Priority as between (1) the assignment of the net proceeds of any future sale of property and (2) a charging order over the property

In Winland Finance Limited v Gain Hero Finance Limited ([2022] HKCFA 3) the Court of Final Appeal had to consider the order of priority as between (1) the assignee of the net proceeds of any future sale of a flat; and (2) a creditor with a charging order over the flat.

T owned a flat in Kowloon (‘the flat’). In June 2014, T entered into a loan agreement with Winland Finance Limited (‘WF’). T borrowed HK$2.1 million from WF and assigned to WF the net proceeds of any sale of the flat.

In November 2014, T entered into a further loan agreement with Gain Hero Finance Limited (‘GH’). In June 2015, GH obtained judgment against T for breach of the agreement. In August 2015, GH obtained a charging order absolute over the flat. In March 2017, GH obtained an order for sale of the flat. Under the terms of the order, payment would be made to GH and the surplus of the net proceeds of sale would be paid to T.

WF argued that its earlier loan agreement gave it priority over GH’s charging order. WF failed both at first instance and in the Court of Appeal.The Court of Final Appeal also found in favour of GF.

A charging order takes effect as if it were an equitable charge over the property (High Court Ordinance, s. 20B(3)). A charging order affects land and is registrable at the Land Registry ([31]).

An assignment of the future proceeds of sale of land does not give rise to a proprietary interest in the land ([27]) though a proprietary interest in the net proceeds of sale will arise immediately on sale ([24]). The Court of Appeal had already decided that this assignment was not registrable at the Land Registry.

If T were to sell the flat, the proceeds of sale would have to be applied to discharge the charging order before T would become entitled to the net proceeds of sale (Conveyancing and Property Ordinance, s. 54(1)). T could not give WF any greater interest than he was entitled to ([40]).

In a sense, there is no priority battle between GH and WF since only GH had a proprietary interest in land. On sale, WF would acquire a proprietary interest in the net proceeds of sale after GH’s order had been paid off.

In a loose sense, GH could be said to have priority over WF ([41]).

Michael Lower

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Charging order over share in the family home: striking the balance

In Melco Crown Gaming (Macau) Ltd v Wong Yam Tak ([2016] HKEC 237) title to the family home was in H’s name but W had an equal beneficial interest under a common intention constructive trust. M was granted a charging order nisi in May 2013 and (having been duly registered) this had priority over a consent order made in July 2013 in matrimonial proceedings ordering H to transfer his interest in the property to W ([43] Deputy Judge Yee).

The normal practice would be for the court dealing with ancillary relief in the matrimonial proceedings also to deal with the charging order. Here, however, there was unlikely to be any further application for ancillary relief ([48] – [49]).

Section 20(3) of the High Court Ordinance requires the court to consider all the circumstances of the case when considering whether or not to make the charging order absolute. It has to consider the personal circumstances of the debtor and whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order. The factors to be borne in mind and the orders that might be made were considered by the English Court of Appeal in Kresmen v Agrest ([2013] EWCA Civ 41). There is a need to strike a balance between the expectations of the creditor and the hardship to W and the children. In Melco, W’s daughter was adult and independent so only W’s interest in having a roof over her head was relevant.

Here, even if the charging order over H’s share were made absolute, Melco could not expect to succeed in an application for an order for sale ([57]). Thus, a fair balance could be struck by making the order absolute. W would remain in exclusive occupation of the property ([58] – [59]).

Michael Lower

Does a charging order sever a joint tenancy?

In Ho Hai Kwan v Chan Hon Kuen ([2015] HKEC 132, CFI) the question was whether there had been an equitable severance of a joint tenancy by virtue of a charging order in respect of the property against one of the co-owners. Was it an act operating on the joint tenant’s share? There were obiter dicta in previous Court of Appeal decisions (Malahon Credit Co Ltd v Siu Chun Wah Alice and Fortis Bank v Yu Kam Hoi Herman) to suggest that this was the case. In this case, it was successfully argued that a charging order did not have this effect. The argument was that a charging order (enforceable in the same way as an equitable charge by virtue of section 20B(3) of the High Court Ordinance) does not confer any title on the person who obtained it but merely creates an encumbrance ([19]). Thus, a charging order had no effect on the four unities of the joint tenancy and was insufficiently final and irrevocable; there was no alienation ([20] – [31]). The charging order did not sever the joint tenancy ([58]).

Michael Lower