Maxcolm Finance Ltd v. Leung Ma Lee Mary and Another

DCMP 2824/2023

[2024] HKDC 492

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 2824 OF 2023

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REASONS FOR JUDGMENT

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1.This was originally a straightforward money lender’s action. However, it transpired that the plaintiff and the plaintiff’s solicitors had misled the court. The plaintiff’s application was therefore dismissed, and I will now set out the reasons for my decision.

Background

2.The plaintiff is a money lender licensed under the Money Lenders Ordinance (Cap 163) in Hong Kong.

3.The 1^st defendant and the 2^nd defendant are the registered owners of the residential flat at Flat H, 29/F, Tower 1, Bailey Garden, 23 Bailey Street, Kowloon (“the Property”), holding 2/3 and 1/3 interest, respectively, as tenants in common. They purchased the Property in 1996 with a mortgage, which had been fully repaid and discharged in 2015. The 1^st defendant is the elder sister of the 2^nd defendant.

4.By way of a loan agreement dated 2 September 2022, the 1^st defendant borrowed HK$200,000 from the plaintiff at the interest rate of 39.60% per annum (“the Loan Agreement”). The loan is repayable in 60 monthly instalments of HK$7,698.00.

5.At the same time, a second mortgage (“the Second Mortgage”) was created to charge against the 1^st defendant’s 2/3 interest in the Property to secure the Loan Agreement in favour of the plaintiff.

6.After having made six repayments, the 1^st defendant has defaulted on repayment since April 2023. The total outstanding amount due, including the principal and interest, as of August 2023, stands at HK$230,183.15.

The plaintiff’s case

7.By an Originating Summons dated 27 June 2023, the plaintiff seeks a money judgment, an order for possession, and an order for sale against the 1^st defendant under Order 83A and Order 88, Rules of the District Court, with the aid of Sections 2, 3 and 6 of the Partition Ordinance (Cap 352) in joining the 2^nd defendant (the co-owner) to the proceedings for the sale of the Property.

8.Miss Ma, the solicitor appearing for the plaintiff, refers to the supporting affirmations made by the plaintiff’s Head of the Legal Department. She submits that all the requirements under Order 83A and Order 88 have been complied with. She urges the court to grant an order in terms of the Draft Order.

9.The requirements include, inter alia, the following.

10.Order 83A rule 4 provides:

“4.  (1) In a money lender’s action judgment on failure to give notice of intention to defend or in default of defence shall not be entered except with the leave of the Court.

(2) (a) An application for the grant of leave under this rule must be made by summons supported by an affidavit which must—

(i) prove that the money is due and payable;

(ii) give the particulars required by rules 2 and 3; and

(iii) exhibit a true copy of any agreement or security relating to the money lent,

and the original agreement or security must be produced at the hearing of the summons.

(b) The summons and a copy of the affidavit in support and of any exhibits referred to therein must, notwithstanding anything in Order 65, rule 9, be served on the defendant not less than 4 clear days before the day fixed for the hearing of the summons.”

11.Order 88 rule 5 provides:

“(1) The affidavit in support of the originating summons by which an action to which this rule applies is begun must comply with the following provisions of this rule.

This rule applies to a mortgage action begun by originating summons in which the plaintiff is the mortgagee and claims delivery of possession or payment of moneys secured by the mortgage or both.

(2) The affidavit must exhibit a true copy of the mortgage and the original mortgage must be produced at the hearing of the summons.

(3) Where the plaintiff claims delivery of possession, the affidavit must show the circumstances under which the right to possession arises and except where the Court in any case or class of case otherwise directs, the state of the account between the mortgagor and mortgagee with particulars of—

(a) the amount of the advance;

(b) the amount of the periodic payments required to be made;

(c) the amount of any interest or instalments in arrear at the date of the originating summons and at the date of the affidavit; and

(d) the amount remaining due under the mortgage.

(4) Where the plaintiff claims delivery of possession, the affidavit must give particulars of every person who to the best of the plaintiff’s knowledge is in possession of the mortgaged property.”

12.In essence, apart from providing the original loan documents for the court’s examination, all that is required is that the plaintiff’s summons be supported by an affidavit and the leave of the court to enter judgment in default. It is also pertinent to note that the decision to grant leave under the RDC and the decision to grant an order for sale under the Partition Ordinance were both within the discretion of the court.

13.The interplays (1) between Order 83A and Order 88 for money judgment, (2) between an order for possession under Order 88 and the delivery of possession under an order for sale, and (3) between Order 88 and the Partition Ordinance for an order for sale, were fully discussed in my earlier judgment in Ego Finance Ltd v Cheung Lam Fong [2023] HKDC 1287, which I would adopt but do not intend to repeat them here.

The 1^st defendant’s absence

14.There was no acknowledgment of service filed by the 1^st defendant.

15.The 2^nd defendant informs the court by way of affidavit that the family has not been able to contact the 1^st defendant since late 2023. The 1^st defendant is now 69 years old and has twice been admitted to the emergency room in the hospital and once fell into a coma in 2022. The family is concerned for the 1^st defendant’s safety and has reported the situation to the police and placed an advertisement in the newspaper in the hope that she will be able to return home.

The 2^nd defendant’s case

16.The 2^nd defendant has filed an acknowledgment of service and affirmation in opposition to the plaintiff’s application. I accept that the 2^nd defendant has been living in Canada and that there has been some delay in her receiving and filing court documents.

17.In brief, the 2^nd defendant challenges the validity of the Loan Agreement on the grounds that the 1^st defendant was lack of the requisite mental capacity at the time of entering into the Loan Agreement. The 2^nd defendant also contends that she is in fact the sole owner of the Property as the initial deposit paid by the 1^st defendant was a family fund entrusted to her, and the 1^st defendant has not contributed to any of the mortgage repayments in relation to the purchase of the Property ever since 1996. She complains that the Second Mortgage on the Property was created without her knowledge or consent (even if she was only a joint owner).

18.Miss Ma submits that these have been addressed by the plaintiff in their affirmation in reply. According to the land search record, the 1^st defendant has extensive experience of borrowing from a number of money lenders in the past. It was also disclosed by the 1^st defendant at the time of applying for the Loan Agreement that there was a first mortgage of HK$3.88 million on the Property in favour of Buddy Finance Limited (老友記信貸有限公司). The plaintiff disagrees that the 1^st defendant lacked the mental capacity to enter into the Loan Agreement and the Second Mortgage.

19.As to the 2^nd defendant’s claim of sole ownership, the plaintiff relies on the declaration signed by the 1^st defendant at the time of the borrowing that the down payment and the mortgage repayments of the purchase of the Property were all settled by the 1^st and 2^nd defendants. There was no other documentary evidence on the alleged family arrangement.

20.At the hearing, I expressed that I had great reservations about the 2^nd defendant’s allegations. It seemed to me that the 1^st defendant had been able to borrow and repay money from various money lenders since at least 2011. It was only after the sixth repayment made under the current Loan Agreement that she defaulted. These did not support the 2^nd defendant’s claim that the 1^st defendant lacked the mental capacity to borrow money.

21.As to the 2^nd defendant’s claim of sole ownership of the Property, the right to claim against the 1^st defendant for the interest in the Property has accrued since the date of the purchase of the Property in 1996 or at any time thereafter under the alleged family arrangement. However, no formal claim has yet been made by the 2^nd defendant against the 1^st defendant. The instant messages disclosed by the 2^nd defendant made no mention of the alleged family arrangement but merely sought the 1^st defendant’s consent to sell the Property during the favourable market conditions a few years ago. It also did not appear to support the 2^nd defendant’s case.

My decision

22.Towards the end of the hearing, I was prepared to grant the plaintiff’s order in terms of the Originating Summons or the Draft Order before me.

23.I asked Miss Ma to produce the original loan documents for my inspection. Miss Ma confirmed to the court that the Second Mortgage and all the important notices relating to the Loan Agreement were signed at the office of the plaintiff’s solicitors. I found no irregularities when I examined the loan documents. All documents appeared to be in order.

24.On the verge of granting the order in terms, I took note, out of an abundance of caution, of the reserve price for the public auction or private sale of the Property asked for by the plaintiff in the Draft Order. It was set at HK$4.9 million as supported by the valuation report made by the plaintiff’s surveyor, Midland Surveyors Limited, dated 24 July 2023 (“the Valuation Report”).

25.At first glance, there was nothing unusual about the reserve price of HK$4.9 million. It was based on the Property’s market value, which was HK$5.76 million, with a 15% discount for repossession. Both the market value and the repossession value were printed in bold in the Valuation Report for the court’s ease of reference.

26.Following that, also as a matter of prudence, I cross-checked the market value of the Property with the comparable sale transactions provided in the Valuation Report. Under the heading of List of Comparable Transactions, there were provided three recent transactions within the same development of the Property: (1) Flat B on 10^th Floor of Tower 2, saleable area 476 sq ft, on 20 January 2023, at HK$6.68 million ($14,034/sq ft); (2) Flat A on 10^th Floor of Tower 2, saleable area 476 sq ft, on 17 October 2022, at HK$6.42 million ($13,487/sq ft); and (3) Flat A on 30^th Floor of Tower 2, saleable area 501 sq ft, on 15 September 2022, at HK$8.6 million ($17,166/sq ft).

27.I was not satisfied with the Valuation Report to the extent that it did not provide the necessary analysis for the adjustments (eg size, floor level, view, etc), by which the valuer arrived at the market value of the Property. I was also bothered by the fact that the report did not state how much the Property's market value was per square foot. It was unhelpful for the Valuation Report to simply state the lump sum of the market value without stating the unit price per square foot, especially when comparing residential flats in relatively new-built buildings (in 1995). This left me with no choice but to do a quick calculation and adjustment by myself.

28.The size of the Property is 494 sq ft (saleable area). The floor level is on the 29^th floor. Assuming that there was not much difference between Tower 1 and Tower 2 (other than the view from the unit), the Property should have a market value per square foot falling within the range of the comparables (ie between $13,487/sq ft and $17,166/sq ft). A quick calculation showed that the unit price of the Property as appraised was only $11,659/sq ft. This alerted the court to look into the matter further.

29.The Property is on a high floor and has open sea views. It seemed to have had the best aspects already. Therefore, its valuation would only be beaten by some other higher-floor units or the one with the roof. My rough estimate was that it should still be in the range of the unit prices of the comparable units on the 10^th and 30^th floors. Alternatively, it could be even close to the unit price of $17,166 for Flat 30H (one floor up), which was transacted about half a year ago. It seemed unlikely that the unit price of the Property would have fallen to $11,659 (32% lower) for no particular reason. Taking into account a further 15% discount (a usual discount) for repossession sale at HK$4.9 million, as requested by the plaintiff, the unit price would fall to $9,919 (42% lower) before being put up for public auction or private sale.

30.At the same moment, the 2^nd defendant mentioned that she had contacted several banks prior to the hearing, and they had valued the Property at over HK$7 million, not just HK$5.76 million.

31.I asked Miss Ma to explain.

32.First, Miss Ma confirmed to the court that she had read the Valuation Report.

33.Second, she confirmed to the court that there was nothing wrong with the Valuation Report as the plaintiff had relied on a professional valuation report, and the method of valuation was clearly stated in the said report, in which it adopted a 15% discount on the market value for repossession sale.

34.However, that was beside the point. A closer examination of the Valuation Report by the court revealed that the valuation of the market value of the Property was based on a long description: “the basis of sale with the benefit of immediate vacant possession and loss of title deed, free all legal encumbrances disregarding all its unauthorized structures, if any.” The court was taken by surprise by the fact that the valuation of the Property was actually based on a “loss of title deed.” In the Valuation Report, there was no statement explaining or analysing the discount taken for the loss of the title deeds. It simply concluded that the market value of the Property was HK$5.76 million without explaining how this figure was reached. It also failed to highlight or mention that the unit price of the Property was outside the range of the comparables. Suffice it to say that the few words “loss of title deeds” in the Valuation Report could easily have been overlooked.

35.Based on my estimate, the discount given by the plaintiff’s surveyor for the loss of title deeds was about 32% off the transaction price of a similar comparable transaction (Flat 30H), as per my calculation above ($17,166/sq ft x 494 sq ft = $8.48 million - $5.76 million = $2.72 million).

36.I also noted that, as stated in paragraph 1.1 of the Valuation Report, Midland Surveyors Limited was appointed and instructed by Siao, Wen and Leung Solicitors & Notaries. Therefore, the instruction to value the Property based on a loss of title deeds was apparently given by the plaintiff’s solicitors, regardless of whether the ultimate instruction was given by the client.

37.At that juncture, I asked Miss Ma that on what basis the plaintiff’s solicitors would have instructed the surveyor to value the Property on the basis of “loss of title deeds.” If this was not the case, it would significantly and unfairly skew the Property's value.

38.I also asked Miss Ma to correct the court if it was wrong for the court to have proceeded with the case as if there had been no loss of title deeds and not to adopt the reserved price as stated in the Draft Order. It was important to note that not a single word about “loss of title deeds” was mentioned in the plaintiff’s supporting affirmations or the plaintiff’s skeleton submissions. Nor did Miss Ma make any oral submissions in this regard before the court proceeded to approve the Draft Order.

39.Miss Ma could not give any satisfactory answer but said that it might have been the client’s instruction. She asked for leave to file supplemental affirmation to explain. I did not think that was necessary because the issue was not whether it was based on the client’s instruction, but that the plaintiff’s solicitors, as officers of the court, had an independent duty to the court and could not knowingly mislead the court.

Duty to the court

40.In the recent decision of Chiu Sui Ching v Cheung Kwai Hung [2023] HKCFI 1417, Marlene Ng J said:

“71. Duty to the court As Lord Hoffmann explained in Arthur J S Hall & Co (a firm) v Simons, ‘[lawyers] conducting litigation owe a divided loyalty. They have a duty to their clients, but they may not win by whatever means. They also owe a duty to the court and the administration of justice ……’ Where the solicitor’s duty to the court comes into conflict with his client’s wishes or what the client thinks are his personal interests, the overriding duty that the solicitor as an officer of the court owes to the court eclipses all other duties. The underlying purpose of the paramountcy of the solicitor’s duty to the court is to protect the public interest in the administration of justice. It is a duty to act with independence in the interests of justice.

72. As explained by Lord Hobhouse at page 142 in Medcalf , which explanation reflects the public interest in the administration of justice, the duties that the professional advocate, whether solicitor or barrister, owes to the court arise out of the distinctive role and position of the advocate in the legal system and the special relationship between the advocate and the court, and represent the price which he must pay for the privileges and immunities he enjoys:

‘54. The professional advocate is in a privileged position. He is granted rights of audience. He enjoys certain immunities. In return he owes certain duties to the court and is bound by certain standards of professional conduct in accordance with the code of conduct of his profession. This again reflects the public interest in the proper administration of justice; the public interest, covering the litigants themselves as well, is now also expressed in CPR Pt 1. (See also paragraph 9 of the Practice Direction, Statements of Case supplementing CPR Pt 16.) The advocate must respect and uphold the authority of the court. He must not be a knowing party to an abuse of process or a deceit of the court. He must conduct himself with reasonable competence. He must take reasonable and practicable steps to avoid unnecessary expense or waste of the court’s time. The codes of conduct of the advocate’s profession spell out the detailed provisions to be derived from the general principles …… All this fits in well with an appropriate constitutional structure for a judicial system for the administration of justice.’”

41.Therefore, the plaintiff’s solicitors owed a duty to the court and such duty is paramount. They must act with independence in the interests of justice and for the administration of justice.

42.On the material before me, there was clearly no basis in evidence to suggest that it was a case of loss of title deeds. I did not consider that an affirmation as to whether it was the client’s instruction would be capable of discharging the solicitor’s duty to the court. The solicitor should have been able to make an independent judgment.

Duty not to mislead the court

43.In Chiu Sui Ching, Marlene Ng J continued to state that:

“83. Duty not to mislead the court There is a general duty of legal representatives (including solicitors) not to mislead the court. Where the litigation solicitor consciously or knowingly misleads the court by act or omission, the inevitable inference is that he has deceived the court and acted dishonestly. The court regards this as one of the most serious offence that a litigator can commit as “such conduct is a fundamental affront to a rule designed to safeguard the fairness and justice of proceedings”.

84. As regards the content of such duty not to mislead the court, the litigation solicitor must refrain from, say, consciously or knowingly misstating the true facts, stating untrue facts, concealing facts which should have been drawn to the court’s attention and/or permitting the client to deceive the court. A solicitor must also refrain from knowingly causing a witness to give incorrect evidence, or allowing a witness to give evidence which he knows to be false, or knowingly permitting the client to attempt to deceive the court. If these duties conflict with the solicitor’s duty of confidentiality to the client, the solicitor’s duty to the court is paramount.”

…

89. … There is a distinction between falsifying/fabricating evidence or knowingly presenting false evidence whether by act or omission (which is not allowed) and not disclosing evidence (which is allowed) (see Commentary 6 under Principle 10.03).”

44.The Hong Kong Solicitors’ Guide to Professional Conduct Vol 1 provides as follows:

“10.03 Duty to the Court

A solicitor must never knowingly attempt to deceive or participate in the deception of a court.

Commentary

1. Breaches of this Principle include:

(a) …

(b) knowingly asserting something as a fact for which there is no reasonable basis in evidence, or the admissibility of which must first be established;

……

3. When it has come to the knowledge of a solicitor that a client intends to mislead the court by making false statements or producing false evidence, the solicitor has a duty to advise the client not to do so and explain the legal consequences of misleading the court, which may amount to a grave criminal offence such as perjury or perverting the course of justice. If the client refuses to accept the advice, the solicitor must cease to act (see also Principle 10.05).

……

6. A solicitor knowing facts which, or of a witness who, would assist his adversary is not under any duty to inform his adversary or the court of this to the prejudice of his own client …… he must not, however, himself knowingly put forward or let his client put forward false information with intent to mislead the court. ……”

45.Hence, a solicitor must not knowingly attempt to mislead or mislead the court. As illustrated in Commentary 1(b), knowingly asserting something as a fact for which there is no reasonable basis in evidence will be in breach of this Principle (ie 10.03).

46.I found that the plaintiff’s solicitors were in breach of this Principle. My reasons are as follows.

47.In general, the court would accept the plaintiff’s expert’s report on the value of the property, especially if the defendant (the borrower) did not appear or acted in person. The defendant would not be in a position, or have sufficient legal knowledge, to file any expert report to rebut. In most cases, there would be only one valuation report (from the plaintiff’s expert) before the court for the purpose of setting the reserve price for the public auction under the Order for Sale. But this does not mean that the court would not scrutinize the valuation before setting the reserve price.

48.For instance, as in the present case, it would be a disaster if the court had granted the order to sell the Property at the reserve price of HK$4.9 million as suggested by the plaintiff. The absentee 1^st defendant and the 2^nd defendant would be clueless to accept that the valuation of the Property was prepared by a professional valuer (as suggested by Miss Ma), and this would have been converted into a court order for sale which were obliged to comply with. If the error on the basis of valuation had not been discovered by this court, the defendants would have been deprived of more than 30% of the market value (that is about HK$2.7 million) by the plaintiff’s conduct without their knowledge. The defendants would have been left with virtually nothing when the 1^st defendant’s loans amounted to only half (HK$3.88 million plus HK$200,000) of the value of the Property.

49.Furthermore, if the public auction or private sale were to proceed at the reserve price fixed on the assumption that the title deeds had been lost, without a statutory declaration by the owners or mortgagees or a finding by the court that the title deeds were lost, a purchaser could easily reap the windfall of the price difference if the title deeds were to re-emerge after the fall of the hammer. This is a matter of serious concern.

50.I pointed out that it was stated in the plaintiff’s 2^nd Affirmation (by the Head of the Legal Department) that it was the plaintiff’s policy to take into account all the aspects including but not limited to borrower’s and guarantor’s salary/income, occupation, age, assets, security property and any other special circumstances before lending the money. I asked Miss Ma whether “loss of title deeds” was one of the factors considered by the plaintiff as it was mentioned in the same affirmation that Siao, Wen and Leung was the one who explained the Second Mortgage and all important notices to the 1^st defendant.

51.Miss Ma reiterated that there had been no misleading of the court because, on 28 July 2023, the plaintiff’s solicitors had asked the 1^st mortgagee (Buddy Finance) whether it had retained the title deeds. However, Buddy Finance did not reply, so the plaintiff’s solicitors treated it as a case of loss of title deeds.

52.The court has emphasised to Miss Ma that it can never be justifiable to treat a lack of response from the 1^st mortgagee as a loss of title deeds of the Property. Based on my understanding from reading the plaintiff’s affirmations, it was never the plaintiff’s argument that the Second Mortgage took into account any loss of the title deeds of the Property. Miss Ma, having the conduct of the case, should have known that there was no basis for the plaintiff or the plaintiff’s solicitors to instruct Midland Surveyors to value the Property based on “loss of title deeds”, and nonetheless proceed to ask from the court an order for sale based on that to set the reserved price for the public auction. Miss Ma’s answer only showed that she was knowingly asserting as a matter of fact something for which there was no reasonable basis in evidence. It was a clear breach of Principle 10.03, in particular Commentary 1(b), and possibly Commentary 3 and Commentary 6.

53.In my judgment, it was opportunistic for the plaintiff or the plaintiff’s solicitors to ask the court to adopt the reserve price based on the market value valued on the basis of the loss of the title deeds. The plaintiff’s solicitors were either incompetent (which the court would never assume, with respect) or attempted to mislead or had misled the court into granting the Order for Sale by adopting the wrong reserve price in total disregard of the interests or benefits of the defendants. This was a clear abuse of the court’s process and an obstruction of the administration of justice.

Disposition

54.As I found that the plaintiff and the plaintiff’s solicitors had misled the court in a material way, I dismissed the plaintiff’s application outright at the hearing on the court’s own motion. Further, had it been necessary for me to deal with the merits of the parties’ cases, I would have rejected the plaintiff’s supporting affirmations as a whole as misleading. As such, the plaintiff was not granted leave to enter a money judgment, nor would the court exercise its discretion to grant the plaintiff an order for sale.

55.At the hearing, I also ordered the plaintiff’s solicitors to file an affirmation to the court, explaining why they should not be personally liable for the costs related to the Valuation Report and detailing how the misleading information occurred.

(Directions for the parties to make submissions on costs on paper)

Costs

56.Miss Ma filed her affirmation into court on 8 February 2024 and I granted retrospective leave for her to file it out of time. However, upon reading the Affirmation of Miss Ma, it found that it referred to another affirmation, namely the 3^rd Affirmation of Tsang Tak Wah (Head of the Plaintiff’s Legal Department), which was filed into court on 10 January 2024 (ie 2 days after the hearing) without the notice or leave of the court. This practice should never be encouraged.

57.Having considered the Affirmation of Miss Ma and the 3^rd Affirmation of Mr Tsang, I have not found sufficient reasons to change my view on costs. However, I have noted that the last sentence of the 3^rd Affirmation of Mr Tsang stated that the plaintiff’s solicitor should not be ordered to pay costs. For that reason alone, this court would not order the plaintiff’s solicitors to bear any costs personally.

58.I also considered the 2^nd defendant’s written submissions on costs dated 27 February 2024, and the plaintiff’s written submissions on costs through counsel Ms Mandy Yau dated 29 February 2024. It is my view that costs should follow the event as between the plaintiff and the 2^nd defendant.

59.This is the costs order I make:

(1)  There be no order as to costs between the plaintiff and the 1^st defendant; and

(2)  The plaintiff shall pay the 2^nd defendant’s costs of the proceedings (including the costs of the hearing on 8 January 2024), to be taxed if not agreed.

Miss Annie Ma, of Siao, Wen and Leung, for the plaintiff

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

The 2^nd defendant appeared in person