RE LAU HIU TUEN

HCB 8430/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 8430 OF 2006

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DECISION
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1.  This is an application by the trustees in bankruptcy of Mr Lau Hiu Tuen, made pursuant to section 6 of the Partition Ordinance (Chapter 352 of the Laws of Hong Kong) and section 60 of the Bankruptcy Ordinance (Chapter 6 of the Laws of Hong Kong), for an order for sale of a property, namely, Flat D on the 22^nd Floor of Block 10, 1128 King’s Road, Kornhill, Hong Kong. I shall refer to it simply as “the property”.

2.  The property was registered in the name of Mr Lau and his former wife, Madam Lam Wai Han Noriko, as joint tenants.  Mr Lau was adjudicated bankrupt on his own petition on 28 November 2006, with two consequences so far as relevant for present purposes.  First, by operation of law, the joint tenancy was severed and converted into a tenancy in common: In re Dennis [1993] Ch 72.  Secondly, Mr Lau’s interest in the property became vested initially in the Official Receiver or provisional trustees and subsequently in the trustees of bankruptcy upon their appointment: section 58(1), (1A) & (2) of the Bankruptcy Ordinance.

3.  Mr Lau was automatically discharged from bankruptcy on 28 November 2010 pursuant to section 30A(1) of the Bankruptcy Ordinance.  However, the discharge does not re-vest in Mr Lau any interest he had in the property which was vested in the trustees: see the decision of Kwan J, as she then was, in 有關張德華(破產人)事宜(HCB 4980/2004, 18 August 2009, at §§23-27).  The total amount of the proofs of debt filed by creditors (subject to adjudication) is approximately $546,000.

4.  Mr Lau was adjudicated bankrupt a second time, again on his own petition, on 6 September 2011.  Different trustees in bankruptcy were appointed in respect of his second bankruptcy estate.  They are not party to the present application, though they have indicated that they have no objection to the application.  The total amount of the proofs of debt filed in the second bankruptcy is approximately $206,000.

5.  Madam Lam, the other co-owner, who has been made respondent to this application, opposes a sale of the property.  Her grounds for opposition are two-fold.  First, she contends that the property is beneficially owned solely by herself and that it would be unfair for her to have to shoulder the debts of her ex-husband.  Secondly, she submits that it would occasion great hardship to her and her child if the property was to be sold.

6.  I shall deal with these two aspects in turn, after setting out the salient provisions of the Partition Ordinance (Cap 352).

7.  Section 2 of the Partition Ordinance provides:

“Subject to this Ordinance, where any property in land is held by 2 or more persons, whether as joint tenants or as tenants in common, the Court may-

(a) make an order under section 4 for a partition of the property;

(b) make an order under section 6 for a sale of the property; or

(c) refuse to make any order.”

8.  Section 6 provides:

“(1) In any proceedings under this Ordinance, where it appears to the Court that a partition of the property would not be beneficial to all the persons interested by reason of-

(a) the nature of the land to which the proceedings relate;

(b) the number of the persons interested or presumptively interested;

(c) the absence or disability of some of the persons interested; or

(d) any other circumstances,

the Court may make an order for the sale of the property.

(2) The Court may exercise its powers under subsection (1), notwithstanding the dissent or disability of any person interested.

(3) (a) Without prejudice to subsection (1), if any person interested in the property applies to the Court to make an order for the sale of the property instead of an order for partition, then, unless the other persons interested undertake to purchase the interest of the party applying for an order for sale, the Court may, if it thinks fit, make an order for the sale of the property.”

Beneficial ownership of the property

9.  If Mr Lau has no beneficial interest in the property and is a mere trustee for Madam Lam, then clearly there is no asset in the form of any interest in the property that falls into the bankruptcy estate (see section 43(3) of the Bankruptcy Ordinance), and no order for sale will be made.  However, since the property was purchased, and thereafter held, in the joint names of Mr Lau and Madam Lam, they were prima facie equally beneficially interested in the property.  It is for Madam Lam to prove that the beneficial ownership of the property is different from the legal ownership: Jones v Kernott [2012] 1 AC 776 at §17. 

10.  The relevant facts may be stated as follows.  In March 2003, Mr Lau and Madam Lam, then husband and wife, entered into a provisional agreement to purchase the property at the price of HK$1,315,000. At that time they paid a deposit of HK$10,000.  They then obtained a loan of HK$410,000 under the Home Purchase Loan Scheme operated by the Hong Kong Housing Authority (“HKHA”).  It appears that part of this loan was available to finance the payment of the balance of the deposit payable upon the signing of the formal sale and purchase agreement on 2 April 2003.  For the purpose of completing the purchase on 9 May 2003, they obtained in addition a loan from the Bank of China in the sum of HK$905,000.  Upon completion, the property was assigned to them as joint tenants.  They also executed a mortgage deed to secure both the HKHA loan and the bank loan.  Mr Lau and Madam Lam were the two mortgagors.  Clause 2 of the deed states that the mortgagors “as beneficial owner[s]” charge the property to the mortgagee.

11.  In one of her affirmations, Madam Lam said that the purchase of the property was done in joint names because that was the requirement of HKHA and the bank.  This in itself is not a basis for holding that there was no intention in 2003 for Mr Lau to be a beneficial owner of the property.  As stated by Russell LJ in Crisp v Mullings [1976] 2 EGLR 103 (quoted in Wong Kwok Ki Stephen (as the joint and several trustee of the property of Lai Kam Po) v Lee Lai Ying (DCCJ 677/2013; 29 November 2013)):

“The crucial point in the judgment appealed from is that the judge, having quite correctly said that the plaintiff started, so to speak, with the advantage of being a joint tenant in law, concluded that this was entirely explained—and explained away—by the fact that her participation was necessary in order to persuade the building society to advance the £5,700. The judge said:

‘The plaintiff was accordingly made a party to the contract, the mortgage and the transfer in order to enable a sufficient loan to be obtained, and not with the object of making a gift to the plaintiff of any share of the beneficial interest.’

With all respect, we do not think that that demonstrates that the plaintiff was to be a mere nominee.  It is, we think, a non sequitur.  On the contrary, the fact that the house for the ‘family’ could not be bought without the plaintiff incurring liability, or potential liability, would be some ground for inferring that the plaintiff was to be beneficially interested.”

12.  Moreover, at the hearing of the application, Madam Lam told the court, with admirable frankness, that when the property was purchased in 2003, she and Mr Lau owned it together. 

13.  Turning to the monthly repayment instalments of the mortgage loans, Madam Lam’s first affirmation dated 5 May 2012 stated that she herself made those payments while Mr Lau contributed towards the family living expenses.  In her third affirmation dated 7 July 2012 she stated that she paid the monthly loan repayment instalments from the time of the purchase in 2003 and that Mr Lau was already in financial difficulty prior to 2006.  At the hearing of the application, however, she accepted that between 2003 and 2006 they made the monthly repayments together.  The earliest available banking documents show that between May and August 2006, the mortgage repayment instalments were paid from a joint savings account of Mr Lau and Madam Lam.

14.  Madam Lam maintains that, after November 2006, she alone paid the monthly repayment instalments.  She accepts that from then on Mr Lau paid their son’s school fees ($7,200 a year) and contributed $24,000 to the annual household expenses on account of their son.  She does not accept, however, that Mr Lau paid the utilities bills as claimed in Mr Lau’s annual statement of earnings provided to the Official Receiver.  On Madam Lam’s case, this remained the position despite Mr Lau’s discharge from his first bankruptcy and despite his second bankruptcy.  In around 2012 or 2013, when they separated and were eventually divorced, Mr Lau ceased to make any financial contribution even towards the son’s maintenance.

15.  While Madam Lam feels strongly that Mr Lau should have no interest in the property because he made no contribution towards repayment of the mortgage loans beyond 2006, I am bound to hold, on the application of established legal principles to the facts of this case, that they were beneficial owners in the property in equal shares at least as at November 2006.  On the facts, there was simply no common intention, at the time of the acquisition of the property, for the property to be held by the two of them as trustees for Madam Lam alone. 

16.  A post-acquisition common intention that the beneficial ownership of the property should change can give rise to a constructive trust binding upon the legal owners, but there must be sufficient evidence to justify such an inference or conclusion: Ip Man Shan Henry v Ching Hing Construction Co Ltd [2003] 1 HKC 256 at §74; Chan Chui Mee v Mak Chi Choi [2009] 1 HKLRD 343 at §§33-35.

17.  In my judgment, the fair inference from Madam Lam’s not altogether consistent evidence is that Mr Lau did make contribution overall to the expenses and outgoings of the family between 2003 and 2006.  It may be that their contributions were unequal, and it may be that Mr Lau’s contribution was dwindling as he got deeper and deeper into financial difficulty.  In a family setting, however, these matters do not support an inference of an intention to change the proportion of beneficial interest of the couple in the property.  In general, married couples do not intend that their beneficial ownership of a jointly-owned property varies from month to month depending on the precise monetary contribution each makes towards the mortgage loan repayments or the party’s overall expenses.

18.  The fact that, after 2006, Madam Lam had solely paid the mortgage loan repayment instalments does not alter the beneficial interest in the property in her favour.  By then the other co-owner was the trustees in bankruptcy of Mr Lau.  They plainly had no intention to make such alteration.  The fact that the mortgage debt was not repaid by the parties equally may be relevant in an equitable accounting between the co-owners if necessary, but it does not in this case lead to the conclusion that the proportions of beneficial ownership changed in Madam Lam’s favour.

19.  I conclude, therefore, that the trustees hold an equal beneficial interest in the property together with Madam Lam.

Hardship

20.  As for the approach to an application for an order for sale under the Partition Ordinance, in Wong Chun Kei Johnny v Poon Vai Ching [2007] 1 HKLRD 825 at §§16-19, Recorder Fok SC (as Fok PJ then was) set out the applicable principles summarised from the cases as follows:

“(a) A co-owner has a basic right to rid himself of the shackles of co-ownership and [if he has no other remedy,] ask for an order for partition or sale.

(b) When it is impracticable to make an order for partition, the court should make an order for sale unless it is persuaded (the burden being on the opposing co-owner(s)) that such an order will not be beneficial to all the co-owners [or that it will result in very great hardship to one co-owner].

(c) Whether an order for sale is beneficial to all the co-owners is not determined by the dissent of the opposing co-owners or the assertion by them that it is not beneficial.  It has to be determined by the court objectively.”

21.  What is meant by the phrase “such an order will not be beneficial to all the co-owners” in (b) above seems to me to be that the order will be beneficial to some only of the co-owners, not that the order will be beneficial to none of the co-owners.  Accordingly, an order for sale would not be refused unless all the co-owners would be benefitted by its refusal or, in other words, an order for sale would be detrimental to all the co-owners, or unless it will result in very great hardship to one co-owner.  See also Beautiglory Investment Ltd v Tang Moon Sum & others, HCMP 531/1989, 10 December 2003, at §32.

22.  The same approach was stated earlier in Fook Sun Enterprises Co Ltd v Cromwell Investment Co Ltd & Ors [1973-1976] HKC 335 at 337H-I, where Briggs CJ said:

“It was suggested that this was not a case for the court to make an order for sale under section 6 of the Ordinance: but that the proper course for the court to take was to make no order under section 2(c) of the Ordinance.

I do not agree. I agree with Mr. Litton’s interpretation of section 2(c) of the Ordinance. I think that a court would only make no order, neither an order for partition nor an order of sale, when the interests of all the parties would be better served by their continuing to remain co-owners, or where the facts show that to make such an order would result in very great hardship to one co-owner.”[1]

23.  On behalf of the trustees, Mr Justen Li, who gave much assistance to the court, referred to certain passages in the English authorities of Re Citro (A Bankrupt) [1991] Ch 142 and Re Bremner [1999] BPIR 185 which might be read as suggesting that the difficulties arising from the eviction of the bankrupt’s family from their home are ordinarily not to be regarded as sufficient reason to prevail over the creditors’ interests in seeing the family home sold and the proceeds of sale distributed.  In Re Cheung Chan Hong (a bankrupt) [2015] 2 HKLRD 1, however, Ng J declined to adopt the approach in Re Citro and held that there is no requirement for exceptional circumstances in order to resist an application for sale in the kind of cases under discussion.  Since then, in Re Liu Yi Fang, HCB 5613/2013, 30 June 2015, Anthony Chan J has, disagreeing with Re Cheung Chan Hong, held that Re Citro should be adopted as laying down the proper approach in Hong Kong to an application by a trustee in bankruptcy for an order for sale of a co-owned property.

24.  In the absence of argument it would not be appropriate for me to deal in any depth with this recent divergence of judicial opinion.  I propose to proceed on the basis of the authorities decided under the Partition Ordinance which establish the principle that the court will make an order for sale on the application of a co-owner unless it is satisfied that all the co-owners would be better served by the refusal of the order or that making an order would result in very great hardship to one co-owner.

25.  In the present case Madam Lam says that there will be hardship for her and her son if the property is sold.  To assess this contention it is necessary to examine the relevant personal circumstances.  Madam Lam is in her 30s, is healthy and has a salaried job.  After her separation with Mr Lau, Madam Lam now lives in the property with her son (born in 2005, now aged 9 or 10).  Her son is her only dependant.  The son is a normal healthy child though it appears he has to take medication for a mental condition. 

26.  Both Madam Lam’s place of work and her son’s primary school are in the same district.  As a single parent, naturally she would like to continue living in the same neighbourhood so as to save travelling time.  According to Madam Lam, she is now paying around $8,000 a month as repayment of the mortgage loans, and will not be able to rent an equivalent apartment in the same district with that amount of money.  Madam Lam also says that, because she had obtained the HKHA loan in 2003, she will no longer be eligible for any form of public housing benefit.  She submits that it would occasion great hardship to her and her son if the court ordered the property to be sold.

27.  On the other hand, as Mr Li submitted, the proceeds of sale that Madam Lam would receive if the property was sold have to be taken into account.  The property has a gross floor area of 521 sq ft and saleable area of 431 sq ft.  On the evidence, the open market value of the property was $3.6 million as at 7 December 2011 and around $5.7 million as at 31 December 2014. Property prices appear to have gone even higher since.  The outstanding amount of the mortgage loan was approximately $708,000 in March 2012, and is likely to have been reduced to below $600,000 by now.  On this evidence I accept Mr Li’s submission that it can be expected that Madam Lam would receive at least $2.4 million as her share of the net sale proceeds if the property was to be sold now.

28.  As Madam Lam is divorced from the bankrupt, I do not take into account the prospect of the bankrupt receiving a surplus from his share of the property after repaying in full the creditors in his two bankruptcies.  Nor do I take into account the prospect of Madam Lam claiming maintenance from the bankrupt in that event, since this would be speculative.

29.  Nevertheless, because of the increase in the value of the property over the years, a sale of the property now would yield a substantial amount of proceeds for Madam Lam alone.  It seems to me the funds would be sufficient to enable Madam Lam to find alternative accommodation in the same district, either as a down payment for purchasing another (perhaps much less desirable) property or to augment her current monthly outlay on housing expenses (around $8,000) in order to pay for the rental of another property. The outcome would of course be far from ideal from Madam Lam’s point of view inconvenience and difficulty to one co-owner is not generally enough to outweigh the interests of the other co-owner in obtaining a sale of the property.

30.  In these circumstances while I have every sympathy for Madam Lam and her son, I do not think she has sufficiently made out a case of very great hardship to oppose the application for an order for sale.  I must not lose sight of the fact that the property is, on my conclusion, owned as to one half by the bankrupt and that the bankrupt owes money to his creditors which needs to be repaid.  The bankrupt has made no contribution to his bankruptcy estate at all and it is practically certain that without an order for sale, the creditors will remain wholly unpaid.

31.  For the above reasons, I accede to the trustees’ application and make the following orders:

(1) a declaration that the applicants of the first part and Madam Lam of the second part hold the property as tenants in common in equal shares;

(2) an order that the property be sold pursuant to section 6 of the Partition Ordinance (Cap. 352);

(3) an order that the conduct of the sale be given to the applicants;

(4) an order that Madam Lam do join in the sale and conveyance of the property and do all things as may be necessary to procure the sale of the property with vacant possession;

(5) an order that Madam Lam and her son do within 70 days of this order deliver up vacant possession of the property to the applicants;

(6) there be liberty to apply including without limitation for directions on the terms and manner of the sale of the property in the absence of agreement between the applicants and Madam Lam; and

(7) an order nisi that the trustees’ costs of this application be paid out of the bankruptcy estate.