Faricho Investment Ltd v. Good Time Finance Ltd

HCA 2496/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2496 OF 2005

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BETWEEN

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AND

BETWEEN

(by Counterclaim)

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Before: Deputy High Court Judge Carlson in Chambers

Date of Hearing: 24 July 2006

Date of Judgment: 25 July 2006 (delivered in court)

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J U D G M E N T

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Introduction

1.Because the Plaintiff is asking for declaratory judgments, I think it would be better to deliver judgment in open court.

2.This case concerns the equity of redemption of a mortgage.  The matter comes before me by way of Order 14 by which the Plaintiff company, as mortgagor, is seeking, amongst other relief, declarations that the Defendant mortgagee is not entitled to enter into sale and purchase agreements with 3^rd parties to sell the two mortgaged properties that are the subject of this action following an 11-day default in the mortgage instalments.  It also seeks permanently to continue injunctions restraining the Defendant from completing the sale and purchase agreements which it has entered into.

The facts

3.The Plaintiff is a company which is owed by a Mr Prenceton Ie and by his brother.  It owns two properties, one at Yuet Wah Street, Kowloon and the other at Des Voeux Road West, Hong Kong.  The brothers were in urgent need of finance to settle a liability under a guarantee in respect of another company that they owned.  They did so by borrowing money by mortgaging these two properties to the Defendant.  They obtained loans of $320,000 on the Kowloon property and $430,000 on the property on Hong Kong Island.  This happened on 5 August 2004 when they signed a Legal Charge, a letter of guarantee and irrevocable Power of Attorney and a Loan Agreement.  The rate of interest charged by the Defendant was high although perfectly legal.  It was at 26.4% per annum.  In respect of the first property the loan was repayable over 72 months at $11,441.00 per month.  On the second property it was for an identical term with monthly instalments of $15,374.00.  The first instalment was payable on 5 September 2004.

4.The Plaintiff paid these instalments timeously for the first year but then missed the payment on 5 August 2005.  It made its payments 11 days late on 16 August 2005 and was again on time for the subsequent payment which it paid on 5 September.

5.Mr Ie says that he and his brother then started getting unpleasant calls from debt collectors, as from 16 August, demanding payment of $300,000 as collection charges.  They were alarmed by this and decided to sell the second property in order to pay off the mortgages.  They found a prospective purchaser who was willing to pay them $934,000.00 for it.  This was on 3 September.  A sale and purchase agreement was prepared but not executed because, perfectly correctly, their prospective purchaser first required the discharge of the mortgage.

6.On 5 September, the Plaintiff's then solicitors wrote to the Defendant asking for the redemption amount up to 18 October 2005 [Bundle 1, page 201].  The Defendant's solicitors replied on 7 September to say that the amount was $1,125,204.  I should pause here to observe that Mr Herbert Leung, who appears for the Defendant, accepts that this amount was overstated by a considerable margin.  It should have been something in the order of $760,000.  Unsurprisingly, the Plaintiff's solicitor wrote on the following day to ask how this amount was calculated.  No reply was forthcoming.  Their new solicitors, who represent them today, wrote again on 12 September, this time to the Defendant's solicitors but this also failed to get a response.  Accordingly, they wrote again on 20 September, 22 September and on 3 October but without success.  That is to say five letters which were not responded to.  The Defendant's solicitors did write on 4 October but only to confirm the identity of the bank into which future instalments should be paid and into which account all instalments have since being paid timeously.

7.Now one may be surprised to learn this but, whilst these unanswered requests for the breakdown of a grossly inflated redemption figure were being sent, the Defendant's solicitors on the Defendant's instructions, were entering into sale and purchase agreements to sell these properties.  The first agreement is dated 21 September 2005.  It relates to the Hong Kong Island property.  The selling price was $980,000.00.  Completion was to take place on 28 February 2006.  This agreement is at Bundle 2, pages 255-275.  On 22 September 2005, the property in Kowloon was also the subject of a sale and purchase agreement for a consideration of $420,000.00 with completion due on 31 December 2005.  See Bundle 2, pages 234-254.

8.On 23 November 2005, the Plaintiff's solicitors learnt from a land search that these two transactions had been entered into.  On 25 November, they wrote to the Defendant's solicitors to demand that these agreements should be set aside.  By 30 November that letter had not been answered and so they wrote again, to which there was also no response.  As a result, they applied for and obtained an interim injunction on 16 December to restrain completion of these two sale and purchase agreements.  And so, it is by this route that this matter now comes before me.

The law on the equity of redemption

9.Mr Lo, for the Plaintiff, submits that by acting in the way that it has, by purporting to enter into sale and purchase agreements after an   11-day default on the mortgages, which were then corrected by payment of the latest instalments, the Defendant has interfered with the Plaintiff's equity of redemption.  The law in this regard is well settled and stated in Halsbury's Laws of Hong Kong, Vol 19(2) at para. 280.012 as follows:

“[280.012] Mortgagor's equity of redemption  Incident to every mortgage is the right of the mortgagor to redeem, a right which is called his equity of redemption, and which continues notwithstanding that he fails to pay the debt in accordance with the proviso for redemption.  This right arises from the transaction being considered as a mere loan of money secured by a pledge of the estate.  Any provision inserted in the mortgage to prevent redemption on payment of the debt or performance of the obligation for which the security was given is termed a clog or fetter on the equity of redemption, and is void. The right to redeem is so inseparable an incident of a mortgage that it cannot be taken away by an express agreement of the parties that the mortgage is not to be redeemable or that the right is to be confined to a particular time or to a particular description of persons.  This is especially illustrated in the case of mortgages by banks where, although redemption is not contemplated for periods usually varying between ten and twenty years, nevertheless the mortgage may expressly allow redemption at any time.  The right continues unless and until, by judgment for foreclosure or, in the case of a mortgage of land where the mortgagee is in possession, by the running of time, the mortgagor's title is extinguished or his interest is destroyed by sale either under the process of the court or a power in the mortgage incident to the security.”

This right has been reinforced by the Court of Final Appeal in Common Luck Investment Ltd v Cheung Kam Chuen, FACV 22/98.  At paragraph 16 of his judgment, Litton NPJ said this:

“16. A right to redeem is an inseparable incident of a mortgage.  It cannot be taken away by an express agreement of the parties.  Although originally at common law the mortgagor forfeited his estate when he defaulted, and it became the absolute property of the mortgagee, from earliest times the courts of equity have intervened and held that until foreclosure by order of the court, or sale by the mortgagee in realizing his security, the mortgagor has an equitable right to redeem: By offering to pay the principal, interest and costs he can have his property re-assigned to him.  The mortgagor's equitable right to redeem is, in the eyes of the law, an equitable estate.”

10.I should draw attention to the position of a mortgagee who has made default, as in this case.  What is his right to redeem his mortgage?  The answer is provided at paragraph 280.454 of Halsbury:

“[280.454 Notice to pay off mortgage]  It was a settled rule of practice that after default has been made by a mortgagor in payment of the principal and interest in accordance with the proviso for redemption, he had to either give the mortgagee six months' notice of his intention to pay off the mortgage, or pay him six months' interest in lieu of notice; and if the mortgagor, after giving notice of his intention to pay off the mortgage, made default in so doing, and the default was not explained, the mortgagee was entitled to further reasonable notice but not a fresh six months' notice or six month's interest in lieu of notice. …”

11.Nevertheless, the position differs where the mortgagee has demanded payment.  In such of case he is not entitled to his six months notice.  The law is set out at paragraph 280.455 of Halsbury:

“[280.455] Effect of steps taken by mortgagee  If the mortgagee himself demands payment or takes steps to realise his security, whether the time fixed by the mortgage deed for redemption has arrived or not, or consents to a sale of the mortgage property in administration proceedings or to payment of his debt out of a fund in court, he is not entitled to the usual six months' notice or interest even though, after he has taken proceedings to recover his debt, the mortgagor has given him notice of intention to pay in six months.”

The significance of this passage is that on the 10^th day of default, as provided for under the Legal Charge, the Defendant wrote to the Plaintiff requiring payment in full, within seven days, of the amounts outstanding under the two mortgagers which amounted to $756,673.  This amount not having been forthcoming the Defendant then purported to exercise its right of sale, also provided for under the terms of the Legal Charge.  These provisions appear at clause 5.01 and 5.02 and 6 of the Legal Charge, page 66-73 of Bundle 1.  It is by this route that Mr Leung for the Defendant has sought to justify what the Defendant has done.  The question here is whether these express terms of the Charge can override the position canvassed in Halsbury at paragraph 280.012 (see para. 8 above)?

The result

12.I have no doubt whatsoever that the express provisions contained in the Legal Charge, which Mr Leung has relied on, cannot survive the mortgagor's equity of redemption.  The general law relating to this “equitable estate” must take precedence.  The question then becomes this?  In Order 14 proceedings such as these, I need to be satisfied that there are no triable issues which require the matter to go forward and to be determined in the course of a conventional trial.  Mr Leung has referred to some other matters which I ought to consider.  He seeks to rely on the fact that the Plaintiff denies having received the letter of 15 August demanding repayment of the outstanding mortgage [page 327, Bundle 1].  The effect of that letter of course was to do away with the Plaintiff's need to give the Defendant notice of its intention to redeem the mortgage [see Halsbury, para. 280.454, para. 10 above).  Mr Leung submits that because the Plaintiff contends that it did not receive the letter it cannot now rely on the effect of the letter removing the need, on the part of the Plaintiff, to give notice of redemption.  In my judgment this is false reasoning.  It is not the receipt of the letter that matters, it is the fact that it was sent by the Defendant mortgagee that triggers this position.  Another aspect which Mr Leung relies on is that the Plaintiff has not tendered the outstanding amount in order to avail itself of the right of redemption.  For my part it lies ill on the part of the Defendant to attempt to rely on such an argument where it had steadfastly ignored requests to provide a break down of the now admittedly inflated amount of $1,125,204 and thereafter provided a lesser amount only on a “without prejudice” basis.  The law is that the mortgagor is entitled to know how much he is liable to pay and how the amount is arrived at.  (See Halsbury, para. 280.456).  The Defendant has simply failed to provide this information.

13.I am satisfied that there can be no arguable defence to the claim for the declarations sought by the Plaintiff.  The Defendant has behaved quite disgracefully in this matter.  Following an 11-day default, against a background of timeous previous repayment, which continued thereafter, it has purported to exercise a right of sale which it had embarked upon in a clandestine manner.  The Plaintiff has validly exercised its right of redemption which the Defendant refuses to recognise.  These purported sale and purchase agreements represent a fetter on the Plaintiff's undoubted right of redemption.  The declarations will now go in the terms that have been asked for.  The inevitable consequence of this is that the injunctions asked for will also be granted to give effect to the declarations.  The claim for damages will have to be adjourned for assessment by a Master.  I will now hear the parties as to costs and any other consequential directions.

Anthony Lo, instructed by Messrs Ho, Tse, Wai & Partners, for the Plaintiff

Herbert Leung, instructed by Messrs Danny Lau & Co., for the Defendant