SOPHISTICATED MATERIALS LTD v. SIDEPEC INTERNATIONAL LTD AND ANOTHER

HCA157/2017

[2018] HKCFI 2836

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 157 OF 2017

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REASONS FOR DECISION

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Introduction

1.  By a summons taken out by the 2^nd Defendant (“D2”) under Order 18 rule 19 of the Rules of the High Court (“RHC”) and the inherent jurisdiction of this Court on 9 July 2018 (“the Summons”), D2 applied for an order striking out the Statement of Claim (“SoC”) filed by the Plaintiff (“P”) on 26 January 2017 and dismissing this action with costs being paid by P to the Defendants (collectively, “Ds”).

2.  I heard full arguments on the Summons on 18 December 2018, after which I (1) struck out the SoC as both disclosing no reasonable cause of action and frivolous; (2) dismissed this action; and (3) ordered P to pay Ds the costs of this action, including the costs of the Summons, to be taxed on the indemnity basis with Certificate for Two Counsel for the Summons if not agreed (“the Decision”).

3.  My reasons for the Decision are as set out below.

Background

4.  On the key date of 24 June 2009 (“the Date of Purchase”), the 1^st Defendant (“D1”), a local corporation, purchased a property known as “Flat F, 60^th Floor, Tower 2, Grand Promenade, Sai Wan Ho, Hong Kong” (“the Property”) at the price of HKD4,792,000.

5.  From June 2009 to October 2013, D1 granted mortgages, 4  in  total, over the Property, as security for loans, in favour of the following  4  entities: -

(1)  Bank of China (Hong Kong) Limited (“BoC”);

(2)  Yieldway International Limited (“Yieldway”);

(3)  Hong Kong Finance Company Limited (“HKFCL”); and

(4)  International Credit Limited (“ICL”).

6.  D2, a local corporation and licensed money lender, came into the picture on 19 October 2015, when it helped D1 refinance its loans by, inter alia, discharging all previous mortgages, and in their place creating a new legal charge over the Property in D2’s favour.

7.  D1 stopped making repayments from April 2016 onwards, as a result of which D2, as one would expect, commenced a mortgagee action (HCMP 2097/2016) against D1, seeking possession of the Property.

8.  It was against this background that P commenced this action against Ds, claiming to be a beneficial owner of the Property.  P alleged in the SoC that it started assisting D1 in repaying its mortgage loans “in or about mid-July 2009”, after the Date of Purchase.  Importantly, the only pleaded case of P was one of resulting trust.  P never pleaded constructive trust, or indeed anything else.

Submissions of D2

9.  Mr Christopher Chain, leading Mr Howard Wong, Counsel for D2, submitted, inter alia, that: -

(1)  P’s case was bad in law since beneficial interests under resulting trusts, in the context of the purchase of landed property, were fixed at the time of purchase and would not change thereafter.  In the absence of any allegation that P paid parts of the purchase price at the Date of Purchase, P’s case (which was on resulting, as opposed to constructive, trust) was bound to fail.  Subsequent assistance in mortgage loan repayments, even if proven, would not change the parties’ positions under resulting trusts analysis.

(2)  In any case, P’s solicitors Jim & Co had, on behalf of P, declared in paragraph 5 of P’s List of Documents filed on 11 December 2017 that P never had a single sheet of paper relating to any matter in question in this action in the Peruvian Guano sense, save and except (i) a Form NAR1; (ii) a Land Search Record; (iii) documents filed into Court; and (iv) privileged documents.  This Court should infer from this declaration that P’s allegations to the effect that it had assisted D1 in making 223 monthly repayments totaling HKD3,723,500 must be false and known to P to be false.  It was impossible for P (which was a corporation) to have made 223 payments totaling HKD3,723,500 without the same being recorded in its accounting and/or banking records.  P clearly knew or should have known its allegations had no substance.

Submissions of P

10.  Mr Jerry Jim, Solicitor for P, submitted inter alia that I should dismiss the Summons.  Mr Jim was however wholly unable to answer the 2 points submitted to me on behalf of D2 as set out above.

My View

11.  In gist, I agreed with the submissions of D2.

12.  D2’s submissions on the law were correct.  As Peter Gibson LJ of the English Court of Appeal had said in the case of Curley v Parkes [2005] 1 P & CR DG15 at D45 & [2004] EWCA Civ 1 515 at para 14: -

“… The relevant principle is that the resulting trust of a property purchased in the name of another, in the absence of contrary intention, arises once and for all at the date on which the property is acquired. Because of the liability assumed by the mortgagor in a case where monies are borrowed by the mortgagor to be used on the purchase, the mortgagor is treated as having provided the proportion of the purchase price attributable to the monies so borrowed.  Subsequent payments of the mortgage instalments are not part of the purchase price already paid to the vendor…”

13.  As resulting trusts always crystallize on the dates of purchase, subsequent repayments of mortgage loans by 3^rd parties would be irrelevant in resulting trust claims.  The analysis in constructive trust claims would of course be completely different, but no constructive trust had ever been pleaded in our present case.

14.  The learned editors of Lewin on Trusts (19^th Edition) said the same thing at para 9-087 of their work, as follows: -

“… In a case where property is acquired on mortgage, the money borrowed and applied in the purchase will, where the resulting trust analysis applies, be taken as being a contribution to the purchase by the person who is obligated at the time of purchase to repay the loan. It will not be taken as a contribution by a person who subsequently pays mortgage instalments, even after the decision in Stack v Dowden…”

15.  The learned editors of Underhill and Hayton – Law Relating to Trusts and Trustees (19^th Edition) were of the same view, and they said the following at para 25.9 of their work: -

“A’s and B’s equitable interests under resulting trusts are fixed at the time they purchased the property by paying the purchase price…. Subsequent payments by A of mortgage instalments for which B is solely responsible do not usually entitle A to an equitable interest under a resulting trust…”

16.  By reason of these trite principles, I was satisfied P’s resulting trust allegation was bad in law.  The SoC plainly disclosed no reasonable cause of action and should be struck out.

17.  D2’s submissions on its alternative “frivolous” ground were also correct.

18.  P was represented and its List of Documents was prepared by its solicitors.  P’s solicitors must have been fully aware full disclosure was a serious legal obligation and that all relevant documents must be disclosed.  Indeed, P’s solicitors would be aware the Court of Appeal had in Deak & Co (Far East) Ltd v NM Rothschild & Son Ltd [1981] HKC 78 and many more cases thereafter applied the Peruvian Guano test in Hong Kong.

19.  The above being the case, and in the conspicuous absence of any prima facie believable explanation to the contrary, the only inference I could draw was that the declaration in paragraph 5 of P’s List of Documents was actually true, that P never had any document in support of its case, and P was simply vexing Ds with false allegations with no substance, knowing them to be false allegations with no substance.

20.  As Au-Yeung J had said in Yifung Properties Ltd v Manchester  Securities Corp (unrep, HCA 1341/2014 & HCA 1359/2014, 19 October 2015, para 12, upheld on appeal, CACV 258/2015 & CACV 259/2015): -

“… Where a litigant brings a claim knowing that there is no substance in it or that it is bound to fail, or if the claim is on its face so manifestly misconceived that it can have no prospect of success, it may be deemed frivolous and an abuse of process”

21.  Applying the test as set out by Au-Yeung  J in Yifung (above), and for the reasons set out above, I was fully satisfied the SoC (and indeed the whole action) was frivolous and should be struck out on this alternative ground as well.  This action should be dismissed.

Costs

22.  Costs should follow the event.  Given that this whole action was frivolous and therefore an abuse of process, P should pay costs on the indemnity basis.

23.  As to Certificate for Counsel, it was reasonable, necessary and proper for D2 to engage two Counsel to argue the Summons, given the law points being relied on.  I certified the engagement of two Counsel.

Final Remarks

24.  D2 did not apply for the vacation of lis pendis under Sections 19 & 20 of the Land Registration Ordinance (Cap 128) in the Summons.  I shall leave it to the parties to sort out lis pendis issues, if any, separately.

25.  I thank Counsel for D2 for their most able assistance.