WING HANG BANK LTD v. SUCCESS ORIENT INVESTMENT LTD AND ANOTHER

HCMP 2457/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2457 OF 2011

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DECISION

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The application

1.  Before me today there is mainly one summons taken out by Madam Yung Sau Mui (Yung) and Madam Wang Lifei (Wang), the intended 3^rd and 4^th defendants to be joined as parties in these Order 88 proceedings in respect of the property House B, No. 31 Barker Road, Hong Kong (the property) mortgaged by the 1^st defendant, the mortgagor, a Hong Kong company to the Plaintiff.  The 2^nd defendant is the only shareholder of the 1^st defendant.

2.  Yung is the 2^nd defendant’s mother and Wang is the 2^nd defendant’s co-habitee, or “de facto spouse”.  Wang and the 2^nd defendant are the parents of 2 children aged 19 months and 4 months.

3.  By an order of Master de Souza dated 4 June 2012 made upon an application of the plaintiff, the mortgagee, under Order 88 of RHC, money judgment and possession order were granted to the plaintiff.

4.  Mr. A. Yip, Counsel, acts for the intended 3^rd defendant and 4^th defendant and Mr. P. Leung, Counsel, acts for the plaintiff.

5.  At the previous hearing on 19 October 2012, I have invited counsel to consider Wing Hang Bank Ltd. v Tsang Sze Yin and Others HCMP 1689/1998, unreported by Ribeiro J. delivered on 30 December 1999.

The defendants’ application for the 1^st defendant’s 4^th affirmation

6.  In the same hearing, I had also given directions for the parties to serve affidavit evidence for this application, which they had done.  However, today I have another application by way of summons for leave to adduce the 4^th affirmation of the 2^nd defendant for this hearing.  In this affirmation, the 2^nd defendant will say that all the money for the purchase of the property in question was paid by him and there is no other third party interest in the property save and except the beneficial interest of the intended 3^rd and 4^th defendants.  He has also asked for an adjournment of this hearing for him to locate more documentary evidence on the source of funding of the purchase of the property.

7.  The plaintiff opposes this application on the ground that the application was made late and was only made immediately before the hearing today.  In the 4^th affirmation, 2^nd defendant has not explained why he had taken so long to prepare the evidence.  As to the documents mentioned in his 4^th affirmation, it can be seen that those documents existed several years ago.  It is clear that the purpose of this application is to delay the proceedings as long as possible.

8.  In the directions which I had given on 19 October 2012, I had directed that any application for further affidavit evidence must be made at least 14 days before hearing, which the intended defendants had failed to do.

9.  Order 32 rule 11A(4) provides that the application has to be predicated upon exceptional circumstances, which the intended defendants have failed to demonstrate.  The application has to be refused, following the decision in Fortune Asset Development Limited v. De Monsa Investments Limited HCA167/2009 by Saunders J. on 21 August 2009 at paragraph 13.  The costs of this application should follow the event and be to the plaintiff, to be dealt with at the end of this hearing (35 minutes).

The principles

10.  The application is based upon Order 15 rule 10 of RHC and the intended defendants rely on the Court of Appeal case of Yu Wing Kan v. Lau Shuk Lan [1990] 2 HKLRD 583, which followed Minet v. Johnson [1890] 6 T.L.R. 417 and said:

“Minet v. Johnson is authority for the proposition that any person in actual possession of land who is not made a party to an action for possession of that land by a plaintiff against a defendant is entitled to be added under Order 15 rule 10 as a defendant before or after judgment, provided he has a bona fide independent claim to be in possession.”

11.  The emphasis on the above decision is whether the intended defendants are able to show, on the balance of probabilities, they have bona fide independent claims to be in possession.

12.  I have referred Counsel to the authority of Good Profit Development Ltd. v Leung Hoi [1992] HKC 539, in which Woo J. had discussed the legal position of a corporation vis-à-vis its only shareholder, which will be discussed below.

13.  At the last hearing, I had referred counsel to the authority of Wing Hang Bank Ltd. v Tsang Sze Yin and Others HCMP 1689/1998, unreported by Ribeiro J. delivered on 30 December 1999.

14.  This case bears similarity to our present case in that the occupant of the mortgaged property, which was subject to a court order for possession, had applied to the Court to join as a party and to set aside the order for possession.  Mr. Justice Ribeiro (as he then was) had set out the proper procedures and the court’s approach:

“(At page 6 ) A line of authorities shows that in cases like the present, the proper approach is for the person claiming the right to remain in possession to apply to be joined as a defendant and to have his claim tried as between himself and the purchaser or mortgagee claiming possession. The substantive rights are determined in the context of the intervener’s application to set aside the order for possession as against himself (but not in respect of any other defendants against whom judgment may have been properly entered) : Minet v Johnson (1890) 6 TLR 417, Berton v Alliance Economic Investment Co [1922] 1 KB 742 at 759, Leicester Permanent Building Society v Shearley [1951] Ch 90, In re Wykeham Terrace [1971] Ch 204, McPhail v Persons Unknown [1973] Ch 447…. The onus rests on the plaintiff claiming possession. He must generally establish his right against all occupiers who assert an adverse claim to possession and who are, or who seek to be, made parties with a view to establishing such claim. … The bank in the present case seeks to enforce an order for possession of the flat presently occupied by Madam Shing. Before it can be allowed to do so, Madam Shing is at least prima facie entitled to be joined as a defendant for her claim to a beneficial interest in the property, allegedly binding on the bank, to be tested. Only if she fails and the bank secures judgment for possession, not only against the Defendants, but also against Madam Shing, should the bank be permitted to enforce such order…. Two elements are essential if Madam Shing is to succeed. First, she must establish her equitable interest in the property and secondly, that such interest is not overridden by the bank’s interest as registered mortgagee.” (page 8)

15.  Mr. Yip is aware of the fact that it is incumbent upon the intended 3^rd and 4^thdefendants to establish their equitable interest in the property.  He has, in his written submissions, argued that the intended 3^rd and 4^th defendants are entitled to claim equitable interests in the property by way of constructive trust and proprietary estoppel in priority over the plaintiff.  He submitted that the 2^nd defendant had paid the purchase price for the property.  Constructive trust was created between the 2^nd defendant and the intended 3^rd defendant where 2^nd defendant agreed that the intended 3^rd defendant should have a beneficial interest in the property.[1]  The 2^nd defendant had also agreed to allow the intended 4^th defendant to have equal share of beneficial interest in the property in return for the intended 4^th defendant’s agreement to cohabit with him as his de facto wife.[2]  The intended defendants had also claimed proprietary interests in the property.

16.  Such equitable interests, even if sustainable as alleged by the intended defendants, are only viable if the 2^nd defendant is the beneficial owner of the property.  However, according to Good Profit Development Ltd. v Leung Hoi [1992] HKC 539, the 2^nd defendant is not the beneficial owner of the property even if he is the sole shareholder of the 1^st defendant.  In the judgment, Mr. Justice Woo said at 543F:

“A company has a separate corporate existence and is a legal personality separate from its shareholders. In Salomon v Salomon [1897] AC 22, at 30 Lord Halsbury LC said:

… it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.

Regarding whether the company was an agent or trustee of Salomon, its promoter and shareholder, and other shareholders, Lord Herschell said at p 42:

It is to be observed that both courts [the trial court and the Court of Appeal] treated the company as a legal entity distinct from Salomon and the then members who composed it, … Under the circumstances, I am at a loss to understand what is meant by saying that A Salomon & Co Ltd, is but an ‘alias’ for A Salomon. It is not another name for the same person; the company is ex hypothesi default a distinct legal person. As little am I able to adopt the view that the company was the agent of Salomon to carry on his business for him. In a popular sense, a company may in every case be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs.

After referring at p 50 to the trial judge’s view that ‘the company was Mr Salomon in another form’, that he (Salomon) ‘used the name of the company as an alias’ and that he ‘employed the company as his agent’, Lord Macnaghten said at p 51 thus:

The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them.

Lord Davey also said at pp 56–57:

I am at a loss to see … in what way the company became an agent or trustee for the appellant, except in the sense in which every company may loosely and inaccurately be said to be an agent for earning profits for its members, or a trustee of its profits for the members amongst whom they are to be divided. There was certainly no express trust for the appellant; and an implied or constructive trust can only be raised by virtue of some equity. I took the liberty of asking the learned counsel what the equity was, but got no answer … If … the company was formed for an unlawful purpose … or, if the appellant has committed a fraud or misdemeanour…, he may be proceeded against civilly or criminally; but how either of those states of circumstances creates the relation of cestui que default trust and trustee, or principal and agent, between the appellant and respondents, is not apparent to my understanding.

In Macaura v Northern Assurance [1925] AC 619, where the question in issue was whether a person who owned almost all the shares in a company had an insurable interest in the timber owned by the company, Lord Sumner said at p 630:

He owned almost all the shares in the company, and the company owed him a good deal of money, but, neither as creditor nor as shareholder, could he insure the company’s assets. The debt was not exposed to fire nor were the shares, and the fact that he was virtually the company’s only creditor, while the timber was its only asset, seems to me to make no difference. He stood in no ‘legal or equitable relation to’ the timber at all. He had no ‘concern in’ the subject insured. His relation was to the company, not to its goods, and after the fire he was directly prejudiced by the paucity of the company’s assets, not by the fire.

At pp 626–627, Lord Buckmaster said:

Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.”

17.  It can be seen from the above authorities that the 2^nd defendant is not the beneficial owner of the property.  As such, the intended 3^rd defendant and 4^th defendant cannot claim any equitable interest in the property, in which the 2^nd defendant has no beneficial interest.

18.  However, Mr. Yip has proposed an interesting scenario for me to consider that the 1^st defendant can be holding the property for 2^nd defendant on a resulting trust.  He says that if all the purchase money was provided by 2^nd defendant directly to the solicitors acting for the 1^st defendant to close the deal of purchase of the property, then the 1^st defendant can be said to be holding the property on resulting trust for the 2^nd defendant, in which case the intended defendants can claim their equitable interests.

19.  Mr. Leung has referred me to [B-421-7], which is a copy receipt issued by the firm of solicitors for about $97 million in the name of the 1^st defendant.  The evidence simply shows that the money came from the 1^st defendant, not the 2^nd defendant.

20.  Mr. Yip will naturally argue that given the chance of adducing further evidence, 2^nd defendant may give further evidence to show otherwise.

21.  What Mr. Yip has submitted is on speculation and this court should not adjourn the matter for such reason.  The 2^nd defendant is the only shareholder of the 1^st defendant.  Even if the money came from the 2^nd defendant, the fact that the property was purchased by the 1^st defendant as the legal and beneficial owner of the property had served the purpose of using a corporate vehicle to hold the property for the 2^nd defendant.  Unless there is a Declaration of Trust executed by the 1^st defendant to hold the property on behalf of the 2^nd defendant, which is registered in the Land Registry, the proposition as raised by Mr. Yip is simply a redundancy, which is not believable in light of the evidence before me.  One may have to further consider that the 1^st defendant would not have the capacity to mortgage the property to obtain the loan from the mortgagee bank in the first place.  The legal charge was executed by the 2^nd defendant, himself acting as the guarantor as well.  An order has been made against the 1^st defendant for possession of the property on the basis that the 1^st defendant is the beneficial owner of the property, which the 2^nd defendant had not disputed in the Mortgagee Action.  This issue has now become an issue res judicata and the 2^nd defendant is not allowed to raise it in this proceeding.

22.  In the circumstances, I hold that the intended 3^rd defendant and 4^th defendant have not been able to overcome the first limb of establishing their equitable interests in the property.  I dismiss their application to join as parties in these proceedings.

23.  As to the costs of this application, Mr. Yip has sensibly agreed that they should follow the event and the costs of this application, including all costs reserved, are therefore to the plaintiff (with a certificate for counsel).

24.  There is a separate set of costs for setting aside the possession application, which had been adjourned for assessment today.  Having considered the schedule of costs by the plaintiff and the argument, I adopt a broad-brush approach and assessed the costs to be $65,000.00 to be paid by the intended 3^rd and 4^th defendants within 14 days from the date hereof;

25.  The costs of the intended defendants’ application for leave to adduce the 4^th affirmation of 2^nd defendant and the costs for the application for joining as parties are contained in one schedule of costs submitted by the plaintiff and are to be assessed summarily to be $135,000.00 to be paid within 14 days from the date hereof.

26.  I shall make an order in terms as follows:

a. In terms of paragraph 9 herein;

b. The summons of the intended 3^rd defendant and 4^th defendant for leave to join as parties be dismissed with costs;

c.  Costs as per paragraphs 24 & 25.