LIU WAI KEUNG v. LIU WAI MAN

CACV 263/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 263 OF 2013

(ON APPEAL FROM HCA NO. 1106 OF 2011)

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the reasons for judgment of the court):

1.  The defendant’s appeal against the judgment of G Lam J on 30 September 2013 ([2013] 5 HKLRD 9) is solely on a question of law, namely, whether the plaintiff’s claim is time-barred by reason of section 20(2) of the Limitation Ordinance, Cap 347. The challenges on the findings of fact have been abandoned two weeks before the hearing. We dismissed the appeal with costs at the conclusion of the hearing and these are our reasons.

Background

2.  The relevant background matters for present purpose may be briefly stated as follows.

3.  The plaintiff and the defendant are brother and sister.  He brought an action against her on 4 July 2011 seeking a declaration that she held a property in Kut Cheong Mansion, 217 Tsat Tsz Mui Road, North Point, Hong Kong (“the Property”) on constructive trust for him and for consequential relief.  The Property was assigned to the defendant as the purchaser on 27 July 1981.

4.  After the writ was issued, and in February 2012, a developer applied to the Lands Tribunal for the compulsory sale of Kut Cheong Mansion, having acquired a majority interest in the building.  The plaintiff, the defendant and the developer later entered into an agreement by which the Property was sold and assigned to the developer.  By consent, the proceeds of sale of $5 million odd were paid into court to abide by the outcome of this action.

5.  Thus, from the time of the acquisition of the Property in 1981 to April 2013 when the agreement with the developer was completed, the legal title of the Property was vested in the defendant.

6.  The judge held in favour of the plaintiff there was a trust implied from the common intention of the parties that the defendant was to hold the Property on trust for the plaintiff.  He found that there was a common understanding among the plaintiff, the defendant and their parents in 1979 or 1980 that a property would be purchased with the down payment to be funded by the plaintiff and the balance of the purchase price was to be paid with a mortgage loan obtained from the bank where the defendant was working at the time.  The property was intended to be the plaintiff’s and it was to be used meanwhile as the family home.  It was agreed that the property would be put under the defendant’s name as she could obtain preferential interest rates for the mortgage loan as an employee of the bank.

7.  On the basis of that understanding, the Property was purchased in the defendant’s name in 1981, using the plaintiff’s funds to make the down payment.  The plaintiff funded all the payments of the monthly instalments of mortgage loan, and the early partial repayment in November 1983 when the defendant left the employment of the bank.  The mortgage loan was fully repaid in July 1991.

8.  Up to the 1990s, the Property was used as the family home of the plaintiff, the defendant, their father and younger brother.  The father passed away in 1998 and the younger brother moved out in 1990 or 1991.  The defendant lived there from the start until November 1983 when she went to the United Kingdom to further her studies.  Upon her return to Hong Kong in 1987, she continued to live in the Property until July 1992, when she moved out with her young son.  The plaintiff quit his sea-faring job in 1987 and began living in the Property from that time on a long-term basis.  He later married and lived in the Property with his wife and children until 2012.

The limitation defence and the judge’s holding

9.  On his evidence, the plaintiff had required the defendant to assign the Property back to him in 1998 or 1999 and at a meeting with a former business partner of the plaintiff in 2004.  It was contended by the defendant that the plaintiff’s cause of action accrued in 1998/1999 and became time-barred by 2004/2005 or it accrued in 2004 and became time-barred by 2010.  Either way, as the writ was issued on 4 July 2011, the limitation defence under section 20(2) of Cap 347 was available to the defendant.

10.  The relevant provisions of Cap 347 are as follows:

“20. Limitation of actions in respect of trust property

(1) No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action –

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy ; or

(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.

(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Ordinance, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:

Provided that the right of action shall not be deemed to have accrued to any beneficiary entitled to a future interest in the trust property, until the interest fell into possession.”

11.  Section 2(1) of Cap 347 provides that the words “trust” and “trustee” have the same meanings respectively as in the Trustee Ordinance, Cap 29, which in turn provides that “trust” and “trustee” extend to implied and constructive trusts.

12.  The judge accepted the plaintiff’s submission that his action is within section 20(1)(b), being “an action to recover from the trustee trust property or the proceeds thereof in the possession of the trustee”, so no period of limitation shall apply.  The judge had no hesitation in rejecting the defendant’s argument that because the plaintiff had been living in the Property and the defendant had not, the Property was not “in the possession of the trustee”.  He said this in the judgment:

“120. In my view, where the legal estate is vested in the trustee, the relevant property is for present purposes “in the possession of” him. He holds the legal estate qua trustee. He may be a bare trustee with no other duty than to hold the legal estate for the beneficiary. Still he is in possession of the trust property because he holds the property on trust, i.e. he holds the legal estate with the equitable estate being vested in the beneficiary.

121. Because the trustee’s possession is not in virtue of any right of his own but is taken for and on behalf of the beneficiaries, his possession is treated as the possession of the beneficiaries, with the result that time did not run in his favour against them: see Hovenden v Lord Annesley (1806) 2 Sch & Lef 607, 632–633.”

13.  The judge quoted from Kekewich J in In re Timmis, Nixon v Smith [1902] 1 Ch 176 at 186 in relation to the effect of the provisions in section 20 of our ordinance:

“The intention of the statute was to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the statute, he would come off with something he ought not to have, i.e. money of the trust received by him and converted to his own use.”

14.  The judge concluded that to suggest that the defendant can plead the limitation statute would be to say that she “would come off with something [she] ought not to have” and that would defeat the very purpose of the trust if she could plead limitation of action against the plaintiff where she still had the legal title at the commencement of the action but where the plaintiff had been in beneficial enjoyment of the trust property for over six years.

The arguments on appeal

15.  Mr Ronald Tang, who did not appear for the defendant at trial, maintained the same arguments on appeal regarding the limitation defence.  He contended that the phrase “in the possession of the trustee” in section 20(1)(b) must mean actual physical possession or occupation of the trust property, as a matter of construction on the plain meaning and a literal reading of the phrase.  He is not able to cite any authority in support of this interpretation, but submitted that there is also no authority directly in support of the plaintiff’s contention, which was accepted by the judge.

16.  Mr Tang further submitted that the judge’s reliance on Hovendenv Lord Annesley was erroneous.  That case was decided when there was no statute of limitation for trusts and it could not have been of any assistance to the construction of the relevant words in section 20(1)(b).  To reason that the beneficiary’s possession is that of the trustee so as to bring the case within the words “trust property or the proceeds thereof in the possession of the trustee” is to stand the principle on its head.  And since a trustee of landed property necessarily holds the legal title, the limitation defence under section 20 would never apply to a trustee of landed property if the judge were right, and that could not be the intention of legislature.

Discussion of the arguments

17.  We do not agree with Mr Tang’s submission that “trust property … in the possession of the trustee” must be construed to mean actual physical possession or occupation by the trustee of the trust property.

18.  Clearly, this phrase would include the situation where the trustee, although not in physical possession, would have control over the property or could readily obtain physical possession.  Thorne v Heard [1894] 1 Ch 599, though not actually concerned with landed property but with proceeds of the trust property, was usually cited as good authority that “a trustee will not be treated as being in possession of trust property where he neither has it nor is in a position to get it” (Limitation Periods by Andrew McGee (6^th ed), §14.010).  Of similar effect is this passage in Halsbury’s Laws of England, vol 68 (5^th ed), §1142, again citing Thorne v Heard in support:

“The requirement of ‘possession’ of trust property for the purposes of the limitation provision discussed above[1] is satisfied where the property or proceeds of sale of trust property are actually in the physical possession of the trustee or could readily be in his physical possession; where the trustee has never in fact recovered the property, ‘possession’ is not satisfied and the disapplication of the limitation period is thus not applicable.”

19.  Thorne v Heard was decided under section 8(1) of the Trustee Act 1888[2], which was subsequently replaced by section 19 of the Limitation Act 1939, on which our section 20 is based.  The relevant wording in the 1888 Act was “to recover trust property, or the proceeds thereof still retained by the trustee”. This slight change in wording was considered to be a difference without substance in Re Howlett, Howlett v Howlett [1949] Ch 767 at 777.

20.  The relevant passages in Thorne v Heard read as follows:

“… in construing this statute, we have to ascertain whether in fact the trust property sought to be recovered is “still retained” by the trustee. That question ought to be answered in the affirmative if he, or any agent for him, has it so that he can get it; but in the negative if it has been lost, whether by his negligence or otherwise. The second exception applies to, and is confined to, cases in which at the date of the writ the trustee still retains – that is, has in his hands or under his control – the trust property, or the proceeds thereof, sought to be recovered. The second exception assumes that the property sought to be recovered exists, and can be recovered. But, at the date of the writ in this action, the Defendants had not in fact got the money sought to be recovered, nor had they it under their control. They had, in fact, lent it and lost it. But for the statute, they would be liable for it, with interest; but the statute protects them, for in no proper sense of the expression can they be said still to retain the money.” (at 606 to 607, per Lindley, LJ)

“[Counsel for the Defendants] argued, and I am inclined to accept his argument, that the intention of the exception in the statute was to prevent a trustee using the bar by lapse of time to enable himself to appropriate a trust fund which he had not appropriated but had the power of appropriating. Money in the hands of an agent, from whom it could be recovered by the trustees, would be in this position; and it could not be the intention of the statute that the trustee might bar the cestui que trust and then recover the money from his own agent and keep it. For example, if the trustee had paid the money to his own separate account at a bank, not mixing it with his own money, so long as he could recover it from the banker I should think he retained it within the meaning of this exception in the Act.” (at 609, per Kay LJ)

“In my judgment, a man cannot be said to retain that which in fact he has not got, and which he has no power of getting.” (at 613, per A L Smith LJ)

21.  The above authorities establish quite clearly that for the purpose of section 20(1)(b), it is not necessary for the trustee to have actual physical possession or occupation of the trust property.  It would suffice if the trustee has the power of control over the property and is in a position to obtain possession of it.  This is satisfied here as, at the time of the writ, the defendant was in a position to obtain possession of the Property by virtue of the legal title vested in her.

22.  Mr Tang’s criticism of the judge deriving assistance from the classic statements of Lord Redesdale, Lord Chancellor of Ireland, in Hovendenv Lord Annesley is unwarranted. In the relevant part of the judgment, Lord Redesdale referred to a judgment of Lord Macclesfield on the application of the statute of limitations by analogy to claims against trustees for breach of trust and went on to say as follows:

“Now, I take it that the position which has been laid down, ‘that trust and fraud are not within the statute,’ is qualified just as he qualifies it here: that is, if a trustee is in possession, and does not execute his trust, the possession of the trustee is the possession of the cestui que trust; and if the only circumstance is, that he does not perform his trust, his possession operates nothing as a bar, because his possession is according to his title: just as in the case of a lessee for years, though he does not pay his rent for 50 years, his possession is no bar to an ejectment after the expiration of this term, because his possession is according to the right of the party against whom he seeks to set it up. But the question of fraud is of a very different description; that is a case where a person who is in possession by virtue of that fraud is not, in the ordinary sense of the word, a trustee, but is to be constituted a trustee by a decree of a court of equity, founded on the fraud, and his possession in the meantime is adverse to the title of the person who impeaches the transaction, on the ground of fraud …”

23.  The judge prayed in aid Lord Redesdale’s statements to explain why the possession of a trustee or de facto trustee, as is the case of the defendant, is not adverse to the possession of the beneficiary, with the result that time does not run in favour of the trustee against the beneficiary.  This is undoubtedly correct.

24.  Mr Tang was wrong to construe section 20(1) by a literal reading, without regard to how the law had evolved in this area.  As explained by Lord Sumption JSC in Williams v Central Bank of Nigeria [2014] AC 1189 at 1199:

“12. Before the Trustee Act 1888 (51 & 52 Vict c 59), no statutory time bar applied to a claim by a beneficiary against a trustee. The practice of equity was to apply statutory limitation periods by analogy to equitable claims, in addition to its own doctrines of laches and acquiescence. But by way of exception statutory limitation periods were not applied, even by analogy, to claims by a beneficiary against a trustee for breach of trust. Trustees were accountable to their beneficiaries without limitation of time.

13. It is important to understand why equity adopted this rule, for its rationale will not necessarily apply to every kind of constructive trust. The reason was that the trust assets were lawfully vested in the trustee. Because of his fiduciary position, his possession of them was the beneficiary’s possession and was entirely consistent with the beneficiary’s interest. If the trustee misapplied the assets, equity would ignore the misapplication and simply hold him to account for the assets as if he had acted in accordance with his trust. There was nothing to make time start running against the beneficiary. It will be apparent that this reasoning can apply only to those who, at the time of the misapplication of the assets have assumed the responsibilities of a trustee, whether expressly or de facto. Persons who are under a purely ancillary liability are in a different position. They are liable only by virtue of their participation in the misapplication of the trust assets itself. Their dealings with the assets were at all times adverse to the beneficiaries, and indeed to the true trustees holding the legal interest.”

25.  The Trustee Act 1888 section 8 was enacted to “relieve honest trustees who had parted with the assets and had not converted them to their own use from the harshness of the rule which held them accountable without limitation of time” (Williams v Central Bank of Nigeria, §22).  So if any of the three exceptions in section 8(1) was satisfied, the trustee was entitled to the same statutory period of limitation as would have been available if he had not been a trustee.  The same scheme was adopted by section 19 of the Limitation Act 1939 and section 21 of the Limitation Act 1980, although it reversed the order of ideas.  Instead of creating a right on the part of trustees to raise limitation subject to the exceptions, the Acts in 1939 and 1980 provided that no limitation period prescribed by the Act should apply in the two cases specified in subsections (a) and (b) of the relevant section (Paragon Finance v D B Thakerar [1999] 1 All E R 400 at 410d to f; Williams v Central Bank of Nigeria, §25).

26.  Viewed in the proper context of how the law had evolved, the legislative intent of section 20(1)(b) was not to relieve a trustee or a de facto trustee from misapplication of the trust property in a situation where the trust property was lawfully vested in the trustee and his possession or right of possession was entirely consistent with and not adverse to the beneficiary’s interest.  The judge was right to hold that it would defeat the very purpose of constructive trusts if the trustee could raise a limitation defence against the beneficiary where the trustee still has the legal title but where the beneficiary has been in beneficial enjoyment of the trust property for over six years.

27.  For the above reasons, we dismissed the defendant’s appeal with costs.  We have made an order that her costs are to be taxed in accordance with the Legal Aid Regulations.