Introduction to Priority of Security Interests in Hong Kong

In Hong Kong, the mortgagor of property may create successive interests, by way of security or sale, over the same property. In China, subject to the consent of the earlier mortgagee, the mortgagor may exercise the same rights as its counterpart in Hong Kong. In a property transfer, the mortgagor has the right to transfer the mortgaged property with the consent of the mortgagee during the mortgage period. If the mortgagor fails to obtain the mortgagee's consent and makes the transfer, the disposal can still be valid provided that the transferee repays the secured sum, thereby obtaining unfettered ownership or possession rights. On the other hand, subject to an earlier interest (for example a mortgage), the mortgagor can create further pledges or mortgages over the same property and subordinate interests of the later mortgagees or pledgees will arise. As a result, there will be competing interests over the secured personal property. Thus when one or more of the interested parties seeks to enforce their security interests, issues with regard to the priority of those competing interests are crucially important. It is in this situation that the efficiency of the credit security laws of both jurisdictions are tested to the fullest extent.

In Hong Kong, three rules underpin the legal framework for determining priority of competing interests in the same property: firstly, the first-in-time rule of creation of the interests, expressed in Latin as qui prior est tempore, potior est jure; secondly, the rule in Dearle v Hall; thirdly, the rule of nemo dat quod non habet, which states that a person cannot pass any title to another person if the transferor has no title.