SUN SEK HAW AND OTHERS v. AU SO KUM

CACV 215/1998

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H E A D N O T E

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If a purchaser's inquiries as to the title reveal the possibility of an adverse claim by a person beneficially interested in the property, the purchaser is entitled to reject the title unless the vendor can demonstrate beyond reasonable doubt that that adverse claim is barred by limitation.

CACV 215/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 215 OF 1998

(On appeal from High Court Action No. A12062 of 1997)

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J U D G M E N T

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Godfrey, J.A. :

Introduction

1. This is an appeal from Sears, J., who on 3 August 1998 resolved a dispute between vendor and purchasers in favour of the vendor. The purchasers had raised an objection to the vendor's title; an objection which related to a conveyance by two administrators of an intestate's estate to one of themselves for no apparent consideration. The vendor rejected this objection and called on the purchasers to complete. The purchasers, maintaining their objection, refused to complete, and called off the contract, demanding the return of their deposit. The vendor refused to return the deposit and instead purported to declare the deposit forfeit. The purchasers instituted proceedings for the return of their deposit and for damages; having failed in those proceedings, the purchasers now appeal.

Background

2. The property the subject of the sale by the vendor to the purchasers was a unit in Kwong Fat Building, Tsuen Wan ("the property"). The contract was made on 28 July 1997, in the form of a so-called "provisional agreement". The price was HK$2,930,000. The deposits (duly paid) amounted to HK$293,000. The transaction was to be completed on 31 October 1997.

3. Under the contract, the vendor was obliged to show a good title to the property. In pursuance of this obligation, the vendor's solicitors provided the purchasers' solicitors with a number of documents. The title shown commenced with a Crown grant, and, down to an assignment of the property dated 29 July 1968 in favour of Wong Lai Yen ("the intestate") disclosed nothing to which the purchasers took objection. The intestate died on 27 October 1972 leaving her surviving (as was revealed as a result of the purchasers' inquiries on investigating the title) a husband and five children. Four of them were minors; one was of full age.

4. On 6 August 1974, a grant of letters of administration to the intestate's estate was issued out of the Probate Registry in favour of the husband and of the adult son as co-administrator with the husband. The schedule to the grant disclosed no assets in the intestate's estate other than the property.

5. By a conveyance dated 6 September 1974, the husband and the adult son conveyed the property to the husband "in the course of administration of the estate of [the intestate] and for the purposes thereof". The conveyance contained nothing to indicate that the conveyance was made for valuable consideration. It did not recite that the conveyance was made in pursuance of any sale to the husband for money or money's worth or in pursuance of any appropriation of the property (proper or otherwise) in his favour.

6. By a conveyance on sale dated 16 November 1987, the husband conveyed the property to purchasers for value; the consideration for the sale was HK$420,000.

7. By a further conveyance on sale dated 20 July 1989, the property was again conveyed to purchasers for value; the consideration for the sale was HK$650,000.

8. Finally, by a conveyance on sale dated 17 June 1992, the property was conveyed to the present vendor, himself a purchaser for value; the consideration for the sale was HK$1,280,000.

The purchasers' objection to the title

9. The purchasers objected to the title on the ground that the 1974 conveyance by the husband and the adult son to the husband was impeachable.

10. As a conveyance by two administrators to one of themselves, it reveals on its face, say the purchasers, a breach of trust, the administrators being trustees for this purpose and bound by what is usually called for convenience "the self-dealing rule". This prohibits a disposition by trustees to one of themselves, unless the transaction is sanctioned by the court or concurred in by all the persons beneficially interested, being of full age and free from disability. The 1974 conveyance here is liable to be set aside, the purchasers say, at the suit of any of the intestate's minor children, as against, not only the husband, but also as against any subsequent purchaser of the property; for no such purchaser, having accepted a title founded on a conveyance impeachable on its face, as was the 1974 conveyance here, can claim to be a purchaser for value without notice of the existence of the equity in the minor children of the intestate to have the 1974 conveyance set aside.

The vendor's answer

11. In answer to this objection, the vendor says that the 1974 conveyance in fact evidences an appropriation of the property by the husband and the adult son, as administrators of the intestate's estate, in satisfaction of the husband's interest in the intestate's estate under the law relating to the distribution of intestate's estates; that such an appropriation was proper, so that the 1974 conveyance is unimpeachable; that even if the appropriation was improper, a purchaser is protected, by section 68(8) of the Probate and Administration Ordinance, Cap. 10 (the "PAO"), from the consequences; and that in any event, any child of the intestate who might have had a claim to have the 1974 conveyance set aside is now, beyond any reasonable doubt, barred by limitation from asserting it, so that if there is any blot on the vendor's title here, it is fanciful rather than real and may be disregarded.

The purchasers' reply

12. The purchasers accept, as I understand it, that an appropriation of property by administrators to one of themselves is capable in a proper case of constituting an exception to the self-dealing rule. But they do not accept that the 1974 conveyance evidences such an appropriation. They say that, under section 68(8) of the PAO, only if an appropriation is made "in purported exercise of the powers confirmed by this section" is it to be deemed, in favour of a purchaser, to have been made in accordance with the statutory power of appropriation conferred on administrators by section 68. They say that any purchaser claiming under a person (being a personal representative) to whom the property was not validly appropriated holds the property on trust to give effect to the equities of those beneficially interested in the estate of the deceased of which the property formed part. They say that no period of limitation prescribed by the Limitation Ordinance, Cap. 347 (the "LO") applies to bar a claim by those persons (here, the four children who were minors at the date of the 1974 conveyance) to recover the property. And so, they say, their objection to the title remains unanswered.

The issues

13. The issues are these :-

The judgment below

14. The judge did not fully consider these issues. He complained that the matter had been set down for only 2 hours (although in fact he had nothing else in his list for that day). He said :-

He said :-

He said :-

His opinion of what had happened in 1974 was this :-

He referred to the fact that the purchasers' inquiries into the title had revealed the affirmation of the husband and the son leading to the grant of administration to the intestate's estate and so the existence of the interests of the minor children of the intestate in the property. But he concluded :-

15. He took the view that any claim by any of those minor children would anyway be statute barred, although he indicated that he did not think it necessary to decide the case on a limitation point.

16. The judge sat to hear the case at 10.02 a.m. and (after a 20-minute break between 11.20 a.m. and 11.40 a.m.) rose at 12.25 p.m., having given judgment for the vendor. It is difficult to avoid the impression that the judge, perhaps believing this to be yet another case of purchasers anxious, in a dropping market, to escape from their bargain, failed properly to evaluate the competing arguments before him with the care they deserved, and so, as we shall see, fell into error in his consideration of the issues he had to decide.

The first issue

17. The first issue is whether, on the face of the 1974 conveyance, there is anything to put a subsequent purchaser on inquiry, in particular as to the validity of the appropriation which it is now said to evidence. In my judgment, there is. In the first place, read with the grant of administration which it recites, showing the property to be the only asset comprised in the intestate's estate, it is manifest that the appropriation (if that is what it was) must have been improper and so a breach of trust. The reason is simple; the husband's rights on an intestacy did not extend to the whole interest of the intestate, to the exclusion of her children. In the second place, the 1974 conveyance disclosed on its face that the grant of administration had been made to the husband and one of the children of the intestate, a matter which, to say the least, points to the existence of the interests of minor children (a state of affairs in fact confirmed by the inquiries very properly and reasonably made by the purchasers' solicitors when investigating the vendor's title). In the third place, the 1974 conveyance is made for no apparent consideration, so that, in the absence of a valid appropriation in favour of the husband, it was manifestly made in breach of trust. In the fourth place, although expressed to be made "in the course of administration of the [estate of the intestate] and for the purposes thereof" there is no possible purpose for which the 1974 conveyance could have been made other than (1) to effect a sale (which would be voidable anyway under section 55 of the PAO, which provides that if a personal representative purchases, either directly or indirectly, any of the property of the deceased, the sale shall be voidable at the instance of any other person interested in the property sold); or (2) to effect an appropriation, of which, however, the 1974 conveyance contains no hint, and which would anyway, as already demonstrated, have been here an appropriation manifestly outside the scope of the administrators' powers of appropriation. The judge's conclusion that this was simply "a family matter" of "the mother leaving the sole asset, the family flat, and the son conveying the flat to his father" was no doubt correct; but the law does not permit a father and his adult son to defeat the interests of the other children of an intestate in this way and (except where section 68(8) of the PAO applies) does not protect any purchaser to whom proper inquiries (mandated by the suspect nature of the 1974 conveyance) would have revealed the existence of those other children. The first issue, then, must be decided in favour of the purchasers.

The second issue

18. In the absence of any evidence of any appropriation in favour of the husband in purported exercise of the powers of appropriation conferred on personal representative by section 68 of the PAO, no purchaser claiming under the husband can claim the protection of section 68. It was argued before us that the 1974 conveyance reveals there was an appropriation here, made in purported exercise of these powers; but, in my judgment, to construe the words "in the course of administration of the estate of the said deceased and for the purposes thereof" as a purported exercise of the administrators' statutory powers of appropriation, when there is no recital of any such appropriation, and indeed no other suggestion of any such appropriation, whether in the 1974 conveyance or anywhere else, seems to me to be quite impossible. The purchasers must succeed on this issue, too.

The third issue

19. This issue, which the judge did not consider it necessary to decide, is therefore the only remaining issue and is of paramount importance; for the success of the purchasers on the first and second issues will not assist them if, in the end, the claims to which they would take subject are barred by limitation. The argument for the vendor is that any action by any of the children (other than the adult son, whose interest is clearly barred by acquiescence) to recover the property must have been barred, at the latest, by 1994, 20 years after the date of the 1974 conveyance. The youngest child was 13 years old in 1974. That child attained 21 in 1982 and the 6 years allowed thereafter for disability expired in 1988, well before the expiry of the 20 years period. The argument for the purchasers is that no period of limitation applies at all, this being a case within section 20(1)(b) of the LO. This provides that no period of limitation is to apply to an action by a beneficiary under a trust to recover trust property from the trustee. I agree with the purchasers that an action brought by one of the children (other than the adult son) to assert his or her claim to an interest in the property will depend on those provisions relating to an action by a beneficiary to recover trust property from a purchaser taking (because he has failed to make reasonable inquiries) with notice of the beneficiary's claim. And I consider it to be at least arguable that no period of limitation applies to the claim. The risk of such a claim being made may not be high, and the chances of its succeeding, if made, may not be good; but the vendor's obligation was to show the purchasers a good title; not necessarily a perfect title, but one against which the purchasers could be sure that no adverse claim could successfully be made. That is not this case, and, as the purchasers rightly contend, they cannot have a title forced on them which they may need a law suit to defend.

Conclusion

20. For these reasons, I would allow this appeal.

Rogers, J.A. :

21. I agree that this appeal should be allowed.

22. I would adopt the analysis of the issues which arise on this appeal which are set out in the judgment of Godfrey J.A.

23. In respect of the first two issues, I do not wish to add to what has been said in the judgment of Godfrey J.A.

The Third Issue

24. Are the children of the intestate who were underage on 6 September 1974 (the "underage children") debarred by the Limitation Ordinance from asserting a claim to title in the property?

25. The third issue raises the question as to whether the purchasers of the property by the conveyances dated respectively 16th November 1987, 20th July 1989 and 17th June 1992 would arguably be and have been constructive trustees of the property for the underage children.

26. It might be pointed out at this stage that the Respondent has not relied upon any ground of laches or acquiescence on the part of the underage children which would debar any claim. The Respondent's case rests upon the limitation period. This is entirely statutory.

27. Sir John Swaine S.C. for the Respondent points out that before amendment in 1991, the Limitation Ordinance Cap. 347 stipulated in Section 7 that the limitation period for the recovery of land was 20 years. He asserts that the only modification of that which is relevant in this case is under Section 22(1). On the footing that a right of action accrued to the underage children on 6th September 1974 and that they were therefore then under a disability, the period of limitation prescribed by Section 7 was not absolute and the underage children could have brought an action at any time before the expiration of 6 years from the date when they became of age. That period would have long since expired since the youngest of the underage children turned 21 in 1982.

28. However, the statutory limitation period is also subject to the provisions of Section 20 which provides :-

29. Because of the provisions of Section 20(2), the requirement that the property to be recovered should be in the possession of the trustee is emphasised.

30. In this case, Mr. Leong S.C. on behalf of the Appellants puts the case on the basis that the respective purchasers took as constructive trustees.

Were the purchasers of the flat subsequent to 6th September 1974 constructive trustees

31. The well-known passage in the judgment of Lord Selborne, L.C. in Barnes v. Addy (9) Ch. App. 244 at 251 pointed out that :-

32. The distinction between knowing receipt, or dealing, with trust property on the one hand and knowing assistance in a breach of trust on the other has been the subject of a number of decisions. There is, of course, no doubt that a bona fide purchaser for value without notice takes free from any trust. But if a purchaser receives trust property with actual or constructive notice that it was trust property and that the transfer to him was in breach of trust, then he becomes a constructive trustee. Dishonesty is not a necessary ingredient to render a third party receiving property a constructive trustee. In this respect decisions relating to knowing "assistance", such as Royal Brunei Airlines v. Tan [1995] 2 A.C.378, are of only marginal relevance.

33. In the present case, as has been pointed out by Godfrey J.A., the transfer of the flat by the Personal Representatives into the name of one of them, namely the husband of the intestate and the subsequent sale by him appear, on what is known, to have been breaches of trust.

34. The question then arises as to whether the purchasers had knowledge which would have made them constructive trustees. The Appellants' case is not put on the basis that they had actual knowledge. What is said is that the documents which the purchasers, through their solicitors, would have had upon a conveyance, would have given them sufficient knowledge to be aware that there would have been persons entitled to the trust property.

35. As Vinelott J. said in Eagle Trust Plc. v. S.B.C. Securities Limited [1993] 1 W.L.R.484 at 494, in the field of conveyancing the law has historically set a very high standard. He quoted Maitland's Equity, 2nd Edn. page 119 :

36. Vinelott J. then went on at page 504 to cite Lindley L.J.'s judgment in Manchester Trust v. Furness [1895] 2 Q.B.539 at 545 where Lindley L.J. made reference to the fact that when dealing with land, there is greater scope for investigating title since time is not so pressing as in cases of commercial transactions.

37. The question as to whether a man has knowledge in relation to trust property is a question of fact. Our attention was drawn to the Court of Appeal judgment in the case of In Re. Diplock [1948] 1 Ch.465 at 478 where that point is emphasised. In the same passage reference is made to the fact that in transfers of land, there is regular machinery established for enquiry and investigation.

38. Sir John Swaine placed emphasis on the passage in the judgment of Sir Robert Megarry V.-C. in Re Montagu's Settlement Trusts [1987] 1 Ch.264 at 285F where the judge expressed doubt as to whether knowledge of circumstances which would indicate the facts to an honest and reasonable man or put him on enquiry would be sufficient knowledge to constitute the recipient of trust property a constructive trustee. Those doubts were, however, in the nature of observations since the judge made clear in the final paragraph of his judgment that he did not consider that the 10th Duke of Manchester had any such knowledge as could, on any basis, have constituted him a trustee.

39. In my view, the standard of knowledge which is relevant is encapsulated in Vinelott J.'s statement at page 494 of the Eagle Trust Plc. case :-

Taking that test as a guideline, the question which should be asked is would the enquiries which a conveyancing solicitor would have made as a matter of prudence have revealed the fact which would have given the purchasers constructive notice. The question is : "Are these enquiries such as would have been made by a reasonable and prudent conveyancer acting properly?" The question in this case might also be turned around the other way : "Did the enquiries which the conveyancing solicitor for the Appellant made in this case go beyond what was reasonable, proper and should be expected of a competent conveyancing solicitor?"

40. Whilst it might be said that the relevant matters in the conveyancing documents which formed part of the chain of title, namely, the conveyance of 6th September 1974 might have escaped the notice of an inexperienced solicitor who had forgotten the fundamentals relating to distribution of intestate estates or who had not read the documents carefully, that cannot be a proper basis upon which to proceed.

41. I consider that the answer must be that the matters which the Appellants' solicitors brought to light are matters which the hypothetical conveyancing solicitor would have discovered when acting properly.

42. In those circumstances, it is an inevitable conclusion that there is a strong case that the purchasers of the flat, subsequent to the conveyance in September 1974, took the property with notice of the rights of the underage children of the intestate. They had that knowledge because their solicitors had or should have had that knowledge. They would therefore have become constructive trustees of the property and any cause of action against a purchaser holding the property by the underage children would not be barred.

43. Whilst the view of this Court at this stage can only be provisional in the sense that any rights of the underage children cannot be determined, to paraphrase the words of Lord Russell in M.E.P.C. Limited v. Christian-Edwards [1981] A.C.205 at 220C, the facts and circumstances of this case are such that this Court could not be sure that the Appellants will not be at risk of a successful assertion against them of a claim by the underage children.

Mortimer V-P :

44. For the reasons given by my brethren, I also would allow the appeal.

45. The order is therefore that the appeal is allowed with an order nisi that the costs of the appeal will be paid by the defendant.