TANG WAI CHO v. TANG WAI LEUNG

HCA 2207/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2207 OF 2007

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J U D G M E N T

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1.  The trial having taken an unexpected course after three days, the Defendant now seeks to have the action struck out under O.18 r.19 on the ground that it is frivolous, vexatious and an abuse of process failing which, for an order that there be a sale of the property which is the subject matter of the action and a payment into court of the net proceeds of sale pending judgment in the case.

2.  I will now explain what has happened which will put these two applications into their proper context.

3.  The parties are brothers.  The property in question, which is a ground floor shop in a residential building above in Caine Road, is registered in the name of the Defendant.  The plaintiff says that he has provided all of the purchase price and that the Defendant therefore holds the property on a resulting trust for him.

4.  The Plaintiff has said in his witness statement [A283] that he and the Defendant agreed that the latter would hold the legal title in his name so that the Plaintiff’s wife in Australia, from whom he was estranged, would not learn that he owned property against which she might wish to claim in ancillary relief proceedings consequent upon their divorce and also to protect himself from potential tax liabilities that might be brought against him by the Australian authorities.  This was all set out in the Plaintiff’s witness statement on 21 January 2009.

5.  The trial started but by the third day in the course of the Plaintiff’s evidence, it had become clear to me that the Plaintiff was probably labouring under distinct cognitive difficulties such that it might well be imperative for him to have a guardian-ad-litem to represent him.  What occurred appears in the transcript of the proceedings of 5 and 8 March this year.  The upshot of all of this is that, with the Plaintiff’s agreement, I directed that he be examined by a psychologist to see whether his intellectual functioning was such that he could not continue to represent himself without a guardian-ad-litem.

6.  He was examined by Professor Peter Lee of Hong Kong University who has provided me with a very detailed report dated 14 April.  Professor Lee concluded that the Plaintiff was of a low average level of intelligence and as such cannot be classified as a mentally handicapped person.  This being so the trial will have to proceed as currently constituted.

7.  The point to all this is that the Defendant has entered into an agreement with a property developer to sell the shop premises for $17.5 million.  I was very concerned that the Plaintiff should bring to bear a properly reasoned judgment on how best to proceed in relation to this offer.  I was told, without of course being provided with the detail, that the parties had been negotiating to see if they could settle the action.  The Plaintiff was not minded to settle on the terms being offered to him, whatever those may have been, nor was he willing to agree to a sale to the developer for $17.5 million which, for all I know, may be an extremely advantageous price from a seller’s point of view.  It is against this background that I called for the psychologist’s report.

8.  On the resumed hearing after Professor Lee’s report was known, the Plaintiff told me that he did not want to sell at any price, certainly not at $17.5 million and, that he wanted the premises for himself because he wished to continue to run his business from it.

9.  The Defendant’s reaction to this has been to make these two applications.  His agreement to sell for $17.5 million expires today.  He therefore wants me to order a sale and have the proceeds paid into court so as not to lose this, according to him, very advantageous sale which if it does not go on will expose him, or at least may expose him, to a claim for damages for non-completion.  But his main application now is to have the entire action struck out because he says the transaction being relied on by the Plaintiff is an illegal one and on old and good authority the law will not allow this Plaintiff to rely on an illegality to succeed by enforcing the resulting trust that is contended for.  It is this which I will consider first.  If the Defendant can deliver a knockout below now, in this way, the property will become his to deal with as he wishes.

10.  Mr B K Ho, for the Defendant, relies on the House of Lords case of Tinsley v Milligan [1994] 1 AC 340.  In that case, by a majority of 3 to 2, the House of Lords decided (and I take this from the holding in the headnote to the report) that:

“… a claimant to an interest in property, whether based on a legal or equitable title, was entitled to recover if he was not forced to plead or rely on an illegality, even although it transpired that the title on which he relied was acquired in the course of carrying through an illegal transaction; that, in the circumstances, by showing that she had contributed to the purchase price of the property and that there was a common understanding between the parties that they owned the property equally the defendant had established a resulting trust; that there was no necessity to prove the reason for the conveyance into the sole name of the plaintiff, which was irrelevant to the defendant’s claim, and that since there was no evidence to rebut the presumption of a resulting trust the defendant was entitled to succeed on her counterclaim (post, pp. 367B-E, 368G-369A, 375B-C, 376D-G).

         Bowmakers Ltd. V. Barnet Instruments Ltd. [1945] K.B. 65, C.A. applied.

         Muckleston v. Brown (1801) 6 Ves. 52; Singh v. Ali [1960] A.C. 167, P.C. and Palaniappa Chettiar v. Arunasalam Chettiar [1962] A.C. 294, P.C. considered.

         Per curiam.  A public conscience test has no place in determining the extent to which rights created by illegal transactions should be recognized (post, pp. 351A, 361D, 363A-C, 367D-E, 369A-B).

         Saunders v. Edwards [1987] 1 W.L.R. 1116, C.A.; Euro-Diam Ltd. V. Bathurst [1990] 1 Q.B. 1, C.A. and Howard v. Shirlstar Container Transport Ltd. [1990] 1 W.L.R. 1292, C.A. disapproved.

        Decision of the Court of Appeal [1992] Ch. 310; [1992] 2 W.L.R. 508; [1992] 2 All E.R. 391 affirmed on different grounds.”

Unsurprisingly, Mr Maurice Chan, for the Plaintiff, also relies on this authority, which he says is on all fours with the matter before me.  The facts of this case can also be conveniently reproduced from the headnote:

         “The plaintiff and the defendant, two single women, formed a joint business venture to run lodging houses.  Using funds generated by the business they purchased a house in which they lived together and which was vested in the sole name of the plaintiff, but on the understanding that they were joint beneficial owners of the property.  The purpose of that arrangement was to assist in the perpetration of frauds on the Department of Social Security (‘D.S.S.’) and over a number of years the defendant, with the connivance of the plaintiff, made false benefit claims on the D.S.S.  The plaintiff did likewise.  The money thus obtained helped the parties meet their bills but did not represent a substantial part of their income and contributed only in a small way to their acquisition of the equity in the house.  Subsequently the defendant repented of the frauds and disclosed them to the D.S.S.  A quarrel between the parties led to the plaintiff moving out, leaving the defendant in occupation.  Thereafter the plaintiff gave the defendant notice to quit and in due course brought proceedings against the defendant claiming possession and asserting sole ownership of the property.  The defendant counterclaimed for an order for sale and for a declaration that the property was held by the plaintiff on trust for the parties in equal shares.  The judge dismissed the plaintiff’s claim and allowed the counterclaim.  On appeal by the plaintiff, the Court of Appeal (by a majority) dismissed the appeal on the ground that in the circumstances the public conscience would not be affronted if the defendant’s counterclaim were to succeed.”

11.  Mr Chan, correctly in my judgment, analyses the effect of the speeches of the majority as follows:

“(1)     D was entitled to recover even though her title was acquired in the course of carrying through an illegal transaction [at 340];

 (2)      There was no necessity on D’s part to prove the reason for the arranged conveyance, which was irrelevant [at 340];

(3)   Since there was no evidence to rebut the presumption of a resulting trust, D was entitled to succeed on her counterclaim (at 340).”

The speech of Lord Jauncey of Tullichettle, pages 366B-H and 367A-D explains the ultimate basis for the conclusions of the majority and for that reason should be repeated here:

         “At the outset it seems to me to be important to distinguish between the enforcement of executory provisions arising under an illegal contract or other transaction and the enforcement of rights already acquired under the completed provisions of such a contract or transition.  Your Lordships were referred to a very considerable number of authorities both ancient and modern, from which certain propositions may be derived.

         First, it is trite law that the court will not give its assistance to the enforcement of executory provisions of an unlawful contract whether the illegality is apparent ex facie the document or whether the illegality of purpose of what would otherwise be a lawful contract emerges during the course of trial: Holman v Johnson 1 Cowp 341, 343 per Lord Mansfield CJ; Pearce v Brooks (1886) LR 1 Ex 213, 217-218 per Pollock CB; Alexander v Rayson [1936] 1 KB 169, 182; Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65, 70.

         Second, it is well established that a party is not entitled to rely on his own fraud or illegality in order to assist a claim or rebut a presumption.  Thus when money or property has been transferred by a man to his wife or children for the purpose of defrauding creditors and the transferee resists his claim for recovery he cannot be heard to rely on his illegal purpose in order to rebut the presumption of advancement: Gascoigne v Gascoigne [1918] 1 KB 223, 226; Pallanippa Chettiar v Arunasalam Chettiar [1962] AC 294, 302; Tinker v Tinker [1970] P 136, 143, per Salmon J.

         Third, it has, however, for some years been recognised that a completely executed transfer of property or of an interest in property made in pursuance of an unlawful agreement is valid and the court will assist the transferee in the protection of his interest provided that he does not require to found on the unlawful agreement: Ayerst v Jenkins LR 16 Eq 275, 283; Alexander v Rayson [1936] 1 KB 169 184-5; Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65; and Singh v Ali [1960] AC 167, 176.  To the extent, at least, of this third proposition it would appear that there has been some modification over the years of Lord Eldon’s principles.”

         The ultimate question in this appeal is, in my view, whether the respondent in claiming the existence of a resulting trust in her favour is seeking to enforce unperformed provisions of an unlawful transaction or whether she is simply relying on an equitable proprietary interest that she has already acquired under such a transaction.  The nature of a resulting trust was described by Lord Diplock in Gissing v. Gissing [1971] A.C. 886, 905:

     ‘A resulting, implied or constructive trust – and it is unnecessary for present purposes to distinguish between these three classes of trust – is created by a transaction between the trustee and the cestui que trust in connection with the acquisition by the trustee of a legal estate in land, whenever the trustee has so conducted himself that it would be inequitable to allow him to deny to the cestui que trust a beneficial interest in the land acquired.  And he will be held so to have conducted himself if by his words or conduct he has induced the cestui que trust to act to his own detriment in the reasonable belief that by so acting he was acquiring a beneficial interest in the land.’

I find this a very narrow question but I have come to the conclusion that the transaction whereby the claimed resulting trust in favour of the respondent was created was the agreement between the parties that although funds were to be provided by both of them, nevertheless the title to the house was to be in the sole name of the appellant for the unlawful purpose of defrauding the D.S.S.  So long as that agreement remained unperformed neither party could have enforced it against the other.  However, as soon as the agreement was implemented by the sale to the appellant alone she became trustee for the respondent who can now rely on the equitable proprietary interest which has thereby been presumed to have been created in her favour and has no need to rely on the illegal transaction which led to its creation.”

12.  The foundation of Mr B K Ho’s submission is that this amounts to a transaction between the brothers in two parts.  Firstly, that the legal title would vest in the Defendant, which has been executed, this in order to further the illegal purposes which I already referred to, and an unexecuted part which is now sought to be enforced by the Plaintiff which is the transfer back of the property to the Plaintiff, presumably the illegal purposes having run their successful course.

13.  Mr Chan submits that this has nothing to do with an unexecuted part of the transaction whatsoever, nor is there any presumption of advancement between the two brothers.  The simple fact is that the purchase monies having been advanced by the Plaintiff a resulting trust has come into existence which he now seeks to enforce.  To do so he does not have to rely on any part of the allegedly illegal purpose for having structured the conveyance in the Defendant’s sole name.  This is mere background which explains what he did and why he did it.  He now seeks a declaration of trust in his favour and a transfer of the legal title to him thereby giving effect to the declaration.  It is the advance of the money for the purchase that binds the conscience of the Defendant.  There is no reliance placed on any illegal scheme.  This is in my view the correct analysis and the strike out application must therefore stand dismissed.  I should observe that it is one which could have been brought and should have been brought, if it was to have been brought at all, once the Plaintiff had made his case clear when he filed his witness statement in January last year and not three days after the start for the trial.

14.  I now turn to the application for an order for sale and the payment into court of the net proceeds of sale to await judgment.

15.  I can find no basis for such an order.  The Plaintiff wants to keep this property if he were to succeed in the action.  The Defendant has rather unwisely entered into his private agreement with the property developer and must live with the consequences of that decision.  If the Plaintiff is right and he is the true beneficial owner of the property then he is entitled to keep it for himself.  I am afraid all must await the outcome of the trial when the parties’ respective rights will be known.

16.  I will now give directions as to the restoration of the action to the list for it to continue to its conclusion.

17.  I make an order nisi that the Plaintiff is to have the costs of these two applications in any event on a party and party basis, with legal aid taxation of the Plaintiff’s costs.