Introduction

Foreclosure is an ancient remedy available to a lender with security where the lender may treat the security as if it is the absolute owner in the case of default by the borrower. While foreclosure is not the most favoured remedy these days, it is still often used by lenders to enforce their rights. In this article, we will give an overview of this ancient remedy of enforcement.

General principal

Foreclosure is practically an action for the lender to take the pledged security, usually in the form of an asset (e.g. real estate property, shares, marine vessel) and convert it into an asset of the lender. If the application is successful and the court makes a foreclosure order absolute, the lender will then be able to deal with the said security as if it is the absolute and beneficial owner.

The legal effect of a foreclosure order absolute is twofold: (a) extinguishing the equity of redemption by the mortgagor, upon which the lender will become the absolute owner of the security in question; and (b) terminating the personal covenant of the mortgagor for repaying the outstanding loan to the lender.

Governing law

Section 53(2) of Conveyancing and Property Ordinance (Cap. 219) outlines the effect of a foreclosure order:

“(2)    Where a mortgagee obtains an order of foreclosure absolute, that order shall (unless it otherwise provides) operate:

(a)     to assign to the mortgagee the mortgagor’s estate in the mortgaged land, subject to any other mortgage having priority to the mortgage under which the foreclosure order was obtained; and

(b)     to discharge that land from the mortgage under which the foreclosure order was obtained and any subsequent mortgage.”

Procedural rule

The procedural rule is set out in Order 88, Rules of High Court (Cap. 4A) or Rules of District Court (Cap. 336H). The court will initially make a foreclosure order nisi, directing accounts to be taken of the amount required to repay the mortgage debt and redeem the mortgage. A deadline is set for the mortgagor, or any other party with an interest in the equity of redemption, to repay the said debt. If the amount required to redeem is paid within the stipulated time, the order nisi will be discharged. If not, the said order nisi may be made absolute. A mortgagor remains entitled to redeem until the foreclosure order is made absolute.

Re-open after foreclosure order absolute

A foreclosure order absolute may be re-opened by the court where it thinks equitable to do so.

Jessel M.R. in Campbell v Holyland (1877) 7 Ch D 166 (cited in Hang Seng Bank Ltd v Mee Cheong Investment Co Ltd [1970] HKLR 94 with approval) sets out a number of principals the court should consider in determining whether a judicial discretion has to be exercised to reopen the foreclosure order absolute:

1.      Prompt action taken by the mortgagor: Whether the mortgagor has acted promptly is a matter of fact for decision in each case depending upon the nature of the property, the amount of the sum involved, and the possibility that the redemption was rendered impossible by reason of some accidental happening;

2.      Amount of the mortgage as compared with the value of the property: For example, if a valuable estate had been mortgaged for a sum much less than its value, the mortgagor who sought to redeem such a mortgage would be treated more leniently than in a case where the mortgage debt is commensurate with the value of the estate; and

3.      The nature of the property which may be of a peculiar value to the mortgagor: For example, a family estate.

The first principal above is further demonstrated by Frencher Ltd and Another v The Bank of East Asia Ltd. and Others [1995] HKCFI 426. In this case, the mortgagor did nothing for a number of years as the market trended downwards by then. The mortgagor only took out the application to re-open the foreclosure order absolute after the market recovered. It was held, inter alia, that:

“42. …. Everybody sat back and did nothing. When the market recovered, [the mortgagor] commercial interest was aroused and he persuaded the Official Receiver to assign this action to him and he now wishes to reap the benefit of his and his company's inactivity. I confess I find, on analysis, this claim the antithesis of the type of claim Courts of Chancery were striving to protect by permitting an order absolute to be re-opened. There is no merit in the claim. It is commercial opportunism.”

The application to re-open the foreclosure order absolute was therefore dismissed.

Takeaway

While foreclosure seems to be an attractive remedy for lenders, the fact that there is a possibility for the mortgagor to reopen makes it less so. Until there is any further development on this area of law, this remedy will likely remain out of favour by lenders in the foreseeable future.