LAM JOSEPH CHAK LUN AND ANOTHER v. CHAN YING HA

HCMP 664/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 664 OF 2013

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JUDGMENT

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1.  The plaintiffs are the purchasers of a property known as Flat D 12^th floor and Parking Space 52 of Waterloo Heights Garden, 3 Man Wan Road, Kowloon (hereinafter called “The Property”).

2.  The defendant is the vendor.

3.  By an Originating Summons dated 28 March 2013, the plaintiffs seek (inter alia) for declarations that:

(i) two requisitions in respect of the title to The Property have not been sufficiently answered by the defendant;

(ii) good title to The Property has not been proved and given;

and an order for the defendant to return the deposits paid by the plaintiff as well as other ancillary reliefs.

4.  By its Notice to the plaintiffs dated 31 May 2013, the defendant seeks for a declaration that the defendant has satisfactorily answered all the requisitions raised by the plaintiffs and has proved and given good title in respect of The Property as well as an order that the plaintiffs do complete the purchase of The Property within 21 days from the date of such declaration.

Background facts

5.  The plaintiffs as purchasers and the defendant as vendor entered into a Provisional Agreement for Sale and Purchase of The Property on 16 December 2012 at the purchase price of $6,390,000. An initial 5% deposit of $319,500 was paid upon signing the Provisional Agreement. On 11 January 2013 a further 5% deposit of a similar amount was paid.

6.  No formal sale and purchase agreement was agreed.

7.  On 31 December 2012 solicitors for the defendant sent to the solicitors for the plaintiffs the title deeds and documents relating to The Property.

8.  Before dealing with the requisitions raised, it would be necessary to know some of the history relating to the defendant’s predecessor in title, China Nam Hoi Development Limited (“China Nam Hoi”).

9.  China Nam Hoi originally tried to sell The Property to Mass Merry Development Limited (“Mass Merry”) for $1,900,000 and an agreement was entered into between them on 26 February 1999 (the “CNH Agreement”).

10.  Completion did not take place under the CNH Agreement, but neither was the CNH Agreement cancelled.

11.  Instead a supplemental agreement dated 31 March 2004 was entered into between China Nam Hoi and Li Chi Fai / Mass Merry (“Supplemental Agreement 1”) by which China Nam Hoi agreed to sell The Property to Li Chi Fai / Mass Merry at the same purchase price of $1,900,000. It was further stated in Supplemental Agreement 1 that China Nam Hoi owed Li Chi Fai $1,639,454.84 and that the purchase price would be partially settled by that sum owed to Li Chi Fai by China Nam Hoi. It was also stated therein that if completion of the transaction could not take place by 31 December 2004, unless there was a new agreement, China Nam Hoi agreed to refund the $1,639,454.84 to Li Chi Fai and cancel the CNH Agreement.

12.  Completion did not take place on 31 December 2004.

13.  Instead, a second supplemental agreement dated 1 February 2005 (“Supplemental Agreement 2”) was entered into between China Nam Hoi (as Party A), Mass Merry (as Party B) and Li Chi Fai (as Party C) whereby the parties agreed to cancel the CNH Agreement and China Nam Hoi agreed to sell The Property for $1,900,000 to Li Chi Fai or a person designated by him. No date of completion was specified in Supplemental Agreement 2.

14.  It would appear that the failures to complete the CNH Agreement and Supplemental Agreement 1 as well as Supplemental Agreement 2 occurred because of a charging order over The Property due to litigation.

15.  Ultimately, China Nam Hoi, Li Chi Fai and the defendant entered into a further supplemental agreement dated 15 December 2010 (“Supplemental Agreement 3”) which stated that pursuant to Supplemental Agreement 2, China Nam Hoi agreed to sell and the defendant, described as a nominee designated by Li Chi Fai, agreed to purchase The Property. The consideration for The Property remained at $1,900,000.

16.  By an assignment dated 15 December 2010, China Nam Hoi assigned The Property to the defendant.

17.  It should also be noted that at all material times the defendant was and is the wife of Li Chi Fai and that Li Chi Fai was the sole owner of Mass Merry.

18.  In the meantime, on 8 December 2010 Zhong Baoguo (“Zhong”), a director of China Nam Hoi, made a statutory declaration (the “Zhong Declaration”) attesting to the loss of various title documents relating to The Property (the “Lost Documents”) as set out in ‘Exhibit A’ annexed to the Zhong Declaration. On 17 December 2010, Leung Chun Kuen Noel (“Leung”), a partner of Messrs Cheung, Chan & Chung (“CCC”) also made a statutory declaration (the “Leung Declaration”) attesting to the loss of those same title documents relating to The Property.

19.  It would appear from the Zhong Declaration and the Leung Declaration that what had happened was that on 9 March 1999 Zhong had delivered the Lost Documents to CCC and on 6 May 1999, China Nam Hoi gave instructions to CCC to deliver the Lost Documents to Messrs Laurence Pang & Co, (“LPC”) the solicitors then acting for Mass Merry. Thereafter CCC received no further instructions from China Nam Hoi in respect of the Lost Documents. On 12 August 2009, the present solicitors of China Nam Hoi instructed CCC to return the Lost Documents to China Nam Hoi. Leung and his staff then discovered that LPC had ceased business and LPC could not be contacted. According to the Law Society upon enquiries made, no agent was appointed to take over LPC files. LPC could not be found. As far as Zhong was aware, China Nam Hoi had not pledged nor allowed any person to pledge by way of deposit or deposited the Lost Documents with any person as a security.

20.  Coming back to the requisitions, on 18 January 2013 a number of requisitions were raised by the plaintiffs’ solicitors by letter of same date. Two of those requisitions are as follows:

(a)     The Zhong Declaration and the Leung Declaration were not sufficient to account for the loss of the original title deeds in question since LPC was the last party keeping the title deeds, only a declaration by a representative from LPC having personal knowledge or by some intervening agent from the Law Society will be acceptable, short of which the originals will have to be provided; (“the Declaration of Loss Issue”) and

(b) In Supplemental Agreement 3 Li Chi Fai failed to:

(1) Nominate the vendor [defendant] to sign any agreement and / or any subsequent assignment;

(2) Account for whether the sum of $1,639,454.84 was paid by the vendor [defendant] or belonged to the vendor [defendant] (and therefore confirm that it was not paid by anyone else); or

(3) Relinquish his right in The Property.

As Li Chi Fai appeared to retain an interest in The Property, clarification was sought and / or a stamped nomination to confirm the above matters (“the Nomination Issue”).

Issues to be determined at the hearing

21.  At the hearing of this matter before me, Mr Lam, counsel for the plaintiffs very properly referred me to the recent decision of the Court of Final Appeal in the case of De Monsa Investment Limited v Whole Win Management Fund Limited (FACV 6 / 2012) the decision of which only came out on 26 July 2013 and which overturned the decision by the Court of Appeal in the same case.

22.  In particular, Mr. Lam referred me to paragraphs 112 and 113 of the judgment of Mr. Justice Litton NPJ where it was said:

“112. The Court of Appeal in this case (para 39) thought that there was a real risk of the purchaser's title being blemished by a prior encumbrance created by deposit of title deeds. Tang VP referred to Oliver v Hinton [1899] 2 Ch. 264, the headnote of which accurately summarizes the position in English law:

"In order that a purchaser for value, who has acquired the legal estate without notice of a prior equitable mortgage of the property, may be postponed to that mortgage, it is not necessary to shew that he has been guilty of fraud, or negligence amounting to fraud; it is sufficient that he has been guilty of negligence so gross as to render it unjust to deprive the prior mortgagee of his priority."

What the Court of Appeal appears to have overlooked (perhaps because the case was never cited by counsel) was this: A situation like that in Oliver v Hinton could not have arisen in Hong Kong. In that case the deposit of title deeds to secure the repayment of £400 was accompanied by a memorandum of the deposit, with an undertaking to execute a legal mortgage if asked to do so. In Hong Kong the memorandum would have been registrable (The properties in Oliver v Hinton were not located in counties which had a system of registering deeds and documents). And when, two years after the deposit of the title deeds, the owner executed a conveyance of the property to a purchaser, whose agent (a former solicitor's clerk) never asked to see the deeds, the equities in that case depended on whether the purchaser had acted with such with gross negligence that she had to be postponed to the equitable rights of the chargee. In Hong Kong, once the assignment to the purchaser is registered the purchaser takes priority over an unregistered chargee.

113. This position was entrenched a hundred years ago in the case of Kwok Siu Lau v Kan Yang Che [1913] HKLR 52. The purchaser of a property had his agreement for purchase registered with actual knowledge of the existence of a prior 5-year lease (unregistered) over part of the property. He completed the purchase and registered his assignment. By section 4 of the Land Registration Ordinance, 1844 - the equivalent of the present-day section 4 - "no notice ... either actual or constructive, of any prior unregistered deed ... shall affect the priority of any such instrument ... as is duly registered in pursuance of this Ordinance". Rees Davies CJ held, affirmed by the Full Court, that the purchaser took the property free of the 5-year lease. As Havilland de Sausmarez J, said in the Full Court (p 65) the Ordinance had, at a stroke, cut off the application of the equitable doctrine of notice to an registered deed. Assuming that a purchaser like the one in Oliver v Hintonhad, prior to completion, actual knowledge of the existence of an unregistered memorandum of deposit covering the property and went ahead nevertheless to complete the sale and then had his assignment registered, he would take the property free of the equitable mortgage.”

23.  Mr. Lam also referred me to paragraphs 118 to 120 of the same judgment by the same judge where it was said:

“118. So far, the risk discussed is that of a lender with an unregistered memorandum of deposit: A lender who does not wish his transaction made public, for one reason or another, by registering a memorandum of deposit, revealing its terms. What of the position of a loan by parol, without a scrap of paper evidencing the loan and its terms: A situation also covered by the passage in Emmet on Title cited in Yiu ping Fong (referred to in para 78 above)?

119. As Mr Mcdonnell QC, counsel for the Appellant said at the hearing (and not contradicted by Mr Edward Chan SC) there is simply not one instance in the reports going back to the earliest days in Hong Kong of equitable mortgagees by deposit of title deeds having defeated the title of purchasers.

120. It is difficult to imagine a situation where a person would lend a substantial sum of money with nothing more than an oral commitment and a deposit of title deeds, when he could have safeguarded his security by requiring a memorandum of deposit and having it registered. One is not dealing here simply with the transaction between the lender and the borrower, against whom there is a personal right of action to recover the loan. One is dealing with the lender's rights against a third party, the owner of the land. If it is security for the loan which the lender wants, why does he not secure it by having a written instrument and having that registered against the property?”

24.  Having referred me to the above passages, Mr Lam, again very properly conceded that the Declaration of Loss issue is no longer pursued by the plaintiffs and that the only issue which remained for determination by this court would be the Nomination Issue.

25.  In this judgment therefore, I would only deal with the Nomination Issue.

Plaintiffs’ case on the Nomination Issue

26.  The requisition by the plaintiffs as contained in paragraph 1 (d) of the letter dated 18 January 2013 from Messrs Ong & Chung (“OC”) to Messrs Edward Ko & Co (“EKC”) reads as follows:

“(d) In the 3^rd Agreement Mr Lee has failed (i) to nominate Ms Chan Choi Ha [the defendant], your client (“Ms Chan”) to sign the Agreement and / or the subsequent Assignment (ii) to account for the Sum [ie $1,639,454.84] was paid by Ms Chan or it is money belongs to Ms Chan and (iii) to relinquish all his rights in the Property and accordingly, Mr Lee seemingly retains interest in the Property. Please clarify and/or provide a stamped Nomination to the above effect.”

27.  In response to that requisition, the defendant was prepared to provide a Confirmation Letter from Li Chi Fai which reads:

“To whom it may concern

Re: Flat D on 12^th Floor & Parking Space No. 52 on Basement, Waterloo Heights Garden, No. 3 Man Wan Road, Kowloon (“the Property”)

Vendor: Chan Ying Ha

I, the undersigned, hereby confirm and acknowledge that (i) I have no interest in the Property, and (ii) I have no right or claim against any party inclusive of but not limit to my wife, Chan Ying Ha, in respect of the Property.

(Signed)

LI CHI FAI (Holder of Hong Kong Identity

Card No. P179500(0))”

28.  The complaints by the plaintiffs are that:

 (1) The defendant was not able to provide a stamped Nomination stating that Li Chi Fai had nominated the defendant to take up The Property under Supplemental Agreement 3, that Li Chi Fai had relinquished his interest in The Property, or explain the origins of the $1,639,454.84 which was originally paid to China Nam Hoi;

(2) Since the $1,639,454.84 was originally intended to be used to partially settle the purchase price under Supplemental Agreement 1, there is no explanation as to whether the money was paid by someone other than the defendant, which could give rise to a purchase-price resulting trust over The Property in favour of that person;

(3) The $1,639,454.84 could have been paid by someone else, who could be nominated by Li Chi Fai under Supplemental Agreement 1 to receive the Property;

(4) Clarification from the defendant was therefore sought to show that nobody else has an interest in The Property;

(5) Notably, EKC did not confirm that the $1,639,454.84 was returned to Li Chi Fai.

The stance of the defendant on the Nomination Issue

29.  Miss Ng, who appeared for the defendant submitted that the terms contained in the CNH Agreement, the Supplemental Agreement 1, Supplemental Agreement 2 and Supplemental Agreement 3 are clear in relation to the following:

(a) Supplemental Agreement 1 clearly stipulated Li Chi Fai to be the sole owner of Mass Merry which is underlined by the fact that Li Chi Fai had signed on behalf of Mass Merry in the CNH Agreement, Supplemental Agreement 1 and Supplemental Agreement 2;

(b) By Clause 2 of Supplemental Agreement 2, Mass Merry has declared that it had no interest in The Property;

(c) By Clause 3 of Supplemental Agreement 2, China Nam Hoi agreed to sell The Property to Li Chi Fai or a person of his nomination;

(d) Supplemental Agreement 3 expressly described the defendant as the nominee of Li Chi Fai and made express reference to Supplemental Agreement 2;

(e) Upon Supplemental Agreement 3 being entered into, Mass Merry had dropped out of the picture completely.

30.  Given the above, Ms Ng submitted that there can be no question that the defendant was validly nominated by Li Chi Fai as the purchaser of The Property.

31.  Ms Ng further submitted that since all three Supplemental Agreements were stamped as well as memoralized (so too the CNH Agreement) there cannot be any need for a further stamped nomination to be produced.

32.  As for the amount of $1,639,454.84 that was originally stated in Supplemental Agreement 1 to be an amount owed by China Nam Hoi to Li Chi Fai but if completion could not take place by 31 December 2004, China Nam Hoi agreed to repay that amount to Li Chi Fai and cancel the CNH Agreement.

33.  By Clause 1 of Supplemental Agreement 2, the CNH Agreement was cancelled.

34.  There was no provision in any of the Supplemental Agreements for China Nam Hoi to pay that amount to any other third party. Accordingly there can be no resulting trust created by way of a third party applying that amount towards the purchase price of The Property.

35.  By executing Supplemental Agreement 3, Li Chi Fai cannot have retained any interest in The Property. But even if Li Chi Fai had provided some consideration for the purchase of The Property, the fact that the defendant is the wife of Li Chi Fai would give rise to a presumption of advancement.

36.  Ultimately, Li Chi Fai has signed a written confirmation to the effect that (i) he has no interest in The Property, (ii) he has no right or claim against any party inclusive of but not limited to his wife, the defendant, in respect of The Property.

37.  Li Chi Fai has also made an affirmation in these proceedings to the effect that he did not retain any interest in The Property.

38.  In the circumstances, Li Chi Fai must be estopped from any claim to the contrary.

39.  Ms Ng sums up by saying that given the above, the defendant has satisfactorily answered the plaintiffs’ requisition on the Nomination Issue before the extended completion date of 1 March 2013 and that this application should be determined in favour of the defendant.

Decision

40.  The first complaint by the plaintiffs is that the defendant has failed to provide a stamped Nomination to the effect that Li Chi Fai had nominated the defendant to take up The Property under Supplemental Agreement 3.

41.  In this respect, firstly, Supplemental Agreement 3 expressly provided for the defendant, stated as Party C therein, to be the “Nominee designated by Party B”, Party B being Li Chi Fai.

42.  Secondly, clause 1 of Supplemental Agreement 3 made it very clear that China Nam Hoi (as Party A therein) was selling The Property to the defendant being the Nominee designated by Li Chi Fai.

43.  Thirdly, Supplemental Agreement 3 made express reference in its preamble to Supplemental Agreement 2 so that both agreements need to be read in conjunction with each other.

44.  Therefore when Supplemental Agreement 3 is read as a whole and together with Supplemental Agreement 2, there can be no question that Li Chi Fai had nominated the defendant to be the purchaser of and to take up The Property under Supplemental Agreement 3.

45.  There can therefore be no proper basis for this first complaint by the plaintiffs.

46.  The second complaint by the plaintiffs relate to stamping.

47.  If I understand correctly what has been submitted by the parties, the plaintiffs require the Confirmation Letter from Li Chi Fai to be stamped.

48.  In this respect it has to be noted that the CNH Agreement and all the three Supplemental Agreements have all been duly and properly stamped.

49.  Section 4 of the Stamp Duty Ordinance, Cap 117, provides that every instrument specified in the First Schedule thereof shall be chargeable with stamp duty.

50.  The Confirmation Letter from Li Chi Fai is not an instrument specified in the First Schedule of that Ordinance such that it is chargeable with stamp duty.

51.  There can therefore be no legal basis for the plaintiffs to require the Confirmation Letter from Li Chi Fai to be stamped.

52.  If the plaintiffs, due to an abundance or excess of caution, would still wish for the Confirmation Letter from Li Chi Fai to be stamped, then the plaintiffs will have to bear the stamp duty charges themselves, and not the defendant.

53.  I turn now to deal with the plaintiffs’ complaint in respect of the sum of $1,639,454.84. That complaint is twofolds:

(a) There is nothing to show that that sum of money has been repaid to Li Chi Fai by China Nam Hoi;

(b) There is no explanation show whether that money was paid by someone other than the defendant (i.e. the Vendor) which could then give rise to the possibility of a purchase-price resulting trust over The Property in favour of that other person.

54.  In so far as the first point is concerned, it was stated in Supplemental Agreement 1 that that sum of money was owed at that time by China Nam Hoi to Li Chi Fai and would be used to partly settle the consideration for the sale of The Property by China Nam Hoi to Li Chi Fai / Mass Merry. However, it was also stated therein that if completion could not be completed by 31 December 2004, China Nam Hoi agreed to refund that sum to Li Chi Fai and cancel the CNH Agreement or enter into a new agreement between the parties.

55.  Completion not having taken place on 31 December 2004, Supplemental Agreement 2 was in fact entered into between China Nam Hoi, Mass Merry and Li Chi Fai on 1 February 2005. Moreover, Supplemental Agreement 2 expressly cancelled the CNH Agreement.

56.  Given the above, it would follow that China Nam Hoi must have refunded that sum of $1,639,454.84 to Li Chi Fai as it had agreed to do so under Supplemental Agreement 1 once completion did not take place on 31 December 2004.

57.  No further mention was made of that amount of $1,639,454.84 or any other amount being used as partial consideration of the purchase price of The Property in Supplemental Agreement 2 or Supplemental Agreement 3.

58.  By his Confirmation Letter, Li Chi Fai has made it absolutely clear, if there can be any doubt beforehand, that he has no further interest in The Property.

59.  Therefore there can be no question of any resulting trust in favour of Li Chi Fai arising in respect of The Property without any need to rely on the presumption of advancement point raised by Ms. Ng in argument.

60.  The second point raised by the plaintiffs is, in my view, wholly fanciful.  There is not the least evidential basis to suggest that any other third party could have been involved with this sum of $1,639,454.84 and therefore no explanation can be called for to explain that aspect.  Without any evidential basis, there is absolutely no reason why the defendant has to explain away why a resulting trust would not arise in favour of a third party.

Conclusion

61.  For the above reasons, I have no hesitation in coming to the conclusion that the defendant has properly and fully answered all the requisitions raised by the plaintiffs satisfactorily and has shown and given a good title in respect of The Property. There can be no real risk of any defect to the title in respect of The Property.

62.  Accordingly there will be a declaration by this court to that effect as prayed for by the defendant in paragraph 1 of the defendant’s Notice to the 1^st and 2^nd Plaintiffs.

63.  There will further be an order that the 1^st and 2^nd plaintiffs do complete the purchase of The Property within 21 days from the date of the declaration by this court.

Costs

64.  As agreed by the parties, there will be no order as to costs of this action and this application.