CALODY ENTERPRISES LTD. v. ABLE FORCE LTD.

1996 No. MP 792

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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INTRODUCTION

1. This is a vendor and purchaser summons. The property to which the summons relates consists of two shops on the ground floor, offices and a store room on the first floor, and the roof of a building at 5 - 9 Fuk Lo Tsun Road, Kowloon. By an agreement dated 19th January 1996, the Plaintiff, Calody Enterprises Ltd. ("Calody"), agreed to sell the property to the Defendant, Able Force Ltd. ("Able"), for the sum of $15m. Completion of the agreement was originally fixed for 31st January. The agreement contained the usual provision requiring Calody to prove its title to the property in accordance with section 13 of the Conveyancing and Property Ordinance (Cap. 219) ("the Ordinance") at its own expense, and to provide Able with copies of those documents which were necessary to complete title.

2. Calody's obligation to prove its title would only be discharged if it proved beyond reasonable doubt that it was in a position to convey the title to the property without any blot on the title or any possibility of litigation. Unfortunately, a dispute arose as to whether Calody had proved its title to the property. It was agreed that that dispute should be resolved on a vendor and purchaser summons under section 12(1) of the Ordinance. It was also agreed that completion of the sale should be postponed until one month after judgment had been given on the summons. The judgment which I am now handing down is the judgment on that summons.

THE FACTS

3. The relevant facts are not in dispute. In 1979, title to the property was vested in Fokker Estates Ltd. ("Fokker"). By an agreement dated 1st June 1979, Fokker agreed to sell the property for the sum of $5,036,200.00. The purchasers were (i) Ng Yat Chai, (ii) Chan Ting Sam,

(iii) Ng Suk Ching, (iv) Ng Chun Yim, and (v) Ng Hung Man. For convenience, I shall refer to them as "the nominors". Each of them acquired a one-sixth interest in the property, with the exception of Ng Chun Yim who acquired a one-third interest. However, the nominors never took an assignment of the property. That was because on 23rd September 1980 they nominated Calody to take up the assignment of the property, and on 2nd March 1981 Fokker executed an assignment assigning the property to Calody. By June 1983, Ng Chun Yim had acquired the shares in Calody of the other four nominors, and all other shares in Calody had been acquired by Ng Chun Yim and members of his family.

THE ISSUE

4. The problem which has arisen is that the nomination which the nominors executed did not expressly declare that the nominors were relinquishing such interest as they had in the property. In those circumstances, it is common ground that Calody must be presumed to have held the property, and still to hold the property, on a resulting trust in favour of the nominors, unless the presumption of a resulting trust has been rebutted. If the documents which Calody's solicitors provided Able's solicitors with are insufficient to rebut the presumption of a resulting trust, Calody will have failed to prove its title to the property in accordance with section 13 of the Ordinance.

THE INDIVIDUAL NOMINORS

5. The position of two of the nominors can be disposed of quickly :

(i) Ng Chun Yim. Ng Chun Yim died on 4th June 1992. There is no question of the property being held on a resulting trust in favour of his estate. That is because one of Ng Chun Yim's sons, Ng Wai Pun, is the administrator of his father's estate, and he has confirmed on affidavit that the property has at all material times been beneficially owned by Calody to the exclusion of the nominors. It is common ground that the effect of that is that Ng Chun Yim's estate is now estopped from asserting otherwise.

(ii) Ng Yat Chai. On 3rd February 1994, Ng Yat Chai made a statutory declaration in which he stated what the intentions of the nominors had been when they had executed the nomination. The intention had been that when the property was assigned to Calody, the property would vest in Calody absolutely, and that the nominors would relinquish all their rights in the property. It is common ground that by that declaration Ng Yat Chai and his successors are estopped from claiming any interest in the property.

THE OTHER THREE NOMINORS

6. Initially, Mr. Anselmo Reyes for Calody was not intending to argue that Ng Yat Chai's statutory declaration would prevent the three remaining nominors from claiming an interest in the property. That, no doubt, was because there was no evidence that Ng Yat Chai was authorised by the other nominors to make the statutory declaration. It follows that they or their successors are not estopped by the statutory declaration from asserting that they have a beneficial interest in the property.

7. However, when I questioned whether that really was the end of the matter, Mr. Reyes was astute enough to sense the wind in his sails, and he then argued that Ng Yat Chai's statutory declaration is nonetheless powerful evidence of what the intentions of the other nominors had been. I agree. Ng Yat Chai would have been in a position to know that, and there is nothing to suggest that he might have had interests of his own to serve when making the statutory declaration. If he had, he would hardly have been likely to have made a statutory declaration which was contrary to his own interests in the matter. None of the other nominors have sought to assert that Ng Yat Chai's statutory declaration misrepresents what their intentions had been at the time of the nomination. It is true that Ng Wai Pun believes that none of the other nominors are still alive, but there is no evidence which suggests that any of them asserted a beneficial interest in the property either (a) in 1981 when the property was assigned to Calody, or (b) in 1983 when their shares in Calody were acquired by Ng Chun Yim. These considerations strongly reinforce the argument that Ng Yat Chai's statutory declaration is compelling evidence that all the nominors intended to relinquish their entire interest in the property. That evidence is, in my judgment, more than sufficient to rebut the presumption that a resulting trust in favour of the nominors arose.

8. In these circumstances, it is not strictly necessary for me to address the other arguments deployed by Mr. Reyes in support of his contention that the presumption of a resulting trust had been rebutted. However, in deference to Mr. Reyes' arguments, and in case a different view is taken by an appellate court of the effect of Ng Yat Chai's statutory declaration, I propose to deal with those arguments. Two instruments were relied on by Mr. Reyes. They were :

(i) a mortgage in respect of the property dated 2nd March 1981 executed by Calody in favour of Nanyang Commercial Bank Ltd. ("the Bank") to secure (a) general banking facilities of $1.5m., and (b) a loan of $2m. to finance Calody's purchase of the property;

(ii) the assignment dated 2nd March 1981 executed by Fokker assigning the property to Calody.

I shall deal with each of these instruments in turn.

THE MORTGAGE

9. The mortgage contained provisions which are said to amount to assertions by Calody that both the legal and beneficial interest in the property vested in it absolutely. Those provisions were in the form of covenants given by Calody to the Bank. Thus, in cl. 5(c) Calody covenanted that it had "power to assign [the property] ... free from encumbrances", and in cl. 5(d) it covenanted that in the event of any default in payment of the sums due under the mortgage, the Bank would be entitled to enter the property and to enjoy it "without any interruption by any person". One of the directors of Calody who signed the mortgage was Chan Ting Sam, and the mortgage bore Calody's seal.

10. On these facts, Mr. Reyes took two points :

(i) At the very least, the assertions in the mortgage rebutted the presumption of a resulting trust arising in favour of Chan Ting Sam (and his successors). If it were otherwise, it would be open to Chan Ting Sam (or his successors) to renege on the assertions which, by signing the mortgage, he made to the Bank on Calody's behalf.

(ii) Calody's Articles of Association provided that Calody's seal should not be affixed to any instrument except by a resolution of Calody's Board of Directors. The presumption of regularity meant that it could be presumed that all Calody's directors were content with the Company's seal being affixed to the mortgage. They must therefore be assumed to have been content with the assertions which had been made in the mortgage. Since the directors of Calody at the time included all the nominors, the assertions in the mortgage rebutted the presumption of a resulting trust arising even in favour of those nominors who did not sign the mortgage. If it were otherwise, it would be open to any of the nominors (and in particular the two remaining nominors, Ng Suk Ching and Ng Hung Man) to renege on the assertions deemed to have been made by them on Calody's behalf.

11. In my judgment, this elaborate argument falls at the first hurdle. The covenants do not amount to assertions by Calody that an equitable title to the property, as well as legal title, vested in it absolutely. Take cl. 5(c). Calody's power to assign the property free from encumbrances does not identify the nature of Calody's interest in the property. It is possible that it was vested with that power because the nominors as the beneficial owners of the property authorised it to assign the property free from encumbrances. Exactly the same thing can be said about cl. 5(d). The point is that the existence of the power is not enough. What really matters is the source of that power, and on that issue the covenants are silent. They cannot be read as asserting that Calody's power derives from its, as opposed to the nominors', beneficial interest in the property.

12. That is what distinguishes this case from the decision of Godfrey J. (as he then was) in Fulltrend Co. Ltd. v. Longer Year Development Ltd. [1990] 1 HKC 452 on which Mr. Reyes relied. In Fulltrend, Darlaston was expressed to be the beneficial owner of the property in the conveyance under which Darlaston assigned the property. In the present case, I have not been able to construe the relevant clauses in the mortgage as amounting to assertions by Calody that it was the beneficial owner of the property.

13. I should add that if I had thought that the covenants in the mortgage amounted to assertions by Calody that both the legal and beneficial interest in the property vested in it absolutely, that would have prevented the nominors from subsequently reneging on those assertions. I do not overlook the point made by Mr. Jat Sew Tong for Able that the assertions were made to the Bank. At first blush, therefore, it was only the Bank which could have sought to argue that the nominors were estopped from asserting that a beneficial interest in the property remained vested in them : subsequent purchasers could not rely on the assertions to found an estoppel since the assertions were not made to them. However, Mr. Reyes reminded me that the mortgage deed was registered under the Companies Ordinance (Cap. 32). Members of the public were therefore deemed to have had notice of the assertions. If a subsequent purchaser relied on those assertions to his detriment, the other nominors would have been estopped from asserting that they retained a beneficial interest in the property.

14. The registration of the mortgage deed puts it in the same category as the conveyance in Fulltrend. In Fulltrend, the assertion that Darlaston was the beneficial owner of the property was made to the purchaser of the property because it was made in the conveyance. It was for that reason that Darlaston (and therefore Messrs. Ha and So who "clothed Darlaston with the mantle of authority to deal with the property") could not subsequently assert the retention of a beneficial interest against the purchaser or its successors in title. But the registration of the mortgage deed in the present case had the effect of treating the assertions in it as having been made to any subsequent purchaser of the property.

15. In the interests of completeness, I should mention that the mortgage was in the form of an assignment of the property to the Bank subject to Calody's equity of redemption. Mr. Reyes argued that that assignment was inconsistent with the retention by the nominors of a beneficial interest in the property. I am not convinced that the beneficial as well as the legal interest in the property was assigned to the Bank, but even if it was, the Bank released Calody in 1987 from its obligations under the mortgage. The effect of that was the reassignment to Calody of whatever interest had been assigned to the Bank under the mortgage in the first place.

THE ASSIGNMENT

16. I can deal with the assignment shortly. One of the directors of Calody who signed it was Chan Ting Sam, and it bore Calody's seal. It stated in one of the recitals that Fokker had agreed with Calody to sell the property to Calody for the sum of $5,036,200.00. The assignment also included a receipt given by Fokker for that sum which had been paid by Calody to Fokker.

17. Even Mr. Reyes admitted that these assertions were at best equivocal. I accept that if the whole of the purchase price had come from Calody, that could go some way toward showing that the nominors were not retaining a beneficial interest in the property. But although the assignment records did that the purchase price came from Calody, the assignment did not tell the reader of it anything about the source of the funds.

18. In those circumstances, it is, in my judgment, quite impossible to contend that the passages in the assignment relied upon by Mr. Reyes amounted to assertions that both the legal and beneficial interest in the property vested in Calody absolutely. Mr. Reyes referred me to the decisions of Patrick Chan J. in Ngai Hing Cycle (Electrical) Ltd. v. China Harmonious Ltd. (HCMP 4343/93) and Mayo J. (as he then was) in Formking Development Ltd. v. Lee Kwok Hung Robert [1993] 1 HKC 412, but he accepted that they did not lay down any general principles, and that they merely reflected the conclusions which particular judges reached on particular facts. There is nothing in those cases which makes me doubt the view I had already formed about the effect of the passages relied on in the assignment.

THE SIZE OF THE INTERESTS OF THE OTHER NOMINORS

19. The balance of the purchase price payable by Calody to Fokker on completion was $3,525,340.00. Since Calody borrowed $2m. from the Bank, and was granted a loan facility of $1.5m, it is fair to assume that the balance of the purchase price paid by Calody was paid from money which it borrowed from the Bank. The sum of $3,525,340.00 represented 70% of the purchase price. There is no evidence as to how the balance was funded, and in favour of Able Mr. Reyes was prepared to assume that the balance of 30% was paid to Fokker by the nominors. However, if one disregards the interest in the property attributable to Ng Chun Yim and Ng Yat Chai (because on any view Ng Chun Yim's estate and Ng Yat Chai have no interest in the property), the greatest interest which the remaining nominors could still have in the property is a 15% interest. Since their interest in the property was in equal shares, the maximum interest which each of them could have in the property is a 5% interest.

20. It is against this background that Mr. Reyes argued that the individual interests which the three remaining nominors could have in the property are so small that there is no real probability of any of them making a successful claim to be beneficially entitled to the property. An argument on these lines - though adapted to fit the facts of their cases - was adopted by Findlay J. in Yeung Kit Lam v. Lau Yiu Shing (HCMP 3392/94) and Yeung J. in Kwok Kai Hing v. Chan Lik (HCMP 1529/95).

21. I would not have been persuaded by this argument alone to say that there was no real probability of the nominors claiming a beneficial interest in the property. If the price which Able has agreed to pay for the property is a reliable guide to its current market value, a 5% interest in property worth $15m. is $750,000.00. That is not a small sum. However, it is a sufficiently large enough sum to make me wonder why, if the nominors retained a beneficial interest in the property, they have not come forward over the years to find out what has happening to a property in which they had a not insignificant interest. When that point is seen against the background of Ng Yat Chai's statutory declaration, the chances of any of the three remaining nominors now coming out of the woodwork and claiming an interest in the property are so negligible that they can be discounted for all practical purposes.

CONCLUSION

22. For these reasons, I have come to the conclusion that Calody has proved its title to the property in accordance with section 13 of the Ordinance. In those circumstances, I declare that a good title to the property has been shown by Calody. Although the originating summons sought, in addition, a declaration relating to the requisitions from Able's solicitors, Mr. Reyes and Mr. Jat told me that if I found that a good title had been shown, a declaration to that effect would be sufficient for their purposes. I make that declaration in the knowledge that it satisfies both Calody and Able. It satisfies Calody, of course, because Calody can now proceed to completion without worrying about the doubts which had been expressed on its title. But it satisfies Able as well, because Mr. Jat told me that Able did not want to get out of the transaction. What Able wanted was to have the protection of a finding of the Court against any attack in the future on its title. By this judgment, I hope that I have put Able's concerns about the title it is acquiring to rest.

23. I was told that the parties had agreed that whatever the outcome of the summons no application for costs would be made. Accordingly, by consent I order that there be no order as to the costs of the originating summons.

24. Finally, when Calody's solicitors served the notice of the hearing of the originating summons on Able's solicitors, the notice informed them that the hearing would be in chambers. When I saw that, I directed that the originating summons be heard in court, and I was proposing to refer in the judgment I eventually gave to the not infrequent practice of originating summonses being listed for hearing in chambers. Since doing so, my attention has been drawn to the judgment of Le Pichon J. in Mayluck Investment Ltd. v. Lee Yih Ping (HCMP 1537/95). Her judgment is a timely reminder to the profession not to confuse interlocutory summonses (which are heard in chambers) with originating summonses (which are heard in court). All I need do is to reinforce her wish that the remarks of Godfrey J. in Yau Fook Hong Co. Ltd. v. The Commissioner of Inland Revenue (HCMP 1340/88) do not go unheeded.

(Brian Keith)

Judge of the High Court