Bank Of China (Hong Kong) Ltd v The Secretary For Justice And Another

HCMP 1820/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1820 OF 2014

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J U D G M E N T

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Introduction

1. This is an originating summons by way of an interpleader. The property at stake is the balance of the proceeds of sale of a property in the sum of $15,254,378.47 which was paid into court in August 2014. The property sold was Flat B on 12^th Floor, Tower 25 (Phase IVB) Ocean Vista, Laguna Verde, No 8 Laguna Verde Avenue, Kowloon (“the property”). The property was previously owned by one Mr Tsoi Chit Tsang (“Tsoi”). The contest is now between the two defendants, both of whom lay claim to the entirety of the proceeds. The 1^st defendant, as representative of the Government, claims the money in court on the strength of a restraint and charging order and a confiscation order made under the Organised and Serious Crimes Ordinance (Cap 455) (“OSCO”). The 2^nd defendant is a licensed money lender who claims the money in court as security for a loan advanced to Tsoi on the basis of a mortgage of the property. The issue raised is which of them has priority. The dispute has arisen in the following way.

Factual background

2. On 21 September 2005, Tsoi obtained a loan of $6 million from Bank of China on a mortgage of the property. I shall refer to this as the “first mortgage”.

3. The 2^nd defendant lent $5 million to Tsoi on the security of another mortgage of the property executed by Tsoi and dated 16 October 2008 mortgage and registered in the Land Registry on 11 November 2008. I shall refer to this as the “second mortgage” and to the loan of $5 million as “the first loan”.

4. On 7 January 2009 Tsoi was arrested by the police.

5. In July 2009, the police interviewed a director, the General Manager and an account relationship executive of the 2^nd defendant, presumably in connection with the arrest of Tsoi. In the course of the interview, they were informed that Tsoi, one of the 2^nd defendant’s customers, was involved in a case of money laundering.

6. On 5 October 2010, Tsoi was, along with four others, charged with offences of money laundering under OSCO. There is no evidence that the 2^nd defendant was informed of this or the progress of the criminal proceedings generally.

7. By July 2011, Tsoi had repaid all sums outstanding under the first loan though the second mortgage was not released. On 22 July 2011, the 2^nd defendant agreed to lend another loan to Tsoi in the sum of $15 million on the security of the second mortgage. On 25 July 2011, Tsoi received the loan proceeds of $15 million.

8. On 3 August 2011, the Government obtained in an ex parte application a restraint and charging order pursuant to ss 15 and 16 of the OSCO in proceedings in the High Court (HCMP 1453/2011) against nine respondents including Tsoi. The order prohibited Tsoi from removing from Hong Kong or disposing of any of his property including the property. It was registered in the Land Registry on 4 August 2011. The order was subsequently continued on an inter partes basis.

9. On 16 April 2012, because of the restraint and charging order and Tsoi’s default on the first mortgage, Bank of China commenced a mortgage action (HCMP 734/2012) against him seeking, inter alia, an order for sale. Tsoi defended those proceedings through solicitors.

10. After the second loan was granted, Tsoi continued to pay interest on it until December 2012. The payments made by him up to that point came to a total of $1,400,484. Thereafter he defaulted on the second loan and did not make any further payment to the 2^nd defendant.

11. On 22 May 2013, the 2^nd defendant instituted a mortgage action against Tsoi (HCMP 1153/2013) on the basis of the second mortgage.

12. The trial of the criminal charges against Tsoi commenced on 15 July 2013. He absconded in the middle of the trial which continued in his absence. Eventually Tsoi was convicted on 31 October 2013.

13. On 10 September 2013, Bank of China obtained judgment against Tsoi and an order for possession of the property.

14. On 10 March 2014, a confiscation order was made in the criminal proceedings against Tsoi pursuant to ss 8, 11 and 13 of OSCO. In making the confiscation order the court certified that Tsoi had benefited from the specified offences of which he was convicted and that the value of his proceeds of the specified offences was $231,819,846.71 and the value of the realisable property of Tsoi as of the date of the order was $33,597,064.02. Tsoi was ordered to pay that sum to the Government.

15. On 16 June 2014, the sale of the property (with the consent of the 1^st and 2^nd defendants) was completed. The proceeds of sale after deducting all expenses and charges and repaying Bank of China all sums due under the first mortgage were paid into court to the credit of these proceedings on 28 August 2014 in the amount of $15,254,378.47.

16. As at 8 October 2014, the date of the 2^nd defendant’s affirmation filed herein, the total amount of principal and interest owed by Tsoi to the 2^nd defendant on the second loan was $22,253,074.

The issues

17. It is common ground that a restraint and charging order under the OSCO once granted takes effect as an equitable charge and enjoys the same priority as if it were an equitable charge: s 16(8) of OSCO. A charging order has priority from the day following the day of its registration: s 5A Land Registration Ordinance (Cap 128). The restraint and charging order in this case therefore has priority from 5 August 2011. If the second mortgage is a valid mortgage for a valid loan, there is no dispute that, being prior in time, it would have priority over the restraint and charging order.

18. In order to defeat the 2^nd defendant’s claim, Mr Michael Yin essentially took three points on behalf of the 1^st defendant:

(1) The second mortgage is unenforceable as security for the second loan because the second loan failed to comply with s 18(1) of the Money Lenders Ordinance (Cap 163).

(2) In any event, the priority enjoyed by the second mortgage does not extend to interest on the second loan because interest cannot be “tacked” under s 45 of the Conveyancing and Property Ordinance (Cap 219).

(3) The partial repayment of $1,400,484 made by Tsoi to the 2^nd defendant should be deducted from the principal owed to the 2^nd defendant so that, as a consequence of (2) above, the 2^nd defendant has priority only over the outstanding balance of the principal ie $13,599,516.

19. In the evidence there is in addition a statement that the 1^st defendant does not accept the second loan was a bona fide commercial transaction. Mr Yin however did not put forward a positive case in that regard, being content to leave it to the 2^nd defendant to satisfy the court that the second loan was a genuine transaction. Nor has he sought to cross-examine the deponent of the 2^nd defendant’s affirmation.

Enforceability under the Money Lenders Ordinance

20. S 18 of the Money Lenders Ordinance (Cap 163) provides:

“(1) No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless-

(a) within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b) there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.

(2) The note or memorandum shall contain all the terms of the agreement and in particular shall set out-

(a) the name and address of the money lender;

(b) the name and address of the borrower;

(c) the name and address of the surety, if any;

(d) the amount of the principal of the loan in words and figures;

(e) the date of the making of the agreement;

(f) the date of the making of the loan;

(g) the terms of repayment of the loan;

(h) the form of security for the loan, if any;

(i) the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2; and

(j) a declaration as to the place of negotiation and completion of the agreement for the loan.

(3) Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is...