ROCK VAST INVESTMENTS LTD v. NATURARY H DEVELOPMENT LTD

HCA 2251/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2251 OF 2002

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J U D G M E N T

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Introduction

1.  The plaintiff was the owner of a property, being various units rented out as office space and storage in a building in Stanley Street, Central.  It sold the same to the 1^st defendant.  Notwithstanding that it was paid no more than an initial deposit of $0.5m, which equated with 10% of the sale and purchase price, the transaction proceeded to completion and title transferred to the 1^st defendant.  Shortly after that the 1^st defendant sold the property to the 2^nd defendant.  The 2^nd defendant by dividing up the property into 8 separate portions sold each of these to the 3^rd to 10^th defendants.  (The 2^nd to 10^th defendants are linked in that all have common shareholders and directors).  Title passed on the date of completion from the 1^st defendant to each of the 3^rd to 10^th defendants via the 2^nd defendant as confirmor.  The plaintiff claims it is the victim of fraud rendering the assignment from plaintiff to 1^st defendant void ab initio entitling it to a return of the property and the right to forfeit the $0.5m deposit.  Alternatively, it claims an equitable lien to secure the unpaid balance of purchase price.  The 1^st defendant having pleaded a defence and filed a witness statement has taken no part in the trial.  The 2^nd to 10^th defendants make no admission but in any event plead that they are bona fide purchasers for value without notice of the plaintiff's alleged interest, entitling the 3^rd to 10^th defendants to retain their respective titles and ownership to those parts of the property they have purchased.

The History

2.  The background that is undisputed or uncontroversial or is apparent on the documents now follows.

3.  The plaintiff is a Hong Kong incorporated company.  Its shareholders who are also its directors are related by blood or marriage.  They are Lee Kwok Cheung (Mr Lee), his wife Wong Yim Kuen (Madam Wong), her sister Wong Yin Yu (Madam Y Y Wong) and Cheng Kwong Pun (Mr Cheng).  Mr Cheng is the brother of Madam Y Y Wong's late husband.  At the material time the plaintiff was the unencumbered owner of the various units in the building in Stanley Street I have referred to (the Stanley Street property).  Ho Mun Kei (Mr Ho) was employed by the plaintiff to collect the rents and account to the plaintiff for them and otherwise carry out certain administrative tasks from time to time.

4.  The directors of the plaintiff acting in concert resolved to sell the Stanley Street property.  Mr Cheng, a real estate agent by profession, was given the primary task of finding a buyer.  In early February Mr Cheng announced that he had found a buyer who was willing to pay $5m.  The directors as one agreed that the sale should be pursued.  Mr Cheng arranged the preparation and, on 4 February 2002, execution of a provisional agreement for sale and purchase and signed on behalf of the plaintiff.  The purchaser was the 1^st defendant.  By its terms the defendant agreed to pay $0.5m forthwith as initial deposit, $1.5m as balance deposit on signing of the formal agreement on or by 8 February and the balance of $3m on completion, being 8 May 2002.  The agreement stipulated that possession would be given and taken subject to tenancies.

5.  The plaintiff's directors called a meeting which was held on 4 February.  All were present save for Madam Y Y Wong who lives in Canada.  Mr Ho stood in for her.  Those who attended recorded that by signing alongside their names; Mr Ho for Madam Y Y Wong.  Mr Lee chaired the meeting.  It was resolved, inter alia, that the transaction be approved, that the documents requiring the seal of the company be sealed with Mr Cheng signing 'on behalf of the company and with intent to bind the Company.'  This resolution reflects Article 21 of the plaintiff's Articles of Association, which reads:-

"

21.

Every document required to be sealed with the Seal of the Company shall be deemed to be properly executed if sealed with the Seal of the Company and signed by the Chairman of the Board of Directors, or such person or persons as the Board may from time to time authorize for such purpose."

It was also resolved that the documents prepared by Messrs Karbhari & Cham, Solicitors, embodying the terms of or for and incidental to the proposed transaction be approved.  The minute was signed by Mr Lee.

6.  Karbhari and Cham (K & C) were appointed to represent the plaintiff in the sale.  A firm called C K Chan & Co (CKC) represented the 1^st defendant.  A cheque for the initial deposit of $0.5m drawn on the 1^st defendant's account was delivered and banked in the plaintiff's account and cleared.  A formal agreement prepared by one of the firms and approved by the other came to be signed by the parties.  Mr Cheng signed for the plaintiff.  There is nothing untoward about this document save that, without apparent amendment to the terms as originally propounded, it provided for vacant possession on the date of completion.  This may have been and probably was a mistake; nothing turns on it.  So far so good.

7.  Then a cheque drawn on the 1^st defendant for $1.5m in payment of the balance deposit was dishonoured on presentment.  K & C wrote reserving the plaintiff's rights by letter of 9 February.  What then followed was correspondence between the solicitors.  Before coming to this I should note that although one of the firms was appointed to represent it, the plaintiff does not admit these are genuine and contemporaneous documents.

8.  If this correspondence is genuine and contemporaneous it is thus apparent that the solicitors had on due date completed the formalities for completion.  It is also apparent that no money was paid; whatever checks were undertaken by K & C it seems they were satisfied that the consideration was paid direct to their client the plaintiff.  But this was not the case; to this I shall return.  On 29 May 2002 the formal agreement between the parties was registered; on 7 June 2002 the Assignment was registered.

9.  Meanwhile there had been further activity involving the Stanley Street property.  On 23 May 2002 the 1^st defendant as vendor and 2^nd defendant as purchaser entered into a provisional agreement for the sale and purchase of the Stanley Street property.  Essential details included that the price was $5m.  Of that a provisional deposit of $4,999,000 was payable forthwith with the balance on completion being on 29 May 2002.  A formal agreement was required to be completed and signed on 29 May 2002 also.  The clause dealing with the issue of possession was ambiguous because one or other of the alternatives had not been crossed out.  The clause read:-

"

2.

At the time of the completion of the transaction, the Vendor shall deliver the said premises to the purchaser with vacant possession/tenancies …….".

10.  A formal agreement between the 1^st and 2^nd defendant came into being on due date, being 29 May 2002.

11.  The 2^nd defendant is one of many companies owned and controlled by three brothers surnamed Siu, of whom the spokesman and a director is Siu Luen Fat (Mr Siu).  The family is in the business of developing property, specializing in the developing of small village houses in the New Territories.  The 3^rd to 10^th defendants are 8 of those companies similarly owned and controlled.  On the same day as it purportedly committed to the formal agreement, 29 May, the 2^nd defendant disposed of its interest in the Stanley Street property by selling it off in 8 subdivided parts to the 3^rd to 10 defendants, for varying amounts ranging between $638,000 and $1m, making a total consideration of $7,185,600.  These subsales were evidenced by 8 formal agreements signed by the respective parties, with completion time for the same day, 29 May, and with the whole of the purchase price due and payable on the day of completion.  On that same day were executed 8 assignments for the respective parts of the Stanley Street property which the 3^rd to 10^th defendants were now committed to buy signed by the 1^st defendant as vendor and in turn the 3^rd to 10 defendants as purchaser with the 2^nd defendant and confirmor.  These agreements were registered the following day 30 May, presupposing thus that completion took place on due date.  The assignments were registered on various dates in June.  Thus the present position is that D3 to D10 are together registered proprietors of all the parts making up the Stanley Street property with all the usual rights associated with that ownership.  The title deeds are in their constructive or actual possession.

12.  But notwithstanding the terms of the preliminary agreement followed by the formal agreement as between the 1^st and 2^nd defendants, no money passed from purchaser to vendor either on due date or thereafter.  The reason for this is on the face of it straightforward, as evidenced by documents apparently contemporaneous.  Again I mention that the plaintiff does not accept that they are genuine.  The first of these is a document in Chinese whose English translation as to the pertinent parts I repeat below:-

Signed by Witness:                  [signature]                     

Witness' Name:                  Cheung Tak Wo  

Witness' Identity Card Number:  XXXXXXX(X)                                                                        ”

13.  Lucas Development Limited (Lucas Development) is one of the companies in the stable of the Siu brothers, and is owned and controlled by them. 

14.  The second document that apparently came into existence on the same day is also in Chinese whose translation I also repeat:-

15.  These documents on their face indicate that contemporaneous with the commitment by the 2^nd defendant to purchase from the 1^st defendant the Stanley Street property was a commitment by the 1^st defendant to purchase an 'indigenous house' from a company from the same stable as the 2^nd defendant represented as the 'owner's agent' with completion to take place within 90 days of those formalities set out in clause 4 of the first of the two agreements.  It further reveals that the parties agreed that the matching deposits be taken as paid by set-off.

16.  For the purpose of this litigation the property I shall refer to hereafter as the village house was valued by two separate valuers.  Although their findings do not match, the parties agree to a figure of $2.9m.

17.  In circumstances I shall come to, Mr Lee of the plaintiff learned by the end of May of apparent irregularities in the sale of the Stanley Street property and on behalf of the plaintiff sought assistance from another firm of solicitors Edward C T Wong & Co (EW).  They undertook a search at the Land Registry which revealed not only that an assignment from the plaintiff to the 1^st defendant had been registered but that there had been apparently sales on, to the 2^nd and then 3^rd to 10^th defendants.  On behalf of the plaintiff EW had prepared and executed a memorandum of rescission which was registered on 8 June 2002.  The plaintiff through Mr Lee then instructed its present solicitors Messrs Kong & Chang to issue this writ; they did so on 12 June 2002.

The Proceedings

18.  Suing all 10 defendants, the plaintiff primarily seeks a declaration that the assignment between itself and the 1^st defendant is void ab initio, rendering this and all subsequent transactions of no effect, and such orders as will restore the Stanley Street property back to it.  Alternatively it seeks a declaration that it is entitled to an equitable lien for the unpaid balance of the purchase price not paid which prevails over all of the interests of the defendants in the property.

19.  In its pleaded defence, the 1^st defendant denied that it was in breach; that in order to facilitate the transaction it had as requested paid $1.5m to Mr Cheng direct with the balance of $3m to be met by Mr Cheng.  (It is to be noted that this somewhat extraordinary pleaded defence was not developed at trial, as by then the 1^st defendant's solicitors had been released and no one showed up.)

20.  The defence of the 2^nd to 10^th defendants now follows.

21.  They pleaded that they had no particular knowledge of any irregularities in the transaction between the plaintiff and 1^st defendant but noted from the documents and Land Transfer records that the assignment had apparently been executed in compliance with the Board's authority and thus on the face of it that the sale between the parties had been completed uneventfully.  It went on to record that by virtue of the subsequent transactions the 2^nd defendant and then the 3^rd to 10^th defendants were bona fide purchasers for value without notice of any apparent claim by the plaintiff and thus in the circumstances the plaintiff is not entitled to relief.  Having as a result of the proceedings been denied possession pending determination of the issues they claim damages and or in the alternative an account of profits.

The Trial

22.  As I have stated there was no appearance by the 1^st defendant.  The 2^nd to 10^th defendants having discharged their solicitors were represented with leave by Mr Siu, one of the shareholders and directors I have already mentioned.  Mr Cheung of counsel represented the plaintiff.  The plaintiff called Mr Lee and Mr Ho.  Mr Siu gave evidence for the 2^nd to 10^th defendants.

23.  I come to their accounts next.

The Evidence

24.  Mr Lee said that Mr Cheng was given conduct of the sale because he had experience in such matters and had found the buyer.  Payment of the initial deposit of $0.5m on due date signalled the matter was on track.  He having been custodian of the title deeds, he handed them over to a staff member of the solicitors K & C.  He also received, on due date, the balance deposit of $1.5m, by cheque from K & C.  It was banked.  But before it was cleared it was stopped, apparently because a cheque paid by the purchaser had bounced.  That set-back was compounded when, on 8 May, being the date for completion, Cheng told him that the buyer had insufficient funds to complete and that completion would have to be deferred.  (This is of course at odds with what did take place on due date, according to the correspondence between solicitors; namely, that an executed assignment had been pledged on undertaking on the basis that all the money had already been paid).  Mr Lee said he told Cheng to give the purchaser until 30 May to complete or the deal was off.  On 30 May Cheng told Mr Lee that the buyer could not find the money to complete.  Then he showed him various documents signed and unsigned which purported to vary the terms of the transaction in a manner entirely inconsistent with what the Board had authorized.  Included was a document which if signed (and it was not) would have been an agreement to cancel the transaction.  He also told him that he had signed under seal a total of 14 blank pieces of paper that he had left with the solicitors K & C, professing that the interest of the plaintiff might be compromised.

25.  This alarming development led Mr Lee to seek the counsel of the solicitors EC; then the search revealed that title had already passed.  Subsequent enquiry established that $1.5m intended for the plaintiff had found its way to Yick Shun.  He instructed the issue of a writ in the first instance against the 1^st defendant alone.  He then initiated an enquiry to establish the bona fides or otherwise of the transactions which followed the transfer of title to the 1^st defendant.  Getting no satisfactory response as to whether and in what circumstances the purchase prices as recorded had been paid, he directed that the 2^nd to 10^th defendants be joined also.

26.  It was only in their statement of defence as amended that for the first time they referred to the transaction involving the acquisition of the village house from Lucas Development.  He had a search undertaken which revealed that the registered proprietor was one Wong Pak Lam, and not Lucas Development.  This Mr Wong features in Mr Siu's evidence as I shall come to.

27.  Mr Ho's evidence was to the effect that one day early in May he was asked by Cheng to take a copy of the Board resolution of 4 February and the plaintiff's seal to the office of the solicitors K & C, where he handed the same to Cheng.  Cheng then proceeded to affix the seal to 10 odd blank pieces of paper and then signed them.  After that he handed them to a lady who was apparently a staff member of K & C.

28.  I come now to the evidence of Mr Siu.  He said that D2 to D10 were all purchasers of the Stanley Street property in good faith for value without having notice of any interest the plaintiff had in the same.  The transaction with the 1^st defendant was at arm's length; there was no conspiracy to defeat the plaintiff's rights.  The representative of the 1^st defendant Chan Xiao Qing (Mr Chan) was introduced to him by a real estate agent called Cheung Tak Wo (Mr Cheung) with whom he and his brothers had dealt many times.  The prospective purchase of the Stanley Street property was attractive because the building as a whole seemed ripe for redevelopment.  They decided to buy when Mr Chan agreed to take in exchange a village house that they were in the throes of building for and on behalf of an indigenous villager who was committed to restore title to them upon completion.  No money changed hands to meet the deposit of $4,999,000 due to the 1^st defendant because the consideration for the village house matched that and the parties agreed to a set-off the one against the other.  They agreed to an expedited completion date at the request of Mr Chan.  He was a Mainlander pressed for time.  They saw no reason not to oblige him.

29.  He said that the formalities associated with the completion of the village house and transfer of title to Lucas Development were completed by February 2003.  But because the litigation had disrupted the transfer of possession and other rights in the Stanley Street property it came to be agreed with the 1^st defendant that completion would await the outcome of the litigation.  He explained that the sale from the 2^nd defendant to the 3^rd to 10^th defendants was at an enhanced figure overall in order to inflate the worth of the property in the event of development or resale.  There has been no passage of money from the 3^rd to 10^th defendants to the 2^nd defendant; the various parties having common ownership and directors the transactions have been carried out by book entries.  He produced the accounts of the 2^nd defendant to show that this was done.

30.  Invited then to explain the machinations of developing land in the New Territories, he confirmed that much of the business that he and his brothers carried on was by this means; that they owned and controlled up to 60 shell companies including the 2^nd to 10^th defendants and Lucas Development was used for this purpose.  Asked to describe the procedure he said that in the case of the land of which the parcel sold to the 1^st defendant is a part, a parcel of land in a village in Yuen Long, designated Lot 1192 DD129, was earmarked as being suitable for development and they bought it, and subdivided it into 4 building sites with a bit left over.  They became Lots 1192 A to D and RP (remaining portion).  The intention being to build on each of Lots A to D for profit, the next step was to find an indigenous villager for each lot; that is, someone qualified by reasons of birth who is thus entitled to apply for the right to have built and thence to live in a village house under the Government's Small House Policy.  Approval of an indigenous villager's application gives him rights not available to the public at large to build on terms less restrictive than these that apply to anyone else, provided the house to be built complies with the standard architectural design known as a village house of 3 storeys and he plans to live in it.  If thereafter he decides to sell within five years he must pay a premium to the Government.  Mr Siu said the 4 indigenous villagers they had to find had to be those who would qualify but who were prepared to 'sell' their privilege; in other words who had no wish to live in the house that was to be built in their name and instead take a reward from the developer in return for putting themselves up for the purpose of getting the Small House grant.

31.  Mr Siu said they found 4 such villagers.  In respect of the lot in question being Lot C that was a man called Wong Pak Lam (Mr Wong).  3 others were found for Lots A, B and D.  A series of documents were professionally prepared to safeguard the interests of the parties.  These included a registrable assignment of title into the villagers' names (it being a condition of a Small Houses Grant that the villager owns the land), an irrevocable obligation for the villager to transfer it back to the developer with power of attorney and will for which the villager on receipt of the Grant was then paid a reward; he mentioned a figure of $100,000 per villager.  Then each of the 4 lots was assigned to the designated villager; of course for no consideration.  That was how Lot C come to be registered into Mr Wong's name as discovered by Mr Lee.  Mr Siu said that construction of all 4 houses was undertaken together; of course at no cost to the villagers.  It was during the course of construction that the agreement with the 2^nd defendant for the sale of Lot C was entered into.  At that stage the land was registered in Mr Wong's name; hence reference in the agreement to Lucas Development selling as agent.  Upon completion Mr Wong, in terms of his commitment to do so, let it be known that he wished to 'sell' his new house and a premium was assessed for payment by him.  The villagers in respect of Lots A, B and D did the same.  In terms of the arrangement entered into the premium was paid by the developer.  For the land 'owned' by Mr Wong this was, according to a letter of 24 January 2003 from the District Lands Office to Mr Wong, $373,200.  Following payment of the premium standard procedure is that a certificate of compliance issues; in this case it was sent out in February 2003.  Only at that point could the house and section be sold.  Produced in the bundle is an assignment dated 20 February 2003 between Wong Pak Lam as vendor and Lucas Development cited as purchaser for the consideration of $1 million 'paid by the purchaser to the vendor'.  The affixing of the seal of Lucas Development was witnessed by Mr Siu (Of course on Mr Siu's account this was a fiction).

32.  Mr Siu conceded that an agreement for the sale to a third party prior to the payment of the premium and grant of a certificate of compliance would be contrary to the building licence conditions imposed and the Small Houses Policy and the enabling Ordinance.  He agreed that this prohibited alienation or the parting of possession by the owner.  He acknowledged that the agreement between Lucas Development and the 1^st defendant was not stamped and registered.  Had this been attempted, registration would have been refused and the licence to build would have been cancelled.  He conceded also that in making application for a licence to build the villager is obliged to say that the land is owned by him.  When it was put to him that he also has to declare that he has no intention of assigning his rights to other people including developers his response was equivocal: 'Not sure'.  He went on to say that now that the premium in respect of Lot C has been paid and the certificate of compliance has issued there is nothing to prevent a transfer to a third party; in this case to the 1^st defendant.  That would by now have proceeded but for the agreement between solicitors to defer until resolution of this litigation.  He concluded his evidence by stating that the Siu brothers have to date completed about 100 of these indigenous villager developments.

The Issues

33.  That being the evidence I heard the issues can now be identified.  They are as follows:-

(a)	is the assignment from the plaintiff to the 1st defendant void ab initio by reason of forgery and or fraud on the plaintiff?  The consequence of this is that no interest could transfer from the 1st defendant, and the Stanley Street property would revert back to the plaintiff.  If not,
(b)	does the plaintiff have an unpaid vendor's lien on the property giving it thus an equitable interest prevailing over everybody except a bona fide purchaser for value without notice?  If so,
(c)	are the 2nd to 10th defendants bona fide purchasers for value without notice?

Discussion

34.  Mr Cheung for the plaintiff submitted that his client was the victim of fraud because an assignment of its interest in the Stanley Street property was made without it having received $4.5m of the $5m consideration.  The 1^st defendant in its pleaded case did not dispute this.  It conceded that $1.5m was paid to Cheng direct and that $3m was to be paid by Cheng himself.  As Mr Cheung was to put it in written submissions:-

“

(1)

Although Cheng Kwong Pun was authorized by the Board Minutes to complete the formality for the sale of the subject Property intended by P, he was never authorized to receive any part of the purchase price personally, or to execute any assignment without the full price having been duly and directly paid to P, or to sign any blank pages using P's chop or common seal, or to sign any documents other than for the due completion of the transaction.”

35.  Mr Cheung adopted the premise that the assignment was a forged document, likely having been compiled from one of the 10 or so sheets signed in blank by Cheng.  But there was no evidence, much less proof of that.  As seen from the conveyancing correspondence between solicitors, an assignment approved and signed by the 1^st defendant was submitted for signing by the plaintiff.  It seems to me that there would be no reason to show why this document was not utilized in the completion.  And this was a document the Board of the plaintiff authorized Cheng to sign under seal.

36.  There can be no argument that Cheng, given conduct of the sale, went off on a frolic of his own.  There is no reason given for the signing of 10 pieces of paper in blank, and the various signed and unsigned documents he showed to Mr Lee in late May were far removed from his brief to deal with a straightforward unconditional sale to the purchaser.  But none of these documents played a part in the transaction.  He undoubtedly withheld from the plaintiff the $1.5m paid to him and no doubt as well the fiction concerning the balance; certainly the plaintiff would have been entitled to call him to account.  But as far as D1 is concerned, it by all accounts complied with the terms laid down by the plaintiff's solicitors for completion and the document it received being the assignment has not been established to be other than a properly compiled document executed under seal by the plaintiff in accordance with its Articles and as authorized by its Board.  I do not find that the correspondence as between the solicitors was other than genuine and contemporaneous.  I am unable to find that the assignment was a fraud much less a forgery.

37.  It follows that I do not hold that it was avoid ab initio.

38.  That said, beyond question the plaintiff has not been paid the consideration contracted for and has what amounts to an equitable lien over the property for the shortfall.  This interest prevails against the whole world save and except a subsequent bona fide purchaser without notice.  The question that remains, therefore, is as to whether the 2^nd to 10^th defendants are bona fide purchasers for value without notice of the plaintiff's claim.

39.  In dealing with this I bracket all 9 of these defendants together, as they are under the ownership and control of the Siu brothers.

40.  Mr Cheung submitted there are a number of pointers to show that the purchases by the 2^nd to 10^th defendants were not at arm's length.  First, he points out that the consideration being by transfer of the village house was not disclosed in the agreements; what was recorded was that it was cash.  Secondly, the purchase by the 2^nd defendant was completed in a rush, with scant time to inspect, search the title, requisition and so on.  Thirdly, the village house was transferred at an inflated price, having regard to the agreed value.

41.  He submitted thus that these unusual features established that the 2^nd defendant was aware of the plaintiff's interest and worked hand in glove with the 1^st defendant to defeat its claim to protect that.

42.  I do not accept that.  There was no evidence to disprove Mr Siu's account that he was introduced to the Stanley Street proposition by an agent with whom he frequently dealt and thence to Mr Chan with whom he had had no previous involvement.  There was nothing to discredit his claim that the Siu brothers were attracted to the Stanley Street property because of its development potential.  Whilst the time frame between commitment and completion was unusually short, there is nothing at law to forbid this and no presumption of mala fides because of it.

43.  That the 1^st defendant was prepared to pay more than the village house was worth is neither here nor there.  That the agreements did not on the face of them disclose the contemporaneous transaction upon which they depended is a matter of drafting.  Mr Siu's production of the accounts of the 2^nd defendant for the period in question show that the book entries he referred to were real enough.

44.  So, there is nothing to indicate that the 2^nd to 10^th defendants were other than bona fide purchasers without notice.  But were they for value?

45.  The consideration being the assignment to the 1^st defendant of the village house, I turn to consider that transaction.  The manner of developing property in the New Territories utilizing grants to indigenous villagers was the subject of a case argued before the Court of Appeal called Chung Mui Tech and others v Hang Tak Buddhist Hall Association Limited and Another [2001] 2 HKLRD 471.  I repeat, verbatim, part of the headnote:-

“In 2000, D1 entered into a deed of joint development (the deed) with D2, a developer.  Pursuant to the deed, D1 would carve out its land into sections and assign them to certain indigenous villagers procured by D2.  These villagers would then apply, as owners, for concessionary building licences to erect small houses under the New Territories Small House Policy (the policy).  Under the policy, villagers who owned land were entitled to a free building licence and villagers who did not own land could apply for a concessionary grant of land.  In return, the villagers would execute security documents such that the small houses when erected would belong to D2, to be sold, let, licensed or otherwise dealt with as D2 saw fit.  P claimed that the deed was unlawful as it would require the villagers to make false statutory declarations namely, that they had not made “any private arrangements for [their] rights under the [policy] to be sold to other individual [or] developer.”

46.  It is apparent that the scheme as set out was very close to that described by Mr Siu, save that in this case D1 and D2 are one and the same entity.

47.  The lead judgment was written by Le Pichon JA.  Putting the plaintiff's case she stated:-

“The plaintiffs contended that as the scheme embodied in the Deed required the second defendant to enter into private arrangements with indigenous villagers to acquire their rights or special privileges under the Small House Policy for valuable consideration to be decided by the second defendant in consultation with the first defendant, that was contrary to the intent and spirit of the Small House Policy of the Government.  It was also submitted that the second defendant's obligations required the second defendant to aid, abet, counsel or procure indigenous villagers to declare, falsely, that they had never made and had no intention at present to make any private arrangements for their rights under the Small House Policy to be sold to other individuals or a developer.  The form of declaration, adopted in 1997, required such a declaration to be made in connection with the application for a Small House Grant.

It was also the plaintiffs' case that the Deed was in effect a conspiracy between the defendants and those indigenous villagers procured by the second defendant to make false declarations and a conspiracy by all these parties to defraud the Government and/or to obtain from the Government an advantage by deception, namely, permission to erect small houses on the site at no premium under a false representation.

……

This appeal falls within a narrow compass.  Mr Macrae SC, for the plaintiffs submitted that because the Deed cannot be performed in accordance with its terms without the commission of an illegal act, it is contrary to public policy and unenforceable.

……

Is the Deed illegal and unenforceable?

The nub of the plaintiffs' contention is that the Deed is unenforceable on public policy grounds because its performance will necessarily involve the swearing of false declarations and the making of mis-representations to the Government and hence the commission of illegal acts.  It is therefore necessary to examine whether or not this is so.

False representations

The starting point is that the implementation of the Deed requires the second defendant to identify indigenous villagers who are eligible under the Small House Policy to build such houses to become the registered owners of sections of the Land.  It is an intrinsic part of the Deed that these villagers make applications to the Shatin District Lands Office for the necessary permission to build small houses on the sections of the Land to be assigned to them by the first defendant.  An application involves the completion by the applicant of a “Small House Application Form” which is in standard form obtainable from any New Territories District Lands Office.  The form is a composite document consisting of several pages and includes a declaration to be made by the applicant.”

She then went on to state that there were different forms of declaration, but that in effect the villager making application had to state:-

'I have never made and have no intention at present to make any private arrangements for my rights under the Small House Policy to be sold to other individual/a developer'.

And she went on to make the following finding:-

"In my judgment, the plaintiff's case is unanswerable.  Since the Deed does involve a “private arrangement”, the declaration to be made by the applicants will necessarily be false.  That being so, it must follow that the Deed cannot be performed according to its terms without the commission of an illegal act."

48.  In the case before me the application form Mr Wong and the other indigenous villagers had to sign was not before me; as a consequence I cannot find as a proven fact that he made a false declaration.  But as a matter of commonsense it could not sensibly be said that an indigenous villager bent, like Mr Wong, on making a commercial profit out of a concessionary licence could suddenly escape the consequences that caught the protagonists in the scheme in Chung Mui Tech.  And Mr Siu with all his experience could only have been fully aware of this.  He did say that he was aware that in making his application the villager had to own the land; of course Mr Wong did not.  And his answer to the proposition that Mr Wong would have had to make a declaration that he had no intention of assigning his rights being 'Not sure', was disingenuous.

49.  I am satisfied that the scheme propounded by Lucas Development was illegal as being contrary to public policy.  Lucas Development's purported assignment to the 1^st defendant was tainted by the same illegality.  For the purpose of this action this means that the 'value' the 2^nd to 10^th defendants have put up as consideration is unenforceable.  It follows as I find that they cannot be described as bona fide purchasers for value without notice, and are caught by the plaintiff's equitable lien.

The Orders

50.  There will be a declaration that the plaintiff is entitled to a lien in equity on the Stanley Street property for the full amount of the unpaid purchase price of $4.5m together with interest thereon, being HSBC prime as from the date of the writ being 12 June 2002 to the date of this judgment and thereafter at the judgment rate.  The plaintiff's lien shall prevail over the interests if any of all the defendants in the property.  There shall be taken all pertinent accounts and enquiries.  There shall be liberty to apply.  Costs, nisi at first instance, are to the plaintiff against the 2^nd to 10^th defendants taxed if not agreed.