FAITH BRIGHT DEVELOPMENT LTD. v. NG KWOK KUEN AND ANOTHER

HCA 9058/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9058 OF 1999

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REASONS FOR JUDGMENT

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1. This is an appeal from the decision of Master H C Wong given on 5 May 2000 in which the learned Master ordered that the Statement of Claim is to be struck out under O.18 r.19(1) of the Rules of the High Court on the ground that it discloses no reasonable cause of action. As no other ground was relied on by the Defendants for striking out, no evidence was adduced by the parties. The Court is only concerned with the Plaintiff's case as pleaded. After hearing submissions, I allowed the appeal and set aside the Master's order. I also gave leave to the Plaintiff to amend paragraph 7 of the Statement of Claim in which the references to the "1st Defendant" and "2nd Defendant" have been wrongly stated. These are my reasons for allowing the appeal.

2. The gist of the Plaintiff's claim as pleaded may be set out as follows.

3. The Plaintiff had entered into a written agreement with the Defendants' father, Mr Ng Hon Chung ("the father") on 8 April 1994, the material terms of which were as follows:

(1) The Plaintiff and the father would enter into a joint venture for the acquisition of Lots No. 542, 543 and 545 in Demarcation District No.1 Lamma Island for the purpose of developing 2 residential properties.

(2) The Plaintiff was to provide all the money for the acquisition of the 3 lots of land.

(3) The father was responsible for the completion of the necessary procedures in relation to the construction sites.

(4) The 3 lots were to be conveyed to and registered in the sole name of the father.

(5) On completion of the development, the father and the Plaintiff would each be entitled to one developed property.

4. Pursuant to the agreement, the Plaintiff paid a total of HK$450,000.00 in favour of the father's solicitors as directed by the father as payment for the purchase price of the 3 lots. The 3 lots were acquired in April and May 1994 with the Plaintiff's money. However, they were not conveyed to the sole name of the father but were assigned by the respective vendors to the 1st and 2nd Defendants as tenants in common.

5. On 5 November 1994, the 1st and 2nd Defendants sub-divided Lot No. 543 into 3 portions and Lot No. 544 into 2 portions and on the same day, Lots No. 543A and 544A were assigned to the 2nd Defendant whereas Lots No. 542 and 543B were assigned to the 1st Defendant.

6. As a result of surrender and exchange with the Government in 1996 and 1997, the 2nd Defendant has become the registered owner of Lot No. 873 (by surrendering Lots No. 543A and 544A) and the 1st Defendant has become the registered owner of Lot No. 874 (by surrendering Lots No. 542 and 543B).

7. It is alleged that the father had refused to make arrangements for the completion of the necessary procedures in relation to the construction sites and had thereby repudiated the agreement, which was accepted by the Plaintiff. The Plaintiff asserts a beneficial interest in Lots No. 873 and 874, which the Defendants have refused to recognise. In the Statement of Claim, the Plaintiff claims declarations that Lots No. 874 and 873 are held by the 1st and 2nd Defendants respectively on trust for the Plaintiff; an account by the 1st and 2nd Defendants of all profits; and an order directing the Defendants to assign the trust properties free from encumbrance to the Plaintiff.

8. It is argued by Mr Richard Khaw, who appeared for the Defendants in this appeal and below, that the Statement of Claim discloses no reasonable cause of action in that the Plaintiff cannot rely on a resulting trust or a constructive trust on the Plaintiff's case as pleaded.

Resulting trust

9. As I have set out above, it is pleaded in the Statement of Claim that the Plaintiff had provided the purchase price for Lots No. 542, 543 and 544 pursuant to an agreement with the father, which agreement had fallen through due to the father's repudiation. It has also been pleaded that the 3 lots were conveyed to the Defendants as tenants in common and it was with the surrender of these lots which were sub-divided subsequently that the Defendants became the registered owners of Lots No. 873 and 874. What then is the basis for the Defendants' argument that the Plaintiff cannot rely on a resulting trust?

10. As I understand Mr Khaw's submission, he has put forward a proposition of law that a resulting trust would only arise in a situation in which the provider of the purchase money and the holder of the property are immediate parties to a transaction. He submits that a resulting trust cannot arise as a matter of law in a situation in which the holder of the property is a third party and a total stranger with no direct dealing with the provider of the purchase money. In the present case, as the Plaintiff had only had direct dealings with the father but not with the Defendants, it is submitted that a resulting trust cannot arise.

11. Mr Khaw has provided quite a number of authorities to me in his 2 lists of authorities. However, he is not able to provide me with any authority in support of the legal proposition he has advanced. Among the authorities he has asked me to look at, I have considered Snell's Equity, 30th ed., page 222 and Goff & Jones, "The Law of Restitution", 5th ed., page 743. These extracts are not dealing with resulting trust but with constructive trust in the case of intermeddling with trust property. I have also looked at another extract in Snell's Equity at pages 206-211 which deals with resulting trust in the case of a purchase made in the name of another and I can find no hint of any support for the legal proposition advanced by Mr Khaw.

12. Mr Khaw's submission does not accord with my understanding of the law on resulting trust in the case where a purchase is made in the name of another. I would also say that in an application to strike out on the ground that the Statement of Claim discloses no reasonable cause of action, the burden is on the Defendant to satisfy the Court that the legal proposition relied on by the Defendant in submitting that there is no reasonable cause of action is plainly correct. That burden has simply not been discharged here.

13. The other point advanced by Mr Khaw that a resulting trust is not applicable here is as follows. It is submitted that the doctrine is based on an unexpressed but presumed intention of the settlor. Hence, it has no application to the present case as the Plaintiff has pleaded an express agreement between the Plaintiff and the father which sets out the actual intention of the contracting parties. The answer to this is that the agreement between the Plaintiff and the father had been discharged by reason of the father's repudiation. The mere fact that the parties had agreed at an earlier stage on the rights and ownership of the properties to be acquired does not mean that the Plaintiff cannot rely on a resulting trust subsequently when the agreement had fallen through. There was no express agreement between the Plaintiff and the father on the interest and ownership of the properties where there was a discharge of the earlier agreement by breach. In this situation, I am of the view that the Plaintiff can rely on a resulting trust, the effect of which is that it is presumed by the law that the properties are held on trust for the Plaintiff as the provider of the funds.

14. Mr Khaw has also made another point in his written submission attacking the case on a resulting trust. It is submitted that it is pleaded that the terms of the agreement between the Plaintiff and the father were to the effect that the Plaintiff was only to take "half of the beneficial interest of the land purchased", which is inconsistent with the Plaintiff's claim for the entire beneficial interest in Lots No. 873 and 874. I do not think there is any inconsistency in the pleading. According to the terms of the agreement as pleaded, the father and the Plaintiff were each to acquire one "developed" property on completion of the development. The development was not completed and the agreement was discharged by breach as mentioned above. The Plaintiff is not seeking a declaration of trust on the basis of the agreement but on the basis that it had provided the entire purchase money for the 3 lots of land acquired.

Constructive trust

15. Mr Patrick Chong, who appeared for the Plaintiff in this appeal and below, has informed the Court that he does not rely on "knowing receipt" in his case on constructive trust. In view of the Plaintiff's stance, it is unnecessary for me to deal with Mr Khaw's submission that the pleading is defective in that the essential element of "knowledge" (which is not confined to actual knowledge for the purpose of "knowing receipt") has not been pleaded.

16. The Plaintiff's case on constructive trust, as advanced by Mr Chong, is that the Plaintiff is making a proprietary claim based on tracing of the trust properties into the hands of the Defendants. As stated in Snell's Equity at page 222, "an innocent volunteer will ... be liable to return the [trust] property if he still retains it, or he has property into which it can be traced".

17. The material facts giving rise to such a proprietary claim have been pleaded as I have summarised above. As I understand Mr Khaw's submission, he does not seem to say that the Plaintiff does not have a proprietary claim and his attack is limited to saying that certain parts of the prayer of relief (i.e. the claims for declarations of trust and an account by the Defendants of all profits) are inconsistent with the relief sought in a proprietary claim. He has acknowledged that the relief sought for an order directing the Defendants to return the trust properties free from encumbrance to the Plaintiff is appropriate in a proprietary claim.

18. I do not accept his submission for the following reasons.

19. Firstly, the Plaintiff is also claiming under a resulting trust, which I have held to be a viable basis for the Plaintiff's claim. The reliefs for declarations of trust and an account by the Defendants of all profits are appropriate reliefs in a claim based on a resulting trust.

20. Secondly, it is argued by Mr Khaw that where a proprietary claim is advanced, the holder of the property is not regarded as a constructive trustee and is not holding the property on trust for the Plaintiff. He has not shown me any authority that is clearly in support of his proposition, as the authorities he cited are to the effect that a distinction should be drawn between a proprietary claim based on tracing and a claim of personal liability as a constructive trustee by reason of the knowing receipt of trust property.

21. Thirdly, the proposition that the Defendants cannot be regarded as constructive trustees if the Plaintiff is advancing a proprietary claim in respect of the properties held by the Defendants is not a valid proposition in law, as borne out by the following passage cited to me by Mr Chong in "Trends in Contemporary Trust Law" by A.J. Oakley, 1996 ed., at page 248:

"Where property subject to a trust has been misapplied, the interests of the beneficiaries in that property are, in accordance with the basic principles of property law, enforceable against the whole world unless and until the property in question reaches the hands of someone who takes it free of their equitable proprietary interests therein. Any recipient of misapplied property who is liable to such an equitable tracing claim will, of course, be a trustee of such property as is in his hands - this is simply because the equitable interests of the beneficiaries therein must necessarily take effect behind a trust of the legal estate." (emphasis supplied)

22. I think the fallacy in Mr Khaw's argument is that he has failed to see that where a trusteeship is imposed on the recipient of trust property by a constructive trust, the obligations of such a trustee may be various. One obligation is to return the trust property if it is still in the hands of the recipient. In this situation, it would be appropriate to make a proprietary claim in respect of the property based on tracing. There are other obligations of trusteeship where a constructive trustee is imposed on a recipient of trust property. The recipient may come under a personal liability to make restitution of the trust property even though he has dealt with the property in such a way that it can no longer be traced or where the property has depreciated in value whilst in his hands. In this kind of situation, the personal liability to make restitution as a trustee is not imposed unless the recipient is guilty of fault in the eyes of equity, and that is the instance where a constructive trust is imposed by reason of the knowing receipt of trust property.

23. For the above reasons, I reject the Defendants' argument that the Plaintiff cannot rely on a resulting trust or a constructive trust for its claim against the Defendants. The Statement of Claim should not be struck out for failing to disclose a reasonable cause of action. I therefore allow the Plaintiff's appeal against the decision of the Master and the Plaintiff is to have its costs of the appeal and of the hearing before the Master in any event. I do not disturb the order made by the Master that there is to be a certificate for counsel for the hearing before the Master.