Finding Nemo

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Article by Michelle W. Cheung


As in any other major financial city in the world, the business of money lending in Hong Kong is robust and thriving; so much so that multiple loans against the one property have been common, secured only by a contractual promise to repay.

 

In the recent Court of Final Appeal decision of Winland Finance Limited v Gain Hero Finance Limited [2022] HKCFA 3, two moneylending institutions fought for priority in claiming the proceeds of sale of a property (“Property”) belonging to a common debtor (“Debtor”).

 

In 2014, the Debtor first borrowed a sum from the Appellant and assigned the balance of all future proceeds of sale of the Property receivable by him (subject in law to prior encumbrances) to the Appellant as security for repayment of the loan (“First Loan”).

 

Subsequently, the Debtor borrowed another sum from the Respondent (“Second Loan”), again under a contractual promise as to repayment.

 

In 2015, upon the Debtor’s default in repayment, the Respondent obtained a judgment against the Debtor for recovery of the Second Loan, followed by charging orders nisi and absolute to enforce the judgment debt.

 

In 2016, the Respondent obtained an order for sale of the Property to enforce the judgment debt.

 

All the orders and instruments above were registered in the Land Registry.

 

In 2017, upon notification of the intended sale of the Property, the Appellant contended that it had priority over the Respondent to the net proceeds of sale of the Property after satisfaction of prior encumbrances, contending that its equitable interest had priority over that of the Respondent.

 

The dispute went all the way up to the Court of Final Appeal, which ruled that while the assignment of the balance of the sale proceeds of the Property by the Debtor in favour of the Appellant was an equitable assignment of the future proceeds and took effect in equity immediately upon the making of the assignment, the assignment of future proceeds did not create any interest in or otherwise affect the Property and it was correct for the Court of First Instance to order the vacation of the registration of the loan agreement of the First Loan in the Land Registry. This is because only instruments in writing that affect land may be registered in the Land Registry under the Land Registration Ordinance (Cap. 128). Instruments that do not affect land are simply not registrable and provisions concerning priority in the Land Registration Ordinance do not apply to them. 

 

Here, as the assignment of future proceeds was only an equitable chose in action, the Appellant obtained no interest whatsoever in the Property itself and the Debtor’s beneficial interest in the Property was unencumbered by such assignment.

 

In contrast, a charging order affects land and is registrable as such in the Land Registry, and has the like effect as an equitable charge. Before sale, an equitable charge or a charging order remains a proprietary interest in a property and is an encumbrance on it.

 

In accordance with the provisions of the Conveyancing and Property Ordinance (Cap. 219), proceeds of sale of mortgaged property should be applied towards the discharge of all prior encumbrances on the Property and to other designated purposes before distribution to the assignee/mortgagee of the proceeds.

 

Applying the maxim of nemo dat quod non habet (i.e. no one can give what they do not have), an assignor cannot assign to an assignee what he is not entitled to receive by way of proceeds of sale upon the sale of the property. This means the Debtor could only assign the balance of all future proceeds of sale of the Property receivable by him to the Appellant subject to the application of the sale proceeds to prior encumbrances.

 

The equitable principle of “first-in-time prevails” relied upon by the Appellant did not apply because the subject matter of the earlier assignment to the Appellant of the future sale proceeds and the charging order subsequently obtained by the Respondent over the Property were simply different.

 

As such, in terms of priority to the proceeds, the Respondent must rank before the Appellant.

 

Finally, Pacific Chambers congratulates its members, Jeevan Hingorani, Lawrence Cheung and Teresa Leung, on their success in defending this case in the Court of Final Appeal.