LEE SIU MAN v. CHU CHI WING AND ANOTHER

1992, No.MP91

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J U D G M E N T

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1. This is a vendor and purchaser summons. The proceedings concern property known as Flat D, 8th Floor, Block 15, Village Gardens, Phase C, 34 Fa Po Street, Kowloon, Hong Kong (and an associated parking space). The agreement for sale and purchase is dated 20th November 1991. The purchase price was $3,640,000.00.

2. The purchaser has taken an objection to the title, in the following circumstances.

3. The vendors acquired the property under a Deed of Gift dated 5th August 1991. The donors are still surviving. The requisition raised by the purchaser's solicitors on 8th November 1991, reads as follows:-

"In the event of the donors dying within a period of three years from the date of the Deed of Gift, the property would be subject to a charge pursuant to the Estate Duty Ordinance. In light of the above contingent incumbrance we should be grateful if you could take your client's instructions as to whether they will agree to deposit a certain sum equivalent to the Estate Duty with your firm as stakeholder which said sum should only be released to your client at the expiration of three years, i.e. 6th August 1993."

4. The vendor's solicitors in reply denied that the property would be subject to such a charge. The purchaser has therefore instituted these present proceedings.

5. The dispute falls to be resolved by an examination of the relevant statutory provisions relating to the estate duty chargeable on property in the circumstances of the present case.

6. The Estate Duty Ordinance, Cap.111 contains the following :-

"5. In the case of every deceased person there shall, save as hereinafter expressly provided, be levied and paid upon the principal value, ascertained as hereinafter provided, of all property passing on the death of such person, a duty called estate duty at the graduated rates mentioned in the applicable Schedule:

 6.     (1)      Property passing on the death of the deceased shall be deemed to include the property following -

...

(c) property ... taken under a disposition made by [the deceased], purporting to operate as an immediate gift inter vivos,... which shall not have been bona fide made :3 years before the death ...

18.    (1)      Subject to subsection (2): -

...

         Provided that the property shall not be chargeable as against a bona fide purchaser thereof for valuable consideration without notice.

    (2) Notice of any charge on any leasehold property constituted by subsection (1) may be given by the Commissioner registering in the Land Office against the property affected thereby a Memorial signed by him specifying the subsection under which the charge is constituted, the name, description, and date of death of the deceased in respect of whose estate the claim to estate duty arises, and particulars of the property charged.

    (3) A notice on writing of any charge under subsection (1) or (2) may be entered on the Land Office as an instrument affecting land.

    (4) If the rateable part of the estate duty in respect of any property is paid by the executor, it shall where occasion requires be repaid to him by the trustees or owners of the property."

7. The vendors, relying on the proviso to s.18(1), say that this property will not be chargeable with estate duty as against the purchaser even if the donors under the Deed of Gift die before 5th August 1994. The purchaser does not accept this.

8. Some assistance in consideration of this problem can be obtained from an examination of the similar provisions originally contained in the Finance Act, 1894 in relation to estate duty in the United Kingdom. Section 9 (1) of that Act reads as follows:-

"9 (1 ) A rateable part of the Estate duty on an estate, in proportion to the value of any property which does not pass to the executor as such, shall be a first charge on the property in respect of which duty is leviable; provided that the property shall not be so chargeable as against a bona fide purchaser thereof for valuable consideration without notice."

9. It was generally assumed that under s.9 (1) a purchaser who knew of a gift affecting the title to the property he was proposing to purchase (being a gift made within the relevant period) would be bound by the charge on the property which would arise on the donor's death within that period. An example is to be found in the case of Manning v. Turner [1957] 1 WLR 91 in which Sir Leonard Stone V.-C. proceeded on that footing. The position, however, was not regarded as entirely free from doubt. In Green's Death Duties, 6th Edition (1967) at pages 560, 561, one finds this:-

"It is doubtful whether a purchaser is protected where there is no existing charge for duty, but the circumstances are such that a charge may arise on a future death (e.g., where the property purchased has been the subject of a gift inter vivos, or a limited interest therein has been disposed of or determined) and a purchaser has notice of the facts. On the one hand it is suggested that the purchaser is protected, as at the time of the purchase there is no subsisting charge of which he could have notice. The contrary argument is that the proviso to s. 9 (1) of the Act of 1894 extends only to property purchased when subject to an existing charge and has no application to a purchase before a charge arises. The official view is that a purchaser is not protected from a latent charge of this kind. But, in practice, the Revenue would seek to enforce such a charge only in exceptional circumstances ..."

The editors of Dymond's Death Duties, 14th Edition (1965) at pages 786, 787 express a similar view.

10. In the United Kingdom provision was made, by s.38 of Finance Act 1957 (possibly after consideration of the decision in Manning v. Turner) to provide for the shifting of the charge from the property itself to the proceeds of sale of the property; but no comparable provision has been made in Hong Kong.

11. It now falls to me to resolve the doubt which has arisen here. It is not sfficient for me to express the opinion that the point is doubtful and therefore the case is one in which I would not be prepared to order specific performance against the purchaser (on the familiar principle that the court does not force a doubtful title upon an unwilling purchaser). This is not a specific performance action. In order to decide whether the purchaser is entitled to rescind, I have to decide whether the objection to the title is well-founded or not.

12. The conclusion to which I have come is that the objection to the title is well-founded. The correct view of s.18, in the circumstances of this case, leaving aside for one moment the introductory words in subsection (1) "Subject to subsection (2)", is that estate duty would be a first charge on the property in the event of the donor's" death before 5th August 1994. Does the proviso to subsection (1) alter the position? The proviso governs subsection (1); but subject to subsection (2). Subsection (2) can apply only in the case where the death has already occurred and the charge is accordingly no longer "latent". The effect is (as I read subsections (1) and (2)) that the Commissioner may register the charge after the death of the deceased, but cannot register a "latent" charge.

13. If the Commissioner has not registered the charge (being a subsisting charge capable of registration) before the completion of the purchase, it may be that in that case the purchaser would take free from the charge, even though he may have had actual notice of the facts giving rise to the charge. But while the charge remains "latent" and incapable of registration I am of the opinion that a purchaser who takes with notice of the facts cannot rely on the proviso to escape the charge. Notice of the facts gives him notice of the contingent liability to the charge. In my judgment, the reference to "notice" is not to be read as limited to notice of facts giving rise to a subsisting charge.

14. In the result, I conclude that the purchaser here was entitled to object to the title. It disclosed a gift made within the period of three years last past. Unless proper provision were to be made for getting over the difficulty to which that gives rise, the title was one which the purchaser was entitled to reject.

15. Here the purchaser made a suggestion for the deposit of a sum to cover the potential liability, which the vendors did not accept. He might have suggested alternatively the cover of the risk by insurance; or by a retention from the purchase money pending the expiration of the period of three years. But the vendors having taken their stand, that the purchaser was not concerned with the charge to Estate duty, took a point which I hold to be bad. Accordingly the purchaser is entitled to appropriate relief.

16. The purchaser has asked for declarations that the title is defective; that a good title to the property has not been shown; and that the requisition has not been sufficiently answered. I think it is sufficient to say that the requisition has not been sufficiently answered and I do not propose to make more general declarations. The purchaser is entitled, in the circumstances, to annul the sale and to claim refund of his deposit.

17. I will declare that the requisition raised by the purchaser's solicitors' letter of the 8th November 1991 has not been satisfactorily answered and that the purchaser is entitled to annul the sale; and I shall order that the deposit of $364,000.00' be returned to the purchaser. I shall further order that the costs of the purchaser of this action be taxed (if not agreed) and paid by the vendors to the purchaser.