Nation Group Development Ltd v. The Bank of East Asia Ltd

HCA 5208/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5208 OF 2001

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BETWEEN

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Before: Hon Sakhrani J in Court

Date of Hearing: 20 and 21 September 2004

Date of Judgment: 14 October 2004

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J U D G M E N T

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Background

1.The relevant background facts are that at all material times New Pacific Properties Limited (“the Vendor”) was the registered owner of the property known as Shop Nos. 12 and 13 on the Ground Floor, the 1^st Floor and its Canopy and the Flat Roof of Wah Cheong Building, Tsuen Wan, New Territories, Hong Kong (“the property”).

2.By a Legal Charge/Mortgage dated 31January 1997 (“the 1^st mortgage”) the Vendor charged the property (with the exception of Shop 13) to the defendant to secure all monies which may from time to time be owed by the Vendor to the defendant upon the terms and conditions contained in the 1^st mortgage.  The 1^st mortgage was registered in the Tsuen Wan New Territories Land Registry by Memorial No. 1114236 on 21 February 1997.

3.By a Further Charge and Collateral Mortgage dated 2 April 1997 (“the 2^nd mortgage”) the Vendor further charged the property (including Shop 13) to the defendant to secure all monies which may from time to time be owed by the Vendor to the defendant.  The 2^nd mortgage was registered in the Tsuen Wan New Territories Land Registry by Memorial No. 1126558 on 19 April 1997.

4.The plaintiff and the Vendor entered into a provisional agreement for the sale and purchase of the property dated 10 September 1997 whereby the plaintiff purchased and the Vendor sold the property at the purchase price of HK$65,000,000 on the terms and conditions contained therein.  An initial deposit in the sum of HK$2,000,000 was paid by the plaintiff to the Vendor on 10 September 1997.

5.The plaintiff and the Vendor entered into a formal sale and purchase agreement dated 30 September 1997 (“the S/P agreement”) in respect of the sale and purchase of the property on the terms and conditions contained therein.  A further deposit in the sum of HK$8,000,000 was paid by the plaintiff to the Vendor on 30 September 2004 thereby making a total of HK$10,000,000 paid as deposit to the Vendor.

6.The sale and purchase of the property under the S/P agreement was not completed.  The plaintiff maintained that the Vendor failed to show and give a good title to the property.  The plaintiff brought proceedings against the Vendor being HCMP 471 of 1998 claiming, inter alia, a declaration that the plaintiff was entitled to a lien on the property for the return of the deposit in the said sum of HK$10,000,000 and all other sums of money, interest and costs awarded in favour of the plaintiff in those proceedings.

7.The trial of HCMP 471 of 1998 was before Stone J and on 29 April 1999 he found in favour of the plaintiff and ordered, inter alia, that the plaintiff was entitled to a lien on the property for the return of the deposit in the said sum of HK$10,000,000 together with interest.

8.The Vendor appealed against Stone J’s Order.  On 20 January 2000 the Court of Appeal allowed the appeal and set aside Stone J’s Order.

9.The plaintiff, being dissatisfied with the decision of the Court of Appeal, appealed to the Court of Final Appeal by the notice of appeal dated 22 March 2000.

10.Before the plaintiff’s appeal was heard the Vendor agreed to charge the property to the defendant to secure a further advance of HK$4,150,000 by a Further Charge dated 26 July 2000 (“the 3^rd mortgage”).  The 3^rd mortgage was registered in the Tsuen Wan New Territories Land Registry on 19 August 2000 by Memorial No. 1366254.

11.On 21 December 2000 the Court of Final Appeal allowed the plaintiff’s appeal and restored the Order of Stone J.

12.On 6 June 2001 the Vendor was wound up by an order of the Court.  The plaintiff put in a proof of debt in the winding-up proceedings claiming the total sum of HK$17,039,700.29 made up of the principal sum of the said HK$10,000,000 deposit paid to the Vendor, interest thereon, the plaintiff’s costs of investigation of title and the plaintiff’s costs of the proceedings in HCMP 471 of 1998 (“the proof of debt”).

13.The defendant exercised its power of sale under the mortgages and took possession of the property on 19 September 2001. 

14.The defendant sold the property by auction at the price of HK$23,000,000 and completed the sale on 29 May 2002.

15.After deducting all the sums owed to it by the Vendor under the 1^st, 2^nd and 3^rd mortgages, the defendant paid the balance of HK$5,468,750.31 into Court pursuant to the Order dated 5 July 2002 of Master Levy in HCMP 2557 of 2002, the proceedings brought by the defendant.

16.The plaintiff made an application in HCMP 2557 of 2002 by summons dated 17 July 2002 for an order that the said sum of HK$5,468,750.31 paid into Court by the defendant be paid out to the plaintiff forthwith.  The application was supported by an affirmation of Mr. Law Chi Sing (“Mr. Law”) a director of the plaintiff filed on 18 July 2002.

17.By Order of Master de Souza dated 31 July 2002 it was ordered that the said sum together with interest be paid out to the plaintiff’s solicitors forthwith.

The plaintiff’s claims

18.The plaintiff brought these proceedings against the defendant on 4 December 2001 seeking, inter alia, a declaration that the defendant’s security for all advances made to the Vendor after 30 September 1997 has lower priority than the plaintiff’s lien and a declaration that the 3^rd mortgage has a lower priority than the plaintiff’s lien.

19.On 7 November 2002 the plaintiff amended the Endorsement of Claim in these proceedings adding a claim for damages for procuring a breach of contract namely, the S/P agreement. 

20.The Statement of Claim was filed on 23 November 2002 and the Defence was filed on 27 December 2002.

21.The claim for damages for procuring a breach of contract was abandoned shortly before the pre-trial review which took place on 20 August 2004.  However, that claim has not been formally dismissed.  As such claim is abandoned, I formally dismiss the same.

The Main Issue

22.The main issue to be decided is whether the defendant’s security over the property for all monies advanced to the Vendor after the date when the plaintiff had a lien over the property (“the said advances”) ranked in lower priority than the plaintiff’s lien over the property.

The Sub-Issues

23.To resolve the Main Issue it has been agreed that there are 3 sub-issues to be decided as follows :

(1)    Whether the plaintiff’s lien over the property was a “subsequent mortgage” within the meaning of section 45 of the Conveyancing and Property Ordinance, Cap. 219 (“the CPO”) and hence ranked in lower priority over the said advances which ranked in the same priority as the advances made by the defendant to the Vendor under the 1^st mortgage and the 2^nd mortgage which were made between the defendant and the Vendor (collectively “the prior mortgages”).

(2)    Whether in any event the plaintiff is estopped from contending that section 45 of the CPO was not applicable on the ground that the plaintiff’s lien over the property was not a “subsequent mortgage” as :

(i)    Mr. Law deposed in his affirmation filed on behalf of the plaintiff on 18 July 2002 in HCMP No. 2557 of 2002 (“Law’s affirmation”) that the plaintiff’s lien had the effect in law as if the Vendor had executed a mortgage of the property in favour of the plaintiff for the amount covered by the plaintiff’s lien, to support the plaintiff’s claim that the sum paid into court by the defendant (being the balance of the sale proceeds of the property after deducting all advances made by the defendant to the Vendor) should be paid out to the plaintiff as a person entitled pursuant to section 54 of the CPO;

(ii)    Master de Souza did on 31 July 2002 make an Order of payment out to the plaintiff in HCMP No. 2557 of 2002 as claimed by the plaintiff after reading Law’s affirmation and hearing counsel for the plaintiff.

Sub-issue (2) only arises if sub-issue (1) is resolved in favour of the plaintiff.  Only if it is decided that the plaintiff’s lien was not a “subsequent mortgage” within the meaning of section 45 of the CPO does it then become necessary to decide sub-issue (2).

(3)    Whether the defendant’s security for the further advance of HK$4,150,000 under the 3^rd mortgage made between the defendant and the Vendor was confined to the legal charge constituted by the 3^rd mortgage and the defendant’s right to tack(or reliance on section 45 of the CPO) was excluded.

Sub-Issue (1)

24.Section 45 of the CPO provides as follows:

“Tacking

(1)    A mortgagee under prior mortgage may make a further advance or re-advance to rank in the same priority over a subsequent mortgage as the original advance under that prior mortgage-

(a)    if the subsequent mortgagee so consents; or

(b)    where the further advance or re-advance does not exceed, with any other outstanding advance or re-advance, the specified maximum amount secured under that prior mortgage; or

(c)    where that prior mortgage is in favour of an authorized institution (as defined in the Banking Ordinance (Cap 155)) and is expressed to secure all money which may, from time to time, be owing to the prior mortgagee,

and paragraphs (b) and (c) shall have effect whether or not the prior mortgagee had notice of the subsequent mortgage at the time when the further advance or re-advance was made by the prior mortgagee.

(2)    The priority to which a prior mortgagee is entitled under subsection (1) shall extend, in addition to the amount secured under the prior mortgage, to interest on that amount and to all costs, charges and expenses secured under the mortgage.

(3)    Subject to subsection (1), the right to tack in relation to land is abrogated:

Provided that nothing in this section shall affect any priority acquired before the commencement of this section.”

25.Section 45 of the CPO deals with tacking.  The mortgagee’s right to tack at common law is as set out in the commentary at para. 45.03 of The Annotated Ordinances of Hong Kong dealing with the CPO as follows :

“At common law, a mortgagee’s right to tack (ie to add later advances to earlier advances so as to obtain priority over an intermediate incumbrancer) formerly existed (a) where a legal mortgagee made a further advance without having notice at the time when the further advance was made of the existence of an intermediate incumbrance(see eg. Tenison v. Sweeney (1894) 1 Jo & Lat 710); (b) where a third incumbrancer, having made his advance without notice of the second incumbrancer, obtained a transfer of the first mortgage so as to obtain the benefit of the first mortgagee’s legal estate (see eg, Brace v Duchess of Marlborough (1782) 2 P Wms 491; and McCarthy and Stone Ltd v Julian S Hodge & Co. Ltd [1971] 2 All ER 973); and (c) where a mortgage was made to secure further advances and such advances were made without notice of an intermediate incumbrance(see eg, Hopkinson v Rolt (1861) 9 HL Case 514).  See further, Halsbury’s Laws of England (4^th Ed) Vol. 32, para. 549.

Notice played a vital part in tacking at common law, and disputes often arose as to whether registration under the Land Registration Ordinance (Cap. 128) constituted notice for these purposes.”

26.The purpose of section 45 is to abrogate the right to tack in relation to land except for the three circumstances specified in subsection (1).  Only the tacking of further advances under subsection (1) is permitted.  Tacking by other means is abolished(section 45(3)).

27.As Sarah Nield commented at page 139 of The Hong Kong Conveyancing and Property Ordinance,by section 45 the common law distinction between a legal and equitable mortgagee’s right to tack is removed and tacking under subsection(1) is available to all mortgagees of land.

28.Section 45(1) of the CPO is, in my view, clear.  The defendant relies on (c) of Subsection (1).  A mortgagee under a prior mortgage may make a further advance or re-advance to rank in the same priority over a “subsequent mortgage” as the original advance under that prior mortgage where,in the situation under (c), that prior mortgage is in favour of an authorized institution, which the defendant is, and is expressed to secure all money which may, from time to time be owing to the prior mortgagee.  The prior mortgages make it plain that they were all monies mortgages to secure all monies which may, from time to time, be owing by the Vendor to the defendant.  This is not disputed. 

29.As to the meaning of “advance” and “further advance”, it was held in Burnes v Trade Credits Ltd [1981] 2 All ER 122 that the term “advance” normally meant the furnishing of money for a specified purpose.  Accordingly, the reference to “further advances” in the guarantee referred to the furnishing or lending of an additional principal sum by the mortgagee to the mortgagor and did not include an extension of the term for repayment of the original principal sum advanced.

30.Recital (2) of the 3^rd mortgage recites that immediately before the execution of the document the principal outstanding in respect of the facilities granted by the defendant to the Vendor stood at HK$14,203,959.04.  Recital (3) recites that the Vendor had applied to the defendant to grant to it “further facilities to the extent of HK$4,150,000” which the defendant agreed to do upon the Vendor entering into the covenants in the 3^rd mortgage and upon the Vendor “further charging” to the defendant the property with the payment of all monies “now payable or which may at any time hereafter or from time to time become payable” by the Vendor to the defendant “in respect of the facilities presently granted or to be granted in the future”.

31.It seems to me to be clear that the further facilities granted by the defendant to the Vendor to the extent of HK$4,150,000 constituted a “further advance” within the meaning of Section 45(1) of the CPO. 

32.It is necessary to consider whether the plaintiff’s lien is a “subsequent mortgage”. 

33.“Mortgage” is defined in section 2 of the CPO as meaning “a security over land for securing money or money’s worth”. 

34.Mr. Li, for the defendant, submitted that the plaintiff’s lien fell within this definition and hence was a “subsequent mortgage” within the meaning of section 45.  That being so, it was submitted that the plaintiff’s lien ranked in lower priority over the said advances made by the defendant to the Vendor after the 30 September 1997 which ranked in the same priority as the advances made by the defendant to the Vendor under the prior mortgages.

35.Mr. Litton, for the plaintiff, submitted that the plaintiff’s lien was not within the definition of “mortgage” in section 2 of the CPO and hence it was not a “subsequent mortgage” within the meaning of section 45.  It was submitted that the said advances made after 30 September 1997 under the 3^rd mortgageranked in lower priority to the plaintiff’s lien.  The defendant was not entitled to deduct the sums in respect of the said advances under the 3^rd mortgage.  The sums deducted by the defendantare particularized in para. 21 of the Defence as follows :

As Mr. Choi Yue Chung, of the defendant, has in his supplemental witness statement confirmed the accuracy of the said sums deducted, no issue is taken in respect of the same.  It was submitted that such sums with interest thereon should be paid to the plaintiff.

36.Is the plaintiff’s lien “a security over land for money or money’s worth” so as to bring it within the definition of “mortgage” under section 2 of the CPO?

37.It cannot be disputed that a purchaser of land who pays a deposit to the vendor acquires a lien over the property to the extent of his deposit from the time of payment(Rose v. Watson [1864] 10 H.L.C. 671 per Lord Westbury at page 682;Whitbread & Co. Ltd. v. Watt [1901] 1 Ch. 911 per Farwell J at page 915 and in the same case in the Court of Appeal [1902] 1 Ch.835 per Vaughan Williams LJ at page 838).

38.Although the lien is created by the payment of the deposit, the purchaser is not entitled to enforce his lien unless and until the contract goes off either by the default of the vendor or without any default by the purchaser(Whitbread & Co. Ltd v. Watt,per Farwell J at page 915; and in the Court of Appeal, per Cozens Hardy LJ at pages 840 and 841).

39.It is also stated at para. 763 of Vol. 28 Halsbury’s Laws of England as follows :

“A purchaser of land who has paid a deposit or money on account of the purchase price to the vendor and has then lawfully repudiated his contract, in addition to a legal lien on any title deeds in his possession, an equitable lien on the vendor’s interest in the land agreed to be sold for all sums paid by him under the contract on account of the purchase money, together with interest on it.  The lien extends to interest paid on the unpaid balance of the purchase money and to the costs of an action for specific performance, as well as to the purchaser’s costs of investigating title where a good title is shown to the property contracted to be sold, including the costs of a vendor and purchaser summons.  In all these cases the lien is the same in effect as if the vendor had executed a mortgage of the property in the purchaser’s favour for the amount covered by the lien”.

40.Mr. Litton referred to section 94 of the Law of Property Act 1925 (“the LPA”) which abolished tacking in England save for the situations set out there.  Section 94(1) provides as follows:

“After the commencement of this Act, a prior mortgage shall have a right to make further advances to rank in priority to subsequent mortgages (whether legal or equitable) –

(a) if an arrangement has been made to that effect with the subsequent mortgagees; or

(b) if he had no notice of such subsequent mortgages at the time when the further advance was made by him; or

(c) whether or not he had such notice as aforesaid, where the mortgage imposes an obligation on him to make such further advances.

This subsection applies whether or not the prior mortgage was made expressly for securing further advances.…”

41.“Mortgage” is defined in section 205(1)(xvi) of the LPA as follows :

“     “Mortgage” includes any charge or lien on the property for securing money or money’s worth.”

42.Mr. Litton submitted that it is instructive to look at the English legislation when construing section 45 and section 2 of the CPO.  He further submitted that if the legislature did intend a lien to be covered by the definition of “mortgage” in section 2 of the CPO it was open to it to do so in the same way as the draftsman did in the English legislation.

43.As a matter of statutory interpretation, the intention of the legislature as expressed in the statute is primarily to be sought in the words used in the statute itself.  If the words are plain and unambiguous they must normally be applied as they stand.  Also, if the words are clear and ambiguous, they themselves indicate what must be taken to have been the intention of the legislature and there is no need to look elsewhere to discover their intention or their meaning (para. 365.036 and 365.037 Vol. 23 Halsbury’s Laws of Hong Kong). If there is nothing to modify, alter or qualify the language which a statute contains, the words must be construed in their ordinary and natural meaning (para. 365.041 Vol. 23 Halsbury’s Laws of Hong Kong).

44.It was submitted by Mr. Li that it was not necessary to look at the English legislation to discover the meaning of “mortgage” in section 2 of the CPO.

45.It seems to be that the definition of “mortgage” in section 2 of the CPO is clear and unambiguous.

46.It is clear that the lien acquired by a purchaser arises by operation of law and not by contract.  The lien is equitable in nature and is a form of equitable charge over the property.  In my judgment the plaintiff’s lien is an equitable lien.  An equitable lien is a form of equitable charge over the property.  An equitable lien, like an equitable charge, confers on the holder a proprietary right so that he is a secured creditor in a bankruptcy or winding-ip(para. 754 Vol. 28 Halsbury’s Laws of England 4^th Ed Reissue).   H

47.It is also stated at para. 1-10 of Cousins On The Law of Mortgages 2^nd Edn., under the heading “Non-possessory securities:equitable lien” as follows :

“Like a lien at common law, an equitable lien can arise in respect of both real and personal property.  However, unlike a common law lien, an equitable lien does not depend on possession of the property which is subject to the lien.  It is a type of equitable charge arising by operation of law irrespectiveof the parties’ intention……………………………........................................

A purchaser also has an equitable lien for his deposit and costs of investigating title should he lawfully rescind the contract.  The lien arises by operation of law…………………  It operates as an equitable charge and the holder is in equity a secured creditor of the vendor and can apply to the court for a declaration of his interest and for an order of sale of the land.”

48.The plaintiff did apply for and was given leave by Master Lung on 8 November 2001 in the winding-up proceedings to commence an action against the Vendor in liquidation for the purpose of enforcing the plaintiff’s lien over the property.  The plaintiff was also ordered to account to the liquidator for any surplus(after deducting the judgment debt and costs of the intended proceedings due to the plaintiff) that may exist after the sale of the property.  It was envisaged that the plaintiff would enforce the lien by seeking an order for sale of the property.  Because of the sale of the property by the defendant the plaintiff did not proceed to obtain an order for sale of the property.

49.Fisher & Lightwood’s Law of Mortgage 11^th Edn.in dealing with mortgages and other securities at para. 1.5 states :

“     Both ‘mortgage’ and ‘charge’ are often loosely used as a generic term for all species of security.”

50.And at para. 1.6, in dealing with lien, it is stated :

“An equitable lien arises automatically under some doctrine of equity and is not intentionally created by contract.  In essence, an equitable lien is a species of equitable charge arising by implication of law. ” 

51.Thus, it is clear that an equitable lien is treated in the same way as an equitable charge.

52.I would also observe that in the proof of debt the plaintiff accepted that its lien was a security.  Item 7 requested “particulars of any security held, the value of the security, and the date it was given”.  The answer given was “There is a lien on the [plaintiff’s] property………………………………….”.  The proof of debt was signed by the plaintiff’s solicitor.  The plaintiff’s solicitor had no difficulty whatsoever in recognizing that the plaintiff’s lien was indeed a security over the land.

53.In my judgment it is not necessary to look at the English legislation.  The right to tack in England and Hong Kong are different and the circumstances where there is a right to tack are different.  The definition of “mortgage” in section 2 of the CPO is in my judgment clear and unambiguous.  It means a security over land for money or money’s worth.  The words are to be considered in their ordinary and natural meaning.

54.Mr. Litton also submitted that within the context of the CPO a clear distinction is made between a lien and a mortgage.  He referred to the definition of “encumbrance” in section 2 which specifically states that it includes a legal and equitable mortgage and a lien.  He also referred to section 44(8) which provides that :

“This section does not affect any mortgage, charge or lien arising under any Ordinance or by operation of law”.

55.Thus he submitted that “lien” was not included in the definition of mortgage in section 2.

56.I am unable to accept Mr. Litton’s submissions.  The definition of “encumbrance” in section 2 simply sets out the different species of security or claimed interest to land.  All these constitute encumbrances to land.  Thus “encumbrance” under section 2 “includes a legal and equitable mortgage, a trust for securing money, a lien, a charge of a portion, annuity or other capital or annual sum…..”  This provides no assistance to the plaintiff in the construction of the word “mortgage” in section 2.

57.Section 44(8) also provides no assistance to the plaintiff.  Prior to the CPO, mortgages of land in Hong Kong were made by assignment of the legal and equitable interest of the mortgagor in the land to the mortgagee, subject to a proviso for reassignment of that interest to the mortgagor upon redemption.  Section 44 introduced a new method of creating a mortgage of the legal estate.  Subsection (1) provides that :

“After the commencement of this section, a mortgage of a legal estate, including any second or subsequent mortgage of that legal estate, may be effected at law only by a charge by deed expressed to be a legal charge.”

58.Subsection (8) simply provides that the section does not affect any mortgage, charge or lien arising under any Ordinance or by operation of law.  This does not mean that a lien does not fall within the definition of “mortgage” in section 2.  It cannot assist the plaintiff in the construction of “mortgage” under section 2. 

59.I find no assistance in the reference to the definition of “encumbrance” in section 2 and in the reference to section 44(8) in the construction of section 45 and the definition of “mortgage” in section 2.

60.I accept Mr. Li’s submissions.

61.In my judgment the plaintiff’s lien is clearly a security over the land for money or money’s worth.  It is a security for the deposits paid, interest and costs. 

62.Sub-issue (1) is resolved in favour of the defendant.  In my judgment the plaintiff’s lien over the property was a “subsequent mortgage” within the meaning of section 45 of the CPO and hence ranked in lower priority over the said advances which ranked in the same priority as the advances made by the defendant to the Vendor under the prior mortgages.

Sub-issue (2)

63.In view of my decision on Sub-issue (1), Sub-issue 2on the question of whether there was an estoppel does not arise.

Sub-Issue (3)

64.It is accepted by Mr. Litton that the prior mortgages were all monies mortgages whereby additional monies could have been advanced either under one or both of the prior mortgages.  The 3^rd mortgage was entered pursuant to an application by the Vendor to borrow HK$4,150,000.  There is no evidence as to the reasons why the 3^rd mortgage was entered into.  It was submitted by Mr. Litton that the 3^rd mortgage was a new all monies charge and the very fact that the Vendor and the defendant entered into the 3^rd mortgage when it was unnecessary to do so supports the contention that the further facilities were not intended to be an“advance” or “further advance” within the meaning of section 45 of the CPO under a prior mortgage but was intended to be a new all monies charge for new monies advanced.  Hence there is no right to tack under section 45. 

65.Paragraph 15(4) of the Statement of Claim raises the issue as follows:

“Further or in the alternative on the true construction of the [3^rd mortgage] dated 26^th July 2000 the only security taken by the Defendant for the Further Advance was the legal charge constituted by that document and the right to tack was excluded.”

66.The construction of a written agreement denotes the process by which a Court arrives at the meaning to be given to the language used by the parties in the express terms of a written agreement.

67.I am unable to accept that on a true construction of the 3^rd mortgage the right to tack was excluded.  I am unable to accept that the Vendor and the defendant intended to enter into a self standing loan agreement for the advance of HK$4,150,000.

68.Recital (1) of the 3^rd mortgage recites the fact that under the 1^st and 2^nd mortgages the property :

“are presently mortgaged or charged and/or further charged to the [defendant] for securing all sums of money in respect of the facilities as may from time to time be granted by the [defendant] to [the Vendor] and the interest thereon…”

69.Recital (2) recites that the principal outstanding in respect of facilities granted by the defendant stood at HK$14,203,959.04.

70.As I have said, recital (3) recites that the Vendor has applied to the defendant to grant to it “further facilities to the extent of HK$4,150,000”which the defendant agreed to do upon the Vendor entering into the covenants thereinand upon the Vendor “further charging” to thedefendant the property with the payment of all monies “now payable or which may at any time hereafter or from time to time become payable” bythe Vendor to the defendants in respect of the facilities presently granted or to be granted in the future.

71.“Facilities” is defined in Clause 1.6 as meaning “general banking facilities of whatsoever kind granted or to be granted to [the Vendor] from time to time.”

72.The reference to “further facilities” is a clear indication that the same was not meant to be an entirely new and separate loan to the Vendor severed from the previous advancements made by the defendant.  And the reference to “further charging to the[defendant] the [property]” is not intended to be a new and separate charge on the property separate from the prior charges.  It is clear that this was to be a continuing security and that the further facilities was a further advance.

73.The covenant to repay in Clause 3 provides that :

“…………….in consideration of the [defendant] continuing to grant the facilities to [the Vendor]…………………. [the Vendor] do HEREBY COVENANTS with the [defendant] that [the Vendor] will pay to the [defendant]ON DEMAND by notice in writing………all sums of money due and payable or which may hereafter become due and payable by [the Vendor] to the [defendant] in respect of all or any of the facilities granted or to be granted by the [defendant] to [the Vendor] as described in [the prior mortgages] together with interest thereon…………..” 

This makes is clear that the covenant to repay is not only in respect of the further facilities of HK$4,150,000 but also in respect of all the facilities granted pursuant to the prior mortgages.

74.Clause 4 provides the Vendor as beneficial owner :

“do hereby further charge the [property] to the [defendant] and declare that the [property] shall be a security for and henceforth stand charged with the payment to the [defendant] by [the Vendor] of all sums of money which now are or may hereafter become due and payable by [the Vendor] to the [defendant] in respect of the facilities granted or to be granted by the [defendant] to [the Vendor] as described in the [prior mortgages] as well as all other monies which may be owing by [the Vendor] to the [defendant] on any account whatsoever………………”

75.Clause 6 deals with the power of sale.  It provides that :

“      It is hereby expressly declared and agreed …….that the power and sale and provisions ancillary thereto and all other powers and provisions and all the agreements clauses terms covenants and conditions in the [prior mortgages] contained for securing the payment of the monies thereby secured and the interest thereon shall extend to and apply for further securing the payment of the further facilities and interest and also all sums of money in respect of any facilities granted or to be granted from time to time by the [defendant] to [the Vendor] to the intent that the[prior mortgages] shall continue to secure payment of all sums of money which are now or may hereafter be due and payable…………”

76.Clause 8 also makes it plain that the security by the prior mortgages and the 3^rd mortgage :

“shall be and will at all times be deemed to have been a continuing security and shall be available to secure whatsoever may be the balance at any time or from time to time due by the [Vendor]to the [defendant] pursuant to the powers agreements clauses provisions terms covenants and conditions of the [prior mortgages] and [the 3^rd mortgage].”

77.In my judgment as a matter of construction of the 3^rd mortgage the parties did not intend it to be a self standing mortgage with a fresh charge on the property.  It was meant to be a continuing security and a further charge. 

78.There is no provision in the 3^rd mortgage which deals specifically with the right to tack by the defendant.  So long as the requirements of section 45 of the CPO are met the defendant has a right to tack.  In my judgment as a matter of construction of the 3^rd mortgage the right to tack is not excluded. 

79.Sub-issue (3) is resolved in favour of the defendant.  In my judgment the defendant’s security for the further advance of HK$4,150,000 under the 3^rd mortgage was not confined to the legal charge constituted by the 3^rd mortgage and the defendant’s right to tack was not excluded.

80.In view of my decision on Sub-issues (1) and (3) in favour of the defendant, the main issue is resolved in favour of the defendant.  In my judgment the defendant’s security over the property for all monies advanced to the Vendor after the date when the plaintiff had a lien over the property did not rank in lower priority than the plaintiff’s lien over the property.

81.I give judgment to the defendant and dismiss the plaintiff’s claim.  I have already formally dismissed the plaintiff’s alternative claim for procuring a breach of contract.

82.I also make an order nisi that the plaintiff should pay the defendant its costs of the action.  As to the plaintiff’s alternative claim for procuring a breach of contract which has also been dismissed, I also make an order nisi that the plaintiff should pay the defendant its costs of defending this alternative claim.

Mr. John Litton, instructed by Messrs Kok & Ha, for the plaintiff

Mr. Li Chau Yuen, instructed by Messrs Vincent T.K. Cheung, Yap & Co., for the defendant