Field Finance Ltd v. Seck King Chung and Another

DCMP 3334/2019

[2020] HKDC 514

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 3334 OF 2019

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REASONS FOR JUDGMENT AND
SUMMARY ASSESSMENT OF COSTS

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1.The plaintiff is a licensed money lender from which the 1^st defendant borrowed on the security of a second legal charge in respect of his half share of interest as tenant in common in the property in question. The registered owner of the other half of interest in the property was joined as the 2^nd defendant in this action. Neither defendant has entered appearance. Nor were they present in the present hearing. Satisfied with the affirmation evidence of service on them, I allowed the plaintiff to proceed. At the end of the hearing, I summarily determined the proceedings and granted the order in favour of the plaintiff with costs. As requested, I also gave direction in respect of summary assessment of costs. I now give my reasons for the judgment and ruling on the assessment of costs.

Background

2.On 24 May 2018, the plaintiff and the 1^st defendant executed a written loan agreement and a second legal charge whereby the plaintiff extended to the 1^st defendant a loan of HK$1,250,000 at 30% interest per annum.  The loan was drawn down.  Since 24 December 2018, the 1^st defendant has defaulted in repayment.  The plaintiff issued formal demand to the 1^st defendant on 10 January 2019, but no repayment was forthcoming.

3.On 22 January 2019, the plaintiff commenced a money lender’s action for recovery of the debt pursuant to the loan agreement (only), namely, DCCJ 362/2019.  On 27 February 2019, the plaintiff applied for default judgment pursuant to O83, r4 of the Rules of the District Court (“RDC”).

4.The fact, however, was that on 19 February 2019, a bankruptcy order was made against the 1^st defendant upon his own petition. Trustees in bankruptcy (“the Trustees”) were subsequently appointed on 10 April 2019.

5.On 3 October 2019, the plaintiff withdrew the application for default judgment in DCCJ 362/2019 by consent with the Trustees.

6.On 4 October 2019, the plaintiff commenced the present action to recover the debt and to enforce the second legal charge in respect of the 1^st defendant’s half share of the property.  It seeks an order for sale pursuant to the Partition Ordinance, Cap 352 (“PO”).  Hence the joining of the 2^nd defendant as an interested party.

7.All the documents have been served on the parties.  The same were also served on the Trustees and, pursuant to section 3(2) of the PO, the Director of Lands.  Since the property is subject to a first mortgage, the first mortgagee bank was also served with the documents.

8.As mentioned, neither defendant has entered appearance.  Nor were they present at the present hearing.  The Trustees and the Director of Land did not appear or make any written representation in respect of these proceedings.

9.Satisfied with the affirmation evidence of service, I saw no reason why the plaintiff should be prevented from proceeding.

10.The background was proved by the uncontested evidence adduced by the plaintiff.  The original of the loan agreement and the second legal charge were also produced to and examined by this court.

Preliminary

11.There were a couple of preliminary issues though.

12.The first issue was duplicity of legal proceedings.  Whilst, as mentioned, the plaintiff has withdrawn its application for default judgment in DCCJ 362/2019, that action was very much a live action.  Commencing the present action in respect of the same matter amounts to effectively duplicity of legal proceedings in the circumstances.  The plaintiff was aware of that, and counsel indeed indicated in his submission that the plaintiff had no intention of proceeding with that action in parallel at the same time.

13.I took the view that DCCJ 362/2019 should be properly disposed of for the avoidance of doubt.  Counsel had no objection.  I therefore ordered that the proceedings in DCCJ 362/2019 be permanently stayed with no order as to costs of that action.

14.The second issue was whether leave of the court was required for the commencement of the present action against the 1^st defendant, who is a bankrupt.  Section 12 of the Bankruptcy Ordinance, Cap 6 (“BO”) provides that:-

“(1) On the making of a bankruptcy order… no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt, nor shall proceed with or commence any action or other legal proceedings, unless with the leave of the court and on such terms as the court may impose.

(2) This section shall not affect the power of any secured creditor or realise or otherwise deal with his security.”

15.Counsel referred to various authorities[1], and submitted that no leave should be required in the present case.

16.Leave would have been required, had this action been to seek monetary judgment in respect of the debt pursuant to the loan agreement only as that in the aborted DCCJ 362/2019.  However, the loan agreement and the second legal charge are from their conception part and parcel of a single secured loan arrangement entered into on the same occasion.  In the circumstances, I agreed that section 12(2) of the BO applies to the plaintiff in its present action to enforce its rights as a secured creditor.

17.Section 43F of the BO protects the right of a bankrupt to continue to reside for a specified period of time in the property that comprises part of his estate subject to the bankruptcy order.  In the present case, such time has elapsed, and there was no evidence of application for extension of such residence.  In any event, such right should not override the right of a secured creditor[2].

Summary determination

18.O28, r4(1) of the RDC provides for the summary determination of originating proceedings:-

“The Court by whom an originating summons is heard may, if liability of the defendant to the plaintiff in respect of any claim made by the plaintiff is established, make such order in favour of the plaintiff as the nature of the case may require, but where the Court makes an order under this paragraph against a defendant who does not appear at the hearing, the order may be varied or revoked by a subsequent order of the Court on such terms as it thinks just.”

Compliance

19.The property consists of the Ground Floor and Garden of a small house in the New Territories built under a building licence subject to non-alienation restriction and a deed of mutual covenant.  The non-alienation restriction under the building licence was removed by way of payment of premium back in December 2009.  In other words, the plaintiff and the 1^st defendant were in a position to enter into a legally binding second legal charge in 2018.

20.I accepted the uncontested evidence in respect of the plaintiff’s compliance with the statutory requirements including sections 18, 22, 23, 24, 25 and 27 of the Money Lenders Ordinance, Cap 163 (“MLO”) as well as O83A and O88 of the RDC, which were set out in detail in counsel’s written submission.

The plaintiff’s contractual rights

21.The acknowledgement of receipt of the loan amount under the loan agreement was unchallenged.  The 1^st defendant charged his half share of interest as tenant in common of the property up to a maximum of the loan amount plus interest and legal costs.  Clause 5 of the second legal charge provided that in the event of default, the entire indebtedness became immediately repayable on demand.

22.As mentioned, the 1^st defendant defaulted repayment since late December 2018.  Pursuant to the terms, further default occurred upon his failure to comply with the written demand of the plaintiff through its solicitors in January 2019 as well as his bankruptcy upon his own petition in February 2019.

23.Clause 6 of the second legal charge provided for the powers of the plaintiff as the lender in the event of default.  Amongst others, the plaintiff had the power to lawfully enter into and take possession of the property, including to take legal proceedings for such purpose. Pursuant to clause 6.01(iii), the 1^st defendant had one month to meet the written demand of the plaintiff.

24.On the basis of the materials before me, I was satisfied that the plaintiff has proved its contractual right against the 1^st defendant pursuant to the loan agreement and the second legal charge.

25.The debt amounted to the principal sum of HK$1,250,000 plus accrued interest (up to 5 March 2020) in the sum of HK$480,822.33.  Clause 22 of the loan agreement and clause 2(xi) of the second legal charge contained the covenant to pay contractual interest, which was expressly stated to be an independent covenant that would not merge with the judgment.  I saw no reason why the plaintiff should not be entitled to interest at the contractual rate after judgment[3]. Hence interest accruing at the rate of 30% per annum (or HK$1,027.40 per day) until full payment.

Order for sale

26.Section 2 of the PO provides for the power of the court to make an order for the partition under section 4 or sale of the property under section 6 or to refuse to make any order.  Section 3(1) of the PO provides that:-

“where any property in land is held in the manner referred to in section 2, any person interested in such property may institute proceedings in the Court under this Ordinance by way of an action for partition or sale.”

27.A legal mortgagee of a tenant in common who can sue for possession and foreclosure of the mortgaged property is an interested person entitled to apply for partition (or sale) of the property: see Success Road Finance Ltd v Mak Kon Sang & Anor, CACV 68/1999 (1 April 1999); Law Chun Wai v Chu Shuk Har [2016] 1 HKLRD 224; Fan Kiu v Li Kwai Wan [2020] HKCFI 130.

28.A legal mortgage includes a second or subsequent mortgage of a legal estate, which may be effected at law by a legal charge by deed: see section 44(1) of the Conveyancing and Property Ordinance, Cap 219 (“CPO”).  A legal mortgagee or chargee is entitled to sue for possession[4] and foreclosure[5] upon default of the mortgagor or charger.  As mentioned, events of default occurred upon the 1^st defendants’ failure to repay and comply with the plaintiff’s written demand as well as his bankruptcy.

29.In the circumstances, the plaintiff has locus to claim for an order under the PO.

Whether an order under the PO should be made

30.Section 6 of the PO provides:-

“(1) In any proceedings under this Ordinance, where it appears to the Court that a partition of the property would not be beneficial to all the persons interested by reason of –

(a) the nature of the land to which the proceedings relate;

(b) the number of the persons interested or presumptively interested;

(c) the absence or disability of some of the persons interested; or

(d) any other circumstances,

the Court may make an order for the sale of the property.

(2) The Court may exercise its powers under subsection (1), notwithstanding the dissent or disability of any person interested.”

31.Clause 6 of the building licence provides:-

“The Licensee shall not … partition any of the floors of such building into more than one self-contained unit on each floor of such building.”

Clause 8(a) of the deed of mutual covenants contain prohibitions, which render partition impracticable.  I accept that partition of the property is not practicable, if not legally impossible.

32.Where partition is impracticable, sale of the property is prima facie the only way for a co-owner to extricate himself from the co-ownership.  In view of section 6(2) of the PO (above), this situation poses a strong case for the court to make an order for sale, unless the opposing interested person persuades the court that sale of the property would not be beneficial to all the parties or that significant hardship would be caused to the other co-owner[6]. In the absence of appearance of and representation by the 2^nd defendant, I saw no reason why discretion should not be exercised in favour of an order for sale.

The order for sale

33.The terms of the order sought were standard, and I need only mention the following specific ones.

34.The 1^st defendant would have 28 days after the service of the order to make full payment of the debt plus interest and costs or the property will be sold.

35.The reserve price for the sale (by private treaty) was fixed at HK$3,500,000 after considering the valuation evidence adduced.

36.Apart from having the conduct of the sale, the plaintiff’s solicitors were also given the authority, pursuant to sections 48 and 51 of the Trustees Ordinance, Cap 29, to execute the agreement and assignment in connection with the sale on behalf of the defendants as the vendor, if the latter default in complying with the written demand to do so within 28 days.

37.In the event that 1^st and/or the 2^nd defendants could not be located after reasonable enquiry, any net proceeds of sale (i.e., after the sale and discharge of the 1^st defendant’s liability to the plaintiff) payable to him and the half share of the net proceeds payable to the 2^nd defendant shall be lodged with the court to the credit of these proceedings and subject to further order of the court.

38.There will be liberty to apply to the court.

Costs

39.The plaintiff should have its costs of these proceedings.  It claimed costs on an indemnity basis pursuant to clause 7(a) of the loan agreement and clause 17(ii) of the second legal charge.  Whilst the plaintiff sought summary assessment of costs, the statement of costs was handed up to this court only during the hearing, and had not been served on the defendants.  I therefore directed the statement to be served, and adjourned the assessment on paper only.  The deadline of 3 July 2020 having elapsed, I now proceed with the summary assessment.

40.Whilst this is not taxation, I bear in mind the contractual entitlement of the plaintiff to the higher scale of costs.  The reservation I have about the costs relates to the substantial amount incurred by the solicitors on the “perusal and preparation (including review)” of skeleton submissions and list of authorities, while counsel was briefed.  All items considered on a broad-brush approach, I assess the costs to be HK$136,000.

41.The 1^st defendant shall pay the plaintiff’s costs of these proceedings, summarily assessed at the sum of HK$136,000. No order is made as to the costs between the plaintiff and the 2^nd defendant.

Mr Alvin Tsang, instructed by K B Chau & Co, for the plaintiff

The 1^st and 2^nd defendants were not represented and absent