LEONART LTD. v. TURN FINE DEVELOPMENT LTD.

HCMP432/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.432 OF 2001

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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 plaintiff purchaser seeks a declaration that the defendant vendor has failed to show a good title to the suit property, and an order for return of the deposit of $4,600,000 paid. In fact I am now advised that the completion date has been extended, and that if I rule in favour of the plaintiff the defendant will return the deposit, whereas if I rule in favour of the defendant the sale will proceed.

2. The suit property is Shop B on the ground floor of the Tak Fat Building, 52 Russell Street, Hong Kong ("the property"). The building stands on the remaining portion of Inland Lot No.3593 and the remaining portion of Inland Lot No.3592.

3. The problem arises out of an assignment in 1975 in respect of which the purchaser has raised a requisition, which it says the vendor has not answered. Lot No.3593 was the subject of this assignment, dated 28 July 1975, whereby Lam Kam Wing and Lam Kam Kwan in their capacity as liquidators of Yet Sing Estate Co. Ltd assigned the whole lot to Lam Kam Kwan, Lam Kam To and Lam So Sau Hing. The solicitors asked for but did not receive evidence that the liquidator Lam Kam Kwan had authority to assign the property to himself.

4. It is not in dispute that a liquidator who sells company property to himself without authority does so in breach of his fiduciary duty. This self-dealing rule appears in Rule 148 of the Companies (Winding-up) Rules, Cap.32, sub. leg. which provides :

"Neither the liquidator nor any member of the committee of inspection of a company shall, while acting as liquidator or member of such committee, except by leave of the court, either directly or indirectly, by himself or any employer, partner, clerk, agent, or servant, become purchaser of any part of the company's assets. Any such purchase made contrary to the provisions of this rule may be set aside by the court on the application of the Official Receiver in a winding up by the court or of any creditor or contributory in any winding up and the court may make such order as to costs as the court shall think fit."

5. The plaintiff argues that there is no evidence that the fact that the liquidator was one of the purchasers was ever disclosed to the members or that the other seven shareholders knew the identity of the purchasers. Any of the shareholders could apply to the court to set aside the assignment. Though the company was wound up long ago, the shareholders could apply to the court for a "Lazarus order" under section 290(1) of the Companies Ordinance, Cap.32, to set aside the dissolution of the company. Though such an application should be made within two years of the dissolution, the court may by section 290(1A) extend the time for application if it is satisfied that there are exceptional circumstances justifying the extension.

6. The result, says the plaintiff, is that there is a real risk that the 1975 assignment will be set aside. Therefore, the title is defective. The defendant further has not shown good title as required by clause 20 of the provisional sale and purchase agreement, which is the only agreement between the parties.

7. The defendant's case is that the vendor's duty is to show a good title rather than a perfect title. There is no absolute bar against the sale by a liquidator to himself; it could be done with the authority of the shareholders. The sale is only voidable on application to the court by a creditor or contributory under Rule 148. That has not happened in 25 years and the chances of its happening now are remote and fanciful.

8. The plaintiff relies in particular, as its solicitors relied throughout the correspondence between solicitors, on the case of Tang Ying Ki v. Maxtime Transportation Ltd, [1996] 3 HKC 257. In that case the defect in title arose when a mortgagee sold mortgaged land to himself by auction in 1938. It was held that since a mortgagee cannot sell to himself unless the sale is made by the court and the mortgagee obtains leave to bid, the vendor's title was impeachable. The court held that notwithstanding a lapse of time of 58 years, it was not for the court to rule on the question of laches and acquiescence, and it was not a case where the evidence was so compelling that the court would conclude that it was beyond reasonable doubt that the purchaser would not be at risk of a successful assertion against him of the incumbrance.

9. The plaintiff says that an equivalent self-dealing rule applies here; the title is impeachable and it is not for me to rule on the question of laches and acquiescence.

10. The bar against a mortgagee selling to himself is absolute; Farrar v. Farrars Ltd (1888) 40 Ch D 395. The rationale is stated at page 409 :

"For a sale by a person to himself is no sale at all, and a power of sale does not authorise the donee of the power to take the property subject to it at a price fixed by himself, even though such price be the full value."

11. The only exception is where the sale is ordered by the court and the mortgagee has leave to bid. See Farrar v Farrars Ltd, above; Fisher and Lightwood's Law of Mortgage, 10th Edn., page 393.

12. I do not see that a liquidator is in exactly the same position as a mortgagee. He is not selling to himself something which he owns; rather he is selling on behalf of the company. He is in the position of a trustee or an agent. See McPherson on The Law of Company Liquidation, 4th Edn. at page 291 where the opinion is expressed that :

"From the practical point of view it does not seem to matter much whether the liquidator is treated as a trustee in the strict sense or simply as an agent, for in either capacity a fiduciary position in relation to the company, its creditors and contributories is occupied."

13. Granted that Rule 148 prohibits the sale by a liquidator to himself "except by leave of the court" it goes on to make provision that "any such purchase made contrary to the provisions of this rule may be set aside by the court" so the prohibition cannot be said to be absolute.

14. The self-dealing rule as it applies to trustees is not absolute. A trustee can sell to himself with the concurrence of the beneficiaries so long as the concurrence is genuine; see Lewin on Trusts, 17th Edn., para.20-91.

15. It follows therefore that the liquidator here was not in the same position as the mortgagee in Tang Ying Ki v. Maxtime Transportation Ltd and that case can be distinguished.

16. It is for the defendant to satisfy me beyond reasonable doubt that the possibility of impeachment of the title is remote and fanciful. In the words of Lord Russell of Killowen in MEPC Ltd v. Christian-Edwards [1981] AC 205 :

"In my opinion, if the facts and circumstances of a case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance, the court should declare in favour of a good title."

17. Recently the courts have stressed the robust, common-sense approach to be applied in this kind of case. In Mexon Holdings Ltd v. Silver Bay International Ltd [2000] 2 HKC 1, at page 8G-H Litton PJ held :

"First principles:

A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust common sense, both intending to see the transaction through to completion in terms of their own bargain."

18. Further, as Liu JA put it in Jumbo Gold Investment Ltd v. Yuen Cheong Leung and Another [1999] 3 HKLRD 825 at 833F-G :

"In a vendor and purchaser summons under s.12 of the Conveyancing and Property Ordinance (Cap.219), the court would be considered best guided by the commercial reality as to whether there is any real risk of problems in title. It is not to be troubled by the absence of an absolute risk-free assurance, nor unduly hampered by strict legal proof in matters requisitioned. Conveyancing practice must be geared to uphold bargains."

19. Though Liu JA gave the dissenting judgment in the Court of Appeal in that case, his approach was approved by the Court of Final Appeal in its decision in the same case reported at [2000] 1 HKLRD 763.

20. Looking at the facts of this case as they appear from the documents, it is clear that the Yet Sing Estate Co. Ltd was a family company. It had 10 shareholders. Eight were surnamed Lam, and two were the executors of deceased persons surnamed Lam. Five of them lived in the same building at 50 Russell Street. All held equal shares. There were five directors, all of them shareholders.

21. A special resolution of the company dated 13 July 1975, appointing the liquidators, was filed with the Registrar of Companies. The property concerned here was sold for $420,000 on 28 July 1975. A final account pursuant to section 239 of the Companies Ordinance was made up as at 10 May 1976 showing a figure of $1,260,000 for the realisation of land and buildings. A return of surplus assets paid to the shareholders, also dated 10 May 1976 was made to the Registrar. It showed assets of $1,444,458.67 paid out in equal shares to the 10 shareholders. A return was made of a resolution of a final meeting of the company on 10 May 1976 providing for the liquidators to retain the books, accounts and documents of the company and the liquidators for one year from the dissolution of the company, and then destroy them.

22. It therefore appears that all the documents which were required to be filed with the Registrar were filed. Everything appears from the documents to have been done openly and above board. From this and the fact that no action has been taken by any of the shareholders over 26 years it can be inferred that everything was done openly and above board and with their consent and concurrence.

23. Following the assignment it appears that the sites at Nos.50 and 52 Russell Street were developed into the Tak Fat Building and no doubt there were many purchasers of shops and apartments there. There is no evidence on that, save that the suit property is shown on the land search as 42/204 of the lot consisting remaining portion of Inland Lot No.3593 and the remaining portion of Inland Lot No.3592.

24. The defendant argues that, this being so, if any action were brought by a shareholder or the company it would be unlikely to succeed because of these third party interests. Reference is made to Lau Sing Ying & Anor v. Wong Cheung Tai, HCMP669/1993 where the court in a similar case of assignment by trustees took the view that if title to the property were allowed to be interfered with by a claim of the beneficiaries, there could not be a just, practical solution in view of the third party interests. The plaintiff however says that any subsequent purchaser could not be regarded as a bona fide purchaser for value without notice; the public documents were there to show that there had been a sale by the liquidator. Counsel relies on Lo Wo & Ors v. Cheung Chan Ka & Anor, CACV217/2000 in support of the proposition that the mere fact that restitutio in integrum is impossible would not prevent the court from exercising its discretion to set aside the 1975 assignment. That may be so, but it is to be noted that in that case an unconscionable bargain was involved and an innocent third party's interests could be protected by application under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap.545.

25. If the shareholders or any of them wished now to overturn the 1975 assignment, an application would have to be made for a "Lazarus order" as mentioned above. Such an application should be made within two years of the dissolution, but the court may extend the time for application if it is satisfied that there are exceptional circumstances justifying the extension.

26. There do not appear to be any exceptional circumstances which might justify extension of time here. There has been no suggestion of fraud and as I have found everything seems to have been done openly and above board.

27. As has been noted, the final resolution of the company was that the liquidators should keep the books, accounts and documents for a year and then destroy them. It is probable therefore that all such documents are long destroyed. To pursue the biblical analogy further, if this company had had a body to be resurrected, that body would by now be long decomposed. The practical problems would be immense.

28. Here it would be for the shareholders to bring their action and prove that the sale was without their authority. There is no absolute bar against sale for them to rely on as there is in the case of sale by a mortgagee to himself. I do not think it is necessary to disregard the question of laches and acquiescence as did the judge in Tang Ying Ki v. Maxtime Transportation Ltd. Obviously there is a strong likelihood that if any action were ever allowed to get off the ground in the first place, it would fail on these grounds.

29. For all these reasons I am satisfied beyond reasonable doubt that possibility of impeachment of the title is remote and fanciful. I am satisfied that the defendant has shown good title to the property and that the title is good. I am not specifically asked for a declaration to this effect but since the Originating Summons asks that the court "make such further or other order as the court may think fit". I make that declaration in order to protect the plaintiff's position in future, on the basis that I have been told that in the event of my finding that the title is good, the purchase will proceed.

30. As the parties have agreed, there will be no order as to costs.