Flying Mortgage Ltd v. Chan Kuen Kwong and Others

DCCJ 5004/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5004 OF 2006

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BETWEEN

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Coram: His Hon Judge Leung in court

Date of hearing: 7-9 September 2009

Date of judgment: 25 November 2009

J U D G M E N T

1.Kwong and King, named together as the 1^st Defendant, are the registered owners of Flat 12, 4^th Floor, Tuen Mun Centre, New Territories (“the Property”).  Flying Mortgage, the Plaintiff, is a licensed moneylender.  On two occasions in 2005, Kwong and King borrowed from Flying Mortgage on the security of mortgage of the Property.  They defaulted in the repayment of the loans.  In October 2006, Flying Mortgage commenced this action against them.

Background

2.Lai, the 2^nd Defendant, is the mother of Kwong and King.  Lai has 6 children.  Kwong and King, ranking the 3^rd and the 4^th, were twins born in May 1963.  In 1985, Lai decided to purchase the Property at HK$215,000 but the Property was registered in the names of Kwong and King.  The Property was subsequently mortgaged in 1989 and 1991 and was last redeemed in 2001.

3.In April 2005, Kwong borrowed from and executed a then 1^st mortgage of the Property in favour of Freeway Finance Co Ltd (“Freeway Finance”).  King acted as guarantor of the loan.

4.In June 2005, Kwong and King executed a 2^nd mortgage of the Property in favour of Flying Mortgage for a loan.  In September 2005, they executed a 3^rd mortgage of the Property in favour Flying Mortgage for another loan.  Part of this loan was used to repay the mortgage to Freeway Finance.

5.As mentioned above, Flying Mortgage commenced this action against Kwong and King to recover the debt and to enforce the mortgages.  In September 2007, judgment and order for possession of the Property was granted against Kwong and King.

6.Claiming to be the sole beneficial owner of the Property, Lai applied to be joined as a defendant in January 2008.  For reasons handed down into writing, the court allowed Lai to be joined on 13 February 2008.

7.There is no dispute as to the above background.  This trial concerned Flying Mortgage and Lai.  The major dispute is:

(1)  whether Lai is the beneficial owner of the Property; and

(2)  if yes, whether Flying Mortgage was a bona fide purchaser for value without notice of Lai’s beneficial interest and is entitled to enforce the mortgage free of her interest.

Whether Lai is the beneficial owner of the Property

8.Lai gave evidence.  According to her, she never had any formal education.  She learned how to write her own name only after her husband passed away in 1971.  According to the documents, she is now 77 years old.

9.Lai was allocated rented public housing in 1975.  Then she had to raise the 6 children and to take care of her aged mother in law.  She explained how the idea of buying the Property came about in 1985 and how she came up with the necessary funds to finance the purchase.  Notwithstanding imperfections in her evidence pointed out by Mr Chai for Flying Mortgage, I am on the whole impressed that Lai did try her best to tell how these things happened more than 20 years ago.

10.Issue was taken in respect Lai’s evidence that some of her money she paid for the Property in fact originated from her mother in law.  In my view, this does not matter.  What matters is that I am not convinced that Kwong and King, who were in their early 20s in 1985, contributed towards the purchase.  King confirmed that it was Lai who paid for the Property.

11.I am also satisfied that after the purchase, Lai has been paying for the utilities and management fees for the Property.  Again it does not matter whether part of the money that she used for the household expenses might have come from some of the children.  There is no suggestion or evidence that any money so given to her was contribution referable to any common intention at the time of purchase that the children would acquire beneficial interest in the Property.  At the time when the Property was purchased, the 2^nd daughter was already married and the 2 youngest sons were teenagers.  According to Lai, Kwong moved out of the Property upon marriage in 1988 and did not pay any household expenses (or in her own words “伙食”).

12.In fact, the case of Flying Mortgage is based on the presumption of advancement.  In other words, by registering the Property in the names of Kwong and King, Lai, who funded the purchase, was presumed to treat the Property as advancement to them absolutely in 1985.

Presumption of advancement

13.The applicability of the presumption of advancement is in dispute.  Mr Chai submitted that like the situation of a father and child, the presumption of advancement applies equally between Lai and her children.  Therefore Lai has the burden of rebutting the presumption by showing that she has and retains beneficial interest in the Property.  Mr Lai relied on Lee Tso Fong v Kwok Wai Sun & Anor [2008] 4 HKC 36.

14.In Lee Tso Fong, the court appeared to depart from Watson v Smith [1989] 3 HKC 461 which held that the presumption advancement applicable between father and child does not apply between mother and child.  It was said that the court of appeal did not have the advantage of considering the jurisprudence from other common law jurisdiction on the issue, in particular, the relevance of the socio-economic condition prevailing at the time of the acquisition of the property.

15.Mr Wong for Lai queried the authoritativeness of Lee Tso Fong in suggesting that the law recognises the extension of the presumption of advancement to a situation of a mother and child.  First, he pointed out that the reasoning of the court in Lee Tso Fong did not render the court of appeal decision in Watson v Smith per incuriam so as to justify the refusal to be bound by it.  Secondly, he submitted that while the socio-economic situation in 1997 when the property in Lee Tso Fong was acquired might justify the court’s view on the issue of advancement by the mother, the situation in 1985 when the Property was acquired does not support a similar view in the present case.

16.In my view, the above points argued by counsel do not call for determination.  This is not the kind of case that needs to be decided by resorting to the application of presumption and therefore burden of proof.  For this, I drew counsel’s attention to the following passage regarding the presumption in Snell’s Equity (31^st ed) at 23-05:

“The evidential weight to be attached to the presumption is now less than in the past.  Changing social and economic conditions have made the presumption as less reliable guide as to A’s true intentions in providing the money than it might once have been.  Where modern experience indicates that the presumption does not provide any firm rational basis for presuming an intention to make a gift between parties in the position of A and B, then the presumption may only be of slight probative value.  The court will always strive to determine the real intentions of the parties.  It may only resort to the presumption of advancement where evidence of those real intentions is absent and a default rule is needed.”

17.Therefore, whether the presumption of advancement applies between Lai and his children, Lai indeed adduced evidence to establish her retention of the beneficial interest in the Property.  It is therefore for this court to evaluate such evidence to ascertain the real intention of the parties.

The evidence

18.Lai stated that the Property was registered in the names of Kwong and King due to fear of losing her entitlement to keep her tenancy of 2 public housing units at San Fat Estate at that time.  In court, she seemed to be unclear about this concern.  But she maintained that she paid for the Property in 1985 clearly without any intention of gift to Kwong and King.

19.According to her, the eldest daughter had then just started her own business with an uncertain future.  The 2^nd daughter was already married.  The 2 youngest sons were too young.  She therefore decided to have the Property registered in the names of Kwong and King, the twins and only other children of age.

20.Lai also keeps the title deeds to the Property and locks them in the drawer of the cabinet in her room.  In court, Lai reiterated that when she passes away, she would expect all the children to share the proceeds of the sale of the Property.

21.The explanation of Lai for choosing Kwong and King as the nominal owners of the Property at the time of purchase is understandable.  But Mr Chai suggested that Kwong and King were chosen to be the beneficiaries of the Property absolutely.  One wonders why Lai would need to make up her mind then to favour Kwong and King to the exclusion of at least the teenage children absolutely.  I am not prepared to share Mr Chai’s view.

22.Since the purchase of the Property in 1985, Lai has been living at the Property.  There are 3 bedrooms.  Lai and King managed to describe the division of the rooms among the family members at different stages in the past decades.  As mentioned above, since getting married on 1988, Kwong has moved out of the Property and lived with his wife in one of her public housing units at San Fat Estate.

23.Besides King, Lai’s neighbours, Wu Shek Pui and Ng Wai Man, gave evidence of their observation that Lai has been residing at the Property throughout the years.  A few family photographs taken at the Property at different points of time in the past were also produced.  There was also the written confirmation by the bank in 2008 that when opening a joint account with King in 2002, Lai still reported the address of the Property as her address.

24.Apart from actual occupation as the family residence, the Property has also been applied to use for the benefit of children other than Kwong and Lai.  As mentioned above, the Property was mortgaged in 1989 and 1991 to the bank.  According to Lai, these were arranged with her consent for loans to support the then business of her eldest daughter and the 2^nd youngest son.  The mortgage was repaid by Lai and eventually redeemed in 2001.  Lai managed to remember the loan amount and the average monthly repayment over a period of 8 years.

25.Mr Chai submitted that if Lai’s explanation for why she registered the Property in the names of Kwong and King in 1985 were true, equity would not recognise her assertion of beneficial interest in the Property because this was an illegal scheme of concealing the purchase in order to avoid the rescission of her eligibility to her public housing tenancy.  He relied on Tinsley v Milligan [1994] 1 AC 340.

26.Mr Wong submitted that there is insufficient evidence of the illegality of what Lai did.  In any event, Lai is not seeking to, as she does not need to, enforce any illegal transaction to found her case.  I agree.

27.In my view, that Lai has all along kept the title deeds to herself is a significant fact: see Warrn v Gurney & Anor [1944] 2 All ER 472 at 473H.   That Lai consented to the mortgages after the purchase of the Property for loans to assist the other children was also a significant fact.  Seeing the witnesses testify and considering the evidence, I also accept the evidence of Lai.

28.Whilst much was said about whether Lai has expressly declared a trust as such at the time of purchase of the Property, the fact was that Lai never declared that the Property was a gift to Kwong and King.  Nor could it be inferred from the circumstances that Lai intended, whether in 1985 or thereafter, that the Property would be a gift to these 2 children absolutely.  The circumstances at and after the time of purchase of Property were on the whole consistent with Lai’s retention of beneficial interest in the Property.  When Lai was over 70 years old, Kwong and Lai sought to deal with the Property and, according to Lai, behind her back.

Whether Flying Mortgage takes the Property free from Lai’s interest

29.Priority between interests in land depends on the dates of the registration of their respective instruments of creation.  A resulting trust is an unwritten equity: see section 5(b) of the Conveyancing and Property Ordinance, Cap.219.

30.Priority of unwritten equities is governed by the common law principles, i.e., first in time prevails.  This is subject to the principle that being unwritten and therefore not subject to registration, such equities do not bind a subsequent bona fide purchaser for value without notice.

31.There is no dispute about the above principles.  Nor is issue taken as to the bona fide of or value provided by Flying Mortgage in obtaining the mortgages in 2005.  The major dispute lies in whether Flying Mortgage was affected with notice of Lai’s interest in the Property.

32.Notice can be actual or constructive.  There is no allegation of actual notice.  In order not to be fixed with notice of a prior unwritten equitable interest, the purchaser must have made all usual and proper inquiries which may include inspection of the title deeds and the property: see Wong Chim Ying v Cheng Kam Wing [1990] 2 HKLR 253; Kingsnorth Finance Co Ltd v Tizard [1986] 1 WLR 783 at 794; Megarry & Wade, The Law of Real Property (7^th ed) at p.263.

The evidence

33.According to Lai, Kwong and King had all along kept her in the dark about the mortgages taken out in 2005 and the subsequent legal proceedings.  She was surprised to know of the possession order when notice was posted up at the Property in November 2007.  Lai explained the steps she then took with the assistance of her 2^nd youngest son.  With the grant of legal aid in January 2008, she then managed to file the application to intervene in these proceedings in the same month.

34.According to King, Kwong told her in April 2005 that his factory in the Mainland needed capital and asked for her help by acting as his guarantor for a loan.  She agreed and the mortgage in favour of Freeway Finance was executed.  At the subsequent requests of Kwong, King also agreed to join him in borrowing from Flying Mortgage by way of further mortgages in May and September 2005 respectively.  As mentioned above, the last loan was used to repay the mortgage in favour of Freeway Finance.

35.King admitted that she never revealed these loans and mortgages of the Property to any family member.  It was only after the order has been made against her in September 2007 then she revealed what had happened to her eldest sister.

36.Leung Chi Yan gave evidence as a director of Flying Mortgage.  According to him, it was Kwong who approached his company for loan on 26 May 2005.  Kwong was said to have represented to him, both on the telephone and face-to-face, that the Property belonged to him and King and that no one else apart from them occupied the Property.

37.According to Leung, his company assumed that Freeway Finance, as the 1^st mortgagee, had the title deeds.  Flying Mortgage did not require the title deeds.  Essentially, it relied on the land search and the borrower’s answers to their inquiry.

38.Had inquiry been made as to the title deeds, it would have been revealed that Flying Mortgage’s assumption was wrong.  Freeway Finance in fact never had the title deeds.  It would also have been revealed that neither Kwong nor King had access to the title deeds.

39.However Mr Chai submitted that failure to inquire about the title deeds would not fix the mortgage with notice of any right or interest existing in the Property.  He relied on Hudson v Viney [1921] 1 Ch 98.

40.For a subsequent purchaser for value without actual notice of a prior equity to be postponed to that equity, it suffices that he has been guilty of negligence so gross as to render it unjust to deprive the prior equity of its priority.  Gross negligence in this context means at least carelessness so aggravated a nature as to amount to neglect of precautions which an ordinary reasonable man would have observed, and to indicate an attitude of mental indifference to obvious risks.  Insofar as the above principles are concerned, Hudson is accepted by parties as the authority.

41.But as Mr Wong for Lai pointed out, the mortgagee in Hudson did in fact inquire into the root of title and the title deed to the mortgaged property.  What the court held was that it was not necessary to make inquiry in relation to an earlier deed in the root of title and therefore failure to make such inquiry would not fix the subsequent purchaser with notice of the same.  Hudson is therefore not an authority for the proposition that failure for the mortgagee to inquire about the title deeds would not fix the subsequent purchaser with notice of any pre-existing unwritten equities in the property.

42.Mr Chai referred to the Australian case of Australian Central Credit Union v Commonwealth Bank of Australia, 4 ACSR 145.  In that case, a chargee registered the security under certain statute but somehow failed to register the same under certain company code.  It was actually mandatory to register under the code but not the statute.  The Supreme Court of South Australia considered that a reasonable business person would not have suspected a chargee, whilst taking the precaution to do the discretionary registration of the security under the statute, would not take the precaution of doing the mandatory registration under the code.  Therefore a person who cared to rely on the registration under the code should not be held to lose priority because he has failed to search the registration under the statute.  The circumstances of the present case are hardly similar to this Australian case.

43.Each case is to be decided on its own facts.  But I agree with Mr Wong that the case of Oliver v Hinton [1899] 2 Ch 264, which was cited and distinguished in Hudson (at 104-105), is more akin to the circumstances of the present case.

44.The issue is not merely whether Flying Mortgage taking a 2^nd mortgage was reasonably expected to ask for the title deeds.  The issue is also whether it could reasonably assume that Freeway Finance, as the 1^st mortgagee, was in possession of the title deeds.

45.On the one hand, Leung’s such assumption suggests that the 1^st mortgagee ought to have the title deeds.  On the other hand, he suggested that title deeds were basically immaterial because the borrower could always declared that they had been lost and obtained duplicates for subsequent mortgage purpose.  He did not ask for the title deeds upon the execution of the mortgage in September 2005 which would repay and replace the 1^st mortgage to Freeway Finance.

46.Somehow Flying Mortgage allegedly cared to inspect the Property.  According to the pleading, it was one of Flying Mortgage’s staff members who inspected the Property on 30 May 2005.  It transpired that this staff member was also Leung, the director.

47.Allegedly appointment was made with King who accompanied him in inspecting the Property on 30 May 2005.  King strenuously denied that.  According to her, she did not know Leung at all and had been to the office of Flying Mortgage only twice to sign documents presumably for the 2 mortgages in 2005.

48.There was no company record of such inspection.  But it was not that report was not necessary because Leung said he had given a verbal report of his inspection to his company.  There was still not a single document recording or referring to that.

49.Mr Wong submitted that even assuming that Leung did inspect the Property as alleged, the setting and arrangement inside the Property sufficed to put a reasonable person on notice of the existence of occupiers other than merely Kwong and King, as Leung was allegedly given to understand.

50.According to Leung, he saw no discrepancy between what was revealed by the inspection and what was represented by Kwong and King.  However he admitted that he was unable to see one of the 3 bedrooms as the same was locked during his inspection.

51.According to Lai and King, there was a bunk bed in each of the 3 bedrooms.  As mentioned above, they managed to tell the distribution of the rooms among the family members who occupied them at different stages in the past decades.  There were the few photographs.  Lai and King confirmed that the bunk bed in Lai’s room has been there for over 10 years.  This happened to be the room that Leung allegedly did not view.

52.King was said to have explained that the room was used as storage for Kwong who was not in Hong Kong.  She allegedly had no keys to the room.  In my view, a reasonable mortgagee would not have stopped at that.  Otherwise, this would not have differed from relying on the borrower’s assertion instead of independent inspection.  It should also be noted that whilst Kwong was allegedly absent from Hong Kong on the day of inspection, he must be present 2 days later at Flying Mortgage’s office to execute the mortgage.

53.As mentioned above, there was the bank’s written confirmation in 2008 that Lai reported her address as that of the Property in 2002.  When asked, Leung suggested that had this written confirmation been available to his company in 2005, he would still have dismissed its importance because this only reflected Lai’s unilateral suggestion.  Like Mr Wong, I finding this attitude and approach to be alarming.

54.Leung sought to distinguish the present case from a case involving a matrimonial home.  But according to him in court, Leung did not even inquire into the marital status of Kwong.  Had such inquiry been made, it would have been revealed that Leung is married.  If what Leung said about Kwong’s representation that he and King were the only occupiers of the Property were true, one would wonder where Kwong’s wife lived.  Leung somehow had the idea that even if he had known that Kwong was married, he would not have been put on inquiry because Kwong and his wife could have resided at different addresses.  As mentioned above, the fact was that Kwong has moved out of the Property upon marriage in 1988 and were residing with his wife at one of Lai’s rented units at San Fat Estate.

55.I accept the evidence of Lai and King.  Considering the evidence including the attitude of Flying Mortgage in processing the loan application, I have grave doubt as to whether Leung did inspect the Property as alleged.

56.Indeed the result of any inquiry if made might somehow depend on whether the borrower would tell the truth.  The borrower may also misrepresent the situation.  This however does not justify not making the reasonable inquiry in the first place.  If Flying Mortgagee chose to neglect making inquiry into the title deeds and the actual occupation of the Property, it assumed the risk of being fixed with constructive notice of interest of person other than apparent owners of the Property.

57.I find that Flying Mortgage had constructive notice and therefore took the mortgages of the Property subject to the beneficial interest of Lai.  In the circumstances, its claim for possession against Lai must fail.  Lai is entitled to the declaration of her beneficial interest in the Property.

Order

58.The claim against Lai is dismissed.  I grant a declaration that Lai is the sole beneficial owner of the Property and that Kwong and Lai held and still holds the same on trust for her.

59.Costs should follow the event so that Flying Mortgage shall pay Lai her costs of this action, including any costs reserved.  Costs shall be taxed, if not agreed, with certificate for counsel.  Lai’s own costs shall be taxed in accordance with the legal aid regulations.  I make a nisi costs order to the same effect, which shall become absolute in the absence of application within 14 days from the date hereof to argue costs.

Mr Michael CHAI instructed by Messrs Joseph Leung & Associates for the Plaintiff

Mr William WONG instructed by Messrs Fairbarin Catley Low & Kong for the 2^nd Defendant upon the assignment of the Director of Legal Aid