Easy One Finance Ltd and Others v. Luk Wing Kee Andrew and Others

HCA 421/2020

[2020] HKCFI 878

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 421 OF 2020

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BETWEEN

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Reasons for Decision

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Introduction

1.By a facility letter dated 2 April 2019, the plaintiffs, who are licensed money lenders, lent HK$75,000,000 (“the Loan”) to the defendants (“the Borrowers”).

2.Repayment of the Loan is secured by a mortgage on the house and grounds at 8 Price Road, Hong Kong (“the Property”) which is owned by the 1^st and 2^nd defendants (“the Mortgagors”).

3.It is not disputed that the Borrowers have defaulted in their repayment obligations under the Loan.

4.From about July 2019 until March 2020, the plaintiffs attempted to sell the Property pursuant to the power of sale reserved under the Mortgage first by appointing estate agents (5 in all) for that purpose and subsequently by way of 5 public auctions.

5.At length, on 27 March 2020, through the introduction of one of the estate agents appointed by the plaintiffs, the plaintiffs entered into a provisional sale and purchase agreement (“the Provisional Sale and Purchase Agreement”) for the sale of the Property at HK$76,800,000 (“the Sale”), with a completion date set for 26 May 2020.

6.Immediately prior to the entering into of the Provisional Sale and Purchase Agreement and thereafter, the Mortgagors objected to it and refused to allow the plaintiffs or their representatives to enter into the Property, arguing that the plaintiffs were not entitled to possession of the Property; that the power of sale under the Mortgage was not exercisable or not exercisable without a court order and that a sale under the Provisional Sale and Purchase Agreement would be at an undervalue.

7.As a consequence of the Mortgagors’ actions, the plaintiffs issued a writ on 21 April 2020 claiming the following relief:

(1) As against the Mortgagors:

(a) A declaration that the plaintiffs had lawfully exercised their power of sale under the Mortgage;

(b) An order that the Mortgagors do quit, vacate and deliver up vacant possession of the Property forthwith; and

(c) An order that each of the Mortgagors be restrained (whether acting by themselves and/or through others, including but not limited to their agents and/or nominees and/or servants) from:

(i) occupying or using the Property in any way;

(ii) impeding, obstructing or delaying, in whatsoever manner, the plaintiffs’ recovery of vacant possession of the Property and the completion of the Sale.

(2) As against all defendants (ie the Borrowers, including the Mortgagors):

(a) A sum to be assessed representing the difference between the net proceeds of sale and the defendant's outstanding indebtedness (HK$84,248,871 as at 20 April 2020, according to the plaintiffs’ calculations);

(b) Interest thereon;

(c) Costs; and

(d) Further or other relief.

8.On the same day as that on which the writ was issued (21 April 2020), the plaintiffs issued an inter partes summons by which application was made for orders against the Mortgagors substantially in terms of those sought against them by the writ (see paragraphs 7(1)(b)&(c) above).

9.The inter partes summons first came on for hearing on 24 April 2020 when directions were given for the further conduct of the application (including the filing of further affidavit evidence) and the matter was adjourned for argument, to be heard on 8 May 2020.

10.At the outset of the hearing of the argument on 8 May 2020, Mr Arthur Yip, counsel for the Mortgagors, stated that, solely for the purposes of the plaintiffs’ application made by their inter partes summons, the only point on which he proposed to address the court on behalf of the Mortgagors was the contention that the Sale was at an undervalue; that in entering into the Provisional Sale and Purchase Agreement at the alleged undervalue the plaintiffs had failed to comply with their duty as mortgagees and that therefore they were not entitled to the orders sought by the summons. Mr Yip expressly reserved the Mortgagors’ arguments that the plaintiffs were not entitled either to take possession of the Property or to exercise the power of sale under the Mortgage.

11.At the conclusion of counsels’ oral submissions at the hearing held on 8 May 2020 and on the plaintiffs giving a cross undertaking as to damages, I made the following order:

(1) that the Mortgagors do quit, vacate and deliver up vacant possession of the Property within 7 days;

(2) that until the conclusion of the trial or further order each of the Mortgagors be restrained (whether acting by themselves and/or through others, including but not limited to their agents and/or nominees and/or servants) from:

(a) occupying or using the Property in any way;

(b) impeding, obstructing or delaying, in whatsoever manner, the plaintiff’s recovery of vacant possession of the Property and the completion of the sale of the Property pursuant to the Sale and Purchase Agreement;

(3) that the costs of the application made by the inter partes summons (including the costs of the hearings on 24 April 2020 and 8 May 2020) be reserved, to be determined upon the handing down of reasons for the orders I had made (which reasons now follow).

Applicable legal principles for the grant of interlocutory injunctions

12.The applicable legal principles for the grant of interlocutory injunctions are well settled and not in doubt: see American Cyanamid Co v. Ethicon Ltd [1975] AC 396 and the commentary in Hong Kong Civil Procedure 2020, Vol 1, §29/1/18 - 29/1/46 at pp 747 - 761, - see especially§29/1/29 which sets out the approach of the court as regards applications for mandatory injunctions, viz:

“Mandatory injunctions – Where the plaintiff seeks a mandatory injunction, by which the defendant is compelled to act rather than prohibited from acting, the American Cyanamid principles are usually modified to require a higher standard of proof. This has been expressed as requiring the plaintiff to show ‘a strong prima facie case’ and that the court must feel a ‘high degree of assurance’ that at trial it will appear the injunction was rightly granted (Brave Venture Ltd v. Xinhua News Media Holdings Ltd (2017) 5 H.K.L.R.D. 153 (CA); Shepherd Homes v. Sand Ham [1971] Ch. 340 at 351; TKI Ltd v. New Happy Ltd [1995] 1 H.K.C. 551, (CA). The plaintiff need not, however, show that its case is so strong as to entitle it to obtain summary judgment Emagist Entertainment Ltd v. Nether Games (Hong Kong) Ltd [2013] 1 H.K.L.R.D. 898.

However, this more stringent test arises due to the typically more onerous effect of a mandatory injunction rather than the mere classification of an injunction as mandatory National Commercial Bank Jamaica v. Olint Corp Ltd [2009] 1 W.L.R. 1405, cited in Re Wako Giken (HK) Co. Ltd [2010] 4 H.K.L.R.D. 121; see also para. 29/1/8.  The ultimate question is: what is the course to adopt that involves the least injustice in case of the grant or refusal of interlocutory relief, as the case may be Music Advance Ltd v. Incorporated Owners of Argyle Centre Phase 1 [2010] 2 H.K.L.R.D. 1041, as applied in China Shanshui Cement Group Ltd v. Zhang Caikui [2018] HKCA 409 (CA).  Where the court cannot be satisfied that the plaintiff has a ‘strong prime facie case’, it may still grant a mandatory injunction where the balance of convenience is tilted so much in the plaintiff’s favour that justice requires the grant of an injunction, (Komal Pantel v. Chris Au [2015] 6 H.K.C. 389), or ‘where the injunction sought is not expensive to comply with, or is not irreversible or would not effectively pre-empt the trial’ (Wu Wei v. Liu Yi Ping (unrep., HCA 1452/2004, [2009] HKEC 139); Kwan Toi Ming v. Man Kit Construction Co. Ltd (unrep., HCA 3959/2002, [2003] HKEC 485), applied in TGI Friday’s Inc. v Perfect Wave Ltd (unrep., HCA 2376/2012, 09 April 2013).  The higher risk of injustice typically associated with mandatory injunctions means the court must take extra care in weighting the balance of convenience (Rover International Ltd v. Cannon Film Sales Ltd [1987] 1 W.L.R. 670).”

The duties of a mortgagee in exercising the power of sale under a mortgage

13.It is well settled that, in exercising a power of sale under a mortgage:

(1) a mortgagee is not a trustee for the mortgagor; that once a power of sale arises the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so and that it matters not that the moment may be unpropitious or that, by waiting, a higher price could or might be obtainable;

(2) the mortgagee is not required to obtain the mortgagor’s consent or to inform the mortgagor before he exercises the power to sell the mortgaged property and the mortgagee is not required to consult or advise the mortgagor of the sale of the property;

(3) the duty of the mortgagee is limited to the duty to act in good faith and the duty to take reasonable care to obtain the true market value of the property at the time he decides to sell it;

(4) the mortgagee cannot be expected to get the market completely right, nor is he required to do so;

(5) when the judgment involves assessing the market value of the property the mortgagee will have acted reasonably if his assessment falls within an acceptable margin of error;

(6) the steps taken by the mortgagee and those acting with him must be viewed in the round and in practical commercial terms; and

(7) in assessing whether or not a mortgagee had breached his duty as regards the exercise of its power of sale, the burden of proof fell upon the mortgagor.

14.These principles have not been disputed or doubted by Mr Yip on behalf of the Mortgagors.

The merits of the plaintiffs’ case

15.In view of the position adopted by Mr Yip on behalf of the Mortgagors on the hearing of the plaintiffs’ summons and, solely for the purposes of the disposal of the application made by the plaintiffs’ on the summons, it must be assumed that the plaintiffs are entitled to possession of the Property and to exercise their power of sale under the Mortgage.

16.In forming a provisional view of the merits of the plaintiffs’ case therefore the only question at this stage is whether, in exercising the power of sale, the plaintiffs have complied with their duty to act in good faith and to take all reasonable steps to obtain the true market value of the Property.

17.The steps taken by the plaintiffs to market and sell the Property can be summarised as follows:

(1) in July and August 2019, the plaintiffs appointed a total of 5 firms of estate agents to sell the Property. Initially the asking price was HK$95 million; subsequently, in September 2019, the asking price was reduced to HK$93 million and in October 2019 it was reduced further to HK$91 million. The attempts to sell at these levels were not successful;

(2) between 22 January 2020 and 4 March 2020 the Property was put up for sale at 5 public auctions, initially at a reserve price of HK$79 million (for the 1^st 2 auctions), then, for the next 2 auctions at a reserve price of HK$73 million and for the last auction at a reserve price of HK$75 million, but the Property did not attract any bids; and

(3) the plaintiffs obtained a valuation of the Property from Prudential Surveyors (Hong Kong) Limited according to which the market value of the Property as at 26 March 2020 was assessed at HK$80 million with vacant possession but only at HK$68 million for a sale under repossession.

18.On this basis it is the plaintiffs’ case that they did take all reasonable steps to obtain the market value of the Property and indeed that the true market value for the Property was obtained.

19.It should be mentioned here that, on or about 14 April 2020 (after the execution of the Provisional Sale and Purchase Agreement), the Mortgagors caused Centaline Property Agency to offer the Property for sale at an asking price of HK$83 million and in a letter dated 16 April 2020 from the Mortgagors’ solicitors to the plaintiffs’ solicitor it was stated that the Mortgagors had received an offer to purchase the Property at HK$78 million, albeit that this was not substantiated by any evidence and no particulars of the purported offer were provided. In my view neither of these matters detract from the plaintiffs’ case.

20.By letter dated 26 March 2020, (the day before the execution of the Provisional Sale and Purchase Agreement), written by the Mortgagors’ solicitors to the 1^st plaintiff, the Mortgagors’ solicitors objected to the then proposed sale and protested that the consideration therefor was “far under the market value” of the Property. No suggestion was made in this letter as to what the market value of the Property was or might have been.

21.In contending that the sale of the Property at the price of HK$76.8 million was or would constitute a breach of the plaintiffs’ duties as mortgagees, Mr Yip on behalf of the Mortgagors placed reliance on 2 grounds:

(1) the plaintiffs proceeded with the Sale despite the letter of 26 March 2020; and

(2) the sale price of HK$76.8 million was (so Mr Yip argued) in excess of any reasonable deviation from the values which the Mortgagors’ valuers, CBRE Limited, had attributed to the Properly by their reports dated 21 April 2020 and 23 April 2020 - specifically, HK110 million (as at 23 January 2020) and HK$108 million (as at 26 March 2020) respectively.

22.I do not find any merit in the proposition, implicit in the first of these complaints, that the plaintiffs should not have entered into the Provisional Sale and Purchase Agreement in the face of the Mortgagors’ objection and the bare assertion that the sale price was under market value. In the first place, the law is clear that, once the power of sale has arisen under the mortgage, the mortgagee does not require the mortgagor’s consent or approval to a particular sale. Secondly, the assertion that the sale price was under market value was, at the time it was made, and at the time the Provisional Sale and Purchase Agreement was entered into, entirely unsubstantiated. In these circumstances and in view of the attempts which had been made to sell the Property, there was no good reason for the plaintiffs to believe that, realistically, any greater price could be obtained for the Property and no good reason to halt the sale.

23.The Mortgagors heavily rely on CBRE’s valuation report dated 23 April 2020, valuing the Property as at 26 March 2020 on a vacant possession basis at HK$108 million. As explained in the report, this was based on a unit rate of HK$58,300 per square foot. The valuation was principally based on 3 sales of what were said to be comparable properties which took place on 14 May 2018, 19 July 2029 and 24 February 2020 at unit rates of HK$66,062 per square foot, HK$62,839 per square foot and HK$54,823 per square foot respectively.

24.Whilst this valuation does of course raise a serious question as to whether in fact the current market value for the Property has been obtained by way of the Provisional Sale and Purchase Agreement, it does not necessarily follow from it that the value suggested represents the value which, given the realities of the situation where the plaintiffs are seeking to exercise their powers of sale under the Mortgage, is or was reasonably obtainable. The steps taken by the plaintiffs to market and sell the Property may well indicate that, for all practical purposes, neither a price of HK$108 million or anything like it was in fact obtainable for the Property.

25.Moreover, as Mr Lam SC, counsel for the plaintiffs, observed, there are a number of reasons why it might be argued that it would be unsafe to rely upon the value attributed to the Property by CBRE Limited, viz:

(1) Clause 1.3 of the report states expressly that it was provided to the 1^st defendant “for internal reference purposes only”;

(2) the report and valuation assume a sale free from encumbrances; no allowance has been made for the fact that the Property is mortgaged and no account is taken of the fact that sale is to be by the mortgagee;

(3) No explanation is given in the report as to why a unit rate of HK$58,300 per square foot has been adopted for the purposes of valuing the Property as at 26 March 2020 in circumstances where the unit rate for the comparables relied upon by CBRE fell from HK$66,062 per square foot in May 2018 to HK$54,823 in February 2020;

(4) Clause 1.5 of the report contains the following warning:

“(f) Most importantly, CBRE, under clause 1.5 “Market Conditions” warn that [B/218-219]:

‘Going forward, we would draw your attention to the fact that the current volatility of the trade war and the unrest in Hong Kong have created a significant degree of uncertainty in the real estate market. The recent lack of liquidity in capital markets has hampered the sale of real estates in the short-term.’

They then give an express ‘Important Warning – Market Valuation Uncertainty from Novel Coronavirus’:

‘…Global financial markets have seen steep declines since late February…

Market activity is being impacted in most sectors.  As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value.  Indeed, the current responses to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgment.

Our valuation is therefore reported on the basis of “material valuation uncertainty’. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Values may change more rapidly and significantly than during standard market conditions…”

(5) In view of the warning in Clause 1.5 of the report, it might perhaps be regarded as surprising that:

(a) the unit rate adopted for the purposes of the valuation is higher than the unit rate in respect of the sale price of the comparable property sold in February 2020; and

(b) the value attributed by CBRE to the Property as at 26 March 2020 is only HK$2 million less than that attributed to the Property by CBRE as at 21 January 2020.

26.On an interlocutory application such as this and in the absence of cross examination it would be entirely inappropriate to make any findings in respect of the current market value of the Property or to decide which of the valuations is to be preferred. In any case, on the material which has at this stage been put before the court it would be impossible for the court to determine these questions.

27.Nevertheless, for the purposes of considering whether or not to grant of interlocutory injunctive relief the court must at least be satisfied that the American Cyanamid threshold has been satisfied of there being a serious question to be tried and that the plaintiffs have real prospects of success. In view of the attempts made by the plaintiffs to market and sell the Property and the valuation they received as well as the fact that the burden will be on the Mortgagors to establish the contrary I am satisfied that that threshold test has been satisfied.

28.Whether or not the plaintiffs are required to do more and satisfy the “more stringent” test, by reason of the fact that they are seeking mandatory injunctive relief (as referred to and explained in§29/1/29 of Hong Kong Civil Procedure 2020) is perhaps open to some doubt. I say this because, unlike many mandatory injunctions, an injunction in the terms sought by the plaintiffs in this case will not have the effect of finally disposing of the issue in question, (namely whether or not the plaintiffs have complied with their duty of good faith as regards the exercise of the power of sale or their duty to take all reasonable steps to obtain the current market value for the Property) and will not pre-empt the trial as regards this issue. In this respect it is to be borne in mind that (a) the Mortgagors have acknowledged that it is appropriate that the Property be sold (indeed they have attempted to sell it themselves) and (b) that an injunction in the terms sought will not prevent the Mortgagors from pursuing a claim for damages for breach of duty either by way of a counterclaim in the present action or by way of separate proceedings.

29.Suffice it to say that if, notwithstanding the doubts I have expressed above, the more stringent test of the merits applies, then I would have difficulty in concluding that it is satisfied. That does not however conclude the matter because, as stated in§29/1/29 of Hong Kong Civil Procedure 2020, even where the court cannot be satisfied that the plaintiff has a “strong prima facie case” it may still grant a mandatory injunction where the balance of convenience is tilted so much in the plaintiff's favour that justice requires the grant of the injunction. In this respect, as also stated in this paragraph, the ultimate question is what is the course to adopt that involves the least injustice in case of the grant or refusal of interlocutory relief, as the case may be.

30.In granting the injunction substantially in the terms applied for I concluded that:

(1) whereas it was unlikely that the plaintiffs would be adequately compensated in damages if the injunctions were not granted (the Borrowers plainly not being in a position to repay the Loan other than by means of the sale of the Property), a cross undertaking as to damages by the plaintiffs was likely to be sufficient to compensate the Mortgagors should the injunction cause loss to them for which the court decides they should be compensated; and

(2) the granting of the injunctive relief involved the least injustice to the parties and the balance of convenience is tilted so much in the plaintiffs’ favour that justice required the grant of the injunction. My reasons for these conclusions are as follows:

(a) first and foremost, the injunctive relief granted will not prevent the Mortgagors from pursuing their complaint that the Sale is at an undervalue - they can do so by way of a claim for damages either by means of a counterclaim in the present action or by instituting fresh proceedings. Damages is in any case the appropriate remedy for a claim by a mortgagor that the mortgagee has breached his duty by failing to take reasonable steps to obtain the current market value of the mortgaged property, the measure of damages being the difference between the sale price and the price which the mortgagee should have obtained for the mortgaged property had he taken the steps he ought to have taken to comply with his duties;

(b) during oral submissions Mr Yip suggested that the Mortgagors would suffer prejudice if the injunctive relief sought by the plaintiffs were granted because the Property would thereby be lost. This does not bear scrutiny because it is clear from the events leading up to the Provisional Sale and Purchase Agreement that the Mortgagors understood and agreed that the Property had to be sold in order to pay off the Loan or at least reduce the indebtedness to the plaintiffs. Mr Yip was unable to identify any other matter capable of giving rise to prejudice;

(c) on the other hand, the consequence of not granting the injunctive relief sought by the plaintiffs would be that the plaintiffs would not be able to give vacant possession of the Property to the purchasers under the Sale and Purchase Agreement which would give rise to the risk that the plaintiffs would be in breach of that agreement and that the Sale would not proceed. In this event, the plaintiffs would be required to return the deposits paid and would be liable for damages for breach;

(d) furthermore, if the sale under the Sale and Purchase Agreement were to go off, there would be no guarantee that either the plaintiffs or the Mortgagors would be able to secure another sale either at or above the sale price reserved under the Provisional Sale and Purchase Agreement. The inability to do so would of course cause the plaintiffs prejudice bearing in mind that there is apparently no other means of paying off the Loan other than by means of a sale of the Property. Even after completion of the Sale under the Sale and Purchase Agreement there would be a shortfall between the amount of the indebtedness pursuant to the Loan (HK$84,248,871 as at 20 April 2020) and the net proceeds of sale (HK$76,800,000 less agents’ commission and other fees and expenses).

31.In the above circumstances I concluded that it was plainly right to grant the injunctive relief substantially in the terms sought by the plaintiffs by this application.

32.I should add that, by refusing to vacate the Property, the Mortgagors are seeking to prevent the exercise by the plaintiffs of the power of sale under the Mortgage, for which no court order is usually required. For all intents and purposes the issues before the court on the plaintiffs’ application are the same as they would have been had the Mortgagors made their own application to restrain the completion of the Sale by way of a prohibitory injunction. Such an application would clearly have failed by reason of the following equitable principles:

(1) an injunction restraining the exercise by a mortgagee of the power of sale under a mortgage will not be granted in the absence of actual tender of monies due and secured by the mortgage or unless the mortgagee is acting in bad faith. See: Super Master Holdings Ltd v. Chung Nam Securities Ltd and another, HCA 4573/2003, unreported, 26 March 2004 and Hong Da Development & Investment Holding Co Ltd v. China Aoyuan Property Group Ltd and others, HCA 1377/2011, unreported, 19 December 2011; and

(2) if the mortgagee has already concluded a contract for the sale and purchase of the mortgaged property (as is the case here), the court will not restrain the completion of the sale even if the mortgagor tenders the amount due unless it is proved that the mortgagee entered into the contract in bad faith. This is because the mortgagor’s equity of redemption is suspended while the contract subsists. See: Property & Bloodstock Ltd v. Emerton [1984] Ch 94; Guang Xin Enterprises Ltd v. Leung Kwai Mui [1996] 4 H.K.C. 572 and Hong Kong Civil Procedure 2020, Vol 1, §29/1/46 at p 761.

it is common ground that there has been no tender of the amount due in respect of the Loan and it is not suggested that the plaintiffs have been actuated by bad faith.

33.As Mr Lam SC put it, it would not be right that the relief that the Mortgagors would not have been able to obtain through the front door (by means of an application for a prohibitory injunction) should be available to them via the back door, as a result of their resistance to the application for the mandatory injunctions which the plaintiffs’ sought by their summons.

Costs

34.The plaintiffs seek an order that the costs of and incidental to their summons (including all costs reserved) be paid forthwith by the defendants to the plaintiffs forthwith on an indemnity basis, such costs to be summarily assessed on paper, on the grounds that in opposing the summons, the defendants adopted a “scatter gun” approach and raised wholly and clearly unmeritorious arguments.

35.Although initially the defendants did raise issues which were not pursued on the hearing of the argument (and were instead reserved), I would not characterise this as a “scatter gun” approach and, whilst on proper analysis, I agree that the opposition to the application for injunctive relief did lack merit, I am not persuaded that the defendants’ conduct as regards the application warrants an order for indemnity costs.

36.In my view however it is appropriate that the defendants should pay the plaintiffs costs of the summons (including all costs reserved), to be summarily assessed on paper on the standard party and party basis. I therefore direct the plaintiffs to lodge a bill of costs for summary assessment within 14 days and that the defendants do lodge a written reply within 14 days thereafter.

Mr Paul Lam, SC leading Ms Astina Au, instructed by Gallan, for the plaintiffs

Mr Arthur Yip Chi Ho, instructed by Sidney Lee & Co., for the 1^st and 2^nd defendants