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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ASSESSMENT OF DAMAGES

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1. The parties were last before me on 20 February 2008 for an assessment of damages hearing.  My decision was given on the same day with reasons handed down on 29 February 2008.  I do not feel the need to dwell in detail on what has been discussed previously.

2. In gist, pursuant to the judgment granted by Deputy Judge Carlson of the High Court on 25 July 2006, I am tasked with the assessment of damages.  In this case a Master is not tasked with the jurisdiction to adjudicate on the liability and the date of the breach which gave rise to the liability.  What I am entitled to do is to construe the date of breach from the judgment of Judge Carlson and assess the damages suffered by the plaintiff from the date of the said breach.

3. The breach described by Judge Carlson at paragraph 13 of his judgment reads: -

“I am satisfied that there can be no arguable defence to the claim for the declarations sought by the plaintiff……  The plaintiff has validly exercised its right of redemption which the defendant refuses to recognize.  These purported sale and purchase agreements represent a fetter on the plaintiff’s undoubted right of redemption…...”

4. What was said by Judge Carlson was reasonably clear to show Judge Carlson was considering the defendant’s act of clogging the equity of redemption of the plaintiff.  For the purpose of the present assessment, I shall ignore other possible acts of breaches.

The Assessment

5. The subject matter in dispute centers around the defendant’s purported exercise of its power of sale of the 2 mortgaged properties pursuant to loan agreements entered into between the plaintiff and the defendant.  The 2 mortgaged properties in question are:

(a)   Flat B-5 on the 7^th floor of Block B, Tai Hong Building at No. 28-30 Yuet Wah Street in Kowloon (the 1^st Property); and

(b)  The rear portion on the 4^th floor of number 408A Des Voeux Road West in Hong Kong (the 2^nd Property).

6. I recap the chronology of events previously set out in paragraph 9 of my judgment of 29 February 2008 for easy reference here: -

5/8/04	The plaintiff executed legal charges over the 1st and the 2nd property for 2 loans of HK$320,000 and HK$430,000 respectively.
	The 2 loans, by way of agreements written in Chinese, were for a contractual period of 6 years with a yearly flat rate of interest of 26.24% (which amounts to an effective rate of interest of 38.4% per annum).  The monthly repayment sums, inclusive of interest, were agreed at HK$11,441 and HK$15,374 respectively for the 2 loans.  The monthly payments were to be paid on or before the 5th of each month, commencing on 5 September 2004.
	From 5 September 2004 to 5 July 2005 the plaintiff made its payments on time.
5/8/05	The plaintiff failed to make payment of the instalment payments from 5 August 2005 to 16 August 2005.  On 16 August 2005 the plaintiff repaid the monthly instalments for the month of August 2005.  Since 16 August 2005 the plaintiff made punctual repayment of all monthly sums till February this year.
3/9/05	The plaintiff received offer from a prospective purchaser to buy the 2nd property at a purchase price of HK$934,000 with the date for completion set for 18 October 2005.
5/9/05	After receiving the 3 September 2005 offer, the plaintiff instructed its solicitors to secure a discharge of the legal charges over the two mortgaged properties.  Solicitors acting on behalf of the plaintiff wrote to the defendant to request for the supply of title deeds as well as an account of the redemption amount up to 18 October 2005.
7/9/05	Solicitors for the defendant replied to the plaintiff’s solicitors by letter to state a sum of HK$1,125,204 was payable on 18 October 2005 in respect of the 2 loans. (Judge Carlson at paragraph 6 of his judgment noted defence agreed the amount outstanding should be in the order of HK$760,000 in September 2005.)
8/9/05	The plaintiff did not agree with the calculation.  Written request, through solicitors, was made to the defendant for a breakdown of the outstanding sum.  The defendant gave no reply to the plaintiff’s request.
12/9/05	The plaintiff, through its solicitors, again wrote to the defendant’s solicitors demanding a breakdown of the calculation of the amount of payment.
16/9/05	The plaintiff received a phone call from a person who indicated he was the defendant’s collection agent.  The caller intimated to the plaintiff that the plaintiff had to pay a sum of HK$300,000 to the defendant since the defendant has already sold the properties.
20/9/05	Solicitors of the plaintiff wrote to the solicitors of the defendant seeking confirmation about the indicated sale of the properties by the defendant.  The defendant again gave no reply to this letter.
22/9/05	The plaintiff, through its solicitors, again wrote to the defendant’s solicitors demanding an answer to their previous requests.
6/10/05	The plaintiff, through its solicitors, wrote to the defendant’s solicitors yet again to demand for the breakdown of the repayment amount.
	Round about the same period of time, the plaintiff’s solicitors conducted land searches and found 2 sale and purchase agreements dated 22 September 2005 and 21 September 2005 respectively registered in respect of the 2 mortgaged properties.
	The registered agreement showed the defendant agreed to sell the 2nd property at a purchase price of HK$980,000 with the date of completion of 28 February 2006.
25/11/05	The plaintiff wrote, through its solicitors, to object to the purported sales of the 2 properties by the defendant.  The defendant again gave no reply.
30/11/05	The plaintiff further pressed the defendant for a reply.
5/12/05	The plaintiff again pressed the defendant for a reply.
10/12/05	The plaintiff took out the present writ to compel the defendant to refrain from completing the purported sales of the 2 mortgage properties.
4/1/07	The plaintiff received a 2nd offer of land purchase in respect of the 2nd property and signed a sale and purchase agreement for a purchase price of HK$1,020,000.

7. Judge Carlson was satisfied the defendant had acted clandestinely in clogging the plaintiff’s right to redemption when the defendant purported to exercise its power of sale after an 11-days default in effecting repayment of the monthly sums.

8. Apart from granting injunctions and declarations to retrain the defendant from selling the 2 mortgaged properties, it was Judge Carlson’s order that the damages of the plaintiff are to be assessed by a Master.  The relevant orders granted were: -

“ (1) a declaration that the Defendant is not entitled to sign the Agreement for Sale and Purchase dated the 22^nd September 2005 and registered at the Land Registry on 14^th October 2005 under Memorial No. 05101402390047 (“the 1^st SPA”) as the purported attorney of the Plaintiff;

   (2) a declaration that the Defendant is not entitled to sign the Agreement for Sale and Purchase dated the 21^st September 2005 and registered at the Land Registry on 7^th October 2005 under Memorial No. 05100701940032 (“the 2^nd SPA”) as the purported attorney of the Plaintiff;

   (3) an injunction to restrain the Defendant whether by itself or its agent or otherwise howsoever from completing the sale and purchase of a 1^st property known as B5 on the 7th Floor of Block B, Tai Hong Building, Nos. 28-30 Yuet Wah Street, Kowloon (“the 1^st Property”) under the 1^st SPA;

   (4) an injunction to restrain the Defendant whether by itself or its agent or otherwise howsoever from completing the sale and purchase of a 2^nd property known as the 4^th Floor (Rear Portion), No. 408A Des Voeux Road West, Hong Kong (“the 2^nd Property”) under the 2^nd SPA;

   (5) an injunction to compel the Defendant to cancel or rescind the 1^st SPA as soon as practicable;

   (6) an injunction to compel the Defendant to cancel or rescind the 2^nd SPA as soon as possible;

   (7) damages to be adjourned for assessment by a Master.”

9. From the written judgment of Judge Carlson, it was clear that Judge Carlson was satisfied the defendant was not entitled to exercise its power of sale of the 2 mortgaged properties.

10. From the facts disclosed by the parties the plaintiff has written to the defendant on 5 September 2005 through its lawyer to evince an intention to redeem the 2 mortgaged properties and asked for an account of the outstanding payments on 18 October 2005 intending to redeem the 2 mortgaged properties.

11. Factually the 2 sale and purchase agreements were not signed until 21 September 2005 and 22 September 2005.  The plaintiff’s request to redeem was sent to the defendant’s solicitor on 5 September 2005 which obviously pre-dated the purported sale by the defendant of 21 September 2005 and 22 September 2005.  There is no evidence to show when the defendant entered into provisional agreements for sale in respect of the two properties.  There is no inking of fact to suggest the purported agreements for sale of the 2 properties were arrived at prior to 5 September 2005.  The defendant cannot possibly claim ignorance of the plaintiff’s intention to redeem since the defendant has responded through his own solicitors to the plaintiff’s request on 7 September 2005.  In the letter of 7 September 2005 the defendant’s solicitors never mentioned the 2 mortgaged properties had been sold or were in the process of being sold.  The natural and logical inference to accept was there was no intended sale of the mortgaged properties on 7 September 2005 as well as on 5 September 2005 when the plaintiff gave its indication to redeem.

12. The plaintiff does not take issue about the legality of the 2 loan agreements and the enforceability of the terms therein.

13. In this hearing counsel on behalf of the plaintiff confirmed his stance that the plaintiff is only seeking damages for overpaid interest in respect of the defendant’s wrongful acts of clogging the plaintiff’s right to redemption.  The plaintiff is contented to accept the date of breach to be 18 October 2005 in respect of the defendant’s wrongful act of clogging the plaintiff’s right to redemption.  The sum the plaintiff is seeking is HK$38,258.51 (being the sum total of interest overpaid since 18 October 2005 deducting the amount of loan principal as stated in paragraph 19 of my judgment of 20 February 2008; i.e. $229,307 + $308,129 + $5,574.19 + $7,490.32 - $218,561 - $293,681).

14. Defence counsel advanced the arguments that in assessing the damages of the plaintiff, this court has to bear in mind (i) firstly the reasonableness of the plaintiff’s action in refusing to agree to the sale of the property by the defendant when the defendant was able to secure a buyer for a price higher than the potential buyer of the plaintiff; (ii) secondly in quantifying the damages this court ought to bear in mind the damages the defendant suffered as a result of the early termination of the loan agreements by the plaintiff as well as the incurrence of the loan recovery agent fees as a result of the late payment of the plaintiff for the 11 days in August 2005; and (iii) last but not the least, as the property market was on the rise, the plaintiff suffers no real financial loss despite the defendant’s wrongful acts of clogging the plaintiff’s right to redeem.

15. I do not find the plaintiff’s acts unreasonable in seeking an early redemption on 18 October 2005 and to effect a sale of its property to potential buyers of its own choice for the following reasons: -

(i)    the plaintiff only intended to sell off one of its 2 mortgaged property rather than both mortgaged properties;

(ii)  the date of completion of the solicited sale of the 2^nd property by defendant was on 28 February 2006 which was about 4 months after the intended date of redemption of 18 October 2005. Defence counsel made calculation and accepted that the interest incurred in respect of the 2 loans for the 4 months from October 2005 to February 2006 would be HK$89,412.  This amount exceeds the increase in sale price of the 2^nd property ($980,000 - $934,000 = $46,000).  The plaintiff would certainly be worse off should the defendant be allowed to insist on completing the land sale in February 2006.

16. Defence counsel does have a case to argue when attempting to seek redress concerning the defendant’s right to damages for early termination of the loan agreement and loan recovery costs in respect of the plaintiff’s late payment.  Defence counsel fairly concedes no documentary evidence has been placed before court for the purpose of the present assessment hearing on the head of liquidated damages for early termination; nor have the recovery agent fees been pleaded in the defence and counterclaim.  One does have to abide by the rules of the pleadings and the Court should not adjudicate on factual issues which parties have not been given an opportunity to consider or to take objection upon in their respectively pleadings.  Nor do I feel just to grant leave for the defendant to amend its pleadings at this late stage to occasion further costs on a disputed sum of HK$38,258.51.

17. I do not find favour with the argument that the defendant would be entitled to cash upon the increase in land value and benefit from the increase in the value of the landed property as a result of the defendant’s own wrongful act in denying the plaintiff’s right to sell.

18. I do enter judgment in favour of the plaintiff in the sum of HK$38,258.51

19. Costs to follow the event in respect of this assessment hearing. I award the plaintiff’s costs of this assessment hearing with its quantum to be taxed if not agreed between the parties.

20. Arguments have been advanced by defence counsel that the scale of costs for the present hearing ought not be granted at the High Court scale as the financial relief sought is well below the HK$1 million threshold.  I do accept the quantum crystallized is well within the Small Claim jurisdiction if this item of damage is singled out on its own, yet the matter started off with a plea for injunctive reliefs against the defendant for wrongful sales of 2 landed property.  I was so informed in the present hearing the legal charges in respect of the 2 mortgaged properties have not yet been discharged.  The subject matter in dispute between the litigants is really their right to dispose of the 2 landed property.  There was no dispute that the value of the 2 property well exceeded the HK$1 million jurisdictional limit, I find the proper scale to grant is costs at High Court scale.

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

(by Counterclaim)

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Before: Deputy High Court Judge Carlson in Chambers

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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