LAWIN (H.K.) LTD v. NG YAU FONG YVONNE

HCA 640/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 640 OF 2011

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BETWEEN

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D E C I S I O N

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Background

1.  This action started as a simple claim made by the plaintiff, Lawin (HK) Ltd (“Company”), against the defendant, Madam Ng (“Ng”), for vacant possession of the ground floor and first floor of the property known as section B of Lot No 154 in Demarcation District No 19 in the New Territories (“Property”).  The Company claims that it is the registered owner of the Property, under an assignment dated 30 August 2007 (“Assignment”) from the previous owner, Chan Cheuk Wa (“Chan”), and that Ng was in wrongful possession of the ground and first floors of a building constructed on the Property.

2.  On 9 June 2011, Ng filed a defence, in which she pleads that the Company was not the legal owner of the Property, but had acquired the Property under a sham transaction to defeat the beneficial interests of bona fide purchasers of the Property, including herself.  Ng further claims that the Company had not paid any purchase price for the Property, and that the purported assignment of the Property to the Company is illegal and contrary to public policy and should not be recognized by the court.  Alternatively, Ng claims that the Company is not a bona fide purchaser for value and takes any legal title of the Property subject to Ng’s interests in the Property.

3.  Ng refers in the defence to a Joint Development Agreement 合作開發香港區域丁屋協議書 (“Development Agreement”) made on 29 October 2004 between Best Star Holdings Ltd. (“Best Star”) acting through one Guo Qigui (“Guo”) on the first part, one Hung Heung Keng (“Hung”) on the second part, and CGT International Ltd. (“CGT”) on the third part, whereby the parties agreed jointly to develop small village houses (or ding houses).  Under the Development Agreement, the parties had respective duties and rights, and envisaged the purchase of small houses in the name of Best Star, the raising of capital for the construction of small houses for sale, and the eventual distribution of the profits under the joint development amongst the parties to the Development Agreement (“Developers”).  Under the Development Agreement, Best Star was entitled to 60% of the net profits, Hung was entitled to 30% and CGT was entitled to 10% respectively of the net profits.

4.  Ng claims that it was pursuant to the Development Agreement that Lot No 154 (“Lot 154”) was purchased by Best Star.  Lot 154 had been further subdivided into various sections including the Property, and 5 small houses were built on Lot 154.  It is claimed that between February and August 2007, Hung, acting on behalf of the Developers under the Development Agreement, entered into provisional agreements with various purchasers (“Hung Purchasers”) for sale of 4 houses constructed on Lot 154.  One of the Hung Purchasers cancelled the provisional agreement, and in its place, Ng made a provisional agreement with Hung on 7 January 2009 (“Provisional Agreement”) for the purchase of the ground and first floors of the small house constructed on the Property. It is Ng’s case that she paid $2,000,000 to Hung under the Provisional Agreement, with a balance of $1,000,000 to be payable upon completion of the sale and purchase which has not yet taken place.

5.  It is claimed in the defence that on 30 August 2007 and 5 September 2007, Guo utilized powers of attorney procured from owners of the sub‑divided Lot 154 to execute assignments of the sub‑divided lots and small houses constructed thereon to the Company, which is said to be associated with Best Star.  These included the Assignment of the ground and first floors of the small house constructed on the Property.

6.  Ng claims that the Company did not in fact pay any consideration for the transfers of 30 August and 5 September 2007, which were devised by Guo and the Company to defeat the beneficial interests of the Developers, including Hung, under the Development Agreement, and the beneficial interests of the Hung Purchasers, including Ng.

7.  Ng also claims (in paragraph 5 of the defence) that Guo acted in breach of his fiduciary duties owed to the Developers, including Hung, in using the power of attorney without the knowledge and consent of the Developers to transfer the Property to the Company.  It is further claimed that the Company had knowledge of Guo’s breach of fiduciary duty and had dishonestly assisted Guo’s breach, such that it holds the Property as constructive trustee for the Developers, and subject to the beneficial interests of the Developers.

8.  Ng counterclaims for a declaration that the Assignment of the Property to the Company was void and of no effect, or alternatively, for a declaration that the Property is held on trust by the Company for Ng.

9.  The Company does not dispute the existence of the Development Agreement. In its Reply, the Company denies that Hung had the authority to sell the Property or Lot 154, or that he had entered into the Provisional Agreement on behalf of the Developers under the Development Agreement.  It is claimed that Hung had pocketed the proceeds of sale of the properties he had sold to the Hung Purchasers.

The subject applications

10.  On 22 July 2011, the Company issued a summons (“Summons”) to seek judgment under Order 14 for vacant possession of the ground and first floors of the Property to be delivered up by Ng, and for damages to be assessed.  By the same Summons, the Company seeks judgment to be entered and determination to be made under Order 14A of the issues of law identified in the Schedule to the Summons, namely:

(1)   whether on a true and proper construction of the Development Agreement, it empowered Hung to enter into the Provisional Agreement with Ng for selling the Property to Ng at $3 million and to collect the sum of $2 million from Ng as part payment thereof on behalf of Best Star and/or the Developers;

(2)   whether the Provisional Agreement which came into existence after the acquisition of the Property together with the building erected thereon by the Company and which has remained unregistered is null and void as against the Company; and

(3)   whether the Company is the beneficial owner of the Property together with the building erected thereon.

11.  The partiesdo not dispute that the Assignment was registered at the Land Office, but not the Provisional Agreement, nor any other document evidencing the agreement made between Hung and Ng for sale and purchase of the ground and first floors of the small house erected on the Property.

The Order 14 application: any triable issue or reason for trial?

12.  The principles applicable to determination of an application for summary judgment under Order 14 are not in dispute.  Ng has filed a defence and has further filed an affirmation to elaborate on the matters raised in the Defence.  She relies essentially on her claim that the Assignment to the Company was a sham, being a device to defeat the beneficial interests of the Developers including Hung under the Development Agreement and of the Hung Purchasers, was illegal, deceitful, and did not confer any interest in the Property on the Company.

13.  In the background of the dispute between the Company and Ng, there are disputes and proceedings between Hung and Best Star and/or Guo, and between the rest of the Hung Purchasers and the Company and Guo.  There is also a dispute between the Company, Guo and Chan, who assigned the Property to the Company.  The evidence of Hung as to his role in the Development Agreement and the transactions entered into in relation to Lot 154 and its development has been exhibited to Ng’s affirmation. The disputes focus on issues as to whether Hung and Guo respectively had the authority of the Developers to sell the properties comprising Lot 154, whether the purchase price for the assignment of Lot 154 to the Company had been paid, and whether there had been a genuine or enforceable sale of the properties comprising Lot 154 to the Company.

14.  Mr Chong for the Company argues that the factual disputes between parties other than the Company and Ng are not relevant to this action.  It is also argued on behalf of the Company that if there should be any claim of the Assignment being void or voidable, or any claim of Guo being in breach of fiduciary duty, such claims should be made by Best Star, which is not a party to these proceedings, and not by Ng who has no locus to make these claims.

15.  However, apart from counsel raising the argument that transfers of properties between associated companies are common in the commercial world, the Company has not produced any evidence of its payment of the price under the Assignment of the Property, or of any consideration to support the Assignment, in answer to the claim made that the Assignment was a sham.

16.  It can hardly be said that the Company is not aware of the factual disputes involving Best Star.  In the affirmation of Miss Leung (who was the solicitor acting for the Company, and not an officer of the Company) which was filed in support of the Summons, assertions were made not only on behalf of the Company, but also on behalf of Best Star, concerning matters affecting and relating to Best Star.  Examples are assertions relating to Best Star's acquisition of Lot 154 on 18 August 2005 under an agreement made with the “beneficial owner" of Lot 154, Cheung Wai On (“Cheung”), for the acquisition of small houses and rights in small houses “認購丁地連丁權協議書” (“Cheung Agreement”).  Best Star and the Company have common shareholders and directors, and share the same registered office address.  Guo, a shareholder and director of Best Star, is also the general manager of the Company.

17.  I would highlight at this stage that Miss Leung did not, in her affirmation, verify the facts on which the Company's claim is based, as required under Order 14 rule 2(1). On this ground alone, the application for Order14 judgment can be dismissed (paragraph 14/2/5, Hong Kong Civil Procedure 2012). Apart from that, the practice of a solicitor (instead of the party itself) making affirmations in support of an Order 14 application has never been encouraged by the court (see paragraph 14/2/5, Hong Kong Civil Procedure 2012).

18.  There are many unexplained features in this case, arising from factual matters which have been raised by either the Company or Ng in their affirmations but which neither has condescended to particularise or explain.

19.  Although the Company pleads in paragraph 2 of its Statement of Claim that it acquired the Property from Chan by the Assignment dated 30 August 2007, Miss Leung states in her affirmation that Best Star had acquired Lot 154 on 18 August 2005 from Cheung under the Cheung Agreement. The Cheung Agreement includes the Property. According to the land search records exhibited to Miss Leung's affirmation, Cheung was the registered proprietor of the Property in 2000, and Chan was the registered proprietor since August 2002. The deed for the subdivision of Lot 154 was made by Cheung on 6 June 2002. Miss Leung simply states that the Cheung Agreement was made for Best Star's acquisition of Lot 154 from the “beneficial owner”, without explaining such beneficial ownership and the relationship between Cheung as the “beneficial owner” and Chan, the registered owner of the Property as at the date of the Cheung Agreement.  Nor does the Reply filed for the Company shed light on Cheung's beneficial interest in the Property or Lot 154 as at the date of the Cheung Agreement.  It is only claimed in the Reply that the Company acquired the beneficial interest in the Property from Best Star, and the legal interest in the Property from Chan.

20.  The Cheung Agreement made on 18 August 2005 provides for the sale to Best Star of the small houses and small house rights of Lot 154 including the Property (丁屋連丁連地權).  According to the land search records, a Building Licence was issued on 23 September 2005 and registered in respect of the Property.  According to the evidence filed, construction of the small houses on Lot 154 commenced in about April 2006, the Certificate of Compliance was issued by the Government in March 2007, and a Consent Letter from the District Lands Office was issued on the same day.  These documents show that the Property clearly involves indigenous villagers’ rights to small houses.  They also show that prior to the grant of the Building Licence and the issue of the Certificate of Compliance, there had been dealings in the beneficial interests in the Property and the rights to build and sell small houses on the Property and on Lot 154.  It is not clear who the indigenous villager was who made the application for the Building Licence, but it can be properly inferred that neither Best Star nor the Company, with which Best Star is associated, is entitled to the concessionary terms and privileges granted under the government's Small House Policy. On the Company's own evidence, Chan did not have the beneficial interest in the Property.

21.  According to the Statement of Claim filed on 5 October 2007 in HCA 2103 of 2007, which was instituted by Chan (the registered owner of the Property since August 2002, and from whom the Company took the Assignment) as plaintiff against Guo and the Company as defendants, the Property was purportedly sold to the Company by Guo acting under a power of attorney granted by Chan to Guo at the price of $4 million. Chan claims in those proceedings that the price was never received by him from either the Company or from Guo.

22.  The transactions disclosed in the evidence filed in these proceedings bear all the hallmark features of schemes entered into between developers and indigenous villagers, whereby indigenous villagers are procured and assigned sections of lots of land, for applications to be made to the government for concessionary rights to build small houses, which are in fact sold to parties not otherwise entitled to the concessionary terms of the building licences granted by the government. The Small House Policy is succinctly summarized in the judgment of Le Pichon JA in Chung Mui Teck & others v Hang Tak Buddhist Hall Association Ltd and another [2001] 2 HKLRD 471 (at p478):

"An indigenous villager who holds the land as mere nominee would not qualify given the purpose of the Small House Policy which is ‘to allow an indigenous villager to apply for permission to erect for himself during his lifetime a small house within his own village’ … It is a once in a life time grant for the villager and the small house is intended for that villager's own habitation. It is claimed that the benefits that accrue from a grant under the Small House Policy such as a free building licence, and the special privileges are intended to benefit the villager personally and not anyone else."

23.  The standard terms of the building licence issued by the government expressly provide that the licensee, having obtained the licence on concessionary terms under the Small House Policy of the government for indigenous villagers, shall not assign, partition, mortgage, part with possession of or otherwise dispose of the lot or any part thereof or any interest or undivided shares therein, or enter into an agreement so to do. It is an integral part of the policy that the building licence will only be granted to an applicant who is the true owner of the lot, being the beneficial and not just the legal owner of the land, and an indigenous villager.

24.  In view of the decisions in Chung Mui Teck and in Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866 and Tiu Sum Fat & others v Shun Hing Development Ltd & another [2010] 1 HKLRD 553, the unexplained features of this case raise questions as to whether the performance of the Cheung Agreement and/or the Development Agreement is tainted with illegality, by virtue of their necessarily entailing the making of a misrepresentation, or the continuation of a misrepresentation, to the government, that the application for the Building Licence for the Property and Lot 154 was made by an indigenous villager who was the legal as well as the beneficial owner of the Property and Lot 154, and hence unenforceable on grounds of public policy.

25.  It may be that the Cheung Agreement and the Development Agreement are not in fact tainted by any form of misrepresentation to the government. It would have been a simple matter for the Company to explain, in the affirmation to support its application for judgment if not in the Statement of Claim, that it had acquired the Property from an indigenous villager after the grant of the Certificate of Compliance and the payment of premium to the government to remove the restriction on alienation, and that when the application was made by the indigenous villager for the Building Licence, he was the legal and beneficial owner of the interests in the Property.

26.  If the Company claims that it is entitled summarily to judgment and to an order from the court to enforce its rights in the Property, it behoves the Company to properly explain all the relevant facts and circumstances of the agreements made and the transactions entered into, so that the court can be satisfied that it is not hoodwinked into granting an order to enforce rights under a contract which may, should the full facts be disclosed, be unenforceable.  Not only has the Company failed to do this in the affirmation which was filed in support of the Summons after the defence was filed, but it has shunned from having a director make the affirmation and verify the facts on which its claim is based.  This is not acceptable to the court.

27.  It is also important that legal advisers, whose paramount duty is owed to the court and which duty is higher than that owed to the client whom they represent, should assist the court in its due administration of justice in our adversarial system by ensuring that all relevant facts are presented to the court.

28.  It may be that at trial, when all the relevant evidence has been produced before the court and witnesses have been cross‑examined, the court may find that there is no question of the Company seeking to maintain, continue or otherwise rely on an arrangement or act which is illegal, contrary to public policy or otherwise unenforceable.  At this stage, however, on the evidence adduced by the parties, I find that there are unexplained features of both the claim and the defence which are disturbing because the allegations of sham transactions are unanswered, and because there are features which suggest illegal or questionable conduct. Where such circumstances exist, the court should not make tentative assessments of the respective chances of success of the parties or the relative strengths of their good or bad faith, but should, in the normal course of events, grant unconditional leave to defend (paragraph 14/4/9 Hong Kong Civil Procedure 2012, citing Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262).

29.  In any event, having considered the evidence filed on behalf of Ng, I find that her assertions of Hung's role and of the transactions made under the Development Agreement are believable.  If the claims made by Ng and Hung are to be believed, there is at least an arguable defence that as the Company did not pay the price for the Property, and should have knowledge of Best Star’s or Guo’s breach of fiduciary duties under the Development Agreement, the Company is not a bona fide purchaser of the Property, and the Assignment may be set aside by Ng as a party prejudiced, under s 60 of the Conveyancing and Property Ordinance (“Ordinance”). Mr Chong argued that it is not open to Ng to rely on the Ordinance when such a defence has not been pleaded.  I do not agree, as Ng has pleaded in her defence the fact of the purchase price not having been paid by the Company to Chan under the Assignment (paragraph 4 (5) of the defence), the fact of the Assignment being a sham and a conspiracy by the Company and Guo to defeat the beneficial interests of Hung under the Development Agreement and Ng as a bona fide purchaser from Hung acting on behalf of the Developers (paragraph 4 (6) of the defence), the fact of the Company having knowledge of or dishonestly assisting Guo’s breach of fiduciary duties owed to Hung under the Development Agreement (paragraph 5 of the defence), and the fact of the plaintiff not being a bona fide purchaser for value (paragraph 6 of the defence).

30.  Ng and Hung claim that the Property was sold to Ng by Hung acting on behalf of Best Star. Ng also argues that the Property and Lot 154 were acquired by Best Star or Guo on its behalf as trust property under the Development Agreement, and that the Property was assigned to the Company with its knowledge of Best Star’s/Guo’s breach of trust.  Whether or not Ng will be able to substantiate these and her other claims, and establish that there was a transfer of trust property, that the Company had knowledge of breach of trust, that there was an actual intent to defraud creditors of Best Star, and that she was a person thereby prejudiced within the meaning of s 60 of the Ordinance, are all matters suitable for determination only at trial. Counsel for Ng has highlighted in his arguments that as a provision operating against fraud, s 60 of the Ordinance should be given a wide construction (Trade Power (Holdings) (In Liq) v Trade Power (Hong Kong) Ltd and ors [2010] 1 HKLRD 674), and I agree that it suffices at this stage for Ng to show that there is a triable issue.

The Order 14A application: are the questions of law suitable for determination without a trial?

31.  Under Order 14A, the court may determine any question of law or construction of any document arising in any cause or matter where it appears that such question is suitable for determination without a full trial of the action.  The three‑step approach to deal with an application under Order 14A is clearly set out in the case of Rockwin Enterprises Ltd v Shui Yee Ltd HCA 19629/1999, unreported 29 August 2001.  It has been emphasized that even if the determination of a question of law or construction would finally determine a claim or issue, there is a residual discretion vested in the court.

32.  For the reasons set out in the earlier parts of this decision, that there is a reason for the case to proceed to trial for determination of the legality of the transactions entered into by the various parties, it is clearly unsuitable to determine the questions of law or construction identified by the Company without a trial.

33.  In any event, I am not satisfied that the question of construction set out in item (1) of the Schedule to the Summons will finally determine either the cause or matter, or a claim or issue in the cause.  Even if, on the proper construction of the Development Agreement, Hung was not empowered to enter into the Provisional Agreement with Ng, it is Hung's case that he was authorized to sell the Property under an oral agreement made between him, Best Star and CGT in February 2007.  Hung also claims that Guo, acting on behalf of Best Star, had knowledge of and had consented to the provisional agreements made with the Hung Purchasers.  These are all denied by Guo and Best Star, but they are key matters for determination at trial, and deciding the question of law identified now will not result in a great saving of time or costs, when the issue of Hung's authority under the oral agreement still has to be resolved at trial.

34.  Further, construction of any contract has to be by reference to the factual matrix of the agreement.  On the facts of this case, it is not only undesirable but inappropriate to construe the Development Agreement without knowledge of or ignoring the background facts known to the parties at the time when the Development Agreement was made.

35.  Determination of the questions identified in items (2) and (3) of the Schedule is intricately linked with the issue of whether the Company had paid the price under or furnished any consideration for the Assignment of the Property, and whether it was a bona fide purchaser for value without notice of any prior equities, which are matters to be resolved at trial.  This is a case in which it would be inappropriate to adopt the Order 14A procedure and determine questions of legal principle without knowing the full facts.

Conclusion

36.  For all the above reasons, I dismiss the Summons and order that the costs of the Summons are to be paid by the Company to Ng, with certificate for counsel.

37.  It would be good practice, in cases where proceedings are brought to enforce an agreement for the sale and purchase of small village houses, which agreement was made within the period of restriction on alienation of such houses, for the statement of claim or relevant pleading to include a plea that there had been no breach of the provisions of either the relevant building licence or the declaration in support of the application for the relevant building licence.  The court can then make the appropriate orders without unnecessary concerns as to the enforceability of the agreement.