Hkmc Mortgage Management Ltd v. Tse Wing Ip and Others

HCMP 348/2014

[2019] HKCFI 1721

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 348 OF 2014

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JUDGMENT

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A. INTRODUCTION

1.This is the trial of interpleader proceedings.  The plaintiffs and the 2^nd defendant compete for a sum of HK$1,938,258.05 which was paid into the Court by the HKMC Mortgage Management Limited (“the Mortgagee”).  This sum represents the balance of proceeds of the sale by the Mortgagee of the property known as Flat D, 8^thFloor, Block 5 (now known also as Anking House), Tsuen Wan Centre, No 97 Tsuen King Circuit, Tsuen Wan, New Territories (“the Property”) after deducting the outstanding loan amount and legal costs and expenses (“the Balance of Proceeds”).  Because of the default in repayment of the mortgage loan, the Mortgagee commenced mortgagee action and thereunder obtained possession, and sold the Property at the price of $3,380,000.

B.   BACKGROUND

2.On 24 October 2008, the 2^nd defendant purchased the Property at the price of $1,100,000.

3.On 24 December 2009, the 2^nddefendant signed an agreement for sale and purchase to sell the Property to the 1^stdefendant at $1,280,000.

4.On 11 February 2010, the 2^nddefendant executed an assignment to assign the Property to the 1^stdefendant.  On the same date, the 1^stdefendant executed a mortgage (“the Mortgage”) in favour of Industrial and Commercial Bank of China (Asia) Limited (“the bank”).  On 30 June 2010, by a Transfer of Mortgages from the bank to the Mortgagee, the Mortgage was transferred to the Mortgagee.

5.The 2^nd defendant’s case is that the sale and purchase between the 1^stdefendant and the 2^nddefendant was in fact a sham.  The 1^st defendant did not pay any money to the 2^nd defendant.  The 2^nd defendant, in his oral evidence at this hearing, told the Court that he used the money obtained from mortgaging the Property to the bank to repay debts that he owed to the 1^stdefendant, his sister Rebecca Luk, whom at that time was the 1^stdefendant’s girlfriend, and his mother.  At all times, so the 2^nddefendant said, the 1^stdefendant was holding the Property on trust for him.  

6.In 2013, apparently without the 2^nd defendant’s prior knowledge, the 1^st defendant purported to sell the Property.  On 5 July 2013, the plaintiffs, a mother and her daughter, visited the Property.  After the visit, having taken a look at the land search record of the Property shown to them by estate agent, they agreed to buy the Property at the price of $2,380,000.  They signed a preliminary agreement for sale and purchase (“thePreliminary Agreement”) with the 1^stdefendant.  Pursuant to the Preliminary Agreement they paid an initial deposit of $100,000 to him.

7.On 18 July 2013, the plaintiffs and the 1^st defendant entered intoa formal agreement for sale and purchase (“the Formal Agreement”).  Thecompletion was stipulated to take place on or before 6 September 2013 (“the Scheduled Completion Date”).  Pursuant to the Formal Agreement the plaintiffs paid a further deposit of HK$138,000.00 to the 1^stdefendant.  In total, the plaintiffs paid HK$238,000.00 as deposit.  The Formal Agreement was stamped and registered with the Land Registry on 1 August 2013.

8.On 17 August 2013, the 2^nddefendant, through his solicitors, wrote to the plaintiffs, claiming that he was the beneficial owner of the Property.

9.On 19 August 2013, the plaintiffs’ solicitors raised requisition with the 1^stdefendant’s solicitors on the 2^nddefendant’s allegation.

10.On 2 September 2013, the 2^nddefendant’s solicitors informed the plaintiff’s solicitors that on 31 August 2013, the 2^nd defendant had issued an originating summons under DCMP 2269/2013, claiming against the 1^stdefendant for breach of trust and a declaration of his beneficial ownership in the Property.  The 2^nddefendant registered the originating summons with the Land Registry against the Property on the same date.  However, in DCMP 2269/2013, the 2^nddefendant sued the 1^stdefendant only and did not apply to join the plaintiffs here as defendants in that case, nor did the plaintiffs here apply to be so joined there.

11.On 4 September 2013, the 1^stdefendant’s solicitors and the 2^nddefendant’s solicitors exchanged correspondence, which were copied to the plaintiffs’ solicitors.  In these letters, the 2^nddefendant for the first time alleged that the 1^stdefendant had executed a deed of trust in respect of the Property in his favour.  In reply, the 1^stdefendant denied the existence of any trust, and alleged that he did not read English and did not know he had ever executed any deed of trust in favour of the 2^nddefendant.

12.This was the first occasion where the plaintiffs were informed of the existence of a deed of trust executed by the 1^st defendant in favour of the 2^nd defendant.  The plaintiff’s solicitors thus immediately wrote to the 1^stdefendant’s solicitors demanding a copy of the alleged deed of trust and proof the 1^st defendant’s good title to the Property before the Scheduled Completion Date.

13.On 5 September 2013, the 1^stdefendant’s solicitors provided the plaintiff’s solicitors with a copy of the alleged deed of trust (“the Alleged Deed of Trust”).  It appeared to be signed by the 1^stdefendant. However, it was neither dated, nor stamped, nor registered with the Land Registry.  It did not bear the 2^nd defendant’s signature.  There was also no witness to the 1^stdefendant’s signature.

14.On 6 September 2013, i.e. the Scheduled Completion Date, the 1^stdefendant could not answer the plaintiffs’ requisition.  It was obvious that the 1^st defendant had failed to prove a good title.  He had also failed to arrange for the pre-completion inspection of the Property to be conducted by the plaintiffs.  There is no dispute that the 1^stdefendant had repudiated the Formal Agreement.

15.On 11 September 2013, by a letter from their solicitors to the 1^stdefendant’s solicitors, the plaintiffs accepted the 1^stdefendant’s repudiation and terminated the Formal Agreement.

16.On 22 October 2014, the plaintiffs issued an originating summons under HCMP 2804/2013 against the 1^stdefendant for loss suffered by reason of the 1^stdefendant’s breach of the Formal Agreement.  The plaintiffs did not name the 2^nddefendant here as a defendant in that originating summons, and the 2^nddefendant did not apply to be joined there.

17.On 16 December 2014, on the 1^st defendant’s admission, judgment in HCMP 2804/2013 was entered by Mimmie Chan J in favour ofthe plaintiffs for, inter alia, (a) return of the deposit of $238,000, (b) wastedconveyancing legal costs and expenses of $9,010, (c) damages for breach of the Formal Agreement to be assessed, (d) interests on the respective sums aforesaid at the judgment rate for the period from 22 October 2013 until the date of payment and costs of the proceedings.  It was also specifically set out in the judgment that the plaintiffs are entitled to a purchasers’ lien on the Property for all the sums found to be payable by the 1^stdefendant to the plaintiffs (“the plaintiffs’ lien”).

18.On 23 December 2014, the said judgment was registered with the Land Registry against the Property.

19.The plaintiffs assert in the present proceedings that the plaintiffs’lien extends to cover their costs of the present proceedings and interest thereon.

20.Regarding the 2^nd defendant’s action against the 1^stdefendant in DCMP 2269/2013, on 19 June 2015, with the 1^stdefendant’s consent, an order in DCMP 2269/2013 was granted by the District Court in favour of the 2^nddefendant for a declaration that the Property was beneficially owned by the 2^nddefendant solely and the 1^stdefendant was holding the Property on trust for the 2^nddefendant.

21.In the meantime, no payment of the instalments due under the Mortgage was made.  As mentioned above, the Mortgagee commenced proceedings, repossessed the Property and sold it at the price of $3,380,000.  On 9 March 2016, the Balance of Proceeds was paid into the Court.

22.I should mention that the 1^st defendant did not appear throughout these interpleader proceedings and was absent at the trial.

C.   THE ISSUES

23.In determining who has a better claim over the Balance of Proceeds, the Court is asked to resolve the following issues raised by the parties:

(1)   The relevance of res judicata and issue estoppel.  The 2^nd defendant complained that the plaintiffs should have sued him in HCMP 2804/2013.  As far as I could apprehend from his written closing submissions, Mr George Chu, counsel for the 2^nddefendant argued that since the plaintiffs have not sued the 2^nd defendant in those proceedings, the principles of res judicata and issue estoppel apply.  As such, the plaintiffs should have and could have taken measures to enforce the judgment in HCMP 2804/2013 against the 1^stdefendant, or should have gone after him personally, hence should not compete the Balance of Proceeds with the 2^nddefendant.

(2)   Whether the plaintiffs had a proprietary claim over the Balance of Proceeds, by virtue of the plaintiffs’ lien.  If so, what are the items recoverable by the plaintiffs from the Balance of Proceeds.

(3)   Whether the 2^nd defendant had a proprietary claim over the Balance of Proceeds.  If so, whether the 2^nddefendant’s claim had priority over the plaintiffs’ claim.

C(1)   The relevance of res judicata and issue estoppel  

24.I do not agree with Mr Chu for the 2^nddefendant.  The principles of res judicata and issue estoppel is not relevant to, and have no place in, these interpleader proceedings, for the following reasons.

25.Firstly, the proceedings in HCMP 2804/2013 concern the plaintiffs claiming against the 1^stdefendant for breach of the Formal Agreement.  The 2^nddefendant was not a party to those proceedings.  He was not bound by the judgment entered against the 1^stdefendant.

26.Secondly, the proceedings in DCMP 2269/2013 concern the 2^nddefendant claiming against the 1^stdefendant for breach of trust and a declaration of his beneficial interest in the Property.  The 2^nddefendant did not name the plaintiffs as defendant.  Hence the plaintiffs were not parties to those proceedings.  They were not bound by the judgment entered against the 1^stdefendant.

27.Thirdly, the issues in dispute in the present proceedings as between the plaintiffs and the 2^nd defendant, namely whether each of them has proprietary claim over the Balance of Proceeds and their priority over it, have, as a matter of fact, not been litigated in either HCMP 2804/2013 or DCMP 2269/2013.

28.Therefore, there is no question of the same issues being litigated twice, or that the same issues could or should have been raised in the previous proceedings. Hence the well-established principles of res judicata (whether in its so-called narrow sense or wider sense) or issue estoppel are not applicable, see Fraser v HLMAD Ltd [2007] 1 All ER 383 at 392, [35] per Moore-Bick LJ and Ray Chen v Anita Wan Ching Lam & another HCA 4582/2001, unreported, 9 May 2002, paragraph 22, per Ma J (as the Chief Justice then was).  

C(2)   The plaintiffs’ lien and the items recoverable from the Balance of Proceeds

29.Mr Anthony Cheung, counsel for the plaintiffs, submitted that the plaintiffs are entitled to an equitable lien on the Property, hence the Balance of Proceeds after its sale by the Mortgagee.  In his submission, the lien was derived from the Formal Agreement.  Mr Chu for the 2^nd defendant submitted that the foundation of the doctrine of lien is the desire to do justice between the vendor and the purchaser, and not between the purchaser and a third party—i.e. the 2^nddefendant in the present case.

30.First of all, it has to be understood that equitable lien is an equitable remedy.  The granting of an equitable lien is to do justice between the parties as the Court considers necessary in the circumstances, as Deputy High Court Judge Au (as Au JA then was) explained in Lee Fu Wing v Yau Po Ting Paul [2009] 5 HKLRD 513 from paragraphs 117 to 131:

“ 117. The plaintiffs seek in the relief a declaration that they are entitled to an equitable lien on Flat 15B for the damages and costs of the action.

118. Ms Wong for the plaintiffs says the remedy of equitable lien is discretionary and flexible, and the Court would and could grant the lien over the property for damages awarded to an innocent purchaser if it thinks it is fair and just to do so in the circumstances. Ms Wong relies on the English Court of Appeal’s decision in Whitbread & Co Ltd v Watt [1902] 1 Ch 835.

119. The defendants however submit that the authorities show that such lien has only and should only be granted to cover any deposit paid for the purchase of the property, but not to be extended to damages. This is so because in relation to the deposit,the purchaser is in the same position of a secured creditor, whilethe same could not be said in relation to damages. Mr Chan relies on Wynn-Parry J’s dictum in Combe v Lord Swaythling [1947] 1 All ER 838 at p.839C–G.

120. In Combe v Lord Swaythling, the claimant purchaser was only seeking to recover the deposit paid for a defaulted land sale, and the learned Judge in his judgment was addressing the question as to why an equitable lien should be granted over the subject property for the deposit almost as of right. Thus Wynn-Parry [J] said at p.839C–D:

… The basis of the undoubted right of a purchaser who has paid a deposit to a vendor to have a lien for his deposit when the contract goes off otherwise than by the default of the purchaser seems to me to be that the purchaser is, in respect of that deposit, to be regarded as a secured creditor …

121. On a proper reading, I do not think Wynn-Parry J was trying to lay down a general principle in Combe v Lord Swaythling that an equitable lien was and could only to be granted to a purchaser in relation to the deposit paid.

122. This dictum is not, in my view, inconsistent with the proposition set out in Whitbread & Co Ltd v Watt that the remedyof an equitable lien is for the purpose to do justice between the parties.

123. Whitbread & Co Ltd v Watt concerned the extent of the equitable lien of the purchaser and whether it extends to a case where the contract was terminated not due to any fault of the vendor but pursuant to a power in the contract for the vendor to rescind. For this, Vaughan Williams LJ said at p.838 as follows:

The lien which a purchaser has for his deposit is not the result of any express contract; it is [just] a right which may be said to have been invented for the purpose of doing justice. It is a fiction of a kind which is sometimes resorted to at law as well as in equity…When Lord Westbury in Rose v.Watson speaks of ‘a transfer to the purchaser of the ownership of a part of the estate corresponding to the purchase-money paid,’and Lord Cranworth speaks of the purchaser being exactly in the position of a mortgagee of the estate to the extent of the purchase-money which he has paid, those expressions are merely verbal vehicles to carry the right which justice demands that the purchaser should have. (Emphasis added.)

See also: Stirling LJ at p.840 who also referred to the foundation of the doctrine of lien being the desire to do justice between the vendor and purchaser.

124. Waung J in Super Keen Investments Ltd v Global Time Investments Ltd [1996] 4 HKC 355, pp.359E–360D applied and adopted Whitbread & Co Ltd v Watt and was of the view that it was at least clearly arguable that defendant purchaser was entitled to claim against a defaulting vendor as third party for an equitable lien for damages in respect of loss of profits. He therefore refused to strike out such a claim as requested by the third party. After citing Vaughan Williams and Stirling LJJ’s dicta referred above, the learned judge continued at p.360B–D as follows:

… It seems to me that having regard to what was said by the English Court of Appeal in the Whitbread case as the basis of equitable lien of the purchaser namely to do justice to the purchaser, I see no reason in principle why equity would not recognise the defendant’s right to a lien for its damages in respect of its loss of profits. If nothing else, the authority of Whitbread v Watt demonstrates that the point is wholly arguable and in the circumstances, my subsequent perusal of the authorities seem to confirm my original view of the equitable reach of the principle of purchaser’s lien to cover damages in respect of loss of profits. As was said at p.456 of Snell’s Equity, an equitable lien arises by operation of equityfrom the relationship between the parties rather than by anyact of theirs. Leave should be given therefore for this heavily contested item of claim.” (Emphasis added.)

125. I respectfully agree and adopt the proposition set out in Whitbread & Co Ltd v Watt and the views expressed by Waung J [Waung J’s view was also adopted by the Court of Appeal in Karex (Hong Kong) Ltd v Fortune Talent Development [2001] 2 HKLRD 759 at 209D–210E, 210G and 210H–I.]. Equitable lien is an equitable remedy, the fundamental basis of which is to enable the Court to do justice between the parties as it sees necessary. There are no reasons in principle to limit the remedy only to cover the purchaser’s deposit.

126. Combe v Lord Swaythling is but only an example of the application of the doctrine, where the Court came to the view that it must be just (and thus ‘the undoubted right of the purchaser’) to grant an equitable lien to the purchaser for the deposit he has paid, as he is almost in the same position as a secured creditor in so far as that deposit is concerned.

127. I further agree with the submissions of Ms Wong (for the plaintiffs) that:

(a) It is now established that the purchaser’s equitable lien extends to interest paid on the unpaid balance of the purchase money, the purchaser’s costs of investigating title properly incurred by the purchaser, the costs of a claim for specific performance, the costs of an applicationto the court in respect of any requisitions or objections, orany claim for compensation, or any other question arisingout of or connected with the contract: Halsbury’s Laws of England (5th ed., 2008) Vol.68, para.864; Snell’s Equity (31st ed., 2005), para.42-32.

(b) These are all various forms of damages awarded to an innocent purchaser which have been included under the remedy of equitable lien, and there appears to be no good reason why damages for loss of bargain or profit (if proved) should not be so covered. This is particularly so after Bain v Fothergill (1874–75) LR 7 HL 158 (which effectively prevented the recovery of damages for loss of profits in a defaulted land sale) has now ceased to be good law [See: Grand Trade Development Ltd v Bonance International Ltd [2001] 2 HKLRD 759 (CA), at paras.46–49 per Le Pichon JA; Strong & Associates Ltd v Flywin Co Ltd [2002] 1 HKC 54, at pp.61I–62A per Le Pichon JA (with whom Rogers V-P and Yuen J agreed). The Court of Appeal’s decision was affirmed by the Court of Final Appeal: (2002) 5 HKCFAR 356.], and the obstacle for a purchaser to claim for damages for loss of profits is no longer there.

128. I therefore hold that a purchaser’s equitable lien could be granted to cover damages for loss of profits if the Court finds it just to do so in all the circumstances.

129. I equally accept Ms Wong’s submissions that it is just in the present circumstances to grant such a remedy to cover damages for loss of a bargain:

(a) Under a sale and purchase of land contract, the equitableinterest in the property contracted to be sold passes to thepurchaser upon agreement. In a rising market, the defaultof the vendor would invariably prevent the purchaser from obtaining, on the contract date of completion, the legal title of the property which has become more valuable since the date of contract.

(b) Such a contract is specifically enforceable by the purchaser to compel the vendor to convey the legal title to him.

(c) Damages in lieu of specific performance are intended to put the purchaser in the same position as he would have been under a decree of specific performance.

(d) The purchaser’s position for such damages is better protected and fortified by an equitable lien on the very property to be sold to him under the agreement. There isno reason why such damages should be treated differentlyfrom the other heads of damages where equitable lien has been granted to cover them.

130. For these reasons, I grant a declaration that the plaintiffsare entitled to an equitable lien over Flat 15B for damages to the extent of $3,800,000.

131.   The authorities [cited at para.127(a) above] also support that the lien should also be granted to cover the plaintiffs’ costs of this action.  I will further so order.”

(my emphasis underlined)  

31.There is no suggestion in DHCJ Au’s exposition above, as well as in the authorities that were referred to, that the equitable lien can only be granted as a remedy in favour of a purchaser against the vendor.  I do not agree with Mr Chu’s submission that the foundation of equitable lien is only to do justice between vendor and purchaser.  In my judgement, there is no doubt that an equitable lien is derived by the operation of equity from the sale and purchase relationship.  Once the Formal Agreement was signed, the equitable interest in the Property contracted to be sold passes to the plaintiffs as purchaser.  When the 1^stdefendant as vendor defaulted, equity operated to give the plaintiffs the equitable lien to enable them to make a proprietary claim for their loss against the Property as security.  Given its proprietary nature, the Court could certainly grant the relief of equitable lien to give priority over other proprietary or non-proprietary claims, so that justice can be done between the claimants. 

32.Moreover, it would be glaring to note that in no way the 2^nddefendant is a third party as argued by Mr Chu.  Clearly, he is no stranger.  He was the registered owner before the 1^st defendant.  He entered into a bogus sale with the 1^stdefendant.  Its purpose was to obtain a mortgage loan for repayment of money he owed to, among others, the 1^st defendant.  Together with the 1^stdefendant the 2^nddefendant knowingly misled the bank by obtaining mortgage loan from it based on a bogus sale.  Furthermore, the agreement and the assignment of this bogus sale was registered with the Land Registry.  They constituted a representation to the world including theplaintiffs before they signed the Preliminary Agreement with the 1^st defendant, that, after the bogus sale, the 2^nddefendant had transferred the legal and beneficial title of the Property to the 1^stdefendant.  As mentioned above, contrary to what he signed, the 2^nddefendant expressly told the Court under oath that the transfer was a sham.  

33.Therefore, I conclude that the plaintiffs have an equitable lien over the Property for their loss and damage suffered by reason of the 1^st defendant’s breach of the Formal Agreement.  Since by virtue of its earlierregistration the Mortgagee under the Mortgage has priority over the plaintiffs under the Formal Agreement and the plaintiffs’ equitable lien derived from it, the plaintiffs’ lien followed the sale of the Property by the Mortgagee and after the sale is attached to the Balance of the Proceeds. 

34.As to the items of loss attachable to the Balance of the Proceeds, as explained by Deputy High Court Judge Au in paragraph 127(a) in Lee Fu Wing referred to above, the equitable lien should be extended to cover the deposit paid, the plaintiffs’ costs of investigating title of the Property, the costs of HCMP 2804/2013 for breach of the Formal Agreement, damages for breach of the Formal Agreement, interest on the outstanding sums above accrued from the Scheduled Completion Date, ie 22 October 2013 and costs of the present proceedings.

35.Regarding damages for breach of the Formal Agreement, there is no dispute on the adoption of the general principle that the plaintiffs’ loss of bargain is the difference between the contract price and the market value of the Property as at the date when the contract was lost, i.e. the Scheduled Completion Date, see McGregor on Damages, paragraphs 27-003 to 27-010. The plaintiffs have produced a valuation report.  It assesses the market value of the Property at the Scheduled Completion Date at $2,500,000.  The difference with the contract price ($2,380,000), and as such the plaintiffs’ loss of bargain, was therefore $120,000.  The 2^nd defendant did not dispute this assessment.  

C(3)   Whether the 2^nd defendant had a proprietary claim over the Balance of Proceeds; and if so, its priority over the plaintiffs’ claim

36.As repeatedly mentioned above, the 2^nd defendant’s sworn evidence is he did not sell the Property to the 1^stdefendant in 2010, amd his transfer of the Property to the 1^st defendant was solely for the purpose of enabling the 1^stdefendant to apply for a mortgage loan from bank, so that he could use the money obtained from the mortgage loan to repay what he owed to his sister, the 1^stdefendant and his mother.  Therefore, according to the 2^nd defendant, the 1^stdefendant at all material times held the Property on trust for the 2^nddefendant.

37.The 2^nd defendant gave further evidence that after the Mortgage was entered, he told his sister that he wished to have some protection of his ownership in the Property. Subsequently in about November 2010, his sister passed to him the Alleged Deed of Trust which was signed by the 1^stdefendant (which was undated and unstamped as mentioned above) and a Power of Attorney dated 23 October 2010 signed by the 1^stdefendant in his favour, coupled with a receipt of legal costs issued by a solicitor firm.  He said he never met with any solicitors.  It was, according to him, his sister who made all the arrangement in preparation and signing of these two documents.

38.In his defence, the 2^nd defendant relied on the Alleged Deed of Trust.  Mr Cheung for the plaintiffs took the preliminary challenge that the deed was not admissible as evidence according to section 15 of the Stamp Duty Ordinance because it had not been stamped.  Mr Chu submitted that it is not a conveyance on sale stampable under the Stamp Duty Ordinance because it did not convey an interest in land. 

39.In my view, it is arguable that if the sale by the 2^nd defendant to the 1^stdefendant was indeed a sham according to the 2^nddefendant’s evidence, the beneficial interest of the Property had not been passed from the 2^nd defendant to the 1^stdefendant.  If this was so, there would be no beneficial interest passed from the 1^st defendant to the 2^nd defendant in the Alleged Deed of Trust, which then operated no more than a declaration of trust, hence not a conveyance on sale chargeable to stamp duty under the Stamp Duty Ordinance [1].  If the Deed is not chargeable to stamp duty, section 15 of the Stamp Duty Ordinance does not apply and there is no question of inadmissibility.

40.Mr Cheung for the plaintiffs submitted that if the Deed of Trust is not a conveyance on sale, then the trust referred to by the 2^nddefendant must either be a constructive trust or a resulting trust.  However, in the 2^nddefendant’s defence, he solely relied on the Alleged Deed of Trust as the basis of his claim for the Balance of Proceeds.  Neither constructive trust nor resulting trust was pleaded at all.  Mr Cheung therefore said it is not now open to the 2^nddefendant to argue that his alleged beneficial interest is derived from constructive trust or resulting trust.  He submitted that had the 2^nddefendant pleaded reliance on constructive trust or resulting trust, the 2^nd defendant should have discovered further documents such as bank records showing for example who paid the mortgage instalments, rates, management fees etc., and the plaintiffs might have to interrogate the 1^stdefendant and the 2^nddefendant’s mother and sister.

41.I find Mr Cheung does have good reason to complain.  The 2^nddefendant’s pleaded case is restricted to the Alleged Deed of Trust.  Mr Chu referred me to an oblique reference in paragraphs 13A to 13Cof his client’s Amended Points of Defence and Counterclaim (settled by him), to the beneficial interest of the 2^nddefendant “as an occupier”.  However, there is no plea or particulars on what that alleged interest “as an occupier” is and how it was derived.  It was pleaded in the said paragraphs that the Property was the 2^nddefendant’s matrimonial home.  However, the 2^nddefendant’s evidence is he has not been married.  It was also pleaded the 2^nddefendant and his parents lived at the Property and placed his personal belongings and displayed his photographs in the Property.  However, nothing has been developed and no assertion was pleaded whether in the pleadings or otherwise as to what interest the 2^nddefendant has in the Property “as an occupier”.

42.In any event, I find that it is not necessary for me to rule on the admissibility of the Alleged Deed of Trust under the Stamp Duty Ordinance and the pleading point raised by Mr Cheung, because the 2^nd defendant’s case on both fronts – the Alleged Deed of Trust and occupier’s interest—is bound to fail.

43.The 2^nd defendant’s reliance on the Alleged Deed of Trust must fail.  The Alleged Deed of Trust, which the Court considered de bene esse, is not registered with the Land Registry.  In contrast, the Formal Agreement is duly registered under the Land Registration Ordinance.  It cannot be disputed that the Alleged Deed of Trust is registrable under the ordinance. As such, sections 3 and 4 of the ordinance applies.  They read:

“ 3. Priority of registered instruments; effect of non-registration

(1) Subject to this Ordinance, all such deeds, conveyances, and other instruments in writing, and judgments, made, executed, or obtained, and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under this Ordinance.

(2) All such deeds, conveyances, and other instruments in writing,and judgments, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels ofground, tenements, or premises, be absolutely null and void to all intents and purposes:

Provided that nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years.

4. Notice of unregistered instrument not to affect registered instrument

No notice whatsoever, either actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing, or judgment, shall affect the priority of any such instrument as aforesaid as is duly registered.” (my emphasis underlined)

44.There is no dispute that the plaintiffs are bona fide purchasers for valuable consideration.

45.It has been held by the Privy Council in Chu Yam On & another v Li Tam Toi Hing (1956) 40 HKLR 250 that a written declaration of trust, not registered under section 3 of the Land Registration Ordinance, is absolutely null and void against a bona fide purchaser for value and must be completely disregarded.

46.Therefore, assuming that it is validly executed, the Alleged Deed of Trust, being unregistered, is, as against the plaintiffs, absolutely null and void to all intents and purposes and must be completely disregarded.

47.On the 2^nd defendant’s claim of “occupier’s interest”, Mr Chu has tried very hard during cross-examination of the plaintiffs and in his submissions that the plaintiffs had actual or constructive notice of the 2^nddefendant’s beneficial interest as an occupier before they signed the Preliminary Agreement.  This exercise takes his client’s case nowhere.  This claim must also fail for two reasons.

48.Firstly, as I have explained above, it was not even identified what interest the 2^nd defendant had as an occupier and how it is derived.  As such, it is futile for the 2^nddefendant to assert that the plaintiffs had actual or constructive notice.  Notice of what the Court was not even informed of.

49.Further, what has transpired from the evidence is that at the time when they visited the Property before signing the Preliminary Agreement, the plaintiffs might notice that somebody was living in the Property.  However, who exactly that “somebody” was the plaintiffs were not aware of.  The evidence went no further than this.  I do not see how this state of evidence assists the 2^nddefendant’s case in any way.

50.Secondly, whatever “occupier’s interest” Mr Chu might say his client had, that interest was a beneficial interest.  Incontrovertibly, this alleged equitable beneficial interest, even if any, did not come with clean hands. 

51.As mentioned above, the 2^nd defendant’s evidence is that the sale by the 2^nddefendant to the 1^stdefendant in 2010 was a sham.  I accept Mr Cheung’s submission that it was a scheme to knowingly mislead the bank for the mortgage loan.  The bank advanced the loan on the security and value of the Property as well as on the basis that the 1^st defendant was the true owner of the Property.  The 2^nddefendant told the Court that with his level of income and commitment, he could not raise finance other than by this scheme.

52.There is a sufficiently close connection between the 2^nddefendant’s misconduct (i.e. perpetration to enter into a bogus transaction to knowingly mislead the bank for a mortgage loan) and the equitable interest that he sought to rely on (be it under express, constructive or resulting trust) to compete for the Balance of Proceeds.  See Snell’s Equity (33^rded), [5-010] and in particular footnote 36. The 2^nd defendant should not be allowed to take advantage from his wrongful, and indeed unlawful, conduct.

53.I therefore conclude that equity should come as no assistance to the 2^nd defendant who did not come with clean hands.

D.   CONCLUSION

54.For the above reasons, the plaintiffs must succeed in the present proceedings.

55.I understand there is no dispute on the quantum in respect of (a) the deposit paid by the plaintiffs to the 1^stdefendant being $238,000, (b) the plaintiffs’ wasted conveyancing costs and expenses including the costs and expenses of investigating the 1^stdefendant’s title in the Property being $9,010 and (c) the plaintiffs’ loss of bargain being $120,000.  I would order interest on the above sums to compensate for the plaintiffs’ loss for being deprived of the use of the money from the Scheduled Completion Date(i.e. 22 October 2013) to the date of actual recovery of each sum, at the usual rate of HSBC’s best lending rate plus 1% per annum.

56.The plaintiffs and the 2^nd defendant agree that should the plaintiffs succeed, after payment of the sums as I shall order below to the plaintiffs, the remaining balance of the Balance of Proceeds should be paid to the 2^nddefendant.  I shall make the order accordingly.

57.I make the following order:

(1)   The plaintiffs be paid out of the Court from the Balance of Proceeds the following sums:

(a)   the said sum of $238,000;

(b)   the said sum of $9,010;

(c)   the said sum of $120,000;

(d)   interest on each of the above sums for the period from 22 October 2013 to the date of this judgment at the rate of HSBC’s best lending rate plus 1% per annum and from the date of this judgment to the date of actual payment at the judgment rate;

(e)   the plaintiffs’ costs incurred in the proceedings under HCMP 2804/2013 to be taxed; and

(f)   the plaintiffs’ costs of the present proceedings to be taxed if not agreed between the plaintiffs and the 2^nd defendant. 

(2)   After full payment of each of the sums set out in sub-paragraph(1) above to the plaintiffs, the remaining balance of the Balance of Proceeds shall be paid out of the Court to the 2^nd defendant.

(3)   Liberty to the plaintiffs and the 2^nd defendant to apply.

(4)   The 2^nd defendant’s counterclaim be dismissed.

(5)   The 2^nd defendant’s own costs be taxed in accordance with the Legal Aid Regulations.

58.I thank Counsel for their assistance.

Mr Anthony P W Cheung, instructed by Au Yeung, Lo & Chung, for the plaintiffs

Mr George Chu, instructed by Carol Lam & Co, assigned by Director of Legal Aid, for the 2^nd defendant

The 1^st defendant was not represented and did not appear