WONG CHIT SEN v. TSE KWONG LAM

HCA002102C/1966

Action 1966, No. 2102

 

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

____________

 

BETWEEN

	TSE KWONG LAM	Plaintiff
	and
	WONG CHIT SEN	Defendant
	(BY COUNTER-CLAIM)

_________

 

Coram: Hon. Mantell, J.

Date of hearing:  26th to 29th November 1984

Date of delivery of reasons for judgment: 10th December, 1984

________________________

REASONS FOR JUDGMENT

________________________

 

1. On 29th November 1984 I assessed damages at $800,047 with interest certified at $2,477,525 and consequently gave judgment for the plaintiff in the sum of $3,277,572 with costs. I directed that time for appealing should not begin to run until such date as I handed down my reasons.

2. This matter came to me by direction of the Court of Appeal pursuant to the judgment of the Privy Council delivered on 25th July 1983, which sets out the whole of the background making it unnecessary for me to say more.

3. My remit was to determine the best price which would have been reasonably obtainable on 24th June 1966 for 54 specified units in Kwong Hing Building which is situated at the north-eastern junction of Cheung Sha Wan Road and Maple Street in Sham Shui Po, New Kowloon. Having done that, I was to assess the damages due to the plaintiff by counterclaim on the basis of the difference, if any, between that figure and the price actually realized at a sale by auction on 24th June 1966, namely HK$1.2 M., less the costs of sale. I was also required to determine the interest due to the plaintiff by counterclaim on such damages which was to be at 1.4% per calendar month from 24th June 1966 until the date of certification which was, in the event, 29th November 1984. Once damages were assessed, the last matter became one of arithemetical calculation only.

4. The evidence which I was able to receive was the relevant evidence given at the trial and any further evidence including that of not more than two experts on each side.

5. It was argued that I ought to have entertained further evidence as to the steps which were taken by or on behalf of the mortgagee in connection with the sale, not being matters given in evidence before the trial judge. The submission was that such evidence ought to have been received as going to the assessment of damages. I did not agree. Of course it was possible to say that if all reasonable steps had been taken by the mortgagee to obtain the best price then it was open to inference that the price actually obtained was the best reasonably obtainable. But it had been held that the mortgagee did not take all such reasonable steps, or, at least, that he had not discharged the burden of showing that he had; and in my judgment it was not an issue which I was free to consider afresh.

6. At trial, Zimmern, J. had before him a valuation report expressing an opinion that the units were worth a total of $2,206,300. That valuation was criticised in the Court of Appeal and by the Privy Council, as being made on the assumption that a sale would take place of individual units over a period of time, and, so it appeared to the Court of Appeal, as having been based upon insufficient information. There was also evidence of an offer made by Wing On Assurance Co. to the mortgagor on 26th April 1966 to advance $1.5 M. on the security of the building. Since there was further evidence that the Assurance Company mould not usually lend more than 70% of the value of the property charged, it was possible to extrapolate a value of $2.15 M, which is what the learned trial judge did. The basis for his conclusion has also been criticized in that there was no direct evidence of valuation from the assurance company and none of any possible fall off in the property market between 26th April and 24th June. Otherwise the Privy Council considered the evidence cogent and it is one of the unusual circumstances of this case that it has come to me even though it has never been suggested that there was no evidence upon which Zimmern J. could make an assessment, or that the figure he arrived at was not supported by the evidence, or that he applied the wrong measure.

7. I have disregarded the earlier valuation report in favour of the additional evidence called before me which more precisely addresses the question posed by the Privy Council. Since the deficiencies noted with regard to the offer of an advance by Wing On Assurance have not been made good, that piece of evidence, also, has played no part in my decision. It has been urged that there is a third piece of evidence which was before the trial judge of which I should have taken account, namely the fact that the property was sold on the 24th June at public auction for $1.2 M. At the auction there has only one bid, that of the mortgagee. There has been no evidence that there were others present, ready, willing and able to bid at what would have been a fair market value. So far as anyone has been able to say the only reason for the price reaching $1.2 M. was that it had been fixed as the reserve by the mortgagee. In my judgment the fact that the price at which the property was sold on the day was $1.2 M. did not assist me at all in assessing a fair market value except to the extent that it allowed me to say that a fair market value could not have been less than $1.2 M.

8. The experts whose reports were placed before me and who were called to give evidence were Mr. Wilburn and  Mr. Fry, for the plaintiff by counterclaim and the defendant respectively. Both were eminently qualified to give evidence as to the value of real property in Hong Kong. Both would have agreed that it was no easy job to attempt a valuation of property as at some specified date more than 18 years ago. The best each has been able to do was to seek out comparables or other relevant, contemporary criteria to serve as a basis for his opinion. I was impressed with the care and skill each of them brought to bear upon a very difficult task. From recollection and available evidence Mr. Fry thought that he was able to detect a general decline in property values throughout 1966 whereas Mr. Wilburn could only discern any such decline taking place in the second half of 1966. Mr. Fry's view was supported by that of Mr. Watson, the very experienced auctioneer. For my part I accepted that the property market did suffer a decline throughout 1966 which included the period between Wing On offering to lend money and the date of the auction.

9. For the purposes of their report, both Mr. Wilburn and Mr. Fry divided the premises up into the ground floor, that is to say shop areas, the first and second floors available for non-domestic use, and upper floors, that is the domestic units. Mr. Wilburn valued the ground floor shops at $585,000 and Mr. Fry at $579,000. They could hardly have been closer. Each acknowledged that the other could be right. The burden was upon the plaintiff by counterclaim and I adopted the valuation of Mr. Fry. In doing so I kept in mind that it was at the lower end of the bracket. For the first and second floors Mr. Wilburn arrived at a figure of $490,000 and Mr. Fry at one of $340,000. Here was a considerable divergence. It was explained by their difference of approach. Mr. Fry was unable to find anything which he was prepared to use as a comparable and so made use of a formula based upon the proportion which the rateable value of the first and second floors bore to that of the domestic units as assessed in 1967. Mr. Wilburn, on the other handy thought that he was able to find something with which to make comparison. It was a small unit with a flat roof and for that reason discounted by Mr. Fry; but Mr. Wilburn who saw it from both the outside and from within said that it had enabled him to form a judgment as to the value of the first and second floors as at the relevant date. Of course he would have been the first to confess to a shortage of available data but, as I accepted, doing the best he could came to the conclusion that the first floor space eras worth $100 Por sq. ft. at the relevant date and the second floor $96 per sq. ft. as contrasted with Mr. Fry's $68 per sq. ft. overall. That was a rather higher rate than was produced by his one comparable, but he told me that the superior position of the subject premises more than compensated for any weighting to be given to the comparable on account of its small area or flat roof. I did not think that Mr. Fry's method was likely to produce a reliable result. Rateable value in turn depends upon rental value which in its own turn is largely determined by capital value. There has been no evidence from anyone who valued these premises for rating purposes and Mr. Fry himself acknowledged that his approach was very much a last resort having not been able to find any comparable from which to work. If one accepts, as I did, that the comparable made use of by Mr. Wilburn is valid for the purpose then Mr. Wilburn's professional evidence as to the value of the first and second floors had to be preferred to that of Mr. Fry's. Therefore I adopted the figure of $490,000 in relation to those floors. Both Mr. Wilburn and Mr. Fry made use of comparables with regard to the upper floors. Mr. Wilburn arrived at a figure of $65 per sq. ft. overall producing $1,045,000 and Mr. Fry thought an overall figure of $60 per sq. ft. more appropriate, producing a total of $964,500. Once again the experts were not so far apart as to force a conclusion that one or other of them must be wrong. Mr. Wilburn paid rather less regard to comparables within the subject building than did Mr. Fry on the ground that he could not be sure of the dates of the transactions resulting in the recorded sale prices. On the material before me it seemed probable that some of the comparables at least had rather more relevance than Mr. Wilburn was prepared to admit. Consequently, for that reason and also because it was for the plaintiff by counterclaim to show that the higher figure ought to be preferred, I took Mr. Fry's figures for the upper floors as my own.

10. Putting those figures together I arrived at the global sum which formed my assessment of damages. Mr. Fry said there ought to be a discount of 15% for the fact that this was to be a block sale. In support of that he argued that any purchaser in 1966 would have wished to resell and would therefore have required a margin for profit. He did not allow the possibility of anyone buying for investment. Statistics, however, showed that whereas a small proportion of such properties were built for re-letting by the developer, nevertheless, more often than not, they were purchased with a view to letting out. In my judgment, "the best price reasonably obtainable" means that which would have been paid on the day, and, if there is substance in Mr. Fry's conjecture, that would most likely have come from someone looking to invest in the property market. Any discount for block purchase ought to have been taken account of in the valuation process which was aimed at establishing a global figure and not the valuation of individual units. That is how Mr. Wilburn viewed it and I thought he was right. In my judgment no further discounting of the aggregate figure was appropriate.

11. For those reasons I reached the assessment as indicated.

(C. B. K. Mantell ) Judge of the High Court

Representation:

Donald Rattee, Q. C. & Sammy Lee (Hastings & Co.) for Plaintiff

Denis Chang, Q. C. & Ronny Wong (Johnson, Stokes & Master) for Defendant

HCA002102B/1966

1966, No. 2102

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

_____________

 

BETWEEN

	TSE KWONG LAM	Plaintiff
	and
	WONG CHIT SEN	1st Defendant
	CHING WAI SHORK (or SHOOK)	2nd Defendant
	CHIT SEN COMPANY LIMITED
	(By counterclaim)	3rd Defendant
	_____________

Coram: Hon. Mantell, J. in Chambers

Date of hearing: 11th October 1984

Date of delivery of ruling: 11th October 1984

_______

RULING

_______

 

1. An unusual situation has developed. I need not rehearse the whole of the background, which goes back a very long way. Suffice it to say that this action was eventually heard on appeal by the Privy Council and one matter was left undecided; that was quantum of damages. The question was remitted by the Privy Council to the Court of Appeal in Hong Kong for the giving of directions as to how that assessment was to be made by a Judge of the High Court. The Court of Appeal, having heard argument, in particular with regard to the number of expert witnesses to be called on matters of valuation, ordered that the number be limited to a maximum of two on each side. The Defendant by counterclaim now wishes for an Order varying that Order of the Court of Appeal so that it might be possible for three expert witnesses to be called. The point has been taken by Mr. Lee for the Plaintiff by counterclaim, that I do not have jurisdiction to vary an Order made by the Court of Appeal. At first blush, that submission would seem to be right particularly since the Order was made after argument and did not, in terms, invest the Judge of the High Court charged with hearing the assessment of damages with any further discretion to make directions in relation to matters covered by the Order of the Court of Appeal. And nothing said to me in argument has persuaded me otherwise. Therefore, I decline to exercise jurisdiction in this matter.

2. I indicate now, as I did at the beginning, that had the parties been prepared to agree that I should have jurisdiction in this matter, I would have exercised it as it seems to me to be right that, in a matter of this sort, it should be open to the Judge hearing the assessment to make further directions as seem necessary.

	(C.B.K. Mantell )
	Judge of the High Court

Representation:

Sammy Lee (Hastings & Co.) for Plaintiff

S.A. Burns of Johnson, Stokes & Master for Defendants

HCA002102/1966

IN THE HIGH COURT	1966 No. 2102
	(Civil)

BETWEEN
	WONG CHIT SEN	Plaintiff
	AND
	TSE KWONG LAM (By original Action)	Defendant

and

BETWEEN
	TSE KWONG LAM	Plaintiff
	AND
	WONG CHIT SEN	1st Defendant
	CHING WAI SHORK (or SHOOK)	2nd Defendant
	CHIT SEN COMPANY LIMITED (By Counterclaim)	3rd Defendant

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:

1.	Whether the sale was a proper sale or whether, in equity, it was a sale which can be set aside and or damages awarded for collusion and bad faith (equitable fraud) and or negligence in relation to the sale.
2.	Whether, in equity, the 1st Respondent as mortgagee should have taken the money paid to him from the pre-sale of units to satisfy interest so that interest would not have been owing.

3.

(a)

Did the Mortgage Deed oblige the 1st Respondent as Mortgagee to release part of his security so as to permit the pre-sale of units.

	(b)	(i)	Whether in fact the Mortgage Deed in law or in equity obliged the claimant to pay over the purchase money of the pre-sale of units to the 1st Respondent.
		(ii)	Was the claimant so obliged.

4.	Whether other like transactions between the 1st, 2nd and 3rd Respondents and other land owners are relevant and material to the above issues.
5.	Was the 1st Respondent negligent in the keeping and rendering of the accounts of the mortgage so as to entitle the claimant to damages.

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:-

(1)	$730,000 on 30/11/63 @ 1.2 per cent per month interest payable monthly,
(2)	$770,000 for the building by ten instalments commencing 30/3/64 ending 28/5/65.

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.

	"7.	Matters for Discussion:
	(1)	Whether or not to take part in the auction of six shops on the ground floor and all offices on the 1st and 2nd floor and 36 residential flats on the upper floors of Kwong Hing Building at Nos. 52 - 54 Cheung Sha Wan Road.

Resolutions

	(A)	Wong Ching Wai Shork (2nd Respondent) be appointed to attend at the office of the Lammert Brothers before 3 p.m. on the 26th June of this year to take part in the auction of Kwong Hing Building but in principle the bidding price shall not exceed $1,200,000.
	(B)	The amount of short fall shall be provided by the Company."

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:

	"It is impossible to pretend that the state of the authorities on this branch of the law is entirely satisfactory. There are some dicta which suggest that unless a mortgagee acts in bad faith he is safe. His only obligation to the mortgagor is not to cheat him. There are other dicta which suggest that in addition to the duty of acting in good faith, the mortgagee is under a duty to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment he chooses to sell it: compare, for example, Kennedy v. de Trafford [1896] 1 Ch. 762; [1897] A.C. 180 with Tomlin v. Luce (1889) 43 Ch.D. 191, 194.
	The proposition that the mortgagee owes both duties, in my judgment, represents the true view of the law. Approaching the matter first of all on principle, it is to be observed that if the sale yields a surplus over the amount owed under the mortgage, the mortgagee holds this surplus in trust for the mortgagor. If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket. The mortgagor is vitally affected by the result of the sale but its preparation and conduct is left entirely in the hands of the mortgagee. The proximity between them could scarcely be closer. Surely they are 'neighbours.' Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take reasonable care to obtain what I call the true market value at the date of the sale. Some of the textbooks refer to the 'proper price,' others to the 'best price' Vaisey J. in Reliance Permanent Building Society v. Harwood-Stamper [1944] Ch. 362, 364, 365, seems to have attached great importance to the difference between these two descriptions of 'price.' My difficulty is that I cannot see any real difference between them. 'Proper price' is perhaps a little nebulous, and 'the best price' may suggest an exceptionally high price. That is why I prefer to call it 'the true market value.'"

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