HUI SHUI KAY v. HON TO AND ANOTHER

HCMP 3399/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3399 OF 2016

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J U D G M E N T

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Introduction

1.  The plaintiff was the ex-boyfriend of the 1^st defendant. They purchased a property in joint names.  The 1^st defendant was declared bankrupt in 2012 and the 2^nd defendant (Fred Lee and Christine Chow) are her joint and several trustees in bankruptcy (“the trustees”).

2.  The plaintiff claims to have borne all the costs of purchase of the property.  The 1^st defendant had executed a declaration of trust in the plaintiff’s favour before the bankruptcy.

3.  The plaintiff now seeks:

(1)   A declaration that the 1^st defendant held and still holds the property on trust for the plaintiff;

(2)   An order to vacate registration of the bankruptcy order and a memorandum to court of resolution at the Land Registry against the property (“the registration”); and

(3)   An order for the 1^st defendant to execute documents to re-transfer the interest to him.

4.  The 1^st defendant has been served at her last known address but did not file any acknowledgement of service.  As far back as 22 July 2014, she knew that she could not enter into private arrangements with the plaintiff because of the bankruptcy order and had asked the plaintiff to contact the trustees directly, which the plaintiff did.

5.  The trustees do not oppose the application but they have never acknowledged the plaintiff’s title.  Their position, disputed by the plaintiff, is that:

(a)   There had been prior settlement with the plaintiff so that this originating summons was not necessary;

(b)   It is not possible to vacate the registration because it was made under the Bankruptcy Rules.

The facts

6.  In about 1997, the plaintiff decided to sell his property in  Fanling in order to buy the subject property at Metro City, Tseung Kwan O (“the Property”).  He decided to put the Property in the joint names of himself and the 1^st defendant who was then his girlfriend.  The assignment was dated 11 November 1997.

7.  The Property was acquired at a price of $3,340,000.  The plaintiff paid for all the deposits, stamp duty, disbursements and legal costs.  He applied the sale proceeds of the Fanling property and money in an overdraft account towards part payment of the purchase price of the Property.  The balance of the purchase price was funded by a mortgage in the sum of $2,338,000. The monthly mortgage repayments and overdraft amount were borne by the plaintiff.  So were the outgoings.  The Property has all along been occupied by the plaintiff’s family.

8.  The plaintiff and the 1^st defendant separated in about 2001. The Property had a negative equity in that the sale price could not cover the outstanding mortgage.  The 1^st defendant therefore executed a declaration of trust dated 7 March 2002 (“the Declaration of Trust”) declaring that she and the plaintiff held and would hold the Property on trust for the plaintiff and she agreed to transfer the interest as the plaintiff would direct. 

9.  On 14 August 2012 the 1^st defendant was declared bankrupt. On 12 October 2012, the trustees were appointed.

10.  The documentary evidence was overwhelming in supporting the plaintiff’s case.  The Declaration of Trust was executed before the bankruptcy order.  No issue turns on its being stamped only on 18 January 2013 after the bankruptcy order was issued.  Neither do the trustees have evidence to rebut the plaintiff’s evidence.

11.  I find that the Declaration of Trust was a genuine document which reflected the truth of the beneficial ownership over the Property being fully vested in the plaintiff and held on trust by the 1^st defendant.

Whether there had been a prior settlement with the plaintiff

12.  The plaintiff made a sanctioned offer on 4 March 2014 to pay $45,000 to the estate in full and final settlement of the matter.

13.  By the “settlement”, the trustees meant that the Committee of Inspection (“COI”) had “accepted” the plaintiff’s offer to pay the bankrupt’s estate $45,000 on the terms set out in a letter dated 24 March 2014:

“Please be informed that your client’s offer of $45,000 to acquire the Bankrupt’s interest of the Property now vested in us has been approved by the creditors’ committee of the Bankrupt subject to the following terms and conditions:-

1. Your client shall pay $45,000 to the estate of the Bankrupt as consideration for the Assignment of the Property;

…”

14.  Among other conditions were those for the plaintiff to bear all legal fees incidental to the assignment, all sums required to discharge any outstanding incumbrances against the property (which would include vacation of registration of the bankruptcy order) and $5,000 costs of the trustees incidental to the transaction.  In addition, as they would “sell as trustee”, the trustees would only give the limited covenants set out in Part IV of the First Schedule to the Conveyancing and Property Ordinance, Cap 219 in the formal agreement for sale and purchase and assignment for the sale. 

15.  Mr Oh (counsel for the trustees) describes the list of conditions as the “mechanisms” for carrying out the settlement.

16.  With the greatest respect to the trustees and Mr Oh, the conditions in this letter were not pure mechanisms but constituted a counter-offer from the trustees.

17.  On 2 April 2014, solicitors for the plaintiff promptly stated their disagreement to those conditions and refused to pay further costs to the trustees.   It was plain beyond daylight that no settlement was reached.

18.  If that was not enough to refute the existence of a settlement, the trustees themselves have:

(a)   By a letter dated 15 April 2014 to the plaintiff’s solicitors, stated that “we have never conceded that the Bankrupt is only holding her interest in the Property as a trustee for your client”;

(b)   By a letter dated 21 July 2014 to the plaintiff’s solicitors, stated that “our view is that the Bankrupt has a beneficial interest in the Property notwithstanding the existence of a Deed of Trust.”

19.  Further, if there had been a settlement, the trustees have taken no steps to sign a settlement agreement, whether before or after issue of the present originating summons.

20.  The trustees’ contention that there had been a prior settlement has no merits.

Whether or not it is possible to vacate the registration because it was made under the Bankruptcy Rules

21.  The bankruptcy order of the 1^st defendant and a memorandum to court of resolution was registered against the Property.  That was perfectly proper having regard to the fact that the 1^st defendant might have interest as one of the joint owners.

22.  However, the trustees have, on their own case, come to a settlement with the plaintiff.  As late as per a letter dated 2 December 2016 before action, they claimed that they would have no claim against the Property upon receipt of the $45,000.  And yet they were not willing to vacate the registration, asking the plaintiff to consult the Land Registry.

23.  Mr Oh relies on the authority in Chow Yuen Ling v The Official Receiver and Trustee in Bankruptcy of Au-Yeung Kwok Wai, a discharged bankrupt, HCMP 1908/2012, 26 February 2013, Poon J (as he then was) for the proposition that it was not possible to vacate the registration.

24.  In that case, the subject property B was registered in Chow’s sole name.  The bankrupt was her husband.  The bankrupt told the Official Receiver that he used to be owner of a property A.  He sold it and gave the net proceeds of about $130,000 to Chow.  Chow spent the money on renovation of property B. He further claimed that Ms Chow paid half of the mortgage on property A and was entitled to half of the sale proceeds.  The Official Receiver took the view that the bankrupt had interest in property B,.  Chow neither responded to the Official Receiver’s request for documents and information, nor raised objection to the proposed registration of the bankruptcy order against property B.  The Official Receiver duly registered the bankruptcy order at the Land Registry.

25.  Ten years after registration of the bankruptcy order, Chow’s application for a mortgage on property B was refused by the bank, which took the view that registration of the bankruptcy order was an encumbrance on property B.  Unable to agree with the Official Receiver on the terms of sale of the bankrupt’s interest to her, Chow took out an application to vacate the registration of the bankruptcy order against property B. 

26.  Poon J held that under rule 73 of the Bankruptcy Rules, the trustee may register a memorial of a bankruptcy order in the Land Registry against any property registered in the name of the spouse of the debtor.  Since the bankrupt’s interest in property B vested in the Official Receiver when the bankruptcy order was made, pursuant to s.58 of the Bankruptcy Ordinance, the Official Receiver was entitled to register the bankruptcy order against property B.

27.  Moreover, Chow has not adduced evidence to dispute the Official Receiver’s case that the bankrupt had interest in property B.  In fact, Chow had openly acknowledged that the bankrupt did have an interest in property B and she was willing to pay $180,000 to procure the bankrupt’s interest in it.

28.  Poon J also rejected the contention that the registration of the bankruptcy order was in the nature of lis pendens and that the Official Receiver should vacate it as she did not intend to proceed with the claim against Chow. 

29.  Chow Yuen Ling does not support the proposition of Mr Oh at all. It says nothing about the trustees’ obligation to vacate registration of a bankruptcy order against a property which the trustees have no claim.

30.  In the present case, if the trustees had accepted the sanctioned offer or if the court makes a declaration of trust in favour of the plaintiff, the trustees could have no claim against the Property.  In either scenario, it was possible and the trustees would be obliged to vacate the registration without imposing any condition on the plaintiff.  The consent of the 1^st defendant was not required.

Conclusion

31.  The plaintiff has firmly established a case of resulting or constructive trust arising before the 1^st defendant went bankrupt. His offer to settle had been overtaken by the counter offer of the trustees.  The trustees should have but failed to agree to vacate registration against the Property as part of the term of settlement.  I therefore make an order in terms of §§1 (to be amended to include the reference to the Declaration of Trust), 3, 4 and 5 of the draft order handed up at the hearing.

Costs

32.  Costs should follow the event and be to the plaintiff. 

33.  The trustees oppose costs alleging that the proceedings have been necessitated simply because of the “convoluted manner” in which the plaintiff and the 1^st defendant had sought to manage the ownership of the Property, in part to conceal the actual ownership of the Property from the mortgagee bank.

34.  With respect, the mortgagee has not made any complaint and has not asserted any detriment suffered.  Notwithstanding anything “convoluted”, the plaintiff has put all his cards on the table before action and his case has never shifted since November 2012.

35.  I accept that the trustees could investigate his claim and ask for documentary proof before taking a position.  The plaintiff has been very cooperative in the provision of documentary proof. 

36.  This piece of litigation could have been avoided and the 1^st defendant’s estate would have received $45,000 but for the unreasonable imposition of conditions in the letter dated 24 March 2014 and the trustees’ irrational decision to insist on maintaining the registration.  The trustees could hardly hide behind the COI as these were legal issues.

37.  In any case, once litigation is contemplated or commenced, the trustees are in no different position to an ordinary litigant.  Whilst as late as 26 November 2016, the plaintiff had invited the trustees to vacate the registration and execute the release, the trustees have never done anything (eg signing a consent summons to settle leaving the plaintiff to pursue the 1^st defendant if needs be).  Their 2 lines of argument are totally devoid of merits.  It was only at this hearing that the trustees confirmed through counsel that any re-assignment from the 1^st defendant to the plaintiff need not involve the trustees, contrary to the position set out in the letter dated 24 March 2014. 

38.  By their conduct, the estate was deprived of $45,000 and has to bear costs of this case.  The trustees also failed to assist the court in furthering 5 underlying objectives under Order 1A, rule 1(a) to (e), ie to increase the cost-effectiveness of practice and procedure, to ensure that a case is dealt with as expeditiously as is reasonably practicable, to promote a sense of reasonable proportion and procedural economy, to ensure fairness between the parties and to facilitate the settlement of disputes.  The plaintiff, the estate and the court are prejudiced from such conduct.

39.  For all these reasons, the plaintiff should have costs on indemnity basis, which I summarily assess at $200,000, having considered the grounds of objection.  Such costs should be borne out of the estate in the first instance.  The 1^st defendant has not contested the claim and no order for costs should be made against her personally.  I make orders nisi accordingly.

40.  Given the conduct of the trustees, I require them to show cause as to why they should not personally bear costs of this action and correspondence relating to the plaintiff’s claim from 25 March 2014 which I have provisionally assessed at $200,000, save that costs for vacating the registration should be borne out of the estate.  If the trustees insist on recovering costs from the estate in respect of the aforesaid costs, the trustees should lodge a costs statements for my consideration. The hearing for showing cause shall be on 20 November 2017 at 9:30 am with 30 minutes reserved.