XCHRX WORLDPART INDUSTRIAL LTD. v. LUNG KAI NUNNERY AND ANOTHER

HCA 7133/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7133 OF 2000

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D E C I S I O N

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Background:

1. The applicant (i.e. the 2nd defendant by original action) and Tang Kwok Yung (hereinafter referred to as "TKY") are managers of Lung Kai Nunnery, appointed under section 15 of New Territories Ordinance, Cap 97. The Nunnery is and was the registered owner of a plot land (hereinafter called "the land") which formed the subject matter of this litigation in which the Nunnery is the 1st defendant.

2. On 29 May 1987, the 2nd defendant and TKY purportedly on behalf of Lung Kai Nunnery entered into a Chinese tenancy agreement with the plaintiff for a lease of the land for 60 years at a yearly rental of $5,000 with provision for rent increase once every five years. Under Clause 5 of the agreement, Lung Kai Nunnery purportedly covenants that if the lease is not renewed upon expiry, it shall assume the plaintiff's responsibility for maintaining the storage of urn chambers for the plaintiff's clients (hereinafter called "the Covenant"). This Chinese tenancy agreement has not been registered as required under section 3 of Land Registration Ordinance Cap 128. About six months later, a letter dated 11 November 1987 issued by the District Officer giving consent to the 2nd defendant and TKY to enter into the 60 years tenancy agreement was registered under memorial number 225830.

3. On 15 November 1987, the 2nd defendant and TKY on behalf of Lung Kai Nunnery executed an English tenancy agreement in the presence of their solicitors, Mr Donald Yap in respect of the land. The Covenant is not contained in the English tenancy agreement. This agreement was registered on 7 January 1988.

4. On 21 December 1987 the plaintiff executed a sub-tenancy agreement with Lung Shan (Temple) Limited (hereinafter called "Lung Shan Temple"). The business of Lung Shan Temple includes providing spaces and maintenance service for urn chambers for its clients.

5. The plaintiff was incorporated on 27 January 1987 with shares held by TKY's nephews who subsequently transferred their shareholding to TKY and his wife on 6 October 1989.

6. On 11 June 2000, the plaintiff put up a notice in Apple Daily asserting the alleged duty of Lung Kai Nunnery as stated in the Covenant and later issued a writ of summons seeking, as against Lung Kai Nunnery as the 1st defendant rectification of the English tenancy agreement by incorporating the Covenant in Clause 5 of the Chinese agreement and as against the 2nd defendant an injunction restraining him from publishing notices or doing acts calculated to disrupt the plaintiff's business or interfere with its possession and quiet enjoyment of the land.

7. On 27 July 2000 TKY filed a defence on behalf of the 1st defendant admitting the plaintiff's claim against the 1st defendant and disclaiming liability on behalf of the 1st defendant in respect of the plaintiff's claim against the 2nd defendant. On 17 October 2000, the 2nd defendant also filed a defence on behalf of himself and the 1st defendant disputing liability. Thus there are now two inconsistent defences filed on behalf of the 1st defendant. On 29 November 2000 the 2nd defendant issued a summons on behalf of the 1st and 2nd defendants against TKY seeking certain declarations and to strike out the defence filed by TKY on behalf of the 1st defendant pursuant to Order 15, rule 14 and Order 19, rule 18 of the Rules of High Court. However, at the hearing, counsel's arguments revolved around the striking out application only.

The parties' case:

8. TKY's case is that at a number of meetings with villagers of Lung Yeuk Tau since 1986 the question of redevelopment of Lung Kai Nunnery was discussed. In particular at a meeting held in early 1986 (first day of the second lunar month) TKY disclosed that he would participate in the redevelopment either in his own name or through a company of which he was or would be a shareholder. Subsequently at a meeting on 8 March 1987, in which the 2nd defendant was not present it was resolved that a lease of 60 years be granted to the plaintiff who shall invest not less than $10 million in construction of a temple and in related land improvement works and that TKY be authorised to negotiate the terms of the tenancy and to obtain consent from the District Officer. The Chinese tenancy agreement was presented to the villagers for approval. This agreement was then signed on 29 May 1987 by TKY and the 2nd defendant.

9. The 2nd defendant says that the redevelopment of Lung Kai Nunnery was not discussed at the meeting on the first day of the second lunar month in 1986 and the minute of meeting was a forgery. There was therefore no disclosure of TKY's interest in the redevelopment. He was not present at the meeting on 17 May 1987 but some other villagers who were present say that the draft Chinese tenancy agreement was not produced. He had not sign the Chinese tenancy agreement. The English tenancy agreement was the only tenancy agreement he signed. In early 1990 when it became known that the Nunnery would be developed into a temple for storage of urn chambers, the villagers kept on demanding TKY for a copy of the English tenancy agreement but TKY declined to produce a copy until 8 January 1995. He knew nothing about the Chinese tenancy agreement until he saw a notice published by the plaintiff in the Apple Daily on 11 June 2000. He informed TKY to attend a village meeting on 18 June 2000 and to produce the Chinese tenancy agreement, but TKY failed to turn up.

Grounds for striking out:

10. The 2nd defendant seeks to invoke Order 19 rule 18 and the inherent jurisdiction of this court to strike out the defence filed by TKY on behalf of the 1st defendant on the following grounds. Firstly, the defence contains admissions which are clearly against the interest of the 1st defendant or its beneficiaries. Secondly, TKY's personal interest as director and shareholder of the plaintiff is conflicting with his obligation as a manager of the 1st defendant. Thirdly, the Chinese tenancy agreement is a disposal of interest in land which required consent from the District Officer under section 15 of the New Territories Ordinance. Ms Hui submits that the consent was given after the agreement was entered into and that section 15 of the New Territories Ordinance does not empower the District Officer to give retrospective consent. In the alternative, she submits that it is inconceivable that the District Officer has given consent right from the beginning of or at the least before the entry of the agreement. Fourthly, TKY being a manager and trustee of the Nunnery is not permitted to gain any personal profit by exploiting his position as manager and contracting with the Nunnery. Fifthly, TKY has not adduced either expert evidence or cogent documentary proof to support the assertion that the Nunnery should be separate and distinct from Tang's Tso. Sixthly, the substantial dispute between the plaintiff and the 1st defendant as to whether or not the plaintiff is entitled to be granted an order of rectification should be left to trial.

Striking out under Order 19 rule 18:

11. The above grounds are very strong arguments that TKY is in breach of his duty as manager and trustee and that the case between the plaintiff and the 1st defendant should be resolved at trial. However, these grounds do not fall within any of the grounds specified under Order 19 rule 18, save perhaps, it could be argued that the defence filed by TKY, being an admission, does not disclose any reasonable defence. But Ms Hui does not seek to argue her case on that basis.

12. Instead Ms Hui proceeds on the basis that the admission of the plaintiff's claim for rectification by TKY would tend to prejudice, embarrass, or delay the fair trial of the action between the plaintiff and the 1st defendant. With respect, Ms Hui seems to have identified or equated the 1st defendant's interest as resisting the plaintiff's action irrespective of the true facts of the case. In my view, an admission, if it is true, may not necessarily be against the interest of a defendant. On the contrary, it would be against the interest of a defendant to contest a claim if there is no defence or to concoct one which is not there. That would really prejudice and delay a fair trial. Thus a defence amounting to an admission is not conclusively against the interest of a defendant and a pleading giving a positive defence is not conclusively in the interest of a defendant. It all depends on where the truth lies.

13. The central issue in the action between the plaintiff and the 1st defendant as it is between TKY and the 2nd defendant is whether the events occurred in the way as described by TKY or by the 2nd defendant. In a nutshell, TKY says he had disclosed his interest in the redevelopment in early 1986, the Chinese tenancy agreement had been presented to the villagers for discussion and approval and the 2nd defendant signed the agreement with full knowledge of all the circumstances. On the other hand, the 2nd defendant says that the minutes of meeting are forged, that he had never signed the Chinese tenancy agreement, let alone been informed of TKY's interest in the redevelopment. The effect of Ms Hui's submission is that as between the plaintiff and the 1st defendant, the issue should be left to trial, but as between TKY and the 2nd defendant, the issue should be determined on the basis of affirmations. This is a logic which I cannot agree.

14. From the background and the parties' case as outlined above, it is clear that there are substantial disputes as to facts. Ms Hui on behalf of the 2nd defendant refers to the minute of the meeting held on the first day of the second lunar month in 1986 in which TKY is recorded as reporting to the meeting his intention to take part in the redevelopment in his own name or in the name of the plaintiff company. As the plaintiff company was not incorporated until almost a year later, TKY could not have known of its name a year in advance. This demonstrates almost conclusively that this part of the minute of the meeting held on the first day of the second lunar month in 1986 is a careless fabrication and TKY had not so disclosed his personal interest in the redevelopment.

15. The name of the plaintiff was not mentioned in the subsequent minutes until the one held on 17 May 1987 in which the 2nd defendant was not present and when TKY was authorized to negotiate with the plaintiff. This suggests that the name of the plaintiff had never been mentioned at all. Further, if TKY had already disclosed his interest in the plaintiff company, it is inconceivable that the meeting would have authorized him to negotiate on behalf of the Nunnery with himself wearing his other hat as a defacto director of the plaintiff company. Such an authorisation would in effect be giving away the tenancy on whatever terms the plaintiff desired. TKY's account is inherently improbable and it is likely that he was acting in breach of his duty as trustee and manager of the 1st defendant.

16. Ms Hui also draws my attention to the identity card number of the 2nd defendant as recorded on the Chinese tenancy agreement. The last digit of this number is incorrect. TKY explained that he made a mistake when copying the 2nd defendant's identity card number. This also supports the 2nd defendant's case that the Chinese tenancy agreement is a forgery.

17. On the other hand, there is no dispute that the villagers were desirous of redeveloping the Nunnery in a similar style as Fung Ying Sin Koon (蓬瀛仙館). However, they became concerned when they learned that urn chambers will be provided in the temple to be built. Usually establishments of this kind provide facilities for storing ancestral tablets or even urn chambers for worship by descendents. There is no evidence if Fung Ying Sin Koon offers facilities for storing urn chambers. If it does, it must be in the contemplation of the villagers that similar facilities would be provided by the redevelopment. This would cast doubt on the veracity of the affirmations filed in support of the 2nd defendant.

18. Thus while there is compelling evidence that the minutes of the meeting held on the second month of the lunar year in 1986 is a forgery, that by itself is insufficient to raise the irresistible inference that the Chinese tenancy agreement must also be a forgery. There are conflicting affirmations filed by both TKY and the 2nd defendant. In my view, these are facts about which there is substantial dispute, which should not and could not be resolved by a minute and protracted examination of the affirmations and documents and should be investigated in depth in trial. Not being able to resolve these disputes of fact, it is impossible for me to say if it is in the 1st defendant's interest to admit or to contest the plaintiff's claim, or looking at it the other way, whether to admit the claim would tend to prejudice, embarrass, or delay the fair trial of the action. Similarly, in view of the dispute of fact, it is impossible for me to decide if the admission is frivolous and vexatious or an abuse of court proceedings.

Striking out and Order 15 rule 14:

19. Ms Hui also referred to the Court's power under Order 15 rule 14. However, that rule only empowers the Court not to treat the outcome of an action where trustees only are joined as party as binding on the beneficiaries and to order any person having an interest to be made a party. That rule does not empower the Court to expunge a trustee and hence strike out his pleading.

Administration of trust: Order 85 rule 2:

20. The present application involves a dispute between co-trustees who together make up the mind of the 1st defendant. The co-trustees are at a difference. TKY has a substantial stake in having the tenancy agreement rectified. He is in a position of conflict. If TKY had been in breach of his fiduciary duty as a trustee in procuring the execution of the Chinese tenancy agreement or if such agreement did not in fact exist, the 2nd defendant is obliged to contest the plaintiff's claim for rectification. The present application is an attempt to tidy one's own camp so that the trustees could act with a united front rather than to argue between themselves in the face of the enemy.

21. I am not aware of any instances where Order 19 rule 18 was used to resolve a dispute between co-trustees who have filed inconsistent pleadings in an action. The fact that the grounds relied upon by the 2nd defendant do not fall within any of the grounds in the rule speaks for itself. In my judgment, the procedure under Order 19 rule 18 is to be invoked by opposing parties in a litigation such as between a plaintiff and a defendant in striking out the pleading of the opposing party and not to be invoked in resolving a dispute between trustees making up the controlling mind of a party.

22. The general rule in administration of trust is that all trustees must act jointly. Any act or decision to be effective must be the act or decision of all the trustees. There is no question of a decision by a majority of all the trustees. A trustee must exercise his own discretion in accordance with the trust reposed on him. He may for good reasons concur in an action by his co-trustee against his own judgment. In the event of a deadlock, a trustee or all the trustees should apply to court for direction or relief. In fact such procedure is available under Order 85 rule 2. Under this rule, the Court may by order direct a trustee to abstain from doing a particular act in his capacity as trustee or direct him to do certain act in the administration of the trust. However, I do not think I should give any directions or order any relief under Order 85 rule 2, as this is not the issue TKY has been asked to address his mind to in the present application and there are other issues of law and fact to be determined, for example who are the beneficial owners of the land or beneficiaries of the Nunnery.

Striking out under inherent jurisdiction:

23. Counsel cannot refer me to any instance of the court's exercise of its inherent jurisdiction in striking out a defence filed by one of the two co-trustees at the instance of the other. I would view any submission that the court does not have such inherent jurisdiction with jealous and suspect. TKY and the 2nd defendant are lawfully appointed as managers of the Nunnery under section 15 of the New Territories Ordinance. No step has been taken to have TKY removed by the District Officer. TKY has as much right as a co-trustee to file a defence as has the 2nd defendant. It is his obligation to do so. The other grounds relied on by Ms Hui support a case of breach of trust on the part of TKY. However, in view of the substantial dispute of fact on the central issue, i.e. the authenticity of the Chinese tenancy agreement, I am unable to determine what defence is appropriate on the strength of the affirmations.

24. The 2nd defendant is concerned that the defence filed by TKY would prejudice the 1st defendant's case in contesting the plaintiff's claim and Ms Hui submits that the substantial dispute between the plaintiff and the 1st defendant as to whether the plaintiff is entitled to be granted an order of rectification should be left to trial. The plaintiff's claim is against the 1st defendant by its managers TKY and the 2nd defendant jointly. TKY and the 2nd defendant are jointly liable as trustees and not jointly and severally liable as separate co-defendants. There is no possibility that the plaintiff may obtain judgment against the 1st defendant by striking out the defence filed by TKY on behalf of the 1st defendant or obtain judgment against TKY and enforce it against the 2nd defendant or the 1st defendant. To succeed against the 1st defendant, the plaintiff must defeat each and every defence filed by all the joint trustees. The defence filed by TKY is no more or less prejudicial than the evidence TKY has to offer as witness for the plaintiff. In the present case, in practical terms, the defence filed by TKY is not worth the paper it is written on and is not worth the effort or the costs to strike it out. I do not think his defence will cause any prejudice to the 1st defendant or embarrassment or delay to a fair trial than that which his evidence on behalf of the plaintiff is going to cause.

25. If TKY and the 2nd defendant were co-plaintiffs, they must ensure that there is no conflict of interest or division of opinion between themselves, for co-plaintiffs will not be allowed to sever or take inconsistent steps and must appear at the trial by the same solicitor and counsel: see Re Mathews [1905] 2 Ch 460. This rule does not apply to co-defendants, who are at liberty to file separate and inconsistent defences and may set up a counterclaim against the plaintiff or bring third party action against a co-defendant. It certainly does not apply to co-trustees who jointly constitute the mind of a defendant.

26. I do not think this is an appropriate case that I should exercise my inherent jurisdiction in striking out TKY's defence.

The declarations:

27. In view of the substantial dispute of fact, it is impossible to determine which of the two managers is not acting in the interest of the 1st defendant.

28. Even if TKY was acting in breach of his duty as trustee, this is a matter which should properly form the subject matter of a counterclaim by the 1st defendant which should be fully investigated at trial with damages assessed and account given. It should not be resolved by a mini trial on affirmations. Granting the declaration in the term sought may have far reaching effect and consequence on the counterclaim than expected of by an application of this kind. It has the effect of entering judgment on liability against TKY on the counterclaim, but without having to go through the process of striking out TKY's defence and obtaining summary judgment. Further, apart from the above disputes, there are other disputes. There are conflicting affirmations filed by both parties.

29. Accordingly, I refuse to grant the declarations sought.

Conclusion:

30. It appears to me that the 2nd defendant has unfortunately sought the wrong relief. For all of the above reasons, his summons must be dismissed with costs.