of the Title Deeds by the Debtor to Winland has created an equitable mortgage over the Property in favour of Winland (“Issue #2”);

(c)  If the Court decides Issues #1 or #2 in the affirmative, whether the Non-Alienation Covenants would annul the intended security to be created by the Winland Agreement or the delivery of the Title Deeds (“Issue #3”);

(d)  Alternative to Issue #3, whether the equitable assignment of the sale proceeds of the Property under the Winland Agreement could still take priority over the Charging Order Absolute in so far as such proceeds are concerned (“Issue #4”); and

(e)  If the Court decides any of Issues #1, #2 or #4 in favour of Winland, whether any security interest so created over the Property or its sale proceeds would still be annulled by public policy (“Issue #5”).

Issue #1 — whether the parties to the Winland Agreement intended to create any interest in land

38.There can be little doubt that if the Winland Agreement has effected only a personal loan to the Debtor not secured by any interest in the Property, it would not have been registrable under section 2 of the LRO.  Only instruments affecting land can be so registered.

39.Mr Cheung submits that the Winland Agreement has indeed effected only an unsecured personal loan.  It does not affect land.  It is therefore not registrable.  It is thus subject to the Charging Order Absolute.  Mr Cheung submits on this basis that the registration of the Winland Agreement should be ordered to be vacated, and the claim by Winland for priority dismissed.

40.Mr Chan does not seek to argue that any legal estate has been created by the Winland Agreement.  Section 4(1) of the Conveyancing and Property Ordinance, Cap 219 [4] is therefore not engaged.

41.Mr Chan submits rather that a valid equitable charge on the Property (as opposed to merely on any future proceeds of sale) was intended to be and has indeed been created by the Winland Agreement.  He submits that:

“ … By way of a common sense reading of Clause 9.1, a reasonable bystander would have no difficulty inferring that the mutual intention of the parties was to create a charge on the Property given the Property and the sale proceeds are practically inseparable for the purpose of serving as a security for a loan. Such inference is only strengthened by the fact that the 2004 Assignment and the two Underleases were delivered by the Debtor to [Winland], which is an act sufficient for creating an equitable mortgage (to be submitted further below).”

42.In making those submissions, Mr Chan relies heavily on Thomas v Rose [1968] 1 WLR 1797.

43.I have considered Thomas v Rose carefully:

(a)  In that case, Megarry J (as he then was) was concerned with two registered agreements between the parties.  Only one of them is relevant for our present purposes.  It is the one recorded in a letter of 9 November 1964 and registered as a general equitable charge under section 10(1) of the Land Charges Act, 1925, class C(iii);

(b)  That letter of 9 November 1964 recorded that a Mr Rose and the 2^nd defendant had agreed to pay the plaintiff certain sums of money, be responsible for all outgoings affecting a piece of land owned by the plaintiff, and for certain works to be carried out on that land, in consideration of the plaintiff agreeing that on the sale of the land, a specified portions of the proceeds would be paid to Mr Rose and the 2^nd defendant;

(c)  That letter was subsequently registered, as said, as a general equitable charge;

(d)  Subsequently, the plaintiff sought an order that the registration of that letter be vacated on the basis that no charge on the land concerned had been created;

(e)  At 1807H – 1808B of the judgment Megarry J observed that:

“ I can see that, in the case of a loan, provisions for the satisfaction of that loan out of the proceeds of specific property may well be construed as creating a charge on that property forthwith, even before it is realised. There is an admitted obligation to pay, and the mere fact that the method of satisfying that obligation is in terms related to the future disposal of the specific property may not suffice to negative an intention to subject that property immediately to the burden of that obligation. To indicate that the means of satisfying an existing obligation is to appropriate to it some or all of the proceeds of sale is by no means inconsistent with making the property liable at once for the satisfaction of that obligation.” (emphasis added)

(f)  I add that the passage cited above is relied upon heavily by Mr Chan;

(g)  Having made those observations, Megarry J continued immediately that:

“ But does that apply to the present case? The letter of November 9, 1964, contains no suggestion of any loan. Sums of money are to be paid to the landowner by Mr. Rose and the second defendant: these payments are to be made, and other acts done, in consideration of the landowner agreeing that on the sale of the land the selling price is to be divided in a particular way … The transaction seems to be merely one of valuable consideration moving from Mr. Rose and the second defendant in return for an agreement that they should have part of the proceeds on the land being sold.” (at 1808B–D)

“ Accordingly, in my judgment the agreement recorded in the letter dated November 9, 1964, created no charge on any land. There was no loan that could stand charged on the land, and the agreement was no more than a contract for the division of the proceeds of sale of the land. Even if it constituted a general equitable charge on the proceeds of sale, it would not be a charge on any land, and so it would not be registrable as a class C (iii) land charge: see In re Rayleigh Weir Stadium [1954] 1 W.L.R. 786, 792; [1954] 2 All E.R. 283 per Harman J. Accordingly, whatever rights the defendants may have in other respects, I hold that this agreement is not a class C (iii) land charge, and I order the vacation of the entry on the register.” (at 1808G – 1809A, emphasis added)

(h)  I read and understand Megarry J’s observations in Thomas v Rose as follows: the existence per se of provisions in a loan agreement for the satisfaction of that loan out of the proceeds of sale of a specific property does not necessarily mean that there is an immediate charge on that property.  Those provisions may well be so construed.  But the important consideration remains whether the parties had an intention to subject that property immediately to the burden of the obligation of paying over the future sale proceeds when realised.  On the facts of that case, Megarry J held that there was no equitable charge, as there was in fact no loan.  He further observed that even if the agreement constituted a general equitable charge on the proceeds of sale, it would not be a charge on any land.

44.My reading and understanding of Thomas v Rose as set out above are consistent with the judgment of Godfrey J (as he then was) in Re Yasaki International Co Ltd [1993] 1 HKC 349:

(a) The facts in Re Yasaki are similar to what we have here.  The debtor there had a landed property.  It was subsequently sold by a bank as mortgagee.  The proceeds were however not sufficient to discharge the debts owed by the debtor to (1) Yasaki, which had the benefit of a charging order on that property; and (2) another company called Afalong, which claimed to have an interest in that same property taking priority over that of Yasaki under the charging order.  The contest which Godfrey J was concerned with was the one between Yakaki and Afalong;

(b) The instrument which Afalong sought to rely upon to establish its alleged interest in the property was an assignment of the future sale proceeds of the property.  The nature of that assignment was described by Godfrey J at 350D–I as follows:

“ The instrument on which Afalong relies is an assignment made on 8 May 1990 between Lee To Bee (called in the assignment the assignor) and Afalong. It recited that the assignor was the registered owner of the shops in question; that the assignor was indebted to Afalong (called the lender) for HK$350,000; and that the assignor had agreed to execute an assignment of the proceeds of sale, or part thereof, in respect of one or both of the shop properties for the due payment to Afalong of the said sum of HK$350,000. The assignment was an assignment by way of mortgage of the proceeds of sale to be received by the assignor from purchasers under the terms of contracts of sale made or to be made by the assignor with those purchasers, with a proviso for reassignment. (This is the classic form of mortgage; although of course this mortgage could take effect in equity only, being an assignment of future property.) The assignment contained as cl 1 a definition clause which is of crucial importance.

The property which is the subject of the assignment is described as the ‘assigned proceeds’ and is defined in the following terms:

‘Assigned proceeds’ means and includes

(i) all moneys representing proceeds of sale received or to be received by the assignor from purchasers under the terms of their respective contracts and

(ii)   all the assignor’s rights, title, benefit and interest of and in all moneys for the time being and from time to time held and retained by the assignor’s solicitors.”

(c) Having considered the nature of the assignment which Afalong relied on, Godfrey J held that it did not affect land, and was not registrable.  His Lordship observed at 351D–H that:

“ But the subject matter of the assignment was, as it says: ‘All moneys representing proceeds of sale received or to be received by the assignor from purchasers’. The assignment does not purport to affect the assignor’s interest in the land itself. It affects only the proceeds of sale which may in the future be received by the assignor from purchasers. I find it quite impossible, in these circumstances, to accept that the assignment is to be treated as in some way affecting the land and so, having regard to its date of creation and the date of its registration, taking precedence over the charging order of Yasaki. In an interesting argument, Mr Yau, for Afalong, suggested that, under the assignment, Afalong took either an equitable interest in the land itself or an interest which affected an interest in the land. To my mind, the assignment did neither of these things. I have arrived at these conclusions without reference to authority; but they are, I think, supported by the English cases Re Rayleigh Weir Stadium [1954] 1 WLR 786 and Thomas v Rose [1968] 1 WLR 1797.”

(d) Mr Chan submits that the decision of Godfrey J in Re Yasaki was wrong.  He submits that “[o]ne of the authorities that the learned Judge referred to was exactly Thomas v Rose & Anor but the learned Judge did not explain how the said authority could support his conclusion at all when Megarry J’s observation (quoted above) was directly the opposite to his conclusion”.  Mr Chan submits further that Re Rayleigh Weir Stadium [1954] 1 WLR 786, the other case cited by Godfrey J, was decided in the context of the Land Charges Act 1925 and also did not support the learned Judge’s conclusion;

(e)            I do not accept Mr Chan’s submission that Re Yasaki was wrongly decided.  Godfrey J found on the evidence that the assignment created only a charge on the future proceeds but not on the property concerned.  That finding was amply supported by the terms of the assignment.  Those terms did not support any alternative finding that the parties had an intention to subject that property immediately to the burden of the obligation of paying over the future sale proceeds to Afalong.  Having made that finding, Godfrey J’s conclusion that a charge on sale proceeds only (as opposed to on the land concerned) does not affect land is clearly supported by Megarry J’s observations at 1808G – 1809A of the judgment (reproduced in paragraph 43(g) above);

(f)            In so far as Re Rayleigh Weir Stadium is concerned, it was cited by Megarry J in Thomas v Rose in support of his observation that a charge on proceeds as opposed to on the land itself is not registrable as a general equitable charge.  Indeed, in Re Rayleigh Weir Stadium, Harman J observed at p 792 that:

“ What the respondent acquired, if he acquired anything at all, was a general equitable charge on the proceeds of sale of this partnership property. Whether or not he became a partner does not matter for that purpose. I take the view, therefore, that, assuming the respondent to have all that he says he has, and notwithstanding the fog in which the facts remain carefully concealed, he could not on the facts as stated have an interest in this land which would entitle him to register a charge against it, and I propose accordingly to make an order vacating both registrations.”

Those observations in my view support the conclusion reached by Godfrey J in Re Yasaki.

45.On the facts before me, did Winland and the Debtor have any intention to subject the Property immediately to the burden and obligation of paying over any future sale proceeds for repayment of the Loan?  In my view, and for the reasons set out in the paragraphs below, the parties did not.

46.There is no dispute that Winland has made the Loan to the Debtor.  The issue was what property or interest was intended to be charged as security for repayment of the same.  In other words, was there an equitable assignment of any interest in the Property, or only an equitable assignment of future proceeds of sale of the Property?

47.The Debtor and Winland had knowledge of the Non-Alienation Covenants.  That is clear from the wording of the Winland Agreement.

48.The intention of the parties was clearly to agree upon and effect a mode of security which was consistent with and not repugnant to the Non-Alienation Covenants.  That intention would be inconsistent with any intention to subject the Property itself immediately to the obligation of repayment.

49.The parties’ intention was evidently reflected by T&C 9.1 of the Winland Agreement.  What was assigned was not any interest in the Property, but the “Assigned Rights” as defined therein, namely the Debtor’s “right and interest to and in the balance of the consideration or purchase money for the sale of the Property” net of any premium payable under the FSI Assignment.  The wording of the subject matter of the assignment is clear.

50.T&C 9.5 itself is a covenant against alienation.  But its insertion is in my view equally consistent with Winland trying to protect the Assigned Rights.  It does not point to any charge of the Property itself.

51.Mr Chan relies on the fact that the Title Deeds have been deposited by the Debtor. 

52.As a matter of law, the depositing of title deeds can be taken as part performance of an agreement.  It however is not conclusive as to the terms of the agreement.  The position is summarized at [230.655] in Halsbury’s Laws of Hong Kong as follows:

“ A deposit, without writing, or by word of mouth, may create a charge upon the property notwithstanding the statutory provision requiring a contract for the disposition of land to be evidenced in writing, since the delivery of the deeds is sufficient part performance of the implied agreement to give a security. The charge created by the deposit is contractual, for, although it arises by presumption, it does not arise by operation of law. Where the deposit is accompanied by a written document, the document must be referred to in order to ascertain the exact nature of the charge; and oral evidence will not be admitted to contradict the writing, although oral evidence of a subsequent oral agreement may be given.”

53.The depositing of the Title Deeds by the Debtor therefore cannot be considered in vacuum.  They were delivered while the Loan was under consideration.  I refer in this regard to Ng’s evidence.  The purpose of their delivery, and the nature of the intended security and charge evidenced thereby, will in my view have to be considered together with and in the light of the terms of the Winland Agreement. Ng’s evidence, that “[Winland] is intended to obtain the maximum possible security on the Property subject to the Alienation Restriction”, does not suggest otherwise.  So construed and understood, the delivery of the Title Deeds was in my view intended to provide security only for the “Assigned Rights” as defined in the Winland Agreement.  It adds little to the Winland Agreement.  The evidence in my view does not support the existence of an agreement to create and effect an immediate equitable charge on the Property separate from and inconsistent with the Winland Agreement. 

54.My views expressed above are consistent with both Thomas v Rose and Re Yasaki, which I respectfully adopt and apply.

55.Having so found, I conclude that the Winland Agreement did not affect land. It only created at best an equitable charge on the future proceeds of sale of the Property.  As such, it is not registrable under the LRO.

Issue #2 — whether the delivery of the Title Deeds has created an equitable mortgage over the Property

56.I have dealt with Issue #2 above.  I agree with Mr Chan’s submissions, with reference to the paragraph from Halsbury’s Laws of Hong Kong quoted above, that “It is well established under common law that deposit of title deeds amounts to part performance of an agreement to enable equity to render assistance and hold that an equitable charge exists.”  However, for the reasons set out above, I do not agree with his submissions that that agreement was an agreement to create an immediate charge on the Property.  As I have observed above, I do not accept that there existed an agreement between the parties to create and effect an immediate equitable charge on the Property itself separate from and inconsistent with the Winland Agreement.

Issue #3 — whether any security annulled by the Non-Alienation Covenants

57.Having decided Issues #1 and #2 in the negative, Issue #3 is not engaged.

Issue #4 — priority between Winland and Gain Hero on the sales proceeds

58.Mr Chan submits that even if the Winland Agreement or the depositing of the Title Deeds did not create any security over the Property, the Winland Agreement still amounts to an equitable assignment of future proceeds of sale of the Property. He submits that this interest of Winland should take precedence over Gain Hero’s interest under the Charging Order Absolute. 

59.In respect of Winland’s interest as an equitable assignee of future property, Mr Chan makes the following submissions:

(a)  Mr Chan first submits that there can in law be valid assignments of future properties.  He cites in support Secretary for Justice v Global Merchant Funding Ltd (2016) 19 HKCFAR 192 at §§37 – 45.  This is not controversial, which I accept;

(b)  Mr Chan then submits that in the context of an equitable assignment of future property, as soon as the future property comes into existence or possession of the assignor, the beneficial interest is vested in the assignee immediately but not in the assignor for any moment — see Hadlee v Commissioner of Inland Revenue [1991] 3 NZLR 517, at 519 – 520. In the absence of any submission otherwise from Mr Cheung, I accept this to be so;

(c)  Mr Chan further submits that an assignee of future property is deemed to enjoy the future property since the time when the assignment was made, rather than when it comes into existence later, ie the right and interest are retrospective.  He cites Goode on Legal Problems of Credit and Security (5^th ed) §§2‑13 and 2‑14.  Again, in the absence of any submission otherwise from Mr Cheung, I accept this to be so.

60.Mr Chan next turns to Gain Hero’s interest under the Charging Order Absolute:

(a)  He refers to section 20B(3) of the High Court Ordinance, which stipulates that:

“ Subject to the provisions of this Ordinance, a charge imposed by a charging order shall have the like effect and shall be enforceable in the same courts and in the same manner as an equitable charge created by the debtor by writing under his hand.”

(b)  He refers to the observation made by Hunter J in Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd [1985] HKLR 103, at 111C–D, that:

“ … a charging order was a form of execution, and that the phrase ‘like effect’ said or implied nothing about the creation of the charge, only that it was valid as, and gave rise to the same remedies as an equitable charge, per Lord Denning at p. 38 and Harman L.J. at p. 45. I can see no reason for not following this reasoning.”

(c)  Mr Chan goes on to submit that:

“ More generally, an equitable charge does not create any ownership in the property, ….” (§53 of his written submissions, with emphasis added)

and

“ The Charging Order [Absolute] created a mere encumbrance on the Property granted by the Court to assist the recovery of a judgment debt in favour of an otherwise unsecured creditor, it did not confer any proprietary interest in the Property or its traceable proceeds upon P. …” (§55(2) of the written submissions, with emphasis added)

61.Mr Chan then submits that Winland’s interest under the Winland Agreement, understood in the light of his submissions summarized in paragraph 60 above, in fact ranks higher than that of Gain Hero under the Charging Order Absolute both in terms of nature and time.

62.I do not disagree with the observations of Hunter J quoted above.  It is a fact that a charging order is a form of execution.  Also, and with respect, the quoted passage in fact does not tell us much more than what section 20B(3) itself has already done. 

63.Further, it is not incorrect for Mr Chan to submit that an equitable charge does not “create any ownership”, or that it does not “confer any proprietary interest”.  However, in my view, it involves quite a jump from what he has submitted to suggesting that a charging order otherwise does not concern any interest in land, so that any interest thereunder ranks lower that an assignee’s mere interest in the future proceeds of sale.

64.In this regard, it is important to note that under section 20A of the High Court Ordinance, “a charge may be imposed by a charging order only on”[5], amongst others, “an interest held by the debtor beneficially”[6] in land[7]. So read and construed, a charging order clearly imposed a charge on an interest in land. 

65.In my view, it is on this basis that Godfrey J in Re Yasaki rejected a similar submissions made before him in that case:

“ Mr Yau then suggested, alternatively, that even if the assignment did not affect an interest in land, it was in no worse case than Yasaki’s charging order, which itself affected only the proceeds of sale of land. But I do not think this is correct. The effect of the charging order is prescribed by s 20B(3) of the Supreme Court Ordinance (Cap 4). This provided that a charge imposed by a charging order shall have the like effect and shall be enforceable in the same courts and in the same manner as an equitable charge created by the debtor by writing under his hand. The charge so created would be a charge on the land itself, and not simply a charge over the proceeds of sale of that land.”

(at 351H–I, with emphasis added)

66.Mr Chan submits that that in so far as Godfrey J’s ruling in Yasaki was adverse to his submissions on this issue, the judgement was per incuriam.  I do not agree.  I am of the view that Godfrey J’s ruling is consistent with the effects of sections 20A and 20B of the High Court Ordinance, and is correct.  It is also consistent with the observations made by Deputy Judge Poon (as he then was) in Sino Billion Ltd v Lam Chok Wai [2003] 2 HKC 167 at §12, that:

“ Section 20B of the High Court Ordinance (Cap 4) provides that a charge imposed by a charging order shall have the like effect and shall be enforceable in the same manner as an equitable charge created by the debtor by writing under his hand.  A charging order on an interest in land, unlike a mortgage, does not confer any proprietary right or title in the land.  There is, I believe, a wealth of authority to support this proposition.  For present purposes, it is sufficient to refer to the following:

(1)   A mortgage is a conveyance of property subject to a right to redemption, whereas a charge conveys nothing and merely gives the chargee certain rights over the property as security for the loan: Megarry & Wade, The Law of Real Property (6th Ed) para 19‑005 at p 1170.” (emphasis added)

67.In my view, the charge created by the Charging Order Absolute is a charge on the beneficial interest held by the Debtor in the Property itself.  It is not simply a charge over the proceeds of sale of the Property.  Gain Hero’s interest thereunder has priority over any unregistrable interest which Winland has in any future sale proceeds of the Property under the Winland Agreement.  I do not accept Mr Chan’s submissions in this regard to the contrary.

Issue #5 — public policy

68.In the light of my rulings above, Issue #5 is again not engaged. But as this issue touches upon the evidence adduced before me, I am prepared to say that there is a lot of force in Mr Chan’s submissions that there is no evidence before me to support any contention that the kind of assignment of the Property by the FSI to the Debtor, or the restriction against alienation provided therein is a matter of public policy.  I note further that the Clause in the Lease restricting the use of the Lot and the Development (as reproduced in paragraph 6 above) had been rendered void by the 2002 Modifications.  No evidence has been placed before me on the impact of this on the alleged public policy.  In fact, Mr Cheung has not sought to address this change in his submissions at all.

69.Hence, if necessary, and in the absence of any proper identification of the alleged public policy, I would have ruled against Gain Hero on this issue.

Clean hands

70.In the course of making his oral submissions on 29 May 2018, Mr Cheung raised and developed a new argument relying on the clean hands maxim.  At the end of that hearing, I granted parties leave to file further submissions on the issue.  In the end, and given my rulings above, this issue is not engaged.  I am however prepared to make these two observations on the issue: (i) in the light of my finding above (in the context of Issue #1) that the intention of the parties was to agree upon and effect a mode of security which was consistent with and not repugnant to the Non-Alienation Covenants, I would not have found that the maxim of clean hands was engaged or infringed; (ii) I agree with Mr Chan’s submissions that in any event, the maxim is not engaged in so far as Issue #4 is concerned.

Disposal

71.In the light my findings and conclusions on Issues #1, #2, and #4 above, I grant Gain Hero judgment in terms of the Originating Summons in HCMP 1980/2017.  I dismiss the Originating Summons in HCMP 2671/2017.

72.On the question of costs, I make a costs order nisi that Gain Hero should have the costs of both Originating Summonses, save those of and occasioned by the adjournment of the hearing on 3 April 2018, which costs I order, also on a nisi basis, should be Winland’s costs in the cause.  The adjournment was ordered primarily to allow Gain Hero’s side to conduct research and file further submissions to deal with Winland’s claim in HCMP 2671/2017, which Mr Cheung’s written submissions filed for the purpose of that hearing did not address.  All costs are to be taxed if not agreed.  Any party who seeks any variation should file its submissions within 14 days from the date of this Decision, then submissions in opposition within 14 days thereafter, and submissions in reply within 7 days thereafter.

Mr Lawrence Cheung, instructed by H Y Leung & Co, for the plaintiff (in HCMP 1980/2017) and the defendant (in HCMP 2671/2017)

Mr Isaac Chan, instructed by Ho & Partners, for the defendant (in HCMP 1980/2017) and the plaintiff (in HCMP 2671/2017)