Fund Management Ltd v Commercial Factors Ltd [2014] TOCA 1; AC 6 of 2011 (9 April 2014)

IN THE COURT OF APPEAL OF TONGA
CIVIL JURISDICTION
AC 6 of 2011

NUKU'ALOFA REGISTRY [CV115 of 2010]

BETWEEN :

FUND MANAGEMENT LIMITED AND

TOURIST SERVICES HA'APAI LTD

Appellants

AND:

COMMERCIAL FACTORS LTD
First Respondent

AND:

CHRISTINE UTA'ATU
Second Respondent

Coram : Salmon J

Blanchard J

Ward J

Counsel : Mr L. Niu SC for the Appellants
Dr R. E Harrison QC, SC for the First Respondent
Mr R Stephenson for the Second Respondent

Date of Hearing : 1 April 2014

Date of Judgment : 9 April 2014

JUDGMENT OF THE COURT

[1] This matter has a long and complicated history but in order to deal with the issues before this Court on the present occasion an abbreviated account can be given.

[2] In 1998, a Dr Wang successively gave certain guarantees to the appellants Fund Management Ltd and Tourist Services Ha'apai Ltd jointly (FM/TSH) and to the first respondent Commercial Factors Ltd (CFL). To provide each of these creditors with some security Dr Wang authorized them to caveat his interests in leasehold land. These included Lease 5404. A hotel has been erected on the land comprised in this lease.

[3] Both FM/TSH and CFL lodged caveats in respect of the lease.

[4] When default was made by Dr Wang, FM/TSH obtained an order from the Land Court in 2004 for the sale by tender of the leasehold interest, but no sale was achieved and FM/TSH took no further steps by way of marketing the property.

[5] Dr Wang had also failed to meet his obligations to CSL. In 2010 there were discussions between representatives of FM/TSH and CFL about whether CSL might be able to join with FM/TSH in utilising the 2004 order for sale so that both could receive what was owed to them. In the end, however, CFL decided to proceed alone. It issued proceedings against the estate of Dr Wang, who had died shortly beforehand, seeking summary judgment and the appointment of a receiver to enforce the judgment, in particular by selling Lease 5404.

[6] FM/TSH complains that it continued to believe that CFL was co-operating with it and that the proceeds of any sale would be shared. It says it was unaware of the receivership application until after the second respondent, Ms 'Uta'atu, had been appointed as receiver by the Supreme Court.

[7] Judgment was entered for CFL on 8 March 2011 in an amount, including interest, of approximately TOP$8,500,000 and the receiver was appointed to enforce the judgment. The receiver proceeded to advertise the hotel, including the leasehold interest, for sale by tender. The only tender received was from CFL which agreed to pay an amount equal to the debt owing to it by Dr Wang on the basis that the price would be set off against that debt. The sale and purchase agreement between the receiver and CFL provided for the contingency that CFL might have to pay something to FM/TSH. In that case it would be credited with the amount it paid FM/TSH and the balance of the price of the hotel would be satisfied by set-off.

[8] Having entered into the agreement, the receiver applied to the Land Court for the removal of FM/TSH's caveat. She successfully argued that FM/TSH did not have a caveatable interest in Lease 5404. Over the opposition of FM/TSH, on 20 August 2011 the Land Court directed that the caveat be removed. CFL withdrew its own caveat and the Minister of Lands removed the FM/TSH caveat from the register. On 20 August 2011 the Minister approved the transfer of the lease to CFL.

[9] On the same day, FM/TSH appealed against the Land Court's decision of 20 August but it neither served a copy of its notice of appeal on CFL nor applied for a stay preventing the transfer of the lease from going ahead. The sale was settled on 12 September 2011 and the price was satisfied entirely by set-off. No money was paid to the receiver. The transfer of the lease was registered immediately.

[10] It was only on 16 September 2011 that the notice of appeal against the removal of the caveat was served on the receiver, who appears to have been unaware of it until then.

[11] Meanwhile Dr Wang's estate had appealed against the order appointing the receiver. FM/TSH was granted leave to intervene in that appeal in order to argue that the Supreme Court lacked the power to make such an order.

[12] The appeals against the removal of the caveat by the Land Court and the order of the Supreme Court appointing the receiver were heard at the same time and on 16 December 2011 the Court of Appeal delivered judgment in both: The Executor(s) (or Alternatively the Administrator) of Dr Sam Lin Wang (a.k.a Sam Lin Wong) Deceased and Helen Chen Wang (a.k.a Helen Chen Wong) v Commercial Factors Ltd) Appeal No AC 6 of 2011; Fund Management Ltd and Tourist Services Ha'apai Ltd v Christine Uta'atu as Court – Appointed Receiver for and on behalf of Commercial Factors Ltd Appeal No 16 of 2010. It held that the order appointing the receiver was validly made. It also concluded that the caveat should not have been removed because FM/TSH had had a caveatable interest. But it did not direct restoration of the caveat to the register because it had been informed of the registration of the transfer of the lease pursuant to the sale of the hotel. In fact FM/TSH had not sought the setting aside of the sale and still does not do so. It wishes instead to take advantage of the sale and seeks a share of the amount which CFL agreed to pay.

[13] In effect, although Mr Niu did not put the matter in this way either at the earlier Court of Appeal hearing or before us, FM/TSH seems to be asserting that CFL was not entitled to set off the whole of the price and must account to the receiver in cash for a part of the price equivalent to Dr Wang's debt to FM/TSH, so that she can in turn pay it over to FM/TSH and that CFL was not entitled to raise a set-off to the extent of FM/TSH's claim, of which it was aware. Such an argument would seem to depend upon FM/TSH's ability to establish either an equitable interest in the lease or the proceeds of its sale, which interest has priority over any such interest of CFL, or alternatively that CFL's course of conduct towards FM/TSH prior to the transfer of the lease gave rise to a right on the part of FM/TSH to claim a share of the sum payable by CFL. Mr Niu was inclined to
put the matter primarily on the latter basis, but the Court pointed out to him that it might be affected either favourably or unfavourably by the question of equitable priorities, by which we mean the existence of equitable charges over the lease and their priority inter se.

[14] The ranking of equitable charges (not involving transfer of the debtor's interest in the land to the creditor) is governed by the common law, not by any provision in the Land Act. The creation of equitable interests by way of charge is not prohibited by any provision of the Land Act. When the Legislature wanted to prohibit such charges it did so explicitly: see s.16 (repealed in 1999) which dealt with mortgages, pledges and charges over certain growing crops. Part VI of the Act, to which Mr Niu referred, is concerned only with legal mortgages, where the land is transferred by way of security: see the definition of "mortgage" in S.96. Section 137 to which counsel also referred does not determine priorities. It merely provides for lodgment of caveats and for their effect in stopping registrations.

[15] The present position is that the Court of Appeal, before whom no arguments about priority of equitable interests were advanced, has remitted both sets of proceedings to the Supreme Court for further consideration. After hearing argument, the Lord Chief Justice, in a decision delivered on 25 January 2013, has declined to amend or add to the orders made appointing the receiver. We note Dr Harrison's submission that the Court of Appeal's order sending that matter back to the Supreme Court did not contemplate any such additions or variations, but we need not determine whether it did. The Chief Justice also recorded that FM/TSH had withdrawn their application concerning the caveat and had never become parties in the receivership proceeding in the Supreme Court.

[16] FM/TSH has now appealed against that decision of the Supreme Court. The argument made in the Supreme Court is renewed: that it should be ordered that the proceeds of sale should be divided between FM/TSH and CFL. We consider, however, that the Supreme Court was right to decline to determine that question in the current proceeding. As we pointed out to counsel, the Court would be called upon to carry out this task without the benefit of fully pleaded statements of claim and defence and on the basis of conflicting affidavit evidence which has not been tested by cross-
examination. Furthermore, little if any attention has been paid to the underlying equitable priorities, which are not addressed in the affidavits.

[17] The receivership proceeding is therefore an entirely unsatisfactory vehicle for the determination of the issues, which would need to be the subject of a trial. If FM/TSH wish to pursue their claim they may only do so in a properly constituted proceeding. We express no view on whether it is appropriate for such a proceeding to be brought in the present circumstances or as to the merits of FM/TSH's claim. All we are determining is that the receivership proceeding cannot be converted into a vehicle for the claim now made.

[18] The present appeal is thus misconceived and is dismissed. The so-called request for orders filed in this Court on 15 March 2013, which essentially asked for the same relief as the appeal, is struck out. The appellants must pay the respondents' costs on the appeal and the striking out, such costs to be taxed if not agreed.

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Salmon J

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Blanchard J

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Ward J