YIM TIN FOOK AND ANOTHER v. YU CHOR LAI AND OTHERS

HCA 2613/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2613 OF 2006

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(By Original Action)

AND BETWEEN

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D E C I S I O N

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INTRODUCTION

1. A Master struck out the counterclaim of the 2^nd defendant and plaintiff by counterclaim (“D2/P”) against D8 by counterclaim, on the ground that the counterclaim disclosed no reasonable cause of action.  In this appeal, D2/P contends that his counterclaim should not be struck out as it is curable by yet a new set of amendment.

BACKGROUND

2. Madam Tang Yin (“Madam Tang”) held a government lease of the Remaining Portion of Section A of Lot No. 1180 in DD 130 (“the land”), which was due to expire on 27 June 1997.  By a written lease, she leased the land to D2/P at a rent $1,500 per month for 15 years from 15 November 1983, with provisions for rent revision at 3-year intervals after the 15-year term (“the lease”).  The lease was never registered.

3. It was accepted, at least by the plaintiff and D8, that by operation of law, the lease was an assignment, although Madam Tang and D2/P intended it to operate as a sub-lease. (See paragraph 20 below.)

4. By a deed of gift dated 25 January 1986, Madam Tang purported to assign the land to herself and D8 as joint tenants.

5. Madam Tang died on 5 January 1990.  By operation of law, D8 became the sole owner of whatever rights there remained over the land.

6. By an agreement for sale and purchase dated 1 February 1997 (“the SPA"), D8 purported to sell the land to D7 by counterclaim (“WS Realty”), subject to and with the benefit of the lease.

7. By an assignment dated 11 April 1997 (“the 1997 assignment”), D8 purported to assign the land to WS Realty, who then sub-divided the land and assigned it to, amongst others, the plaintiffs. 

8. The plaintiffs sought possession of the land against D2/P.  D2/P, in turn, counterclaimed against defendants by counterclaim for a declaration that D2/P was the owner of the land, and various other reliefs.

9. Despite an attempt to amend his pleading, D2/P’s defence and counterclaim were struck out.  This is D2/P’s appeal against that order.

10. Five days before hearing of this appeal, D2/P took out a summons for leave to re-re-amend his defence and counterclaim as per a draft attached to the summons (“the purple version”). The material parts of the purple version affecting D8 pleaded that:

(i)     By reason of the lease operating as an assignment, the title and rights of Madam Tang in Lot No 1180 had been assigned to D2/P and so none of the defendants by counterclaim had any title or proprietary interest in that Lot (§58A of purple version).

(ii)    The 1997 assignment provided that D8 “as beneficial owner” assigned the land to WS Realty.  Since D8 admitted that the lease operated as an assignment, D8 was only a trustee of D2/P in respect of the legal estate of Lot No. 1180 and not the beneficial owner of it. D8’s assignment was in breach of trust to D2/P.  (§ 64A to 64E of the purple version).

(iii)    Even if D2/P has no claim against D8, the disputes among the plaintiff and the remaining defendants by counterclaim raise issues on the effect and validity of the SPA and/or the 1997 assignment. D8 is a necessary party to the counterclaim (§64F of the purple version).

NEW EVIDENCE ON APPEAL

11. Mr David Wong acting for D8 raises a preliminary objection under Order 58, rule 5(1), which provides that no further evidence (other than evidence as to matters which have occurred after the date on which the order was given) may be received on the hearing of an appeal under this rule except on special grounds: Hong Kong Civil Procedure 2015, Vol 1, para58/1/3.  He submits that in putting forth the purple version, D8 is in fact relying on new evidence. 

12. Mr Wong’s objection is legitimate.  It is of course regrettable that 8 years since the first filing of his counterclaim and only when faced with a striking out application that D2/P makes a second attempt to amend his pleading through a different team of counsel.  

13. However, when one looks at the substance, the new pleas are directed at the legal effect of facts already before the court and the concession of D8 that the lease operated as an assignment.  (That concession escaped the attention of all the lawyers on both sides until D8’s case went into the able hands of Mr Wong.)  The only new “fact” relied on is that D2/P allegedly acquired knowledge of D8’s alleged breach of trust in 2006 – a fact disclosed in the witness statement of D2/P but not in the hearing bundle.

14. Striking out is a draconian order.  A party should not be denied his day in court except for cogent reasons. In Patriarch Partners Media Holdings LLC v Wong Siu Wa Sammy & anor, CACV 248/2014, 22 May 2015, the Court of Appeal considered a new version of pleading which was not placed before the judge below.  It decided not to strike out the amended statement of claim but gave leave to defend.

15. I will therefore consider the purple version in this appeal to see if the defence and counterclaim is curable by amendment.

ISSUES ARISING UNDER THE PURPLE VERSION

16. Two issues arise under the purple version:

A.   Whether D8 had acted in breach of trust to D2/P;

B.   If he had, whether D2/P was time barred.

A.  Whether D8 had acted in breach of trust to D2/P

17. D2/P alleges that D8 acted in breach of trust when selling the land to WS Realty.

18. Mr Wong contends that D8 neither had privity of contract (not being a party to the lease) nor privity of estate with D2/P (as the lease was not registered).  As surviving joint tenant, D8 had rights to rent charges over the land although he retained no title over the land itself. He could not have acted in breach of trust when he believed that he had some valuable interest in the land and assigned them to WS Realty.  Even D2/P thought that there could be renewal of the rent charges in his own pleading (paragraphs 8, 9, 15, 17, 20 and 22 of the Defence).  In 1996, D2/P even offered to pay D8 $1,100,000 to purchase the land although the sale fell through.

19. Further, Mr Wong submits that the 1997 assignment was not executory in nature.  On completion, the assignment had the effect of transferring the legal title to the purchaser.  Title to the land was defeated by D2/P’s own failure to take steps to have his interest in land protected by registration.  The land eventually ended up in the hands of WS Realty, a bona fide purchaser for value without notice.  There was no reason for equity to salvage D2/P.

20. I start by looking at the legal effect of various transactions.  When Madam Tang granted the lease, by operation in law, it became an assignment to D2/P.  In Milmo v Carreras [1946] 1 All ER 288, 290G-H Lord Greene MR held that:

“In accordance with a very ancient and established rule, where a lessee, by a document in the form of a sub-lease, divests himself of everything that he has (which he must necessarily do if he is transferring to his so-called sub-lessee an estate as great as, or purporting to be greater than, his own) from that moment he is a stranger to the land, in the sense that the relationship of landlord and tenant, in respect of tenure, cannot any longer exist between him and the so-called lessee.”

21. The Land Registration Ordinance, Cap 128 (“LRO”) had not yet come into effect at the time of the lease.  The governing legislation was the Law Amendment and Reform (Consolidation) Ordinance, Cap 23.  It provided that simple writing (not necessarily by deed) would suffice to dispose of interest in land: section 6(1); but this section did not affect the creation or operation of resulting, implied or constructive trusts: section 6(2). 

22. The lease thus validly assigned the land to D2/P.  Madam Tang (and hence D8 by survivorship) retained only (a) the legal title; (b) the right to receive rental and (c) possibly, a right for rental to be negotiated or charged at the market rate when the 15 year lease “expired”.  In principle, D2/P could have directed D8 to transfer the title to D2/P.

23. In purporting to sell the land to WS Realty “as beneficial owner”, it is arguable that D8 acted in breach of trust as against D2/P.  He clearly knew of the interest of D8 (however termed) as the sale was subject to the lease.

24. Although the lease was not registered, for 2 reasons, the non-registration should not affect D2/P’s rights as beneficial owner. 

25. Firstly, D2/P as purchaser had no obligation to register: Fast Forward Ltd v Magicsound Co Ltd and others [1991] 2 HKLR 529, 532; following Wright v Dean [1948] Ch 686.  Of course, failure to register would expose him to potential risks over land rights. 

26. Secondly, non-registration merely made the lease null and void against a bona fide purchaser for value without notice, but it does not affect D2/P’s rights in equity against his trustee: HKSAR v Lau Kam Ying (2013) 16 HKCFAR 595, §19.

27. The relevant legislation is LRO which provides as follows:

“3(1) Subject to this Ordinance, all such deeds, conveyances, and other instruments in writing, and judgments, made, executed, or obtained, and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under this Ordinance.

(2) All such deeds, conveyances, and other instruments in writing, and judgments, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes.

4.   No notice whatsoever, either actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing, or judgment, shall affect the priority of any such instrument as aforesaid as is duly registered.”

28. The Court of Final Appeal held that those 2 sections concerned priorities between registered instruments but did not affect remedies which might be available whether in contract, tort or equity. For example, a beneficial owner would have a claim for breach of trust against a purchaser who had procured the breach of trust.

29. The Court of Final Appeal relied on the case of Midland Bank Trust Co Ltd v Green [1981] AC 513.  There, a father gave his son an option to buy his farm at £1 but the option was not registered.  The father later sold the farm to the mother (who had notice of the option) at £500, much below the market price of £40,000.  The trial judge held that the sale was genuine; the option was not specifically enforceable against the mother but the father had no answer to a claim for damages.  The decision was upheld by the House of Lords.

30. If Mr Wong is right in his submission in paragraph 19 above, the unregistered lease may be unenforceable against WS Realty.  However, D2/P could still sue D8 for breach of trust.  Accordingly, the purple version as set out in sub-paragraphs 10(i) and (ii) above does disclose an arguable counterclaim.

D8 being a necessary party

31. Mr Wong submits that D8 could not be a necessary party to this action.  This is because, as between the plaintiff and the defendants, the dispute is one of proprietary interest, which, unlike personal interest, is good against the whole world.  D8’s interest had been made absolutely clear. The effect of the lease is a question of law that did not require D8 to make further submission. There was no act for D8 to perform to complete anyone’s title.

32. With respect, Mr Wong overlooks the fact that the plaintiff claims through the 1997 assignment.  D2/P also sues other defendants by counterclaim for, amongst others, dishonestly assisting D8 in breach of trust or knowing receipt of trust property.  Moreover, D2/P is also seeking damages against D8 for breach of trust.  D8 is arguably a necessary party to the counterclaim as set out in paragraph 10(iii) above.

B.  Whether D2/P was time barred

33. Mr Wong submits that if the 1997 assignment was somehow wrongful, D2/P’s counterclaim has long become statute-barred, the limitation period being 6 years for an action founded on simple contract or on tort: section 4(1)(a), Limitation Ordinance, Cap 347 (“the LO”).

34. Mr Wong submits that D2/P could have sued for return of the land in 1996 when the sale fell through.  Instead, D2/P returned all the title deeds to D8.  Once again, D2/P missed the opportunity to register the lease or to sue D8 for return of the title to the land.  Delay defeated equity.  Moreover, it could not be said that D8 was fraudulent when D8 sold the land, a year later, subject to the lease and at the same price as D2/P previously offered to buy from him.

35. I do not think section 4(1)(a) LO is applicable.  Instead, section 20 of the LO is:

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

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

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

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

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

36. Under section 26 of the LO:

“(1) Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either-

(a) the action is based upon the fraud of the defendant;

(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or

(c) the action is for relief from the consequences of a mistake,

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”

37. It is arguable that the purported sale and purchase in 1996 was made when D8 and D2/P were both under misapprehension as to their title over the land.  No breach of trust occurred until the 1997 assignment. There is a dispute of fact as to whether D2/P acquired knowledge of the breach of trust only in 2006. The purple version, if allowed, will relate back to 2007 when D2/P’s defence and counterclaim was first filed.

38. Mr Wong points out that the limitation defence was a live issue before the Master but the current limitation points and fraud of D8 were never raised then.

39. Mr Wong is correct.  However, D2/P’s failure to plead D8’s fraud in the purple version is not fatal.  As a matter of pleading, a claimant may refrain from pleading a charge of fraud and wait to see if the defendant raises a defence of limitation.  If the defendant does, the claimant must plead fraud in reply and prove it, if he wishes to defeat the defence in that way; the defendant does not have to prove fraud to establish that the claim is statute-barred.  Lewin on Trusts (19^th ed) §44‑011.

40. The purple version does disclose an arguable case on breach of trust which may be within the limitation period.  Where a party has a viable claim which can be made good by amendment, his claim should not be struck out: Patriarch Partners Media Holdings LLC v Wong Siu Wa Sammy & anor, CACV 248/2014, 22 May 2015. 

41. Accordingly, I allow the appeal.  I also make an order granting leave to D2/P to file and serve its purple version on D8 within 7 days of the handing down of this decision.  D8 shall have 14 days in which to amend his defence to the counterclaim and D2/P shall have 14 days thereafter in which to amend his reply to defence to counterclaim, if so advised.

42. Given the age of this action, the parties shall proceed swiftly to trial.

COSTS

43. Mr Chan SC does not seek to disturb the order for costs before the learned Master.  He submits, however, that D8 should bear costs of this appeal having had the opportunity to consider the purple version.

44. With respect, it was a belated second attempt to amend 5 days before this appeal was heard that enabled D2/P to escape the consequence of a struck out.  Mr Wong’s arguments against the purple version are not just a re-run of those before the learned Master.  Justice demands that D2/P should bear D8’s costs of this appeal.

CONCLUSION

45. I allow the appeal and set aside the order for striking out.  I grant leave to D2/P to amend as per paragraph 41 above.

46. I make an order nisi that:

(1)  The costs of the summons before the Master and in this appeal be to D8. 

(2)  The costs of this appeal are summarily assessed at $100,000. 

(3)  Costs of and incidental to the amendments shall be to D8.

47. I thank counsel and Mr David Wong for their able assistance.