Wong Chit Sen v. Tse Kwong Lam

HCA002102/1966

and

Coram: Zimmern, J.

Date of Judgment: 15 May 1979

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JUDGMENT

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1. This is a contest between a Mortgagor and a Mortgagee.

2. In June 1966 the Mortgagee exercising his power of sale under a Building Mortgage and three further charges sold by public auction the security of divers shops, offices and flats being part of a newly completed building for the sum of $1,200,000. By a writ dated 31st October, 1966 the Mortgagee sued the Mortgagor on the covenant for the balance of the debt due. The Mortgagor served a defence and counter-claim inter alia to have the sale set aside. In 1967 upon the application of the Mortgagee, the Court ordered the appointment of Mr. Ronald F.S. Li, Certified Accountant as arbitrator to consider what amount if any was still due and owing by the Mortgagor and to report to the Court. In February 1968 Mr. Li reported to the Court that the principal due was $316,383.39 with interests set out therein. On 16th November 1968 the Court adjudged that the Mortgagee recover against the Mortgagor the principal and interests found due by Mr. Li with a stay of execution until further order pending the Mortgagor's prosecution of his counterclaim. In February 1969 the Mortgagor with leave amended his counterclaim by replacing it with a new one. The Mortgagee with leave amended his defence to the counterclaim in July 1970.

3. On the date fixed for hearing the Mortgagee applied to strike out the counterclaim on the ground of Res Judicata and the Mortgagor applied for leave to amend the counterclaim. Both applications were dismissed with costs. Should this case go elsewhere I must add that it was expressly understood between bench and bar that the Mortgagor on the pleadings would not be allowed to allege actual fraud as distinct from equitable fraud against the Mortgagee but if in the course of the trial should there emerge evidence which could support such an allegation then the dismissal of the Mortgagor's application would not prejudice his right to apply for leave to amend to allege actual fraud. Such an application was in fact made and refused.

4. I shall now refer to the Mortgagor as Claimant and the Mortgagee as Respondent as shown on the record. I sat through, I am told, 23 days of hearing during which time quite a few so called issues were vented and contested. They were quite unnecessary for the real contest between the parties - namely whether the sale of the property by the Respondent was bona fide and without negligence on the part of the Respondent.

5. In the course of the Claimant's evidence I was handed a document called "Agreed Issues" setting five questions which leading counsel for the parties asked me to answer. This document alone shows some of the unnecessary skirmishing but I shall nevertheless answer them. The questions are:

6. I start off with a description of the parties and the history of the mortgage and further charges.

7. The Claimant calls himself a property developer perhaps a bit euphemistically for he did not at material time appear to have had either the experience or the wherewithal to enter into such speculative adventures. Anyway he purchased in 1962 52 and 54 Cheung Sha Wan Road (which I shall call the property) by way of mortgage. His object was to rid the sitting tenants, demolish the existing buildings and erect a 15 storey building with the usual shops on the ground floor a commercial area on the 1st and 2nd floors and 72 domestic flats on the upper floors. He estimated that the total costs including redemption of the existing mortgages and compensation for the sitting tenants at just under $2,000,000 and conceived the notion that if he could raise a mortgage for $1.5 million the rest could come from pre sale of flats prior to completion. He was introduced to the 1st Respondent. There is much conflict of evidence as to when and where they first met and by whom they were introduced. Nothing turns on this. They executed a mortgage dated 13th November 1963 at the offices of Johnson Stokes and Master (J.S.M.). The 1st Respondent was then and no doubt still is an important client of one of the managing clerks of that firm named Liu King Wah. Before I deal with the terms of the mortgage let me say a few words about the 1st Respondent. He has been in the property business since the thirties. He appears to me to be a top professional in his line of country, well versed in the rights and liabilities of mortgagors and mortgagees. To him rights are rights in which sentiment plays no part. His wife the 2nd Respondent is a kindred soul.

8. Under the mortgage the 1st Respondent agreed to lend the Claimant sums not exceeding $1.5 million on the security of the property in the following manner:-

9. All the loans were repayable on 29th May 1965. There were the usual clauses covering default by the Mortgagor and the Mortgagee's power of sale.

10. J.S.M. opened ledger accounts in the names of the Claimant and the 1st Respondent with them. The latter about mid December paid into his account sums totalling $730,000 which J.S.M. partly used for clearing the existing mortgages, costs for obtaining vacant possession and partly paid to the Claimant.

11. The Claimant paid interests for the first four months and then defaulted. It was agreed between him and the 2nd Respondent on behalf of the 1st that interests due and owing should be capitalised and treated as advances under the $770,000 building loan. They exchanged receipts to this effect on 3rd December 1964 in the sum of $57,962 and thereafter approximately monthly up to August 1965 for sums totalling $84,689.30 making $142,651.30 all told. These were of course acts of grace shown by the 1st Respondent but well might a bystander ask where will the replacement money for building costs come from? In fact the parties had executed a further charge for $300,000 on 17th July 1964 at 1.4 per cent per month, repayable 29th May 1965 and on 23rd July 1965 they executed another for $200,000 at 1.4 per cent per month and 23rd May 1965 a third further charge for $250,000 at the same interest rate both repayable on 29th May 1966. These were all acts of grace by the 1st Respondent and it must have been obvious to the Claimant that his budget of the cash flow at inception was just wishful thinking.

12. I now inspect the pre-sale of flats. The Claimant had printed the usual catalogue and price lists. The Claimant said he agreed to sell a shop space on the ground floor to a buyer for $100,000 in April 1964 and both had instructed Woo & Woo Solicitors to prepare the formal sale and purchase agreement. He had told both Liu and the 1st Respondent of this agreement and the latter insisted that such agreements must be handled by Liu at the offices of J.S.M. Both Liu and the 1st Respondent denied any knowledge of this. The sale fell through but all the other sales totalling 36 domestic flats were put through Liu at J.S.M. which leads me to Agreed Issue 3. What this issue has to do with the issues pleaded in the counterclaim I fail to see. The Claimant is apparently suffering from a sense of grievance over it. Where there is a conflict of evidence it often happens that the truth is somewhere in between. It is because of that sense of grievance that I answer the three questions raised in the Agreed Issue 3 and the answer is no to all three of them. As to Agreed Issue 3(a) the 1st Respondent as Mortgagee was not concerned with the pre-sale of units by the Claimant who was free to sell to whom, when and at any price he liked without any interference by the 1st Respondent. The 1st Respondent qua Mortgagee need not release any part of his security until the last cent due on principal and interests had been repaid unless there was a collateral agreement express or implied to the contrary. If there was it would no doubt be upon terms as to the Claimant's conduct of such sales. The parties are agreed that there was such a collateral agreement between them but there was much conflict of evidence as to time place and the terms thereof. Nothing turns on this for the 1st Respondent did re-assign the units sold by the Claimant for assignment free from incumbrance to the buyers. As to Agreed Issue 3(b)(i) & (ii) nothing in the mortgage deed in law or in equity obliged the Claimant to pay over any purchase price to the 1st Respondent. The disposal of the purchase price which term no doubt includes deposits, instalment payments was a matter for agreement between seller and buyer. This would be convenient now to dispose of Agreed Issue 2 also. There is no question of any equity in this matter. The various sums paid by J.S.M. into the account of the 1st Respondent from the proceeds of sale were pursuant to express powers given them as stakeholders under the sale and purchase agreements. J.S.M. as stakeholders only had powers to retain the money or apply them for construction costs or reduction of the mortgage principal. They chose the last mentioned and the 1st Respondent agreed to accept those sums in reduction of principal.

13. Up to the date of the sale by the 1st Respondent J.S.M. as stakeholders had paid into the account of the 1st Respondent with them in reduction of mortgage principal sums totalling $838,860.

14. The building was completed on 30th December 1965 and the Building Authority issued his occupation permit on 12th January 1966. Unfortunately two contractors' bills remained unpaid and they effectively stopped any occupation between them by disconnecting the lifts and removing locks of doors. The lines of loans from the 1st Respondent were exhausted and the Claimant cap in hand had to ask him for more and it was not till sometime in April 1966 when the 1st Respondent agreed to pay these sums totalling $87,450 before re-connection were made by the contractors. The Claimant complained that his lines of loans totalling $2,250,000 had not been exhausted in as much as the 1st Respondent had not paid out of his own pocket anything like $2,250,000. That was perfectly true but no one has apparently explained to him that the mortgage and the further charges were not taken to secure a floating balance up to a limit of $2,250,000 but were for definite amounts which when once drawn on went towards the exhaustion of those amounts irrespective of the Mortgagee's receipts from pre-sales. For example the capitalisation of interests were drawn on those amounts. The Claimant had no cause for complaint.

15. By a letter dated 28th February 1966 J.S.M. on the instruction of the 1st Respondent served notice on the Claimant to pay interests outstanding on or before 29th March 1966 failing which the 1st Respondent would exercise his power of sale. On the 28th April J.S.M. similarly served two notices on the Claimant calling in the Mortgagee and further charges demanding repayment of principal in the sum of $1,512,137.95 and interests due in the sum of $136,803.35 on or before 29th May 1966 failing which the 1st Respondent would sell. The Claimant was frantic. He had not been able to sell further units firstly because 1965 1966 were bad years for the property market and secondly because of the contractors' "lock out" of the building already referred to which matter was not completely resolved till April 1966. He did not have the money to redeem. He wrote to the Governor. He tried to get another mortgage with C.C. Lee & Co. which fell through. He said he approached the Wing On Life Assurance Co. Ltd. on 26th April 1966 and that Company agreed in principle to take on the mortgage for a loan of $1,500,000 at 1.2 per cent per month. He produced a letter to this effect signed by the Manager. This letter was proved by the Asst. Manager of the Company who had actually written the letter (in the Chinese language) on the instructions of the then Manager. He further told the Court that the Company generally disregards an applicant's list prices and makes its own evaluation of the security and advances 70% on it. I accept his evidence and find that the letter to be authentic and that such an offer was made to the Claimant on the 26th April 1966. The Claimant said he showed the letter to Liu, the 1st Respondent and his wife, and demanded a transfer of the mortgage as the 1st Respondent had demanded a sum in excess of his debts which was no more than slightly over $1.4 million and that $1.5 million obtainable from the Company was ample to cover the transfer. There is no doubt that the sums demanded were in excess of the debt then due and this was found by Mr. Li the Court appointed Arbitrator. The sums demanded were given to J.S.M. by the 1st Respondent and made up by his wife. Having seen the so called account book kept by her I would have been surprised if she had got any figure right. Liu, the 1st and 2nd Respondents all denied ever having seen the letter before trial. Each was confronted with it and each denied it in a convincing manner and I believe them in this matter. It is not up to me to speculate why he did not show them the letter. He was by then without a solicitor. In view of my finding there is no evidence that the Claimant had in any way which could remotely suggest a tender of the mortgage debt which leads me to Agreed Issue 5. The answer is the 1st Respondent was negligent in the keeping and rendering of the accounts but there was no duty on the 1st Respondent to keep accounts. The 1st Respondent was not a mortgagee in possession. It was the duty of the Claimant qua Mortgagor to tender repayment on due date. He failed to tender any sum and no dispute arose at that stage as to the accounts. The Claimant is not entitled to damages in this issue.

16. The 1st Respondent as I said was highly professional and he timed the moment to exercise his power of sale to perfection - after the entire building had been completed occupation permit issued and the last debt to contractors arranged. That was his right and privilege which cannot be queried. A mortgagor has no power to postpone sale.

17. The 1st Respondent told the Court that the Claimant went to see him and asked him not to put up the property for auction but to sell flat by flat. He refused because (1) the Claimant had failed to pay interests for six months (2) the mortgage was up (3) Hong Kong was then unsafe because of disturbances. There is in evidence a pathetic letter written by the Claimant to the 1st Respondent dated 17th June 1966 in which he begged the 1st Respondent to sell flat by flat.

18. The 1st Respondent said he gave instructions to Liu to sell and was advised that he could sell by private treaty or public auction but that the latter with a reserved price was fairer.

19. J.S.M. then caused to be printed and made available for circulation the particulars and conditions of sale dated 9th June 1966 by Lammert Brothers on Friday 24th June 1966 at 3 p.m. The sale was subject to a reserved price. The auction was prominently advertised in both the Chinese and English press. All this was quite unimpeachable.

20. The 1st Respondent said he made certain calculations and estimated the value of the 36 remaining domestic units at $20,000 each the 12 units on the 1st and 2nd floors at $15,000 each and the six shops on the ground floor at $50,000 each making a total of $1.2 million in all. He had taken into consideration the unsteady political situation, the falling property market and the locality being north of Boundary Street therefore the lease (presumably the lease with China) had only a short term to run. He then said he had no interest in the property himself but his company the 3rd Respondent decided that if nobody would take the property at the reserved price of $1.2 million then it would.

21. I now set out the contentious minutes of a meeting of directors of the 3rd Respondent dated 20th June 1966. It was reported to have been attended by the 1st and 2nd Respondent and the last mentioned took the chair.

Resolutions

The 3rd Respondent was incorporated on 29th December 1964 and at the date of the meeting the issued capital was 190 shares of $1,000 each i.e. $190,000 all paid up by the 1st Respondent. The shareholders were the 1st and 2nd Respondents and their eldest son who was then away. The balance sheet of the Company as at 31st March 1966 shows fixed assets of Land & Building at cost of about $1.3 million. Advances of nearly $900,000 no doubt a mortgage, and a non interest bearing loan of over $2.5 million from a director (1st Respondent). Shareholders funds stood at $263,000. This is a typical picture of a family company completely under the control of a rich father.

22. On the day appointed the 1st and 2nd Respondents with a solicitor from J.S.M. and Liu attended at Lammert Brothers and saw Mr. Watson the auctioneer who was told the reserved price. On the advertised hour Mr. Watson mounted the rostrum read the particulars and conditions of sale which were then read in Chinese by his assistant. He then announced the reserved price of $1,200,000. The 2nd Respondent made the bid and there being no other bid the property was knocked down to her. That was the sale which the Claimant seeks to impeach. He was present at the auction. He told the Court the first he heard of the reserved price was when it was announced by Mr. Watson and he protested that it was too low. There was much conflict of evidence as to how many people attended the auction. This is not important but the conflict of evidence as to whether the Claimant was told of the reserved price beforehand is. The 1st Respondent did not say he had told the Claimant the reserved price. He said Tse (the Claimant) ought to have known of it before (the auction) because his wife and Liu had told him. Liu said he did not know if it had been communicated to Tse before the auction. He himself had been told a few days before. The 2nd Respondent first said that she could not remember whether the reserved price was mentioned to Tse then went on to say Tse went to see her to withhold the auction as he had written to the Governor. He mentioned that the reserved price was on the low side. She said she told Tse to find friends to bid higher. I totally disbelieve her in this aspect of the case and find as a fact that the Claimant was never told before-hand the reserved price and that he first heard of it from the mouth of Mr. Watson at the auction.

23. It is now clearly established that a mortgagee when exercising his power of sale must act in good faith and owes a duty to take reasonable care to obtain a proper price. In Cuckmere Brick Co. v. Mutual Finance Ltd.⁽¹⁾ Salmon L.J. said:

and at p.968

"I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line."

24. The burden of proof is on the mortgagor to prove the breach of duty by the mortgagee but this may shift. In Farrar v. Farrars Ltd.⁽²⁾ Lindley L.J. said:

"A sale by a person to a corporation of which he is a member is not, either in form or in substance, a sale by a person to himself. To hold that it is, would be to ignore the principle which lies at the root of the legal idea of a corporate body, and that idea is that the corporate body is distinct from the persons composing it. A sale by a member of a corporation to the corporation itself is in every sense a sale valid in equity as well as at law. There is no authority for saying that such a sale is not warranted by an ordinary power of sale, and in our opinion, such a sale is warranted by such a power, and does not fall within the rule to which we have at present referred. But although this is true, it is obvious that a sale by a person to an incorporated company of which he is a member may be invalid upon various grounds, although it may not be reached by the rule which prevents a man from selling to himself or to a trustee for himself. Such a sale may, for example, be fraudulent and at an undervalue or it may be made under circumstances which throw upon the purchasing company the burden of proving the validity of the transaction, and the company may be unable to prove it. Fraud in the present case is not now alleged; it was alleged in the Court below, and was then clearly disproved. But, for reasons which will appear presently, the circumstances attending the sale were such as, in our opinion, throw upon the company the burden of sustaining the transaction."

25. Let me now examine the facts as I have found them. First the reserved price. A sale by public auction is a mode of sale whereby intending purchasers may fairly equally and openly compete by bidding for the subject matter of sale. If the sale is subject to a reserved price that must be announced but whether the price is to be announced or not at the onset of the auction is a matter for the vendor. In either case the reserved price ought not be made known beforehand to any intending purchaser at the auction otherwise how can there be fair and equal competition. In the commercial world advance knowledge is knowledge indeed. The 1st Respondent divulged the reserved price to the 3rd Respondent well before the auction which then decided to buy and did buy with the 1st Respondent's backing at that price. Yet it was not divulged to the Claimant the one vitally affected by the result of the sale, the one who ought to have been informed if anyone were to be informed at all. In Barns v. Queensland National Bank Ltd.⁽³⁾the High Court of Australia reversing the Supreme Court of Queensland reviewing the duties of a mortgagee in exercising his power of sale decided the disclosure of a reserved price to an intending purchaser may be a breach of the mortgagee's duty. The hearing at first instance was before a jury.

26. I now turn to the valuation of the reserved price. The 1st Respondent made the valuation himself without calling in aid a professional valuer. He fixed a price and he admitted under cross-examination he wanted the property at that price for his company. A reserved price must bear some relationship with the property's true value and not capriously fixed otherwise it serves no purpose. Where it is fixed at below the mortgage debt the more care ought to be taken over it as the mortgagor has no say in the fixing but might be called upon to pay the difference. On the facts of this case the price of $1.2 million was fixed by the 1st Respondent quite capriously. All the domestic flats were fixed at one price without regard for size and location as were the ground floor shops. I am unable to accept on the evidence that the price of $1.2 million bore any relationship with the property's then true value even after taking into consideration that 1966 was a bad year for property. Further it was the intention of the Claimant to develop the building and sell unit by unit. The 1st Respondent knew of this and there was a collateral agreement to the effect that the 1st Respondent as Mortgagee would re-assign piecemeal. It was the duty of the 1st Respondent to obtain the true market value of the mortgaged property. The Claimant had begged the 1st Respondent to sell unit by unit and he had refused. Why did the 1st Respondent not at the very least take professional advice to see in the circumstances then prevailing whether a better price was obtainable by auctioning off unit by unit as against what was in fact the sale of an odd lot of a building wholesale. There was here a conflict of interest between the Mortgagor and Mortgagee and in my view he intentionally sacrificed the interests of the Claimant for his own gain. He is not entitled to do that. (see Forsyth v. Blundell (1973) 129 C.L.R. 477 at p.494). He was minded to acquire the property for his company for the purpose of retail i.e. selling unit by unit. This is implicit in his statement that after the auction the company tried to sell the units but could sell only two or three in three years. Further the 3rd Respondent did not have the money to hold on to the property. The reason why the company was not more successful is obvious, for the Claimant had registered a lis pendens against the property at the Land Registry.

27. I now come to the company the 3rd Respondent. Applying Farrar v. Farrars Ltd.⁽²⁾ the circumstances of this case certainly throw upon it the burden of proving the validity of the sale. What can it say? It went to the auction in a privileged position. It knew the reserved price. It did not have the money but knew the vendor will not ask. Its whole case depends upon the conduct of the 1st and 2nd Respondents. It was argued in its favour that the company did acquire the property at a properly advertised public auction. That is not evidence of the true market price of the property. (see Hodson v. Deans [1903] 2 Ch. at 653). Let me also add this, the sight of a wife bidding at an auction sale ordered by the husband Mortgagee might well deter others from entering.

28. Viewing all the circumstances of this case I find the conduct of the 1st Respondent in regard to the sale was grossly unfair to the Claimant and he had acted in bad faith. What then is to be done. It will be quite wrong to set aside the sale after a lapse of 13 years. The Claimant was at fault in delaying so long. However, the 1st Respondent is accountable to the Claimant for the difference between the true market price and $1.2 million being the loss sustained by him.

29. Mr. William Hsu, Manager of Harriman Realty Co. Ltd. was called by the Claimant. He produced his report. It is dated 1st June 1970 and he on behalf of Harriman Realty estimated the value of the property as at 24th June 1966 to be $2,206,300. It was done by way of comparable values, a system which leaves much room for doubt unless corroboration is forthcoming. It is however a well known and accepted method of valuation. There is corroboration in this case. I refer to Wing On Life Assurance's offer in April 1966. It is sufficiently proximate to June 1966. The offer was $1.5 million being 70% of its valuation of the property which comes to just under $2.15 million. This is institutional money and an offer of this nature is not made lightly. The two estimates are very close and I find the true value of the property to have been $2.15 million from which I have to deduct the $1.2 million accounted for. There will be judgment for the Claimant on his counterclaim in the sum $950,000 against the 1st Respondent. There is still the outstanding judgment against the Claimant in the sum of $316,383.39 with interests at 1.4 per cent per month. I cannot offset one against the other but I do not see any reason why the Claimant should not enjoy the rate of interest first charged by the 1st Respondent i.e. 1.2 per cent per month on his the Claimant's $950,000 and I award that to commence from 1st July 1966. The Counterclaim against the 2nd and 3rd Respondents are dismissed.

30. This leaves the last two questions raised in the Agreed Issues. As to (1) the answer is that it was not a proper sale. As to (4) the answer is no as there is no evidence of a common design. The findings in this case were made entirely on the suit mortgage and no other.

31. Claimant to have 50% of his costs against the 1st Respondent. No order as to costs in respect of the 2nd & 3rd Respondents. Stay of execution dated 16th November, 1968 lifted.

Representation:

B.Bernacchi, QC & Patrick Woo (H.H.Lau & Co.) for Plaintiff in Counterclaim.

Jackson-Lipkin, QC & R. Wong (Johnson, Stokes & Master) for Defendants in Counterclaim.

(1) [1971] 1 Ch. @ 966

(2) [1889] 40 Ch.D. at 409

(3) [1906] 3 C.L.R. 925