ROCK VAST INVESTMENTS LTD v. NATURARY H DEVELOPMENT LTD AND OTHERS

CACV 182/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 182 OF 2005

(ON APPEAL FROM HCA NO. 2251 OF 2002)

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J U D G M E N T

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Hon Tang JA (giving the judgment of the Court):

1.  The plaintiff was the registered owner of certain units in Won Hing Building, Nos. 74-78 Stanley Street, Central, Hong Kong ("the Stanley Street property").  At the time its shareholders, who were also its directors, were Lee Kwok Cheung ("Mr Lee"), his wife Wong Yim Kuen ("Madam Wong"), her sister Wong Yin Yu ("Madam Y Y Wong") and Cheng Kwong Pun ("Mr Cheng").  They are related by blood or marriage.  Mr Cheng is the brother of Madam Y Y Wong's late husband.  One Ho Mun Kei ("Mr Ho") was employed to collect the rents and carry out administrative tasks from time to time.

2.  The directors of the plaintiff having decided to sell the Stanley Street property, Mr Cheng, a real estate agent by profession, was given the primary task of finding a buyer.  On 4 February 2002, Mr Cheng signed a provisional agreement for sale and purchase on behalf of the plaintiff.  It is accepted that Mr Cheng was duly authorized by the plaintiff to do so.  The purchaser was the 1^st defendant.  The 1^st defendant was owned and controlled by Chen Xiaoqing, a mainland businessman.  By its terms the 1^st defendant agreed to pay an initial deposit of $0.5 million, $1.5 million as balance deposit on signing of the formal agreement on or before 8 February and the balance of $3 million on completion, namely 8 May 2002.  The Stanley Street property was sold subject to tenancies.

3.  At a meeting of the directors held on 4 February 2002, at which all the directors were present either in person or by a representative, the plaintiff resolved as follows:

"… After due consideration, it was unanimously resolved that :-

1. The proposed transaction(s) be approved.

2. Documents prepared by Messrs. Karbhari & Cham. Solicitors, embodying the terms of or for and incidental to the proposed transaction(s) be approved.

3. Those of the said documents requiring the seal of the Company be sealed with the Common Seal of the Company and signed by Mr Cheng Kwong Pun on behalf of the Company and with intent to bind the Company.

4. Those of the said documents not requiring the seal of the Company be signed by at least one director of the Company with intent to bind the Company.

THE SCHEDULE ABOVE REFERRED TO

NATURE OF THE TRANSACTION:	Assignment (in consideration of HK$5,000,000.00)
PARTIES TO THE TRANSACTION:	Rock Vast Investment Limited "the Vendor" and Naturary H Development Limited "the Purchaser"
PROPERTY AFFECTED	Offices Nos. 1, 2, 3, 4 and 5 on Second Floor
	Office No. 2A on Fifth Floor
	Offices 1, 2, 3, 4 and 5 on Sixth Floor
	Offices Nos. 1, 2, 3, 4 and 5 on Ninth Floor
	The Whole of the Main Roof
	Storerooms on 2nd, 5th, 6th and 9th Floor"

4.  The initial deposit of $0.5 million was paid to and received by the plaintiff.

5.  The plaintiff was represented by Messrs Karbhari & Cham ("K & C"), Solicitors.  The 1^st defendant was represented by C K Chan & Co ("CKC").

6.  A formal agreement dated 8 February 2002 was signed by Mr Cheng on behalf of the plaintiff.  There is no dispute that Mr Cheng had the authority of the plaintiff to do so.  However, it provided for vacant possession upon completion.  As the judge said:

"This may have been and probably was a mistake; nothing turns on it."

7.  But the cheque given in payment of the balance of deposit was dishonoured on presentation.

8.  Then followed the correspondence between the solicitors which the judge has summarized in para. 7 of his judgment as follows:

"CKC to K & C (11-2-02)	'…… Please be informed that we are instructed by our client that the further deposit for the sum of $1,500,000 has been paid by our client to your client direct on 9 February 2002. ……'
CKC to K & C (6-3-02)	'We refer to our letter dated 11 February 2002 and now send you herewith copy receipt for the sum of $1,500,000 being further deposit in respect of the above property for your record.'
Enclosed was a deposit slip of HSBC for $1.5m into an account called Yick Shun Co.  Yick Shun Co is the name of Mr Cheng's real estate agency.
CKC to K & C (3-5-02)	'…… we send you herewith our draft Assignment (in duplicate) ……'
K & C to CKC (6.5.02)	'We refer to your letter dated 3 May 2002 and return you herewith the approved draft Assignment …… without amendment.'
CKC to K & C (8.5.02)	'….. We are instructed by our client that the balance of purchase price of $3,000,000 has been paid by our client to your client direct. ….. We enclose ……. an Assignment duly executed by our client and witnessed by us.
(There followed the usual request for an undertaking to forward in 7 days the Assignment executed by the plaintiff and certified copy of the plaintiff's Board resolution authorizing execution).
K & C to CKC (13.5.02)	'We refer to your letter dated 8 May 2002 and now send you herewith the Assignment of the above property, duly executed by our client ……'"

9.  The plaintiff did not admit that the correspondence were genuine and contemporaneous documents.

10.  On 8 May 2002, the Stanley Street property were assigned by the plaintiff to the 1^st defendant.  The Assignment was sealed with the plaintiff's seal and signed by Mr Cheng purportedly on behalf of the plaintiff ("the Assignment").

11.  On 29 May 2002, the formal agreement between the plaintiff and the 1^st defendant was registered; on 7 June 2002 the Assignment was registered.

12.  On 23 May 2002 the 1^st defendant as vendor and the 2^nd defendant as purchaser entered into a provisional agreement for the sale and purchase of the Stanley Street property.  The price was $5 million of which a provisional deposit of $4,999,000 was payable forthwith with the balance on completion on 29 May 2002.  A formal agreement was required to be signed on 29 May 2002 as well.  We will refer to this transaction as "the 23 May 2002 transaction".

13.  It is not clear whether the sale by the 1^st defendant to the 2^nd defendant was to be subject to tenancies or not.  As the judge said:

"The clause dealing with the issue of possession was ambiguous because one or other of the alternatives had not been crossed out.  The clause read:-

'2.  At the time of the completion of the transaction, the Vendor shall deliver the said premises to the purchaser with vacant possession/tenancies …….'."  para. 9

14.  A formal agreement dated 29 May 2002 was signed between the 1^st and 2^nd defendants.

15.  This is what the judge said about the 2^nd defendant and the 23 May 2002 transaction:

"The 2^nd defendant is one of many companies owned and controlled by three brothers surnamed Siu, of whom the spokesman and a director is Siu Luen Fat (Mr Siu).  The family is in the business of developing property, specializing in the developing of small village houses in the New Territories.  The 3^rd to 10^th defendants are 8 of those companies similarly owned and controlled.  On the same day as it purportedly committed to the formal agreement, 29 May, the 2^nd defendant disposed of its interest in the Stanley Street property by selling it off in 8 subdivided parts to the 3^rd to 10 defendants, for varying amounts ranging between $638,000 and $1m, making a total consideration of $7,185,600.  These subsales were evidenced by 8 formal agreements signed by the respective parties, with completion time for the same day, 29 May, and with the whole of the purchase price due and payable on the day of completion.  On that same day were executed 8 assignments for the respective parts of the Stanley Street property which the 3^rd to 10^th defendants were now committed to buy signed by the 1^st defendant as vendor and in turn the 3^rd to 10 defendants as purchaser with the 2^nd defendant and confirmor.  These agreements were registered the following day 30 May, presupposing thus that completion took place on due date.  The assignments were registered on various dates in June.  Thus the present position is that D3 to D10 are together registered proprietors of all the parts making up the Stanley Street property with all the usual rights associated with that ownership.  The title deeds are in their constructive or actual possession." para. 11

16.  In fact, no money passed from the 2^nd defendant to the 1^st defendant at all.  There is another agreement dated 23 May 2002 ("the Lucas Agreement"), under which the 1^st defendant agreed to purchase, from one Lucas Development Limited ("Lucas"), a company owned and controlled by the Siu brothers, a village house under the Government's Small House Policy, at Lot No.1192C in Demarcation District No.129, Mong Tseng Wai, Yuen Long, New Territories ("the village house"), which was then in the course of construction, at the price of $5 million.  It was also agreed that on signing of the Lucas Agreement, the 1^st defendant should pay the sum of $4,999,000 as deposit and part payment.  According to the Lucas Agreement the balance of $1,000 shall be paid:

"… within ninety days from the date stated in the notice issued by the Vendor's solicitors to the Purchaser for attending to the procedure for the change of ownership of the above mentioned property."

……

(4)     Within ninety days after the Vendor's solicitors issue (notice) that the above mentioned property has had the letter of satisfaction issued by the District Lands Office or the relevant department and the premium paid, the Purchaser shall go to the Vendor's solicitors to attend to the signing of the Formal Agreement for Sale and Purchase and Assignment for completing the transaction with vacant possession."

17.  The village house was to be built under the New Territories Small House Policy for indigenous villagers.  The judge has dealt with the building of the village house in some detail.  We would not repeat it.  Suffice it to say, that it involved an indigenous villager lending his name (and making a false declaration in the process that he had never made and had no intention at present to make any private arrangements for his rights under the Small House Policy to be sold to other individuals or a developer) to obtain a licence to build a village house on a plot of land supposedly owned by him.  It followed that the Lucas Agreement could not be registered.  Nor was it stamped.

18.  There was a further agreement signed between the 1^st and 2^nd defendants and Lucas dated 23 May 2002 whereby it was agreed that the deposit of $4,999,000 payable by the 2^nd defendant to the 1^st defendant in respect of the Stanley Street property should be set off against the deposit payable by the 1^st defendant to Lucas in respect of the village house.

19.  On 29 May 2002, the Stanley Street property was assigned to the 3^rd to 10^th defendants by the 1^st defendant as vendor and the 2^nd defendant as confirmor.

20.  The plaintiff did not accept the genuineness of any of the transactions between the 1^st and 2^nd defendants.

21.  The plaintiff's case is that the Assignment to the 1^st defendant by the plaintiff was null and void because it was unauthorized.

22.  According to the evidence of Mr Lee, who was called on behalf of the plaintiff, it appeared that on 30 May 2002, Mr Cheng told him:

"… that the buyer could not find the money to complete.  Then he showed him various documents signed and unsigned which purported to vary the terms of the transaction in a manner entirely inconsistent with what the Board had authorized.  Included was a document which if signed (and it was not) would have been an agreement to cancel the transaction.  He also told him that he had signed under seal a total of 14 blank pieces of paper that he had left with the solicitors K & C, professing that the interest of the plaintiff might be compromised." para. 24 of the judgment.

23.  This eventually led to these proceedings.

24.  After trial, the judge made a declaration in favour of the plaintiff that it is entitled to a lien in equity on the Stanley Street property for the unpaid purchase price of $4,500,000 together with interest and that the plaintiff's lien should prevail over the interests of any or all the defendants in the Stanley Street property.

25.  The 2^nd to 10^th defendants appealed.  But at the hearing of the appeal, none of the defendants appeared.  Before this Court proceeded to hear the hearing, we caused inquiry to be made by one of our clerks on the telephone with Mr Siu Luen Fat, the appointed representative of the 2^nd to 10^th defendants, whether he would attend the hearing.  He claimed to be in Hong Kong and was seeing a doctor but refused to provide an answer whether he would attend the hearing by claiming that as he was not sure who he was talking to he would not talk with the clerk.  The hearing then proceeded.  On 16 June 2006, the Court received a certificate of sickness dated 14 June 2006 stating Mr Siu Luen Fat was suffering from pharyngitis and one day sick leave was recommended.

26.  The plaintiff has cross appealed by a respondent's notice, basically for a declaration that the Assignment was null and void and that it had rescinded the provisional agreement and the formal agreement.

27.  The judge rejected (as he was entitled to do) the plaintiff's argument that the Assignment was compiled from some blank sheets signed in blank by Mr Cheng, or that the correspondence set out in para. 8 above were not genuine and contemporaneous documents.

28.  However, in para. 36 of the judgment, the judge said:

"36.   There can be no argument that Cheng, given conduct of the sale, went off on a frolic of his own.  There is no reason given for the signing of 10 pieces of paper in blank, and the various signed and unsigned documents he showed to Mr Lee in late May were far removed from his brief to deal with a straightforward unconditional sale to the purchaser.  But none of these documents played a part in the transaction.  He undoubtedly withheld from the plaintiff the $1.5m paid to him and no doubt as well the fiction concerning the balance; certainly the plaintiff would have been entitled to call him to account.  But as far as D1 is concerned, it by all accounts complied with the terms laid down by the plaintiff's solicitors for completion and the document it received being the assignment has not been established to be other than a properly compiled document executed under seal by the plaintiff in accordance with its Articles and as authorized by its Board.  I do not find that the correspondence as between the solicitors was other than genuine and contemporaneous.  I am unable to find that the assignment was a fraud much less a forgery."

29.  We believe "the various signed and unsigned documents" have a significant impact on the validity of the Assignment.

30.  Mr Anthony Cheung, counsel for the plaintiff, has provided a helpful summary of these signed and unsigned documents in his skeleton submission, which we are happy to adopt:

(1)   Undertaking letter (dated 5.2.02) signed by Chen Xiaoqing of the 1^st defendant which provided that the plaintiff or one Susan Development Ltd. might buy back the Stanley Street property at $5.3m before 8.5.02.  Otherwise, the Stanley Street property would be transferred into the name of the 1^st defendant.

(2)   Undertaking letter (dated 8.2.02) signed by Mr Cheng which provided inter alia that:

(a)   Mr Cheng might in the name of Susan Development Ltd. buy back the Stanley Street property from the 1^st defendant at $5.3m within 3 months.

(b)   If Mr Cheng did not do so in time, the Stanley Street property would be transferred to the 1^st defendant.  The balance of $3m would be paid by Mr Cheng to the plaintiff and 1^st defendant would not have to pay the same.

(3)   Undertaking letter (dated 8.5.02) signed by the 1^st defendant and Mr Cheng which provided that:

(a)   the 1^st defendant allowed the plaintiff to buy back the Stanley Street property at $2.45m within 1 year, with overdue interest at $25,000.00 for every 7 days.

(b)   The Stanley Street property shall in the meantime be transferred to and held by 14 companies to be confirmed.

(4)  Cancellation Agreement (undated and unsigned) which recited that of the purchase price of $5m, $2m had been paid as deposit and provided that the sale and purchase was cancelled and the sum of $2m be returned to the 1^st defendant.

31.  It is clear from the evidence of the plaintiff's witnesses which the judge has accepted that Mr Cheng was only authorized to execute an assignment "in consideration of $5,000,000.00".  See minutes of 4 February 2002, para. 3 above.

32.  However, the signed documents referred to in para. 30 above show that the agreement(s) between the plaintiff and the 1^st defendant were entirely different.  More importantly, on the plaintiff's evidence, these agreement(s) were unauthorized.  As the judge said, Mr Cheng was on a frolic of his own.

33.  Although the 1^st defendant did not appear at the trial (nor in the appeal) a defence was filed on its behalf.  This is how the 1^st defendant pleaded its case:

"6.  Paragraph 2 is admitted save for the following:

(a)   the 1^st Defendant denies that it agreed to pay the Plaintiff for the Property at the price of HK$5 million in full personally. The 1^st Defendant avers that:-

(i)    at the time, the rest of the shareholders/directors of the Plaintiff agreed to sell their shareholdings in the Plaintiff to Mr. Cheng Kwong-pun at a price unknown to the 1st Defendant.

(ii)   in order to assist and facilitate their transactions (the precise arrangement and the reasons behind the arrangement were not known to the 1st Defendant), at the request of the board of directors of the Plaintiff and the 1st Defendant agreed:

(1)  that the Property be sold to the 1st Defendant at the price of $5 million;

(2)  that the further deposit ($1.5 million) be paid to Mr. Cheng Kwong-pun for an on behalf of the Plaintiff; and

(3)  that the balance of the purchase price ($3 million) was to be paid by Mr. Cheng Kwong-pun personally.

(iii)   by reason of the matters aforesaid, the Plaintiff is estopped from claiming the further deposit (i.e. $1.5 million) and/or the balance of the purchase price (i.e. $3 million) from the 1st Defendant.

(b)   the 1^st Defendant denies that he shall pay to the Plaintiff the balance of the purchase price in the sum of HK$3,000,000.00 as allegedly in paragraph 2(3). The 1st Defendant repeats paragraph 6(a)(ii)(2) above;

(c)   the 1^st Defendant denies that on completion the Property shall be delivered to the 1^st Defendant subject to existing tenancies, the 1^st Defendant avers that the Plaintiff shall deliver vacant possession of the Property to the 1^st Defendant on completion pursuant to Clause 7(a) of the Formal Agreement as alleged in paragraph 2(4); and

(d)   the 1^st Defendant denies that it has nominated Karbhari & Cham to act for it in the sale and purchase or at all as alleged in paragraph 2(5).  The 1^st Defendant avers that Karbhari & Cham was nominated by Cheng Kwong-pun for and on behalf of the Plaintiff."

34.  The defence was not substantiated at the trial and was contradicted by the evidence adduced on behalf of the plaintiff which the judge accepted.

35.  Ruben and Anor v Great Fingall Consolidated and Ors [1906] AC 439, is authority that the application of the seal to the Assignment in the circumstances of this case made the Assignment a forgery.  Lord Davey said at page 445:

"The seal on the certificate was, indeed, a genuine impression of the company's seal, but it was placed there without any authority, and (as concisely stated by Lord Lindley, in his work on Companies, 6th ed. page 246) 'A document of that kind, if there is any intent to defraud, is a forged instrument.'"

36.  Here, in signing and sealing the Assignment, Mr Cheng was on a frolic of its own.

37.  Having regard to the 1^st defendant's knowledge of Mr Cheng's lack of authority, no question of estoppel against the plaintiff can arise.  We should add that insofar as Chen Xiaoqing attempted to say in his witness statement that the plaintiff knew or approved the various agreements referred to in para. 30 above, that was contradicted by the plaintiff's witnesses.  In any event, Chen Xiaoqing never gave evidence at the trial.

38.  Because the judge was of the view that the Assignment by the plaintiff to the 1^st defendant was not void, he did not go on to consider the 2^nd defendant's position in that eventuality.

39.  Although the Assignment was unauthorized and void, the provisional agreement and the formal agreement were not void.  However, in the absence of any relevant estoppel, since the legal interest remained in the plaintiff, even if the 2^nd defendant was a bona fide purchaser for value without notice, the plaintiff being the holder of the legal interest would have priority.

40.  In any event, we do not believe the 2^nd defendant could be regarded as a bona fide purchaser for value without notice.  Constructive notice is sufficient.  The general principle is that:

"A purchaser will be treated as having constructive notice of all that a reasonably prudent purchaser, acting on skilled advice, would have discovered." Snell's Equity 13^th ed. 4-20.

41.  The sale by the 1^st defendant to the 2^nd defendant was highly unusual.  On the face of it, the 1^st defendant had paid $5 million for the Stanley Street property on 8 May 2002, but on 23 May 2002, the 1^st defendant agreed to sell the same property to the 2^nd defendant in return for the village house which according to the valuation of both the plaintiff and the 2^nd defendant, and accepted by the judge, had a value of only $2.9 million.  Moreover, the village house, was in the course of development.  As noted, the Lucas Agreement could not be registered.  Nor was it stamped.  It is difficult to understand on what rational basis the 1^st defendant could have agreed to the completion of the sale of the Stanley Street property when the 2^nd defendant (or Lucas) was not in a position to complete the sale of the village house to the 1^st defendant.  The 1^st defendant was left completely exposed.  Nor do we believe this can be explained away by saying that Chen Xiaoqing was a mainland businessman.  In such circumstances, we believe a reasonably prudent purchaser would have enquired into the matter.  One obvious enquiry would have been to call for evidence of payment by the 1^st defendant to the plaintiff.  If such an enquiry had been made, the 1^st defendant would not have been able to present to the 2^nd defendant satisfactory evidence of payment.  Further enquiry with the plaintiff would have revealed that the Assignment was unauthorized.  On the other hand, if the 1^st defendant were to disclose to the 2^nd defendant the various agreement(s) referred to in para. 30 above, the 2^nd defendant would have discovered that the Assignment executed by Mr Cheng in favour of the 1^st defendant was unauthorized by the plaintiff.

42.  So, in our view, the 2^nd defendant was not a bona fide purchaser without notice.

43.  The judge decided against the 2^nd defendant on the basis of an authority of this court in Chung Mui Teck and Others v Hang Tak Buddhist Hall Association Ltd and Another [2001] 2 HKLRD 471, where it was held that an agreement similar to that which was entered into between the 1^st defendant and Lucas was unenforceable and unlawful since it would involve villagers making false declarations under the New Territories' Small House Policy.  The judge was of the view that since the Lucas Agreement was unenforceable, the 2^nd defendant could not be said to be a purchaser for value.

44.  It is unnecessary for us to decide whether that is correct.

45.  The position of the plaintiff, accepted by the judge, is that apart from the initial deposit of $500,000, they have not received payment for the Stanley Street property.

46.  That being the case, we would make the following orders:

(1)     A declaration that the Assignment dated 8 May 2002 purportedly made by the plaintiff in favour of the 1^st defendant and registered at the Land Registry on 7 June 2002 by Memorial No. 8698609 is null and void.

(2)     An order against the 2^nd to 10^th defendants to deliver up the assignment dated 8 May 2002 to the plaintiff for cancellation.

(3)     A declaration that the Provisional Agreements dated 4 February 2002 and the Formal Agreement dated 8 February 2002 made between the plaintiff and the 1^st defendant have been rescinded.

(4)     A declaration that the plaintiff was entitled to and did forfeit the deposit of $500,000 paid by the 1^st defendant to the plaintiff.

(5)     The appeal of the 2^nd to 10^th defendants be dismissed.

(6)     Costs of the appeal and the plaintiff's respondent's notice be paid by the 2^nd to 10^th defendants to the plaintiff.  Such costs to be taxed if not agreed.

(7)     Liberty to apply.