GOLDFAME CONSULTANTS LTD v. TSE SAI MING AND ANOTHER

HCA 1065/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURTACTION NO 1065 OF 2011

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JUDGMENT

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Introduction

1.  The plaintiff ("Goldfame") is a Hong Kong company, of which Mr Leung Kin (“Mr Leung”) is and was a director.  Mr Leung is a solicitor, being the named partner in the firm of Leung Kin & Co.

2.  By a written sale and purchase agreement dated 16 August 2005 ("the SPA"), Goldfame purchased two properties, being vacant land at Lots Nos 537 and 962 in Demarcation District No 289 ("Lots 537 & 962" or "the Lots"), which are in the village of Ko Tong, in the Sai Kung Country Park, New Territories.  Though the lot numbers do not suggest it, Lots 537 & 962 are adjoining lots.  The vendor of Lots 537 & 962 was Tse Chun Shang ("TCS"), and the price was $900,000.

3.  The SPA contained a term that completion would be on a date to be agreed between Goldfame and TCS.  Nevertheless, full payment of the consideration was made to TCS by 14 August 2006.  For reasons which I shall explain, the SPA was not registered with the Land Registry, and completion had not taken place before TCS died intestate on 9 May 2008.

4.  Instead, by a declaration of trust dated 14 August 2006, TCS declared that he held Lots 537 & 962 on trust for the benefit of Goldfame.  By two powers of attorney also dated 14 August 2006, TCS nominated Goldfame as his attorney to act for him in connection with Lots 537 & 962 and for the purposes of execution of any relevant documents.  None of the declaration of trust and powers of attorney was registered with the Land Registry.

5.  The 1st defendant ("Mr Tse") is one of the sons of TCS.  Mr Tse was granted letters of administration dated 18 May 2010, and is sued by Goldfame in his capacity as administrator of the estate of TCS.

6.  Mr Tse is sued because, in his capacity as administrator, and by a memorandum of sale and purchase and an assignment both dated 18 November 2010, he sold Lots 537 & 962 to the 2nd defendant ("Mr Hau") at the price of $500,000.

7.  Goldfame therefore claims against Mr Tse for breach of the SPA, claiming damages or the return of the $900,000, and a declaration that the property is held by Mr Tse on trust.  Goldfame also asserts against both Mr Tse and Mr Hau that the sale in November 2010 was at an undervalue and was designed dishonestly to defeat the prior interests of Goldfame, of which (it is said) both had notice.

8.  Mr Tse’s defence (which was drawn by Counsel then acting) denies the claim and pleads that he had no knowledge of the matters pleaded by Goldfame, when none of the documents was registered with the Land Registry, and that the consideration achieved on the sale to Mr Hau was the best price achievable in the circumstances.

9.  Mr Hau’s defence also denies the claim and makes similar points.  It is expressly pleaded that Mr Hau was a bona fide purchaser for valuable consideration, with neither actual nor constructive notice of Goldfame’s interests.

10.  At the trial, Goldfame was represented by Mr George Chu of counsel, and Mr Hau was represented by Mr Anthony PW Cheung of counsel.

11.  However, Mr Tse did not appear and was not represented at the trial (though he was sent notice of it), and had apparently taken no steps in the action after filing a notice to act in person early in the course of the proceedings and not long after his defence was filed. He did not give any real discovery, did not file any witness statement, and he had not appeared at the PTR.

Further Factual Background

12.  The following facts and matters can be taken from the witness statements and oral evidence given at trial, and are not really controversial.  In any event, and insofar as is necessary in respect of any of the facts that were at any point controversial, the following recital of facts constitutes my factual findings.

13.  Factual evidence was given for Goldfame by Mr Leung, Mr Lau For On Kenny ("Mr Lau") and Mr Cheng Wai Leung ("Mr Cheng"), and by Mr Hau for himself.

14.  As well as being the director of Goldfame, Mr Leung was also the director of inter alia two other companies, Standard Land Finance Limited ("Standard") and Elegance Investment Limited ("Elegance").

15.  In about July 2005, Mr Leung was told by his friend, Mr Lau, who is a surveyor by profession, that TCS had instructed him (through the introduction of Mr Cheng, another surveyor doing land surveying work for TCS) to apply for approval of redevelopment of certain properties – being various lots in DD 289, including Lots 537 & 962 – and that TCS also intended to sell those properties at a total price of $3,000,000.  Mr Lau suggested that Mr Leung might buy the properties, as the approval from the District Lands Office ("DLO") was expected to be granted soon.

16.  In fact, Mr Lau had already applied to the Lands Department both for approval for site formation and Certificates of Exemption, and for surrender of the Lots in exchange for the grant of a new lot in situ (in what he later accepted in evidence was a process that for these particular lots was "complicated").

17.  Having viewed them, Mr Leung agreed to purchase the properties at that price of $3,000,000, and instructed his own firm to act as his solicitors for the purchase.  He agreed to the purchase price on the expectation that building approval would soon be granted (though it turned out that such an expectation was misplaced).  Mr Lau confirmed that fact, but Mr Leung also said in evidence that he would still have purchased at that price even if he had known the approval process would take years, as he did not think there was any risk that approval would not be ultimately forthcoming.

18.  The purchase of the various lots was divided across three sales, one to each of Standard, Elegance, and Goldfame.  The total price of $3,000,000 was also divided across the three sales as follows: Standard purchased Lots 539 and 540 for $700,000; Elegance purchased Lot 1003 for $1,400,000; and (as already mentioned) Goldfame purchased Lots 537 & 962 for $900,000.  The apportionment was roughly to reflect the respective sizes of the lots involved.

19.  The sales to Standard and Elegance were completed in the usual manner, and need not be considered further (save perhaps in the context of land valuation: see later).  However, the sale to Goldfame was treated differently. 

20.  This arose because Mr Lau suggested to Mr Leung not to effect transfer of Lots 537 & 962 at once, because TCS had applied to the Lands Department for approval of redevelopment proposing to surrender the Lots for the re-grant of a new lot in the same location by way of Conditions of Exchange, and immediate transfer of ownership would require Goldfame to make a new application, resulting in a waste of time and effort used in the extant application.  Mr Lau said that the mere transfer of ownership would trigger the need for a new application, and that might cause a delay of several years.

21.  With acceptance of that advice, the sale and purchase agreement relating to Lots 537 & 962 dated 16 August 2005 was made on terms in the SPA that included the payment of certain deposits at signing of the agreement and on 14 February 2006, with the balance of the purchase price to be paid on 14 August 2006. The completion of the sale and purchase was to take place seven days from the date on which written approval had been granted by the Buildings Department for the proposed site formation plan, or at such time as specified by the purchaser.  The vendor was required to execute a power of attorney, giving full power to deal with the property, including the assignment of it, to the purchaser or its nominee on the date of payment of the full purchase price.

22.  No approval for redevelopment had been granted by the Lands Department by 14 August 2006, but in compliance with the terms of the SPA, Goldfame paid the balance of the price to TCS.  In return, TCS signed documents intended to protect the interest of Goldfame in Lots 537 & 962, being a Declaration of Trust confirming that TCS held the Lots on trust for Goldfame, and an Irrevocable Power of Attorney giving full power to Goldfame to deal with the Lots.

23.  As accepted by Mr Chu, the thing lacking was the registration of those documents, and hence Goldfame’s interest in the Lots, so that the documents at the Land Registry did not reflect any legal or other interest of Goldfame; to the outside world, TCS remained the legal and beneficial owner of the land.

24.  This was, of course, the root of the problems which Goldfame later faced, and some people might require some effort to sympathize with the problem, not least when Mr Leung as a lawyer might be expected to know the potential consequences of not properly registering an interest in land.

25.  Indeed, as part of the lengthy correspondence with the DLO, the DLO had by letter dated 26 February 2007 noted that the Land Registry showed TCS remaining as owner of Lots 537 & 962, and expressly asked if there had been any change of ownership.  Goldfame’s solicitors, namely Mr Leung’s firm, replied by letter of 28 February 2007 confirming that TCS was the "registered owner" that "there is no change of ownership up to the present".  This was deliberate concealment of the transfer of ownership in 2005, apparently made to avoid the need for a new application.

26.  TCS passed away in Hong Kong on 9 May 2008. 

27.  A little later that month, or thereabouts, Mr Lau learned from Mr Cheng and then told Mr Leung that TCS had passed away.  Rather than doing it himself (apparently because he had never spoken directly to TCS in the whole transaction), Mr Leung asked Mr Lau to give notice to TCS’ wife and sons that Lots 537 & 962 had been sold to Goldfame so that TCS held them only on trust.

28.  Again, rather than doing it himself, Mr Lau (as he put it) asked Mr Cheng to give notice to the son of TCS of the existence of the transaction between Goldfame and TCS relating to Lots 537 & 962.

29.  Mr Cheng said that about 6 months later, he spoke to one of TCS’ sons – a Tse Chi Cheong ("TCC") – who had been the person from whom Mr Cheng had learned that TCS had passed away.  The delay was caused by the suggestion of Mr Lau to Mr Cheng that speaking immediately to TCC might seem insensitive when TCC was still in mourning.  When the conversation did take place, Mr Cheng told TCC of the Goldfame/TCS agreement and of the full payment of the purchase price by Goldfame.  TCC told Mr Cheng that the matter of his father’s estate had been passed to solicitors for handling, and any matter of transfer would be dealt with by that firm in due course.  Mr Cheng reported that back to Mr Lau.

30.  It is clear that none of Mr Leung, Mr Lau or Mr Cheng made direct enquiries with the Tse family as to precisely who might be dealing with the estate of TCS on behalf of the family (whether a family member or a named solicitor), and none of them spoke to Mr Tse, the actual administrator of the estate of TCS.  Mr Cheng was not able to say how many sons and daughters TCS had.  There is no evidence that TCC spoke to Mr Tse about the matter at all (even if Mr Cheng thought that he would).  On the totality of the evidence (some set out above, some below), I find that Mr Tse was not informed by anyone of the agreement between Goldfame and TCS, and that without being directly informed he would not have known – and he did not know – of that agreement.

31.  The Schedule of Assets and Liabilities of TCS dated 29 October 2008, exhibited to Mr Tse’s affirmation of the same date making application for letters of administration, listed no cash assets, no safety box and no stocks and shares, but various land and buildings said to be wholly owned by the deceased, including Lots 537 & 962.  That Schedule also identified that there were no liabilities of any kind.

32.  It seems the Schedule – and in particular that part relating to land and buildings – had been compiled in part with the benefit of the response to an enquiry made by Mr Tse to the Reports-on-Title & Owners Incorporation Section of the Land Registry.  That enquiry was made by Mr Tse’s letter of 4 August 2008 seeking to search the record of properties owned by TCS.  By its response dated 25 August 2008, that Section provided a list of the properties’ information bearing the ID card number and name of TCS.  The list included express reference to Lots 537 & 962.

33.  An additional Schedule dated 17 June 2009 did also list cash at bank of approximately $22,000, and a small outstanding credit card debt of almost $8,400.  No amendment was otherwise made to the Schedule of Assets and Liabilities previously filed.  It has not been suggested that any of the land (other than the point made as to Lots 537 & 962) was in any way encumbered.

34.  Mr Hau retired as a teacher in about 2009, and is primarily living in the USA where he had migrated, but coming back to Hong Kong three or four times a year.  Mr Hau knows a former classmate, a Mr Liu, who is engaged in development or rebuilding of houses.  In about May or June 2010, in Hong Kong, Mr Liu asked Mr Hau if he would be interested in purchasing a piece of land to build a house on, as Mr Liu could arrange the construction.  Mr Hau agreed to this course.

35.  Mr Liu then introduced Mr Hau to Mr Tse (whom he had not previously met), who explained that his father had passed away, and as administrator of the estate he could sell some of his father’s land to Mr Hau.  Lots 537 & 962 were suggested as a possibility for purchase, and Mr Hau went to look at them.  He was told that the bare land of about 549 sq ft in total could be made the subject of an application for erecting a house.

36.  It seems the price of $500,000 was agreed very quickly.  Though it is not clear who first suggested the price, Mr Tse did not ask for more, and Mr Hau did not ask for less.  There was essentially no bargaining, so the price was agreed.  Mr Hau knew Mr Tse wanted to sell for the benefit of the estate of TCS, and he thought the price about right for a piece of undeveloped bare land, being reasonable as he would still need to put in more money to build a house or a shed on it which he might use on vacations to Hong Kong.

37.  Mr Hau then instructed solicitors to act for him in the sale and purchase, while he returned to New York.  He returned to New York a little earlier than had been planned – ie in July – as his granddaughter was born around that time.  There was, therefore, no time to have completed the necessary enquiries to allow the transaction to be actually entered into before he left.

38.  Mr Hau’s solicitors later told him that a land search showed no adverse encumbrance against the land.  When Mr Tse had the letters of administration and Mr Hau returned to Hong Kong, the sale and purchase agreement and the assignment were both signed at his solicitors’ office on 18 November 2010 (“the 2010 sale and purchase”).  Mr Hau paid the price of $500,000 by means of a personal cheque (drawn on an account held jointly with Mr Hau’s son) made payable directly to Mr Tse and written that day.

39.  That was only the second and last time Mr Hau had met Mr Tse.  I accept Mr Hau's evidence that at the material time he had no knowledge of any previous dealings between any member of Mr Tse’s family and Goldfame or Mr Leung.

40.  The transaction was registered at the Land Registry, by a memorial dated 13 December 2010.  No notification was received from the Stamp Duty office suggesting that the agreed price for the transaction was at an undervalue.

41.  In about June 2011, Mr Leung discovered that Lots 537 & 962 had been sold to Mr Hau in November 2010, at a price which Mr Leung considered to be far below market value.  He, through his firm, wrote to Mr Tse demanding Mr Tse to effect transfer of the Lots to Goldfame, but Mr Tse never responded to the letter.  Hence, he commenced these proceedings against both defendants.

42.  Though there is no suggestion of it in Mr Leung’s witness statement, in his oral evidence Mr Leung said that he had in fact agreed to sell Lots 537 & 962 in 2007, and had actually received from the new purchaser (who he did not name) the price of $1,500,000.  Thus, he suggested he and Goldfame no longer had any "official interest", and that he was in effect taking these proceedings only to complete his obligation to the purchaser.  No relevant contracts were produced by Mr Leung.

43.  It is also relevant to note that in 2007, Mr Leung – through Standard – sold the Lots 539 & 540.  They were sold as bare land, yet to receive permission to commence building – notwithstanding that approval had been sought since at least as early as 1997. At around the same time, Mr Leung (through Elegance) had sold Lot 1003, though that was with the benefit of a re-grant and building permission, and there is now a house on that lot.

44.  But these suggested sales in 2007 of all the lots purchased from TCS in 2005 might help to explain why Mr Leung took less than a very direct interest in the properties – and had not made any direct contact with TCS’ family – after he learned of TCS’s death in 2008.

45.  No relevant DLO approval for Lots 537 & 962 was granted up to the date of the trial.

Claim against the 2nd Defendant

46.  It is convenient first to deal with the claim made against Mr Hau, based as it is primarily on an alleged breach of section 60 of the Conveyancing and Property Ordinance, Cap 219 ("CPO").  Of course, this necessarily involves some consideration of the position of Mr Tse as well.

47.  In this context, I accept the submission by Mr Cheung, for Mr Hau, that Goldfame is in effect forced to seek to rely on section 60 of the CPO because it has no more direct claim against Mr Hau by virtue of sections 3 and 4 of the Land Registration Ordinance, Cap 128 ("LPO").  I accept that the SPA and the declaration of trust in favour of Goldfame are "absolutely null and void to all intents and purposes" against Mr Hau, and that even if he had had actual notice of Goldfame's interest at the time of his purchase (which is not the case), Mr Hau's rights would still have prevailed unless they had been actual fraud on his part.

48.  So, Mr Cheung submitted, Goldfame has tried to squeeze the facts of this case into section 60 of the CPO, when it is wholly artificial to do so, and that the claim was always bound to fail.

49.  For his part, Mr Chu, for Goldfame, acknowledges the effect of sections 3 and 4 of the LPO, and also accepts that Goldfame must show actual intention to defraud.  He also accepted that the actual intention in this case would be found by drawing an inference, presumably because (as might be expected) there is no direct evidence to prove the alleged intent.

50.  Mr Chu referred me to the consideration of section 60 of the CPO by Ribeiro PJ in Tradepower (Holdings) Ltd (in liquidation) v. Tradepower (Hong Kong) Ltd [2010] 1 HKC 380, where after a consideration of possible different approaches (see §85) he formulated the applicable rule for cases like Freeman v. Pope (1870) 5 Ch App 538, as follows (see §88):

"Where it is objectively shown that a disposition of property unsupported by consideration is made by a disponor when insolvent (or who thereby renders himself insolvent) with the result that his creditors (including his future creditors) are clearly subjected at least to a significant risk of being unable to recover their debts in full, such facts ought in virtually every case to be sufficient to justify the inference of an intent to defraud creditors on the disponor's part.  In cases falling outside the rule, that is, in cases where the disposition is made for valuable consideration, or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to the creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before s 60 is engaged."

51.  Ribeiro PJ also pointed out (see §91) that whether the disponor was insolvent at the material time and whether the disposition was made for consideration are questions of fact to be objectively determined.

52.  I also accept that in each case, one must look at the whole of the circumstances surrounding the execution of the deed, and then ask oneself the question whether the deed was in fact (it is a question of fact) executed with the necessary intent: see Skink Ltd (in liquidation) v. Comtowell Ltd [1994] 2 HKC 286, at 291E-F.

53.  Mr Chu also invited me to draw some adverse inference against Mr Tse on the authority of Cheung Ying Lun v. Legal Way [2014] 1 HKLRD 106, where at §28 G Lam J held:

"While a defendant's absence is not in itself evidence against him, if there is some evidence tending to establish the plaintiff's case, albeit slender evidence, the defendant's silence in circumstances in which he would be expected to answer might convert that evidence into proof."

54.  I have these various principles well in mind.

55.  On the question of possible adverse inferences, Mr Chu also invited me to draw an adverse inference against Mr Hau because he had not filed any cross claim against Mr Tse, whether by way of third-party notice or contribution notice, and had not sought to subpoena Mr Tse to give evidence.  However, I do not think any adverse inference may be drawn against Mr Hau from such circumstances.  Leaving aside whether it is open to one defendant to subpoena another defendant, it seems to me Mr Hau was perfectly entitled to take the view that his own evidence was capable of dispelling any notion of intention to defraud, and to show that he was a bona fide purchaser without notice.

56.  I also reject Mr Chu's submission that a lack of bona fides inference can be drawn from certain special circumstances on which he placed reliance. First, he pointed to the fact that the 2010 sale and purchase involved only one firm of solicitors acting for both vendor and purchaser at the same time, but as Mr Chu himself noted the particular circumstances were exempted from any of the Solicitors’ Practice Rules as would have prevented that occurring.

57.  Secondly, he relied upon the short time between the grant of the letters of administration to Mr Tse and the date of the sale and purchase between Mr Tse and Mr Hau, but I think that the more important time began with the date when TCS passed away.  It is hardly surprising that at some point during the administration of the estate that some (or, indeed, all) of the property would be sold, and the actual sale took place over two years after TCS passed away.  The short time between the grant of the letters of administration and the date of sale was merely the consequence of the administrative delay in the grant of the letters of administration which were necessary to permit the sale being effected.

58.  Thirdly, Mr Chu suggested that it was unlikely that Mr Hau really wanted the land to build a vacation home, when he was himself an indigenous villager, but had never built a village house before. However, I do not think this a matter of any weight.

59.  Fourthly, Mr Chu relied on the quick process of negotiation and agreement in June 2010, yet no provisional agreement was entered into at that time.  It seems to me that is wholly explained by two matters: one being the need for the grant of letters of administration before an actual sale could be effected; the other being the fact that Mr Hau returned to New York for his granddaughter's birth, and also instructed his solicitors to make appropriate enquiries in relation to the Lots whilst he would be away.

60.  Fifthly, Mr Chu suggested it was unlikely that Mr Hau would really have wanted to build a vacation home, when his enquiries with the DLO suggested it might require 3 to 4 years to have the necessary permit, and that in any event, the combined site area of Lots 537 & 962, was only 50.2 m² and not big enough for a vacation home.  But in his evidence, Mr Hau identified that the idea had been originally put into his head by Mr Liu, and it did not seem that he was in any particular hurry to follow through, and he spoke about building a "shed" for his temporary vacation stays.

61.  Sixthly, reference was made to the fact, which I accept is unusual in Hong Kong conveyancing practice, that the vendor Mr Tse accepted a personal cheque from Mr Hau on the same date as the Assignment was made. But, unusual though this may have been, I do not think it is a point which lends much weight to the drawing of any inference as to a lack of bona fides in the transaction.

62.  Seventhly, Mr Chu relied on the fact that Mr Tse had not appeared, and therefore had never rebutted in evidence, the conversation between Mr Cheng and TCC.  But, though I accept that that conversation did take place, I do not think that it necessarily follows that TCC passed on any relevant notice or information to Mr Tse.  I have in mind, amongst the other facts which I have set out in this Judgment, the specific enquiries made by Mr Tse of the Land Registry, which seem to me to be consistent with his looking for knowledge would otherwise he did not have (or at least could not confirm), and the fact that Mr Tse told Mr Hau that he could apply for permission to redevelop. 

63.  I also bear in mind that it is not very surprising that Mr Tse might have lost interest in, and would not have wanted to spend time and money on, a claim against him as representatives of the estate for return of the monies on a breach of contract, which it was going to be at least extremely difficult successfully to defend.

64.  Then Mr Chu asserted that the estate of TCS was insolvent, in that it had a large land bank, but not much cash, so that it could not meet government rents, rates and other miscellaneous maintenance costs. Indeed, Mr Chu pointed to the recent searches performed by Mr Leung and produced in his evidence, which show that of all the pieces of land which originally comprised the estate, only two pieces were left unsold by the date of the trial.  However, it seems to me that it would make commercial sense – and would not be indicative of an intent to defraud creditors, but probably indicative of the opposite – to raise some funds for any anticipated ongoing maintenance expenses by selling some parcel or parcels of the land.  No evidence was adduced as to what those maintenance expenses might amount to.

65.  Anyway, as such land was fairly readily tradable, I am not sure I can agree that the estate was insolvent. In any event, other than an almost insignificant credit card debt, which was well able to be met out of the slightly larger amount of cash at bank, the estate had no liabilities at all.  In short, this meant that there were no known creditors.

66.  I also think the following fact points away from drawing an inference of an intention to defraud creditors: Mr Tse apparently sold 34 pieces of land held by the estate over a period of four years, leading 2 pieces of land.  This does not point to a rushed sale, and at any given point in time there remained pieces of land, the value in which could have been realised to meet any debts, even if the cash raised by other sales had been distributed from the estate.

67.  Further, I reject the submission that because Mr Hau was made aware that the intended sale of Lots 537 & 962 was to raise cash, that somehow gives rise to an inference that he was party – or even that there was – an intent to defraud creditors.  It is obvious that any sale of land is designed to exchange a land asset for a cash asset, but it is a non sequitur to suggest that fact gives rise to any knowledge or inference of wrongdoing such as intending to defraud creditors, or imposed upon the purchaser any need to investigate the vendor’s motives for sale.

68.  The only other matter from which I am invited to draw an inference as to an intent to defraud creditors is as regards the alleged undervalue in the sale to Mr Hau at $500,000. 

69.  This point has given rise to expert opinion evidence, contained in expert reports and their exploration in oral evidence.  Goldfame relied on the opinion of Mr Frances Lau, and Mr Hau relied on the opinion of Mr Chris Tang.  Though there was some criticism of Mr Tang’s expertise – including by reference to the fact that he had not checked the relevant sizes of the Lots, which he had to admit in cross-examination and so as to amend his calculations accordingly – I am satisfied that both experts were sufficiently qualified and experienced to offer expert opinion on the question of valuation.

70.  Mr Lau provided a report dated 2 June 2013, which was later updated on 9 June 2014.  He pointed out that the Lots 537 & 962 are in a local village within the Sai Kung West Country Park area. The two Lots are attached to each other and – subject to a surrender and re-grant – might be jointly developed into a building area of about 50.2 square metres.

71.  Mr Lau adopted a typical definition of market value, being the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. 

72.  In deciding on an appropriate method of valuation, Mr Lau considered three methods: first, the direct comparison method by reference to bare sites with house status as would be good comparables, subject to adjustment according to the differences such as view, aspect, accessibility, etc; secondly, if bare site comparables are not available or suitable, other comparables such as houses may be used, adopting a residual method to find the bare site value; thirdly, the value derived by the residual method could be checked against the Private Domestic (Buildings) Price Indices By Class (Territory-Wide) from 2005, as published by the Rating and Valuation Department.

73.  Mr Lau chose to make valuations in August 2005, November 2010 and 2013 (later updated to 2014).  In my view, the key valuation date would be that in November 2010, for that is the date it is said by Goldfame the agreed price of $500,000 was at a marked undervalue.  None of the other proposed valuation dates seems to me to be of central importance, though valuations across the whole period might indicate the characteristics of the market and any market trend.

74.  For each of the valuation dates, Mr Lau mainly used the residual method checked against price indices, in relation to sites where a house was already built.  This is because he did not find, or did not consider suitable, any (or at least many) direct comparables.  In adopting the residual method, first adjustment has to be made to the sale price to make the sale price comparison to the subject site. Then, the residual method deducts the building cost and profit etc to find out the bare site value and accommodation value.

75.  Mr Tang pointed out the Lots are held on lease terms of 75 years renewable for 24 years commencing 1 July 1898 and extended to 30 June 2047, and that there is no current town planning zone for the Lots.  He emphasized that the small size of each of the Lots meant that it would be fairly difficult, if not impossible, to develop each separately. Hence, they were valued by Mr Tang on a separate basis not assuming joint development, as no permission for that had been given even by the date of the trial despite the application having been made many years earlier.

76.  Mr Tang adopted the direct comparison method, by reference to sales of land lots in DD 289 since 2005.  He did not look at, and did not consider it apt to employ, the residual value method.

77.  Mr Lau considered the value of Lots 537 & 962 to be as follows: $1,113,154 at 16 August 2005; $2,037,467 at 18 November 2010 (checked by reference to the index at $1,940,490); $2,766,598 at 2 June 2013; and $4, 526,433 at 9 June 2014.

78.  In his reports, Mr Tang considered the value of Lots 537 & 962 to be as follows: $503,000 at 16 August 2005; $470,000 at 18 November 2010; $703,000 at 28 June 2013; and $828,000 at 11 June 2014. In his oral evidence, and by reference to the corrected size and hence unit rate derived from a comparable lot 536, he gave a value for the Lots as would I think come out at about $730,000.

79.  Obviously, the valuations between the experts are some way apart.  The difference is explained – not least in the Joint Report produced by the experts – essentially by the particular choice of comparables (in those included or excluded by each expert), and the difference between those which are bare land and those which have a house built (the latter requiring the residual method).

80.  In my view there are real problems with the residual valuation method, as there are so many variables and assumptions which come into the calculation.  These variables include the costs of construction, interest rates, rates for professional fees, and the expected development profit figures.  Even looking at the brackets for construction costs for example, just the difference in calculation between taking costs at the lowest and highest ends of the bracket makes a large difference in the valuation calculation.  The greater the variation in the greater the number of the variables, the more magnified are differences in the ultimate valuation calculations.

81.  During the evidence, with the parties I performed a calculation as regards one piece of developed land making changes just to the variables of the construction costs and the development profit – both changed within a proper possible range – and the valuation difference in the calculation was by a very large factor.

82.  I tend to agree with Mr Cheung’s submission that land with a building on it and bare land are two ‘different species’.  As he pointed out, bare land transactions in the area have tended to be in the price region of a few hundred thousand dollars – though also highly variable – but land with buildings valued on the residual method tends to identify valuations in the millions of dollars.

83.  Indeed, if one applies the residual method process to land which was sold and later developed and sold with a house, it tends to point up that the residual method must give a valuation that is too high, as it is well above the actual land transaction price for that very piece of bare land.  The difference may lie in the assumption, often (as here) misplaced, that the land is immediately developable with no risks from any delay or the uncertainty and costs of delay.

84.  I have in mind Mr Chu’s point that removing all land with houses from the comparables reduces the number to very few – he would suggest potentially a meaningless few – but I do not think that point makes up for the deficiencies I see in the residual method process.  It does suggest that the particular ‘market’ is not itself very active, and not very sophisticated.

85.  I do not think the DLO ex gratia compensation rates for resumed land are very helpful, as those rates in effect assume immediate development potential.  Also to argue backwards from the resumption rate requires one to know the valuation to which the ex gratia uplift is added.  So, in short, the resumption rate is not a reliable valuation tool.

86.  Also, checking the figure against a territory-wide price index does not seem to me to be likely to provide more than the most general assistance, and I do not think it is a very reliable guide or check in this case.

87.  Indeed, the particular market – for bare land in a village inside a country park, with limited access, and open to potential development only practically if there is a surrender and re-grant which can take years if it is ever to be given – is clearly not at all typical of the wider Hong Kong property market.  Nor is it one about which many people would have any particular knowledge, so that a wider fluctuation of agreed prices is likely.  That seems to me to be indicated also by the wide range of prices of the transactions for bare land in DD 289 as in fact occurred over the relevant period.

88.  I take into account that the price paid by Goldfame to TCS in 2005 was between the valuations given by the experts though nearer to Mr Lau’s (even though it might be said that the actual price agreed is perhaps a decent indicator of what was then the market price, as was agreed between buyer and seller).  Perhaps that means either that the possible land price to be agreed is rather variable in a limited market, or that Mr Lau’s valuations are high.  Of course, it is also fair to note that Goldfame bought in the expectation that the necessary permissions to develop were to be given soon (though, as it happened, that did not in fact occur).

89.  Though I think the 2010 valuation date is the key, I have had reference to the wider period from 2005 to 2013.  One useful indicator is one comparable identified by Mr Lau, being a transaction relating to bare land in April 2012 (lot 547).  That lot is slightly larger than Lots 537 & 962 together, and being one lot it was not necessary to seek surrender and re-grant to use the area as one piece.  The consideration was $400,000 for a half share, which gave a value of $4,929 per square metre.

90.  Mr Lau considered that value to be out of “normal range” and “too low for comparable”, so he did not think the transaction suitable for comparison purposes, and he ignored it.  But that seems to me to have been a ‘bootstraps’ argument, as it presupposes the correct valuation is much higher so as to justify ignoring the lower valuation otherwise identified by the transaction.  Rather, I think the transaction of highly comparable land is the better comparison than a convoluted calculation involving numerous variables and assumptions.

91.  Adopting that value, the value for the Lots 537 & 962 in 2012 might be in the region of $740,000, at a time when both experts appeared to agree the market price was higher than in 2010.

92.  For the avoidance of doubt, I would point out that in the absence of any proper material on the point, I have wholly ignored the suggested sale of the Lots 537 & 962 and its price, which Mr Leung says he agreed in 2007.

93.  At the end of the day, I do not think it is necessary to fix on any particular valuation for the Lots 537 & 962 in July or November 2010, though for the reasons explained I consider valuations pointed up by the direct comparison to other bare land transactions are far preferable to valuations reached using the residual valuation method.  I also specifically note that there is a wider possible variation of ‘proper’ values of this type of land – ie prices at which bona fide willing buyers and sellers might agree – than with the more standard Hong Kong property, and a deviation by a couple of hundred thousand dollars would not necessarily mean sale at an under- or over-value.

94.  For the various reasons identified above, and on the evidence as a whole, I decline to draw the inference that – and I therefore reject the submission that – the sale from Mr Tse to Mr Hau was at an undervalue.  I think the sale price agreed was justifiable in the market, and I reject the notion of any intention to defraud creditors on the part of either of Mr Tse or Mr Hau.

95.  For the avoidance of doubt I also hold that there is no reason to think Mr Hau was not acting in good faith, and I reject any suggestion to the contrary.

96.  The claim against Mr Hau fails.

Claim against 1st Defendant

97.  As stated, Mr Tse had notice of the trial, but neither attended nor was represented.  This was not surprising against his earlier lack of participation in the interlocutory process.

98.  In any event, Mr Tse is sued in his capacity representing the estate of TCS as its administrator.  Though – as I have held – Mr Tse himself did not have knowledge of the matters relating to the sale of the land by TCS, as the material documents were not registered and he was not personally given notice (directly or indirectly), there can be no doubt that the estate was in breach of the agreement with Goldfame in failing to deliver TCS’ side of the bargain.

99.  In the circumstances, it seems to me that the Goldfame is entitled to succeed on its claim against Mr Tse representing the estate of TCS to a return of the purchase price paid, together with simple interest at 5% per annum from the date of the writ.

100.  Obviously, I do not grant the other relief sought by Goldfame, in light of my findings that Mr Hau was a bona fide purchaser without notice, and that there was no intent to defraud any creditors of the estate of TCS.

Costs

101.  I do not see why costs should not follow the event, so I order that Goldfame shall pay Mr Hau’s costs, to be taxed if not agreed.

102.  As to the costs of the claim against Mr Tse in his capacity of representative of the estate of TCS, costs should also follow that event and so Goldfame is entitled to its costs of that claim from Mr Tse/the estate, also to be taxed if not agreed. 

103.  In his closing submissions, Mr Cheung said that Goldfame could have applied for summary judgment against Mr Tse for the return of the $900,000 long before the trial, and in asking me to “do justice for D1 as well”, Mr Cheung suggested that “there is no reason why D1 should bear all the unnecessary costs”.  I am not sure why Mr Cheung made that submission, as he holds no brief for Mr Tse, but it does not take matters very far anyway. 

104.  Though it is in the end a matter for taxation, it seems to me that the costs of the trial essentially related to the claim against Mr Hau, and much of the interlocutory process after Mr Tse filed a notice to act in person would be seen in the same light.

Postscript

105.  Very shortly before the trial, Goldfame issued a writ of subpoena duces tecum against Mr Cheung Kam Min Mickey, seeking certain conveyancing documents relating to the transaction for sale of Lots 537 & 962 in 2010.

106.  Of course, that Mr Cheung is the solicitor on the record for Mr Hau in this action.  At the trial, I queried whether it was even permissible for a party to subpoena the solicitor on the record for the party on the other side, but in any event Mr Chu chose not to push the point and did not seek to call Mr Cheung as a witness.  I made no order at the time as to payment of the costs of the ‘witness’ Mr Cheung, and after the trial Goldfame’s solicitors asked me to order the refund of the $500 paid for the filing of the Praecipe for Writ of Subpoena.  I so order.