WONG CHICK KEUNG AND ANOTHER v. WOO MAN SANG AND OTHERS

CACV 1945/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1945 OF 2001

(ON APPEAL FROM HCMP NO. 3490 OF 1991)

____________________

____________________

____________________

J U D G M E N T

____________________

Hon Rogers VP:

1. This is an appeal from a judgment of Yam J given on 13 February 2001. Judgment was given against the 1st defendant but dismissed as against the 2nd - 4th defendants. The 2nd - 4th defendants were awarded their taxed costs against the plaintiffs and an indemnity as to all their costs and expenses in defending the action against the third party. There was a minor amendment to the orders in relation to costs following an application in May 2001, but that is not relevant for this appeal. On this appeal, the plaintiffs seek orders for accounts against the 2nd - 4th defendants on the basis that they have been trustees of the relevant property from 5 December 1991 until the sale of the property under a sale and purchase agreement on 23 April 2001 and, in the alternative, claim the balance of the purchase money paid by the 2nd - 4th defendants to the 1st defendant in December 1991 after taking into account the payment made to discharge the mortgage to which the property was then subject. At the conclusion of this appeal this court reserved its judgment and said that it would be handed down in writing, which we now do.

Background

2. The plaintiffs are now husband and wife. In 1991, the 1st plaintiff was a manager of an estate agent and the 2nd plaintiff was a supervisor in the same firm, Fortune Realty. The 2nd plaintiff was then married to the 1st defendant, who was a taxi driver.

3. In August 1991, the property, the subject to this action, namely, Flat 3, 7th Floor, Block B, Greenview Garden, Shatin was purchased with the plaintiffs' money. Because there was thought to be a conflict of interest if the plaintiffs should purchase the property in their own names, the 1st defendant agreed to allow the property to be put into his name. Indeed, the 1st defendant executed a mortgage in his name in favour of Hang Seng Finance Limited.

4. By the end of September 1991, the plaintiffs had set up their own estate agency, Lee Tat Kui. At about the same time the 2nd plaintiff and 1st defendant's marriage fell apart and the 1st defendant ceased to live at the then matrimonial home. Occasionally thereafter the 1st plaintiff lived at the property, but not apparently on a permanent basis.

5. By October or early November 1991, the plaintiffs had decided to sell the property. They arranged for a Miss Kwok, one of the employees of Lee Tat Kui, to negotiate the sale of the property on their behalf. The 2nd - 4th defendants were interested in buying the property. In early November Miss Kwok met the 2nd and 3rd defendants at the property so that they could view it. The plaintiffs were present. They were introduced to the 2nd and 3rd defendants as Miss Kwok's colleagues. The judge found as a fact that not only did the plaintiffs not reveal the fact that they were the owners of the property, but they intentionally concealed that fact and would not have revealed it had they been asked.

6. The asking price for the flat had been $1.9 million. After some negotiation, the price at which both the plaintiffs and the 2nd - 4th defendants were prepared to sell and buy respectively was $1.842 million. However, on 9 November Miss Kwok informed the 2nd - 4th defendants that the plaintiffs were not willing to sell. The plaintiffs withdrew from the sale because they feared that they would not be able to prevail upon the 1st defendant to execute the sale documents and return the balance of the proceeds of sale to the plaintiffs. The 2nd plaintiff and 1st defendant were by then locked in divorce proceedings. The 1st defendant had refused to pay his wife the balance of proceeds of sale of another property which he had held. Furthermore, the plaintiffs suspected that the 1st defendant had been responsible for changing the lock of the property.

7. Thereafter matters moved swiftly. The 1st defendant himself instructed other estate agents. On 10 November 1991 the 2nd - 4th defendants were offered the property. When they went to see the flat they were introduced to the 1st defendant as the owner. The price was agreed at $1.76 million. The 2nd defendant questioned the new estate agent about the offer which had been made in respect of the property a few days earlier. The new estate agent said that she knew nothing about it. The 2nd - 4th defendants wanted to be satisfied as to the 1st defendant's ownership: they were then shown the mortgage documents which were in the 1st defendant's name. On the strength of that the 2nd defendant signed the provisional sale and purchase agreement on 10 November 1991. Thereafter the third party was engaged as the solicitors for the 2nd - 4th defendants. On 18 November the 2nd - 4th defendants signed the formal sale and purchase agreement at the third party's offices and paid the 10% deposit. The formal sale and purchase agreement was dated 19 November 1991. The inference drawn by the judge was that the 1st defendant had signed the agreement on that day. It was registered at the Land Registry on 25 November 1991.

8. On 18 November 1991 a so-termed inter partes summons was issued in the name of the plaintiffs which named the 1st defendant as defendant. The relief sought in the summons was a vesting order, vesting the title of the flat in the plaintiffs. This document was given a miscellaneous proceedings number. It was saved from its deserved fate of being struck out by an order made by consent by Bokhary J (as he then was) on 9 January 1992, the effect of which was to reconstitute the summons as an originating summons.

9. The 2nd - 4th defendants inspected the property on 4 December 1991 prior to completion of the sale on 5 December. The judge accepted their evidence that by then some belongings, including hi-fi apparatus, had been removed.

10. The inter partes summons was registered at the Land Registry on 22 November 1991 as a lis pendens, the effective day was thus 23 November. The judge was satisfied that the 2nd - 4th defendants were, as a practical matter, unaware of this prior to completion of the contract of sale. In the absence of any evidence from the third party, the judge concluded that either a Land Registry search had not been conducted prior to completion or, if one had been conducted, it had been conducted negligently.

The findings of the judge

11. The 1st defendant took no part in the trial. Indeed, he seems to have "disappeared". There was no dispute between the parties that the 1st defendant had held the property on trust. The judge had no difficulty in holding that the 1st defendant held the property on a resulting trust in favour of the plaintiffs.

12. The judge commented that the events in early November were curious. He said that they had put the 2nd - 4th defendants on inquiry to ascertain the identity of the true registered legal owner. He went on to hold that the inquiries that were made, which resulted in the 1st defendant producing authentic documentation evidencing his ownership, were adequate. He also drew attention to the conduct of the plaintiffs in concealing their interest in the property.

13. The judge held that there were competing equities between the plaintiffs, on the one hand, having their concealed interest as beneficiaries in the property and the 2nd - 4th defendants, on the other hand, who had entered the contract with the 1st defendant in good faith and without knowledge of the plaintiffs' interest, having made all due and proper inquiries. On that basis the judge held that the 2nd - 4th defendants had an equitable interest which defeated the plaintiffs' beneficial interest. He went on to hold that because the registration of the lis pendens took effect on 23 November 1991, it was too late to affect the 2nd - 4th defendants' interest because their interest was duly registered by registration of the sale and purchase agreement within one month of its date and it, therefore, took effect as of 19 November 1991.

The case on appeal

14. The foundation of the plaintiffs' case in this appeal rests upon the registration of the lis pendens as of 23 November. It is, of course, trite that effect must be given to a registration whether or not a diligent search has been made by a party who would be affected by it. The argument, on behalf of the plaintiffs is twofold. In the first place, the plaintiffs were the beneficial owners of the property and by reason of the notice, which the 2nd - 4th defendants must be taken to have had because of the registration of the lis pendens, the 2nd - 4th defendants took the property subject to the same trust under which the 1st defendant held the property. On that basis it is said that the 2nd - 4th defendants had to account to the plaintiffs in respect not only of the balance of the purchase price which they paid for the property over and above the amount paid to discharge the mortgage to Hang Seng Finance Limited but, also, they had to account for the rents and other profits received in respect of the property. As already noted, as put in the notice of appeal, that would include any profit on the sale which took place after judgment in the court below and before the notice of appeal had been filed. However, in argument Mr Cheung, on behalf of the plaintiffs did not argue that the claim extended to any profit made on this last sale. It was by no means clear as to why he stopped short in this regard. In the alternative, the plaintiffs put their claim on the basis that they should recover the excess amount paid by the 2nd - 4th defendants on their purchase of the property over and above the amount paid to discharge the mortgage, on the basis that at the time the purchase money was paid over, they had knowledge of the plaintiff's claim to title.

15. In my view, the position is thus. The 1st defendant was a bare trustee holding under a resulting trust. Up until 23 November 1991 the 2nd - 4th defendants had no reason to know and did not know of that trust or of any interest held in the property by the plaintiffs. The 1st defendant did not have any equitable interest in the property, in that respect he did not differ from many other trustees of property.

16. The effect therefore was that as at 19 November 1991 the 1st defendant was the owner of the legal estate in the property. He held that legal estate as trustee on an implied or resulting trust. There were no written terms of that trust. Insofar as there were any implied terms it was clearly that the 1st defendant should only sell the property on the instructions of the plaintiffs. As such the 1st defendant was therefore a bare trustee.

17. Important for the purposes of this case is the question of whether the 1st defendant had the power of sale of the property. In my view, the 1st defendant did not have the power of sale of the property. Although trustees under an implied or resulting trust might have the power of sale under statutory provisions such as were contained in the Law of Property Act 1925, and in legislation which has replaced that, in the United Kingdom, no equivalent legislation has been brought into force in Hong Kong. As noted in Megarry & Wade, The Law of Property, 6th Edition para. 8-130, bare trustees did not under the Common Law prior to 1925 have a power of sale. Coupled with that, as has already been noted, the terms of the trust upon which the 1st defendant held the property, such as they existed, must have precluded the 1st defendant from selling the property.

18. The 1st defendant did not have any equitable interest in the property other than, perhaps, a right to recoup any expenses which he incurred in respect of the property from either any income generated from the property or the proceeds of sale.

19. In contrast the plaintiffs had an equitable interest in the property. Until 23 November 1991 their equitable interest was unregistered. Indeed, because it was an interest derived from an implied or resulting trust, it was an unregistrable interest. The judge held that the plaintiffs had kept their interest in the property secret. Once action had been commenced to seek a vesting order that action became registrable and hence, indirectly, the plaintiffs' interest became registrable.

20. When the 2nd - 4th defendants entered their contract on 19 November 1991, the 1st defendant was, unbeknownst to them, acting in breach of trust. The contract which they entered was to purchase the legal and beneficial interest in the property. If the breach of trust had become known before the conveyance were to take place a court would not specifically enforce the contract because to do so would have been to enforce a breach of trust. In the course of argument, Mr Merry, on behalf of the 2nd - 4th defendants and the third party, conceded that the contract would not have been specifically enforceable had the plaintiffs' interest become known. In those circumstances, the 2nd - 4th defendants would have been left to their remedies at law had they sought to enforce the contract against the 1st defendant which would have entailed the 1st defendant acting in breach of trust.

21. The principle that a vendor who has entered a contract for sale of land holds the property, until completion, in trust for the purchaser is based on the concept that the vendor has a personal and substantial interest in the property. See, for example, the passage in the speech of Lord Cairns in Shaw v Foster (1872) L.R. 5 H.L. 321 at page 338 cited by Huggins JA in the case of Ho King-yim v Lau King-mo [1980] HKLR 42 at page 44. Indeed, when Huggins JA went on to say at page 45:

"Where both a contract for the sale and purchase of land and an assignment pursuant to that contract have been registered, it seems to me that no charge created after the date of the contract can rank prior to the interest of the purchaser or, a fortiori, to the interest of the purchaser's successors in title."

he was there saying that on the basis that the purchaser had already obtained a substantial equitable interest in the property. In the present case, the 1st defendant had no relevant interest in the property. He held no equitable interest. He only had the bare legal estate.

22. The importance of whether the vendor had an equitable interest in the property at the time of the sale and purchase agreement can be seen in relation to the case of Lam Sau Wah v Tam Chi Hung [2001] 1 HKC 679, where the same principles were applied by this court. In that case the vendor entered into a contract for the sale of the property at a time when it had been held that no adverse equitable claim existed. The vendor was thus at that time the legal and beneficial owner and, because the original lis pendens had been vacated after the action had been dismissed at trial, there were no adverse equitable claims. The sale and purchase agreement was duly registered. That gave the purchasers priority over unregistered equitable claims of which there was no notice. However, a notice of appeal was subsequently served and registered as a lis pendens prior to the completion date. When the notice of appeal was registered, the holder of the underlying interest, i.e. the interest which was the subject of the appeal, in so far as there was any interest, was subject to the interest of the purchaser under the sale and purchase agreement, because that had been registered: see page 687F-G. However, since the purchasers had, by the time of completion, notice of the lis pendens they were in a position where they might be called upon to account for the purchase monies and there would be a possibility of a tracing claim see page 688 B-D.

23. The conclusion, in my view, is that until completion on 5 December 1991 there was only a contract to convey the property. The 1st defendant had no equitable interest to give, hence the rights which were held to be given in, for example, Ho King-yim's case did not exist in the present case. If completion had taken place and the conveyance had been made prior to any registration of any interest by the plaintiffs, then the plaintiffs would have been prevented from asserting their equitable interest against the purchasers. On general principles a bona fide purchaser for value of the legal estate without notice takes free from equities; since the legal estate was transferred on 5 December, if there had been no notice then the 2nd - 4th defendants would have taken free from equities. Insofar as the plaintiffs' equitable interest could have been registered, for example, by the back door route of registering the lis pendens in respect of their application for a vesting order, if there had been no such registration the provisions of sections 3(2) and 4 of the Land Registration Ordinance would have precluded their reliance on any such rights.

24. In this case, the plaintiffs had registered their lis pendens in which a vesting order was sought. As a result therefore the 2nd - 4th defendants had constructive notice of their claim in equity. They therefore took the legal estate on 5 December 1991 subject to that equity. On that basis, the 2nd - 4th defendants held the property until the sale in April 2001 subject to the plaintiffs' equitable rights. There is no dispute between the parties that the legal estate has since passed to the new purchaser who has taken free from any equity which the plaintiffs had.

25. In the premises this appeal must be allowed. The plaintiffs are entitled to an account from the 2nd - 4th defendants in respect of their dealing with the property. To avoid misunderstanding, it should be said that, because the 2nd - 4th defendants were in fact unaware of the plaintiffs' rights at the time of purchase, there would be nothing to prevent their bringing into account all sums expended in respect of the property, including mortgage interest payments. Since the representation of the 2nd - 4th defendants has been by those acting for the third party, it is assumed that the 2nd - 4th defendants are fully indemnified as to costs and damages by the third party.

Hon Le Pichon JA:

26. I agree.

Hon Yuen JA:

27. I agree.

Hon Rogers VP:

28. The appeal will therefore be allowed. The judgment below will be set aside. The plaintiffs are entitled to a declaration that the property was held by the 2nd - 4th defendants from 5 December 1991 as bare trustees. The plaintiffs are entitled to an account of profits. A draft order should be agreed between the parties and submitted for approval. There will be an order nisi of costs in favour of the plaintiffs here and below.