TANG TENG AND OTHERS v. CHEUNG TIN WAH AND ANOTHER

HCA 729/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 729 OF 2011

______________

_______________

J U D G M E N T

_______________

1. The plaintiff seeks recovery of landed properties from the defendants under the principles of resulting trust.

The facts

2. The Tang Teng Hong Tso (“the Tso”) is an ancestral worship trust.  The named plaintiffs are its current managers.

3. The 1^st defendant (“D1”) was in the business of developing small houses in the New Territories and the 2^nd defendant (“the company”) was and is his corporate vehicle.

4. Prior to 23 February 1998, the plaintiff was the registered owner of the Remaining Portion of Section A of Lot No. 1326 and the Remaining Portion of Lot No. 1322, both in Demarcation District No. 112 (collectively “the lands”).

5. On 26 June 1997, the plaintiff (acting through its then managers) and D1 entered into a 合作發展丁屋協議 (“the agreement”) to jointly develop small houses on the lands.

6. Under the agreement, the plaintiff was to provide the lands while D1 would provide the capital and all costs for development: clauses 1 and 3.1.  D1 had to buy ting rights (買丁權), partition the lands, and apply for building licenses (丁牌) within 18 months, failing which the plaintiff may terminate the agreement and demand D1 to return the lands: clause 3.3. Within 60 days of the grant of building licenses, D1 had to commence construction of the houses and deliver them to the plaintiff within 18 months: clause 3.4.  The plaintiff would be given 5 small houses whilst D1 would have the rest: clauses 4.1 and 4.2.  The plaintiff could sell the 5 small houses to D1 for $3.3m each and D1 would be responsible for paying the land premium: clause 3.4.  D1 would also be responsible for paying the land premium for the remaining houses: clause 3.4.  If the District Lands Office confirmed it would not issue building licenses, D1 had to return the lands to the plaintiff within one year: clause 3.7.

7. The obligations of D1 under the agreement were subsequently taken over by the company under a 承諾保證書 (“the undertaking”) dated 23 February 1998.  Clause 6 of the undertaking was similar to clause 3.7 of the agreement.

8. On 16 July 1997, the plaintiff applied to the District Lands Office for the sale/transfer of the lands at $3.88m for the purposes of:

(i) Paying for the costs of repair of the Tso’s properties;

(ii) Maintaining a reserve fund for worshipping ancestors; and

(iii) Sponsoring the education costs of the children of the Tso’s descendants.

The plaintiff’s witness, 鄧己生 (“Mr Tang”), stated in his oral evidence that those purposes were “made up” for the District Lands Office’s consideration (作D理由比地政處睇).

9. On 23 February 1998, with the approval of the District Lands Office, the plaintiff assigned the lands to the company.  The assignment contained an acknowledgement made by the plaintiff’s then managers of receipt of the consideration of $3,880,000 (“the acknowledgment”).  In fact, the plaintiff had only received $200,000 as deposit (“the deposit”) from the defendants.

10. The property market fell drastically in the year 1998.  The development was put to a halt.  No building licenses had been applied for in respect of the lands (contrary to what was stated in D1’s witness statement).

11. The parties then entered into a supplemental agreement dated 24 March 2000 to vary the agreement. One of the 2 variations was that 5 houses to be built on lot no. 1327 in DD 112 (“lot no. 1327”) were allocated to the plaintiff: clause 2.  Subject to those 2 variations all other terms of the agreement remained valid.  In the witness box, D1 stated, for the first time, that 5 tings had applied for building licenses in respect of lot no. 1327, but till now there has been no approval or rejection.

12. For 17 years since the agreement, the lands have been left vacant.  The plaintiff took out this action in 2011.

13. The above facts are largely not disputed and I accept them to be true.

The parties’ cases

14. It is not disputed that the agreement, the supplemental agreement and the undertaking (collectively “the agreements”) were illegal.  The plaintiff’s case is that since the illegal purpose had not been carried into effect, the lands should be returned to the plaintiff under the doctrine of locus poenitentiae.  Alternatively, the transfer of the lands to the company was a voluntary assignment and hence the company is holding the lands on resulting trust for the plaintiff.

15. The defendants contend that they had provided consideration in the amount of $2,447,900 (including the deposit).  They say that the plaintiff is estopped by deed from denying the defendants’ provision of consideration.  Further, the common intention of the parties at the time of the assignment was not for a trust to be created but for an outright transfer of the lands to the defendants.

16. The issues are therefore:

(A) Whether the doctrine of locus poenitentiae is applicable;

(B) Whether the defendants had provided consideration for the assignment;

(C) Whether the plaintiff is estopped by deed from denying receipt of the consideration; and

(D) Whether there was an outright transfer of the lands to the defendants so that no resulting trust could arise.

Credibility of witnesses

17. Only Mr Tang and D1 gave evidence for the plaintiff and the defendant respectively.  Both of them were evasive witnesses.  Upon given warnings against self-incrimination, they avoided answering questions relating to legality of the agreements.

18. By way of example, Mr Tang elected not to answer the question as to whether or not the purposes for the sale of the lands were true.  D1 elected not to answer the questions as to:

(i) whether or not a ting had to make a false declaration in order to apply for a building license;

(ii) whether a ting had to pay the developer for transfer of the land to the ting;

(iii) whether a 回頭契 (a document signed in advance by a ting to transfer houses back to the developer) would still be useful after a small house is built;

(iv) how a developer would protect itself against the contingency of a ting selling a small house instead of assigning it to the developer.

19. I find their evasive attitude to be a reflection that they personally knew about the illegality of the arrangement under the agreements and elected not to answer to avoid incriminating themselves.

Documentary evidence

20. Given the evasive attitude of the witnesses, this court places great emphasis on the documentary evidence, except for 2 items:

(a) a report of the Audit Commission dated 15 October 2002 on Small House Grants in the New Territories; and

(b) a paper known as Rethinking the Small House Policy.

They contained opinion evidence on how the government policy on small houses was abused and has no place in a case like the present.  I disregard those 2 documents.

Applicable legal principles

21. The principles distilled from the authorities are as follows:

(1) Where an agreement is entered into for an illegal purpose, the court will not enforce it.  Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866, Yuen J (as she then was); Cheerbond Development Ltd v Tung Kwok Yu [2010] 2 HKLRD 546.

(2) A development scheme that takes advantage of the Small House Policy under which an applicant ting would have to represent himself as the legal and beneficial owner of a piece of land even though he would merely be holding it as a nominee is illegal, as it would necessarily involve making of a false declaration and hence commission of the tort of misrepresentation to the government.  See Best Sheen’s case at 874B-C; affirmed in Chung Mui Teck & ors v Hang Tak Buddhist Hall Association Ltd & anor [2001] 2 HKLRD 471 at 477F-H.

(3) It is no answer that no false statutory declaration has yet been made if the implementation of the scheme necessarily involves the making of such a declaration: Chung Mui Teck’s caseat 477H.

(4) However, a party to an illegality can recover by virtue of a legal or equitable property interest if he did not need to rely on the illegal contract for any purpose other than providing the basis of his claim to the property right: the Best Sheen case at page 874D-E.

“… a declaration that the plaintiff is the beneficial owner of the Land does not amount to enforcement of the illegal contract.

This is because the plaintiff is not forced to rely on the illegal contract for the declarations sought as to its property interests, even though the illegal contract explains why it came about that the bankrupt was registered as the owner of the land.” (page 874C-E)

(5) A classic example was the claimant’s reliance on resulting trust where he provided the consideration for the acquisition of a property and was not the named purchaser or where a voluntary transfer was involved. See the Cheerbond case at para 9(b); Best Sheen caseat page 874F-875A.

(6) In respect of an assignment containing a clause acknowledging receipt of the consideration when it was not paid, even if pursuant to section 17 of the Conveyancing and Property Ordinance, Cap 219, the effect was that the plaintiff did not retain a beneficial interest in the land, the plaintiff could recover the land under the doctrine of locus poenitentiae. Under the doctrine, a party who transferred his property for an illegal purpose can recover his property provided that he has withdrawn from the transaction before the illegal purpose has been wholly or partly performed. Best Sheen case at page 875B-E; Cheerbond case at para 9(e).

Breach of the small house policy

22. Under the small house policy (“the policy”), a ting (ie a male indigenous villager of the New Territories) who is over 18 years old and was descended through the male line from a resident in 1898 of a recognized village, is entitled to one concessionary grant during his lifetime to build one small house for his own use.

23. The agreements were no different in substance with that which the Court of Appeal found to be illegal and unenforceable in Chung Mui Teck’s case at pages 478 C to 479D.

24. Mr Leung, counsel for the defendants, states in his opening submission that the defendants are “not putting up the argument that the agreement and the undertaking were not illegal”.  He also abandons the plea in reliance of clause 6.6 that part of the agreement remains enforceable even though part of it was not.   

25. In my view, that was a right stance for the defendants to take, for I have no doubt that both Mr Tang and D1 knew about the illegality.  From their oral evidence, they knew the tings were recruited (套丁) from nearby villages as hired guns of the developer.  Each ting might be paid a different sum.  The defendants but not the tings had acquired lot no. 1327 and assigned to the tings for making applications to the District Lands Office.  On completion, the tings would transfer the small houses to the defendants pursuant to回頭契placed in the custody of solicitors to ensure that the lands transferred to those tings and the completed houses would belong to the developer.  They also knew about the tings having to apply to the District Lands Office for payment of land premium so that they could transfer the relevant small houses to the company or its nominee; and that the defendants would bear the costs of the land premium.

26. It was clear that the assignment of the lands was the first step in the performance of the illegal agreement.  It was to arm the defendants with apparent ownership of the lands.  The purposes given by the plaintiff for sale of the lands was to mislead the District Lands Office.  I find that in declining to answer the questions set out in para 18(i) and (ii) above, D1 clearly knew that each ting (whose rights the defendants bought) necessarily had to sign a false declaration[1] to the effect that the ting was the sole legal and registered owner of the lands when the ting had no interest in the lands; and that the ting has never made any private arrangements for his rights under the Small House Policy to be sold to an individual/a developer when the ting had.  The defendants simply could not carry out the agreements without procuring the tings to commit the tort of deceit or misrepresentation to the government in applying for building licenses.  In declining to answer the question in para 18(iii) and (iv) above, D1 clearly knew that the pre-signed 回頭契 was to protect the defendants’ interest as developer.

27. I find that the agreements were formed for an illegal purpose and thus the whole arrangement was tainted with illegality.  The principles in paragraph 21(1) to (3) apply.

(A) Whether the doctrine of locus poenitentiae is applicable

28. The defendants contend that the doctrine of locus poenitentiae is not applicable as the parties have performed in a material manner.

29. I reject the contention.  The lands have been partitioned into a total of 33 lots on 10 March 1998, but the partitioned lots are still held under the name of the company.  Even if the applications for building licenses for lot no. 1327 were relevant, those applications have not yet succeeded by the time of the trial.  The lands remain vacant as of now. 

30. Mr Leung argues that for the doctrine of locus poenitentiae to apply, it has to be additionally shown that the withdrawal from an illegal transaction was voluntary and not forced upon the plaintiff by exterior circumstances (such as intervention of the police, or of a third party, or by the other party’s breach of the contract).  This argument is based on the obiter dictum of Deputy Judge Horace Wong SC in Tiu Sum Fat v Shun Sing Development Ltd [2010] 1 HKLRD 553at §55-57.

31. It is not necessary for this court to decide whether there is this additional requirement for the doctrine.  Assuming there is, there were no exterior circumstances to show that the withdrawal was forced upon the plaintiff.  On the defendants’ case, the application for a building license can take years.  The application (in respect of lot no. 1327) is still “pending” and not yet rejected.  The plaintiff is not relying on the defendant’s breach. It is not too late in withdrawing.

32. I hold that the principle of locus poenitentiae applies. 

(B) Whether the defendants had provided consideration for the assignment

33. As the documentary evidence is produced by the defendants, I shall assume that the payors of the money (including a company known as Goldlikan Ltd and a Yung Kang Chung) were paying on behalf of the defendants.

34. The documentary proof is inadequate:

(i) Even if $2,447,900 had been paid, it is still about $1.43m short of the consideration stated in the assignment. 

(ii) The deposit was not an outright payment to the plaintiff.  It has to be returned to the defendants when the building licenses for the lands are issued: clause 3.6 of the agreement.

(iii) Some of the payments were made for the personal benefit of some members or even managers of the Tso (eg A201), but there was nothing on the face of the documents to relate the payments to the consideration for the assignment. 

(iv) Some of the payments were for specific purposes other than for the assignment, eg cash payments signed on behalf of one Lee Hang Kwong whom Mr Tang denied knowledge of; the welfare funds of the Tso; loans to individual persons like 鄧雙喜(A200, 204); payments to middlemen.

(v) None of the receipts were signed on behalf of the Tso.

(vi) Neither witness could tell how the consideration was determined.  In their answer to the request for further and better particulars of the re-amended defence, the defendants claimed that the consideration of $3.88m was “the capital investment” paid under clause 3.1 of the agreement, implying that it was not as consideration for the lands.

35. In any case, the defendants are relying on their performance under the illegal agreements to show provision of the consideration.  This defence is not sustainable.  See para 21(1) above.

(C) Whether the plaintiff was estopped by deed from denying receipt of the consideration

36. The defendants rely on the acknowledgement.  The plaintiff has, rightly in my view, abandoned its plea of mistaken belief.

37. Estoppel by deed is a rule of evidence founded on the principle that a solemn and unambiguous statement or engagement in a deed must be taken as binding between the parties and privies and therefore as not admitting any contradictory proof: Greer v Kettle [1938] AC 156 at page 171.

38. Estoppel by deed may be applied in actions on the deed that contains the statement but not to collateral actions between the parties to the deed: Wilken and Ghaly, the Law of Waiver, Variation and Estoppel (3^rd ed) §12.37.

“Estoppel by deed may only be used in actions on the deed that contains the statement relied on. It does not apply to separate or collateral actions between the parties to the deed. In such cases, the deed may be relied on as evidence of the facts asserted in it but there is nothing to stop the parties adducing contradictory evidence. For example, in Carpenter v Buller, W and M executed a deed pursuant to various building works which they were carrying out. The deed recited that W was the owner of a specified plot of land. M later sued W for trespass over the land specified. No estoppel arose to prevent M from asserting his title to the land. The action in trespass was wholly collateral to the deed and was not an action founded upon it.”

39. Specifically, where money has not been paid,

“The well known rule of the Chancery Courts in regard to a receipt clause in a deed not effecting an estoppel if the money has not in fact been paid is a good illustration of the equity view.” Greer v Kettle at 171.

40. Prime Sight Ltd v Lavarello [2014] 2 WLR 84 is an example of an action on a deed where money was not paid.  The deed recited that a sum had been received by a person as consideration.  In fact, there was no payment and the person subsequently became bankrupt.  The official trustee sued for consideration as being due on the deed, but was held to be estopped from challenging the assumed facts stated in the deed.

41. Further, evidence as to the true nature of the transaction can be given.  In Ali v Khan [2002] EWCA CW 974at §20, it is said that,

“20. Further, the limitation on the use of extrinsic evidence in relation to deeds or other written contracts has never excluded evidence as to the true nature of the transaction … extrinsic evidence may be relied on to show that a conveyance in form absolute was only for a limited purpose for which a transfer of the legal estate was both sufficient and all that was intended …

…

23. It is clear from Greer v Kettle [1938] AC 156, 171 as well as the two cases to which I have referred that an estoppel by deed does not preclude contradictory oral evidence admissible in accordance with equitable principles. …”

42. There would be an exception to the estoppel if the deed was fraudulent or illegal or if one party induced an untrue recital by his own representation to the other party: Greer v Kettle, at page 171; Prime Sight Ltd v Lavarello [2014] 2 WLR84, at § 33.

43. Mr Leung, counsel for the defendants, relies on the cases of Rimmer v Webster [1902] 2 Ch 163 and Tsang Chuen v Li Po Kwai [1932] AC 715. With respect, the estoppel principle was applied there to prevent a party to a deed from asserting something contradictory to the deed because an innocent third party was involved. 

44. The circumstances are entirely different here where the direct parties to the assignment are before this court. The plaintiff is not suing on the assignment for the unpaid consideration.  It is just providing the basis of its claim to proprietary rights.  See paragraph 21(4) above.  I hold that the plaintiff is not estopped from proving that the consideration stated was illusory and that the assignment was made with a view to deceiving the District Lands Office.

(D)  Whether there was an outright transfer of the lands to the defendants so that no resulting trust could arise

45. Mr Leung submits that the arrangement between the parties was a joint venture whereby each party took risks.  The plaintiffs assigned the lands outright to the defendants.  The defendants had already allotted 5 houses to be built on lot no. 1327 to the plaintiff in exchange, so whether the defendants would use the lands for agricultural purpose should not concern the plaintiff.

46. This line of defence can be dismissed outright as it has not been pleaded.

47. Even if this defence can be considered, it was clear that the actual intention was not for an outright transfer of the lands.  The transfer was for a specific development purpose so that the plaintiff was to receive 5 houses, not another unbuilt portion of lot no. 1327.  If the District Lands Office does not grant the building licenses, the lands have to be returned to the plaintiff: clause 3.7 of the agreement.

48. In any case, since the defendants have to rely on the illegal agreements to establish its defence, the court will not assist them.  This line of defence is unsustainable.

Conclusion

49. The agreements were illegal.  The plaintiff is entitled to rely on the principle of locus poenitentiae as the illegal agreements have not been carried into effect.  Since they have not provided consideration to the plaintiff for the assignment, the defendants are holding the lands on resulting trust for the plaintiff.  The plaintiff does not have to rely on the illegal agreements to establish its property rights. 

50. I order as follows:

(1) I declare that:

(a) prior to the partition of the lands on 10 March 1998, the 2^nd defendant had been holding the lands in the remaining portion of Section A of Lot No. 1326, and the remaining portion of Lot No. 1322 in Demarcation District No. 112 together with the messuages erections and buildings thereon and under a resulting trust for the plaintiff and/or its members absolutely;

(b) upon partition of the lands on 10 March 1998, the 2^nd defendant has been holding the lands under a resulting trust for the plaintiff and/or its members absolutely;

(c) the assignment was null and void and of no legal effect.

(2) The 2^nd defendant do convey the following properties to the plaintiff and its managers:

(a) Subsections 2 to 19 of section A of Lot No. 1326 and the Remaining Portion of Section A of the Lot No. 1326 in Demarcation District No. 112. 

(b) Sections B to H and Sections J to N and Section P of Lot No. 1322 and the Remaining Portion of Lot No. 1322 in Demarcation District No. 112.

(3) The assignment be rectified by deleting the words “IN CONSIDERATION of the sum of HONG KONG DOLLARS THREE MILLION EIGHT HUNDRED AND EIGHTY THOUSAND (HK$3,880,000) paid by the purchaser to the vendor (the receipt whereof is acknowledged). 

(4) The assignment be set aside.

Costs

51. Costs should follow the event and be to the plaintiff.  However, it was after the pre-trial review that the plaintiff sought leave, from a master, to issue a writ of subpoena to an officer of the District Lands Office to produce documents.  The documents turned out not to be in dispute and could have been agreed upon if the plaintiff had acted earlier.  The questions posed by both counsel at the trial to the officer (eg concerning statements in the report by the Audit Commission of Hong Kong) or progress of application of building licenses, were not really something that the officer, who acting very honestly, could have answered from his personal knowledge. 

52. Further, if the officer had been called on day 1, the hearing on day 2 could have been dispensed with.  I therefore disallow all costs arising from the need to call the officer and the costs of the 2^nd day hearing.

53. I make an order, nisi, that costs, except those of and incidental to the calling of the officer of the District Lands Office and of the hearing on the 2^nd day, be to the plaintiff.

54. The costs shall be summarily assessed on the papers on 9 May 2014 without a hearing.  The plaintiff shall file and serve their costs statement by 25 April 2014.  The defendants shall file and serve their grounds in opposition by 8 May 2014.

55. I thank counsel for their assistance.