Priority contest between a charging order and an assignment

Asparouh Ianov Dimitrov v Dominic Tak Ming Lau ([2022] HKCA 1146 ) was a dispute between a creditor with a charging order over the debtor’s property (‘the Property’) and the debtor’s ex-wife to whom the debtor assigned the Property.

The sequence of events was:

• 20 November 2017 –  charging order nisi obtained
• 23 November 2017 –  charging order nisi registered
• 3 January 2018         – debtor assigned the Property to his ex-wife
• 15 January 2018       – charging order absolute obtained
• 19 January 2018       – assignment registered
• 25 January 2018       – charging order absolute registered

The creditor sought a declaration that the charging order had priority over the assignment and an order for sale and succeeded at first instance. The debtor’s wife appealed.

There was no difficulty in confirming that the charging order had priority over the assignment: the priority date for the charging order absolute relates back to the priority date for the charging order nisi ([20]).

Section 5A of the Land Registration Ordinance specifies that a charging order has priority from the day after its registration. The priority date of the charging order was 24 November 2017 (the day after the 23 November 2017 registration).

Section 5 of the Land Registration Ordinance says (in effect) that assignments registered within one month take effect as from the date they were executed. The priority date of the assignment was 3 January 2018.

The debtor’s wife relied (unsuccessfully) on an argument that she had a prior unwritten equitable interest to which the charging order was subject.

She argued, for example, that there was an oral gift of the Property to her before the date of the charging order nisi. She relied on Re Rose to argue that she had an equitable interest because her husband gave her the title deeds.

Hon Chow JA pointed out that her husband had not executed a deed of gift at the relevant time and so had not done everything in his power to divest himself of his interest in the land.

Arguments based on proprietary and / or promissory estoppel failed because, even assuming there to have been an assurance, the wife incurred no detriment.

The declaration that the charging order had priority and the order for sale were upheld.

Michael Lower

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Registrability and priority of an assignment of the proceeds of a future sale of land

In Winland Finance Limited v Gain Hero Finance Limited ([2021] HKCA 576) the Court of Appeal looked at the registrability of a loan agreement where the borrower assigned the right to the net proceeds of any future sale of real property to the lender by way of security. It also looked at the relative priorities of such an agreement and a later charging order.

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. T also gave WF the title deeds to the flat. WF registered the loan agreement at the Land Registry on 17 September 2014.

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 brought proceedings arguing that its earlier, registered loan agreement gave it priority over GH’s charging order or that the delivery of title deeds to it gave it an equitable mortgage with priority over the charging order. WF failed. Yuen JA gave the principal judgment.

First, the WF loan agreement did not relate to land and should not have been registered ([22.2]). Yuen JA expressed the hope that the Land Registry would refuse to register such agreements in the future ([23]).

Second, the WF loan agreement did not disclose any intention that the delivery of title deeds was to give rise to an equitable mortgage.

Third, while the charging order was to be treated as if it were an equitable charge over the flat (High Court Ordinance, s. 20B(3)), WF only had an equitable interest in the proceeds of any future sale. Thus, GH had priority. In fact, GH had a proprietary interest in the flat ([28.1]) and WF did not.

Fourth, it would have been prudent for the masters who dealt with GH’s charging order applications to order service direct on WF but they did not do so ([31.1]). WF, however, did not take any steps to have the order set aside. Had it done so, the court could have considered whether T was insolvent at the time of the charging orders. The court could then have considered the impact of a charging order on the fair distribution of assets.

Michael Lower

Priority as between unwritten equitable interest and lender supplying funds to re-mortgage

Where A supplies part of the purchase price of property conveyed into B’s name then A is very likely to have an equitable interest under a common intention constructive trust or a presumed resulting trust.

When, however, the balance of the purchase price is supplied by a lender who takes a charge over the property, the charge has priority over the equitable interest. An intention is imputed to A that B’s charge should have priority over A’s interest (Bristol & West Building Society v Henning ([1985] 1 WLR 778 and  Abbey National Building Society v Cann ([1991] 1 AC 56).

In Equity & Law Home Loans Limited v Prestidge ([1992] 1 FCR 353) the English Court of Appeal held that this imputed intention also gave priority to any charge taken out to redeem the original charge  (but with this priority limited to the amount secured by the original charge).

Mrs Brown supplied part of the purchase price of a property conveyed into Mr Prestidge’s name. The Britannia Building Society provided the balance of the purchase price. Mr. Prestidge then re-mortgaged and used a loan from Equity & Law to redeem the Britannia’s charge.

The Court of Appeal decided that Mrs Brown was the sole beneficial owner of the property. The result of the Henning case was that her interest was postponed to that of the Britannia. There was no evidence of actual intentions. Mrs Brown had an imputed intention authorising Mr Prestidge to grant the charge to Britannia.

This imputed intention went further and extended to any charge replacing the Britannia charge (Mustill LJ at 359). This priority was limited to the amount originally secured by the Britannia charge.

Michael Lower

The priority of unwritten equitable interests

In Si Tou Choi Kam v Wealth Credit Ltd ([2017] 1 HKLRD 1074) A and B acquired property as legal joint tenants. B’s creditor, C, obtained and registered charging orders over the property. C then applied for an order for sale of the property. A obtained a declaration that A was sole beneficial owner of the property (having supplied the entire purchase price) and registered it at the Land Registry.

The priority of unwritten equitable interests is governed by the doctrine of notice. The charging order is to be treated as if it were an equitable charge. Priority is governed by the first in time rule. A’s interest, having arisen at the time of acquisition, has priority under this rule.

There is no authority for the proposition that A is under a duty to obtain a declaration and register it in order to preserve this priority. It was surprising, therefore, that the court held that A’s priority was governed by the date of registration of the declaration.

Michael Lower

 

 

Abbey National v Cann: mind the gap?

In Abbey National Building Society v Cann ([1991] 1 AC 56) the House of Lords considered the relative priorities of a charge used to acquire a home and an unwritten equitable interest in it which came into existence simultaneously. A man bought a home for his mother. She undoubtedly had an equitable interest in the home since this was their common intention and since she had provided part of the purchase price. Title to the home was in the son’s sole name. He borrowed money from the Abbey National Building Society (‘the lender’) to finance the purchase and granted the lender a charge over the home. The son was unable to meet the repayment obligations under the loan and the lender sought possession of the home. The mother argued that her equitable interest had priority over the charge. One of her arguments was that there was a notional gap (a moment in time or scintilla temporis) between the son’s acquisition of the title and the charge granted to the lender. She argued that her equitable interest attached to the property in that moment in time and so took priority over the charge.

The interpretation of the provisions of the Land Registration Act 1925 is an important feature of the judgments. Leaving this aside, the mother failed for what appear to be two (perhaps three) separate reasons. The first was that there is no moment in time in which the son had title to the home unfettered by the lender’s rights. The home could not have been acquired by the son without the aid of the loan. The acquisition of title to the home and the grant of the charge to the lender were a single composite transaction (Lord Oliver at 93 and Lord Jauncey at 102). The second reason given for the priority of the lender’s charge was that the mother knew that a loan would be needed to finance the purchase so that she must be taken to have accepted that the charge would have priority over her own interest (Lord Oliver at 94). Lord Oliver suggested a further argument in favour of the lender’s priority. Before completion it had agreed to advance funds on the security of a loan. This gave the lender an equitable interest that arose before the mother had any such interest (at 89).

Michael Lower

The Brocklesbury principle: postponing an owner’s rights to those of a later lender or purchaser

In Credit and Mercantile plc v Kaymuu Ltd ([2015] EWCA Civ 655) S, W and E were three businessmen who acted as a consortium to carry out property development ventures. There was no formal written agreement between them and they operated on the basis of trust. They agreed to distribute between themselves the proceeds of sale of shares in a company used as the vehicle for one of their ventures. It was agreed that W’s share would be used to finance the purchase of a house (Dalhanna) for occupation by W as his family home. W left all the arrangements for the purchase to S. The property was acquired and W went into occupation. Unknown to W, S had arranged for the property to be acquired by Kaymuu Ltd, a company wholly controlled by S. There was a short interval in the time between the transfer of title to Kaymuu and its registration at the Land Registry. In that interval, S arranged for Kaymuu to grant a charge to C & M in return for a loan of GBP500,000 which S took for himself. S went into bankruptcy and C & M sought possession of the property.

At first instance, W was found to have a beneficial interest under a Pallant v Morgan equity. W argued that his occupation, discoverable on a reasonably careful inspection of the land at the time of the disposition, meant that his interest was an overriding interest and that C & M was subject to it (Land Registration Act 2002, s. 29). This failed; W was prevented from having a right enforceable against C & M by virtue of the Brocklesbury principle (see Brocklesbury v Temperance Permanent BS [1895] AC 173). Sales LJ explained the principle thus:

‘The Brocklesby principle is not based on actual authority given to the agent, but rather on a combination of factors: actual authority given by the owner of an asset to a person authorised to deal with it in some way on his behalf; where the owner has furnished the agent with the means of holding himself out to a purchaser or lender as the owner of the asset or as having the full authority of the owner to deal with it; together with an omission by the owner to bring to the attention of a person dealing with the agent any limitation that exists as to the extent of the actual authority of the agent. This combination of factors creates a situation in which it is fair, as between the owner of the asset and the innocent purchaser or lender, that the owner should bear the risk of fraud on the part of the agent whom he has set in motion and provided (albeit unwittingly) with the means of perpetrating the fraud. The same principle applies where the dishonest vendor or mortgagor of the asset, who by the sale or mortgage raises money from an innocent third party, has been vested with the legal title as a trustee’ ([52])

The principle, which was the basis for the ruling in Abbey National Building Society v Cann, applied in the present case. W had given S authority to act on his behalf in relation to the purchase; S was given the freedom to make whatever arrangements he saw fit to effect the purchase and W exercised no supervision over S’s arrangements. W gave S the means to hold himself out to C & M as the true owner ([57]). As a result, ‘[W] was precluded by operation of the Brocklesbury principle from maintaining that he had a beneficial interest in relation to Dalhanna with potential to have priority over the security interest of C & M’ ([58]).

Michael Lower

Purchasers from squatters take subject to equitable interests of which they have notice

Re Nisbet and Potts’ Contract ([1906] 1 Ch. 386, CA (Eng)) concerned N’s contract to sell land to P. N’s title was possessory. The formal title had been defeated and there had been several conveyances of the possessory title before its conveyance to N. The contract beween N and P required P to accept this title. At the time of his purchase, N had not investigated title for the full forty years then demanded by conveyancing practice. Had he done so, investigating the paper title that had been defeated, he would have discovered that the paper title was subject to a restrictive covenant controlling what could be built on the land. P was a builder and he acquired the land with a view to building shops and other buildings on it. Before the contract was completed, the neighbour with the benefit of the restrictive covenant informed him of it and that proceedings would be brought in the event of breach. P refused to complete on the basis of this undisclosed encumbrance. The question was whether the covenant was binding on N; if so, P was justified in refusing to complete.

The English Court of Appeal held that a restrictive covenant is an equitable proprietary interest binding on all but a good faith purchaser for value without notice of it (Collins M.R. at 403; Romer LJ at 405 and 406). It was not defeated merely because the paper title had been extinguished. Time would only begin to run against the covenantee when there had been a breach so that the covenantee had a right to bring proceedings (Collins M.R. at 401 and 402).

The squatter himself is always subject to the covenant whether or not he had notice of it (Cozens Hardy L.J. at 410). A purchaser of the squatter’s title is subject to the restrictive covenant unless he is a good faith purchaser for value without notice (Cozens Hardy L.J. at 410). N was not such a purchaser. He had not investigated the title for the full forty year period  and so had constructive notice of any interests that he would have discovered had he done so. N’s title was subject to the restrictive covenant and P was entitled to resile from the contract.

Michael Lower

Effect of failure to register a written declaration of trust

In HKSAR v Lau Kam Ying ([2013] HKEC 1503, CFA)  Company X transferred the title to land to indigenous villagers. The villagers executed declarations of trust to the effect that each of them held his section on trust for company X. This declaration was never registered. Company X was wound up.  When the Government resumed the land, some of the villagers assigned their land to Company Y which had been set up to collect compensation on their behalf. They made false statutory declarations to the effect that the title deeds had been lost. These were then submitted to the Government as part of the process of claiming the compensation.

The leading players behind the scheme were convicted of conspiracy to defraud. They had falsely represented that company Y was a bona fide purchaser for valuable consideration and concealed the beneficial interest of company X. In this decision, the Court of Final Appeal rejected the defendants’ application for leave to appeal against the convictions.

The defendants argued, first, that the declarations were null and void as against company Y as a result of section 3(2) of the Land Registration Ordinance. This failed since sections 3 and 4 of the Land Registration Ordinance, ‘concern priorities between registered instruments but do not affect remedies which may be available whether in contract, tort or equity.’ (Tang P.J. at [19]). The second argument was that the declaration was unenforceable on the grounds of public policy. This would have failed anyway since company X would not need to plead an illegal act (Tinsley v Milligan) ([20]).

In any event, the conviction relied on the fact of the concealment not on whether company X had an indefeasible beneficial interest ([21]).

 

 

Equity’s darling

In Pilcher v Rawlins ((1871 – 72) LR 7 Ch. App. 259) a father set up a trust for his children. There were three trustees, one of whom was P the children’s uncle (a solicitor). The trustees advanced money to R on the security of a mortgage (the mortgage deed explained the existence of the trust). Two of the trustees died leaving P as the sole trustee.

P and R connived in a fraudulent scheme. R (also a solicitor) prepared an abstract of title making no mention of the mortgage. R then purported to convey the property to S and L (who had no notice of the trust or the fraud). Immediately before that P executed a deed reconveying the property to R free of the mortgage (despite the fact that the loan had not been repaid). P and R agreed that the reconveyance to R would only be produced if necessary. S and L had no notice of this conveyance either.

The fraud came to light and the beneficiaries sought a declaration that they were the beneficial owners and an order that S and L convey the title back to the trust. They failed on the basis that S and L were bona fide purchasers for value without notice of a legal estate (Sir G Mellish LJ at 273).

Given the facts above, the conveyance of the property by P to R (with its reference to the trust) was an essential element of S and L’s title. This did not fix them with constructive notice. They had acted diligently and at the time of the purchase had reasonably believed that they had good title. The later conveyance to R only came to light in the course of the proceedings. At the relevant time, S and L had ‘neither knowledge nor means of knowledge’ of the trust (Sir G Mellish LJ at 274).

Michael Lower

A contractual licence does not bind a mortgagee

A contractual licence does not bind a third party such as a mortgagee.

In Chartered Bank v Wong ([1987] HKLR 844) a man had given his mistress a contractual licence to occupy the family apartment until the two children had finished full-time education. The man then mortgaged the property but failed to keep up with the mortgage repayments. The Bank sought possession of the property but the mistress refused to leave. She claimed that she had an interest that was binding on the bank. It was held that she had only a contractual licence and there was no equitable dimension to her rights (such as a proprietary estoppel or constructive trust). Her licence was not binding on the bank. Garcia J suggested that the result might have been different if the bank had had actual notice of the licence. It is hard to see why this should make a difference.

Michael Lower