CHOW KWUN CHUNG (in his personal capacity, and as the sole executor of the estate of LEUNG KING, deceased) v. LEUNG YI SZE AND ANOTHER

DCCJ 2577/2018

[2023] HKDC 528

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2577 OF 2018

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JUDGMENT

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1.  This is a fight over the beneficial ownership/possessory title of a flat purchased in the name of the late Madam Leung King (the “Deceased”) under the Tenants Purchase Scheme (“TPS”) in August 2002 (the “Flat”), between the Deceased’s grandson (“P”) who has become the registered owner of the Flat through the Deceased’s last will made in 2004 (the “Last Will”) and the Deceased’s “godson” (“D1”), who lives in the Flat with his family (presumably within the class of the 2^nd Defendant).

2.  Mr Lung, counsel for P, and Mr Liu, counsel for D1 have most helpfully further distilled the previously agreed issues down to the following 3 broad topics:-

2.1.  Whether an express common intention constructive trust or a resulting trust exists over the Flat on the facts alleged by D1 (the “Trust Claim”);

2.2.  If not, whether D1 has obtained possessory title through adverse possession (the “AP Claim”);

2.3.  If either of the above is made out, whether they would be defeated by illegality.

The Trust Claim

3.  Mr Liu agreed with the general principles cited in Mr Lung’s Opening Submissions, which are summarised as follows:-

3.1.  The burden is on the party asserting the trust to establish the trust, because the starting point is that beneficial ownership follows legal ownership;

3.2.  To establish a common intention constructive trust, the party asserting the trust must prove (a) a common intention that he/she was to be the beneficial owner despite the legal ownership; (b) he/she had altered his/her position in detrimental reliance upon such a common intention; (c) it is unconscionable for the legal owner to assert ownership relying on legal title;

3.3.  Such common intention is to be assessed objectively and with a holistic approach, having regard to the context, conduct and circumstances;

3.4.  At least in a domestic context, the court need not resort to resulting trust if it is possible to resolve the matter by reference to common intention.

4.  As pleaded, D1’s case on the Trust Claim, including relevant context, conduct and circumstances, is as follows :-

4.1.  D1 came to know the Deceased in about 1992, as the Deceased was a frequent customer of D1’s “siu mei” (燒味) shop in Tung Tau Estate, i.e. where the Flat is;

4.2.  They became closer soon thereafter and the Deceased proposed to “adopt” D1 as her “godson” (契仔) and D1 agreed;

4.3.  Soon after, the Deceased invited D1 (together with his then family) to move into the Flat and live with her; D1 agreed and moved in with his then family and did not have to pay any rent to the Deceased;

4.4.  In about 2002, the Deceased and D1 discussed on different occasions about the TPS, and the Deceased and D1 expressly agreed that D1 would purchase the Flat and he would solely pay off the monthly mortgage instalments, and that the Flat would belong to D1;

4.5.  There was a common understanding and intention between the Deceased and D1 that upon D1 agreeing to pay the monthly mortgage instalments and outgoings of the Flat, and allowing the Deceased to reside in the Flat, D1 would become the 100% beneficial owner of the Flat and the Deceased would hold the legal title on behalf of D1;

4.6.  In consideration and in reliance of the above agreement, common intention and/or understanding, D1 executed the necessary mortgage document to incur a liability to pay the monthly instalments, paid all the expenses of the transaction and all outgoings of the Flat since 2002, until in 2013 when P prevented him from paying the mortgage instalments and rates;

4.7.  Soon after executing the above documents, the Deceased asked D1 to attend a solicitor’s office on 31 August 2002 to execute a will, appointing D1 as the sole executor and bequeathing the Flat to D1 under the will (the “2002 Will”);

4.8.  The Deceased stated to D1 that her own daughter would not be interested in the Flat and all D1 had to do would be to pay off the mortgage, and reiterated that the Flat would belong to D1.

5.  The first critical finding is whether there was indeed a common understanding between the Deceased and D1. The case D1 has to prove is that there was an express agreement that upon him agreeing to pay the monthly mortgage instalments and all outgoings etc., the Flat would belong to him.

6.  Apart from assessing it objectively, as D1 is now the only remaining “actor” in the story that he now tells, I must also approach his story with a healthy dose of suspicion.

7.  In his witness statement D1 quoted the Deceased as having said to him the following before actually purchasing the Flat:-

7.1.  “阿仔，而家政府用19萬賣層樓畀我哋”

7.2.  “傻仔。可以全部問銀行借”

7.3.  “如果你不要，將來我就將間屋畀返政府。”

7.4.  “唔洗一次過畀。如果我死咗，你都有個地方住。我為你著想，你都唔珍惜。”

7.5.  她說已經問過好多人，我只需要努力工作去供樓就可以，間屋就係我嘅。

7.6.  契媽亦說我只是需要每月準時供樓，以及她會去定立一張遺囑，所以我唔使擔心，比心機去工作。

8.  When in the box, D1 was asked about the above and, perhaps understandably given the lapse of time and his apparent psychological distress, he was unable to offer further details in relation to the above.

9.  What can be deduced from D1’s evidence in the box is that he took the above to mean that he was to, in layman terms, become the owner of the Flat when it was purchased, and all he had to do was to keep up with the mortgage instalments.

10.  At this juncture I ought to explain the significance of the 2002 Will in the context, the existence and the then validity of which are not disputed, as well as the nature of D1’s payments into the account jointly held in the names of D1 and the Deceased, i.e. HSBC account number 191-1-080073 (the “D1&D Joint Account”).

The 2002 Will

11.  Firstly, as is also not disputed, between D1 and the Deceased, only the Deceased was “qualified” to purchase the Flat under the TPS in her name, i.e. D1 could never have become the legal owner at that point. The only way D1 could ever directly acquire the legal title of the Flat under the Housing Ordinance (Cap 283) would be through a disposition by will (see s 17B(3) thereof) (apart from purchasing it from the Deceased with permission obviously).

12.  Secondly, given the above, the making of the 2002 Will appears to me to manifest an actual intention on the Deceased’s part, which would have certainly been in layman terms, to let D1 become the “real owner” of the Flat after her demise, as opposed to leaving it to her blood descendant(s). I come to this view on the basis of the following:-

12.1.  The existence of the 2002 Will fits D1’s story of what was allegedly discussed between him and the Deceased;

12.2.  Hence, unless I were to find that D1 completely fabricated all of the above, the clear observation must be that D1’s story makes sense given the making of the 2002 Will;

12.3.  To find that D1 completely fabricated all of the above, logically I would have to find not just that he lied but also he had devised a scheme whereby he would be seen to be paying for the mortgage instalments, while in fact they were loan repayments (see the section below), and somehow persuaded the Deceased to leave the Flat to him by will as a gift (as D1 would not have paid anything for it, if he had only been repaying loans) – I am unable to so find, given my observation on the sophistication level, demeanor and the years he had spent taking care of the Deceased;

12.4.  On the other hand, strangely in my view, there is no evidence of competing explanation for the existence of the 2002 Will offered by P – as indeed, P’s evidence is that neither himself nor his mum, who also testified as a witness at trial, asked the Deceased why the Deceased made the 2002 Will when the 2002 Will was shown to the Deceased;

12.5.  I would have thought that, as blood descendants of the Deceased and thus the usual or indeed expected beneficiary of the Deceased’s estate, including the Flat, they would ask for an explanation why the Flat was left to D1 instead;

12.6.  The fact that they did not signifies to me that they understood why the Deceased wanted to leave the Flat to D1, and all they focused on was to make sure that the Deceased would make another will bequeathing the Flat to P instead.

Payments into the D1&D Joint Account

13.  On this issue there are competing explanations from parties: P says the payments represented repayments of various loans that the Deceased had advanced to D1 and D1 says they represented his payments towards the mortgage instalments of the Flat.

14.  Both parties have pointed out in their submissions various matters that should render the opposite party’s story nonsensical. To me, however, the following matters are more pertinent and give rise to observations that are more influential to my determination, as they are objective and therefore should be preferred over parties’ own say-so, especially hearsay from the Deceased :-

14.1.  As per P’s story, the monies lent to D1 came predominantly from an account jointly held by the Deceased and P’s mum, as well as from an account in the Deceased’s sole name, both with Hang Seng Bank;

14.2.  At the relevant time, the Deceased also had 2 accounts in her sole name with HSBC, one of which was used to pay the first 4 mortgage instalments of the Flat;

14.3.  There was objectively no need for the D1&D Joint Account for the purpose of repayment, and there is no evidence to explain why it was set up – D1’s evidence is simply that he did not know why and just went along with the Deceased;

14.4.  Further, I agree with D1’s submission that it would be odd to have an account that receives repayments from a debtor which the debtor could exercise control over the funds therein – this would be counter-intuitive;

14.5.  Also, the D1&D Joint Account was apparently used also for paying the monthly management fee of the Flat ($392) since October 2002, objectively speaking therefore this account was unlikely to have been set up for the sole purpose of receiving repayments from D1;

14.6.  On the contrary, coupled with the fact that monthly instalments for the Flat did come out from this D1&D Joint Account after the initial 4 instalments (as indisputably shown on bank records), the likelihood is that this joint account was set up to service the expenses on the Flat, at least the most consistent items in terms of both frequency and amount, namely the monthly mortgage instalments and the monthly management fee;

14.7.  Not to forget also the then existence of other accounts in the Deceased’s sole name, with HSBC (the bank that granted the mortgage) no less, there was no need for the D1&D Joint Account to be set up to service the Flat’s monthly mortgage payments if it was up to the Deceased to pay for the same, albeit with monies coming from D1 as “repayment”, hence setting this account up in the names of both D1 and the Deceased lends credence to D1’s story.

15.  As a connected issue, I am however unable to find that D1 had contributed to the whole of the purchase consideration of the Flat:-

15.1.  As shown by bank records, the first 4 mortgage instalments were paid out from one of the Deceased’s HSBC accounts under her sole name, and there is no documentary or objective evidence showing that D1 had contributed to the relevant funds therein, either specifically or at all;

15.2.  D1’s explanation that he had paid for those 4 mortgage instalments by deposits into the D1&D Joint Account (which did show deposits of $5,000 in total from July to October 2002) does not help – as it was a joint account, funds therein not utilised by the Deceased would become D1’s property after the Deceased’s demise, hence unless there is evidence that the Deceased had used those deposits for her own benefit (which there is not), D1 cannot begin to argue that those deposits represented his contribution to the 4 initial mortgage instalments;

15.3.  It is not disputed that the mortgage of the Flat was redeemed in June 2013 by a payment of $73,900 odd, and that D1 did not contribute to that payment.

16.  Inherent probability therefore suggests to me that the Deceased did utter those words to D1 and that D1 had at least paid part of the mortgage as opposed to repaying any loan advanced by the Deceased, and I so find.

17.  That said, viewing those utterances objectively they would also be compatible with the Deceased having an intention of leaving the Flat to D1 upon her death, albeit on condition that D1 would have to start paying for the monthly instalments etc. upon acquisition of the Flat.

18.  Between these two possible intentions, i.e. beneficial ownership be vested in D1 outright upon purchase vs D1 being bequeathed ownership upon the Deceased’s demise, I find the latter objectively more probable because the Deceased certainly would have wanted herself to be able to retain control qua “real” owner, as opposed to just a “paper owner” (which in fact may not have even crossed her mind as a concept) during her lifetime.

19.  I therefore find that there was no such common intention as pleaded by D1 and thus in so far as the common intention constructive trust claim is concerned, it is not made out by D1.

20.  There is supposedly also a claim based on resulting trust but D1 has not advanced any submissions in this respect in his closing submissions; even in his opening submissions there were no substantive point made in this respect, albeit that “resulting trust” was mentioned in reciting the issues and in addressing P’s illegality submissions.

21.  In any event, given my inability to find that D1 had contributed to the whole of the consideration of purchasing the Flat, it would not be right (nor indeed possible) for me to grant the relief sought in D1’s counterclaim on the basis of a resulting trust, which by its terms covers the entire beneficial interest of the Flat.

22.  For completeness, I am not aware of any principle (and have not been referred to any) that allows a party claiming resulting trust of the entire beneficial interest to “complete” the trust in cases where he/she had only made partial payment, by offering to pay the shortfall after the event.

23.  For the above reasons the Trust Claim as pleaded is not made out.

The AP Claim

24.  The focal dispute under this part is the intention element.

25.  From what was found above, i.e. the Deceased did utter those words (as recited in paragraph 7 above) to D1 and that D1 did pay for part of the mortgage instalments (although objectively he fails to prove that the first 4 instalments were contributed by him, his subjective intention could still be that he had put up the monies for the same in the D1&D Joint Account), I do find it on balance that D1 regarded himself as the owner of the Flat since its acquisition, in August 2002 (although that intention was not “common” with that of the Deceased given my findings above).

26.  That is not however the end of the analysis on intention to possess. It is trite that an intention to possess encompasses both (a) a subjective intention to possess and (b) some outward manifestation of the subjective intention which makes clear that intention to the world at large (see Adverse Possession by Jourdan QC (2^nd edition) §9-01 to 9-03).

27.  It is on the objective limb that D1’s claim falls:-

27.1.  Between D1 and the Deceased, there had not been any change in how either D1 or the Deceased used the Flat after the Flat was purchased in August 2002;

27.2.  Despite the plea that the “agreement” between D1 and the Deceased included D1 allowing the Deceased to reside in the Flat with D1 (§13 of D&CC), there is no evidence elicited to substantiate that plea;

27.3.  When the Deceased left the Flat and moved to an elderly home in around the end of 2003, there is no evidence of any change in the way D1 used the Flat after he became aware of it;

27.4.  When D1’s brother applied for a new electricity supply account in January 2004, this was compelled by circumstances and at the time not even known to D1, hence it was insufficient to constitute an outward manifestation of intention to possess;

27.5.  As to the “change of lock incident” in early 2004, it was similarly compelled by circumstances (as the lock was damaged by P) and done without D1 even knowing at the time; as indeed, according to D1, his brother did not tell him why the lock was changed even afterwards;

27.6.  When the Deceased passed away in July 2005, there is again no evidence of any change in the way D1 used the Flat, which would only be natural as on D1’s case he did not know of the Deceased’s passing until 2013;

27.7.  As such, up to at least 2013, as between D1 and “the world at large”, there is nothing capable of showing that D1 had regarded himself as the owner of the Flat or an intention to exercise exclusive control over the Flat otherwise.

28.  For completeness, I agree with P that the deeming provision in s 8(2) of the Limitation Ordinance (Cap 347) does not advance D1’s position – it does not operate to take away or dilute the need for intention to possess, in both of its subjective and objective limbs, hence the demise of the Deceased changes not my analysis above.

29.  For the above reason I am unable to find for D1 on his adverse possession claim.

Illegality

30.  Given my conclusions above, the issue of illegality does not arise.

31.  However, for what it is worth, I shall briefly deal with the issue of illegality given the very recent Court of Appeal decision in Monat Investment Ltd v All Person(s) in Occupation of Part of The Remaining Portion of Lot No. 591 in Mui Wo D.D. 4 No. 16 Ma Po Tsuen, Mui Wo, Lantau Island & Anr [2023] HKCA 479 (CACV 448/2020, 31.3.2023).

32.  In short, in the context of an adverse possession claim, the CA has held therein that the applicability of the maxim of ex turpi causa in a claim of adverse possession should depend on all the relevant factors set out in the “range of factors approach” based on the trio of necessary considerations in Patel v Mirza [2016] HKSC 42 (see §58-61 of Monat).

33.  In so holding, the CA also held that the “range of factors approach” in Patel (previously referred to at times as the “proportionality approach”) should be adopted in Hong Kong in place of the previously adopted “reliance approach” as propounded in Tinsley v Miligan [1993] UKHL 3, applying the declaratory theory of the common law method and before a CFA decision on the point (see §51-53 of Monat).

34.  The Monat case was of course in the context of an adverse possession claim, however logically there is no reason why the “range of factors approach” now found to represent the current state of the common law on the ex turpi causa maxim should not be applied to all situations where the maxim may be engaged. As indeed, the CA’s reasoning and conclusion of adopting the “range of factors approach” covered all contexts of application of the maxim, or the common law defence of illegality in general (see §45-50 of Monat).

35.  In the current case it is also engaged in the context of the Trust Claim, i.e. common intention constructive trust and also resulting trust.

36.  The “range of factors approach” based on the trio of necessary considerations entails the following:-

36.1.  consider the underlying purpose of the prohibition which has been transgressed;

36.2.  consider conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim;

36.3.  keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.

37.  Applying the above to the Trust Claim, the precise illegality relied upon by P being a fraud against the mortgagee bank (as opposed to the Housing Authority: see §13 of Reply & §102 of P’s Closing Submissions), my view is as follows:-

37.1.  In general of course prohibition of fraud against a bank in obtaining a mortgage serves to protect the bank’s interest and in turn the important public function of safeguarding overall integrity in a very prolific type of commercial transaction;

37.2.  In the present case however the bank’s risk is premised upon D1’s ineligibility to a “Deed of Guarantee” (§13 of Reply) or “the guarantee backing of the Government under the TPS” (§101 of P’s Closing Submissions);

37.3.  The only reference to a “Deed of Guarantee” involving the government I can find is a reference to a “Deed of Guarantee” between the mortgagee bank and the Housing Authority in paragraph 4 of the preamble to the Legal Charge between the mortgagee bank and the Deceased; according to that paragraph, the “Deed of Guarantee” was a guarantee on the part of the mortgagee bank not to sub-mortgage or assign or transfer the Legal Charge, or allow the Deceased to further charge or mortgage the Flat, as opposed to a guarantee on the part of the Housing Authority in favour of the mortgagee bank in the event of default by the Deceased;

37.4.  The mortgagee bank’s security lies, as in other mortgages, in a right to enforce against the charged property; in this context, the bank’s protection was not watered down as contended;

37.5.  On the other hand, borrowing from the wisdom of Lord Hoffmann NPJ in Cheuk Shu Yin v Yip So Wan (2012) 15 HKCFAR 344 at §33, there is public interest in allowing financial assistance from family or friends for the deposit or mortgage payments, to enable an eligible person to acquire a government subsidised property (flats under the HOS in that case) who otherwise could not afford to do so, and share the beneficial interest therein;

37.6.  Weighing the above, I would have thought that denying the Trust Claim in the present case on the basis of the precise illegality alleged herein would be an “overkill” and disproportional.

38.  Turning to the AP Claim, the precise illegality relied upon by P is that of the prohibition against “alienation”, per ss 17B and 27A of the Housing Ordinance (see §14(3) of Reply).

39.  To this extent, Mr Justice Chan PJ’s analysis of the meaning of “alienation” under those sections in the Cheuk Shu Yin case, and in turn the correct ambit of the catch of the prohibition thereunder, is instructive, although not directly applicable (§8 of Cheuk Shu Yin):-

“8. The language of the relevant provisions points to a construction which is much narrower than that held by the Court of Appeal. In order to fall within the Schedule and ss 17B and 27A, the alienation in question must be a transfer or divesting by the owner of his or her rights and interests in the flat and this supports the argument that a positive act by the owner is required. The statutory restrictions also prohibit an unauthorized mortgage, charge and conveyance which normally involve the execution of an instrument. This strongly suggests that the type of alienation contemplated by these provisions does not include the situation of a constructive or resulting trust as alleged in the present cases which usually arises by operation of law. Further, alienation is not altogether prohibited: provided that certain requirements are satisfied, eg the specified period has expired or the premium calculated according to a specified formula has been paid, the Housing Authority may approve such a transaction. What is prohibited is an alienation which is in breach of the terms and conditions of the sale. And if what is involved is in effect some arrangement which would not defeat the purpose of the Scheme and which the Housing Authority would consider acceptable, it would not be caught by these provisions. In my view, the type of alienation which is caught is a transaction which is aimed at enabling the owner to take an unfair advantage of the benefit conferred on him or her by the Scheme to make a quick profit. It does not include the family arrangements alleged in the present two cases.”

40.  By the same logic, adverse possession being also something that arises by operation of law like constructive or resulting trust and does not require any positive act by the owner, the word “alienation” should equally not catch an adverse possession claim.

41.  As such, had I found in favour of D1 on either the Trust Claim or the AP Claim, I would not have denied either of them for reason of illegality.

Conclusion

42.  I therefore give judgment in favour of P, in the following terms:-

42.1.  Vacant possession of the Flat;

42.2.  Mense profit at the agreed rate of HK$10,000 per month from the date of the Writ herein until delivery of vacant possession of the Flat;

43.  As to costs, I make an order nisi that D1 shall pay P’s costs of this action, with certificate for counsel, to be taxed if not agreed. D1’s own costs be taxed in accordance with the Legal Aid Regulations.