NICE BEAUTY LTD v. LYDIA MOO YUN FUNG MEMORIAL FOUNDATION LTD

HCA 827/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 827 OF 2013

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JUDGMENT

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Introduction

1.  This action is in relation to the property known as Unit 4B, 4th Floor, Tai Chi Court, No 134 Austin Road, Kowloon, Hong Kong (“the property”).  Tai Chi Court is the building where the property is situated. 

2.  The plaintiff is and was, at all material times, a company incorporated in Hong Kong.

3.  The defendant is and was, at all material times, a company limited by guarantee.  It was incorporated on 22 November 2004.  The defendant is and was, at all material times, a charitable institution exempted from taxes under the relevant provisions of the Inland Revenue Ordinance, Cap 112.

4.  The defendant was previously represented by solicitors and has filed and served a defence to the plaintiff’s statement of claim.  At the pre-trial review on 23 June 2015, Deputy High Court Judge Kent Yee ordered, inter alia, that the defendant’s director do apply for leave to represent the defendant at the trial within 14 days from the date of the order. 

5.  The defendant failed to obtain leave to be represented by a director at the trial. The trial proceeded before me in the absence of the defendant. 

6.  There is no dispute that the property was assigned to the defendant as purchaser by the vendor by an assignment made on 5 September 2006 in consideration of the sum of HK$2,980,000.  The defendant is the registered owner of the property.

7.  By an assignment made on 13 June 2012 (“the 2012 assignment”) between Yulin City Hsen Yuen Library (“the Yulin Library”), a PRC legal entity as assignor and the plaintiff as assignee, the Yulin Library assigned to the plaintiff all rights, interests and benefits in the property as set out therein.

8.  It is the plaintiff’s case that by the 2012 assignment, it has acquired the beneficial interest in the property and that the defendant is obliged, as trustee, to transfer the legal title in the property to the plaintiff. 

Background

9.  The relevant background is that the Yulin Library has, at all material times, been a legal entity in the PRC and directly subordinated to the Yulin City Government. 

10.  Yulin City HY Woo Charitable Foundation (“the Yulin Foundation”) has also been, at all material times, a legal entity in the PRC.  

11.  The Yulin Foundation was established on 16 June 2006 as evidenced by a letter from the Yulin City Government dated 16 June 2006.  The legal representative of Yulin Foundation, at all material times, was Zhao Qinfen. 

12.  Hsen Yuen Library HY Woo Charitable Foundation Management Limited (“the HK Management Company”) was a company limited by guarantee incorporated in Hong Kong on 7 December 2001.  The HK Management Company was dissolved on 26 February 2010.

13.  By an authorisation letter dated 20 July 2006 from the Yulin City Government to the Yulin Library (Exhibit P2), the Yulin Library was authorised to transfer charitable funds in the sum of HK$3,100,000 held in the account of the HK Management Company to the defendant for the purchase of the property.  The said authorisation letter provided that all revenues earned from the property after its purchase and after deduction of reasonable management costs every year should be donated to the Yulin Foundation.  It was also provided in the said authorisation letter that the defendant should unconditionally transfer the property as a gift to HY Woo Charitable Foundation (“the New HK Charity”) to be used for charitable purposes after the establishment of the New HK Charity.

14.  By another authorisation letter also dated 20 July 2006 (Exhibit P3), the Yulin Library authorised Ching Sham, a director of the defendant, to transfer the charitable funds in the sum of HK$3,100,000 held in the account of the HK Management Company to the defendant for the purchase of the property.  It was provided therein that all revenues earned from the property after its purchase and after deduction of reasonable management costs should be donated to the Yulin Foundation.  It was also provided therein that the defendant should unconditionally transfer the property as a gift to the New HK Charity for charitable purposes after it was established.

15.  The board minutes of a meeting of the defendant’s directors held on 2 August 2006 (Exhibit P7) records that HK$3,100,000 was received by the defendant from the Yulin Library and the Yulin Foundation for the purchase of the property by the defendant.  The sum of HK$3,100,000 (“the purchase money”) comprised of the sum of HK$2,980,000 for the purchase price of the property and the sum of HK$120,000 for interior decoration fees.

16.  It was also recorded in the said board minutes that after deducting the reasonable expenses, the rental revenues to be earned should be donated to the Yulin Foundation.  The board minutes also recorded that after the establishment of the New HK Charity the defendant should unconditionally transfer the property to the New HK Charity for charitable purposes.

17.  There is no dispute that the purchase money was transferred from the bank account of the HK Management Company on 24 July 2006 as is evidenced by the bank passbook of HK Management Company (Exhibit P13).

18.  The New HK Charity has not been established. 

19.  The above background facts are undisputed.

20.  As submitted by Mr Lam, for the plaintiff, the defendant became the registered owner of the property as a result of an arrangement with the Yulin Library and the Yulin Foundation.  In my view, this is clear from the contents of the authorisation letters, Exhibit P2 and P3, and from the board minutes Exhibit P7.

21.  There is also in evidence the letter to the Yulin Foundation dated 18 August 2006, from the HK Management Company (Exhibit P4) signed by two directors, namely Poon Lai Hing (“Poon”) and Wong Tak Fu (“Wong”).  Poon and Wong were also directors of the defendant at all material times.  Poon and Wong were the directors who signed the assignment dated 5 September 2006 on behalf of the defendant whereby the property was assigned to the defendant. 

22.  Exhibit P4 confirms that originally it was intended that the property would be purchased by the HK Management Company.  However, for tax reasons, it was felt that the better course was to put the property in the name of a charity, but the HK Management Company did not qualify as a charity. The New HK Charity could not be set up in time before the purchase was completed.  It was decided that the property be purchased in name of the defendant to take advantage of its charitable status and that the property would be transferred to the New HK Charity after it was established. 

The Main Issues

23.  The main issues are:

(1) What was the legal effect of the arrangement by which the defendant acquired the property?

(2) Who was the beneficial owner of the purchase money provided to the defendant for the purchase of the property?

(3) Whether the 2012 assignment to the plaintiff required the approval of the Yulin Government?  And if so, whether such approval was given?  and

(4) Whether the consideration for the assignment to the plaintiff by the 2012 assignment was at an undervalue?

24.  In a recent Beddoe application made by the defendant in HCMP 2187 of 2014, which was dismissed by Chow J by his order dated 28 July 2015, the defendant stated at paragraph 6 of the Memorandum that the purchase money for the purchase of the property was ultimately owned by the Yulin Foundation or the Yulin Library, but that the defendant does not know who precisely ultimately owned the purchase money.  The Memorandum was supported by a statement of truth made by Poon on behalf of the defendant.  This was repeated in Poon’s affirmation in the Beddoe application where she said, at paragraph 7, that the defendant accepted that the purchase money was provided by the HK Management Company and the funds may ultimately belong to either the Yulin Library or the Yulin Foundation, but that the defendant had no precise knowledge as to whom the purchase money ultimately belonged to.

25.  Thus it is plain that the defendant accepts that the purchase money ultimately belonged to either the Yulin Library or the Yulin Foundation, but the defendant does not aver any positive case as to which of these two entities was the ultimate owner of the purchase money.

26.  I heard evidence from Fung Yiu Fai (“Fung”), a director of the plaintiff.  I am satisfied that he was a truthful and reliable witness.  I accept his evidence. 

The legal effect of the arrangement

27.  I am satisfied that the defendant became the registered owner of the property under the arrangement as submitted by Mr Lam.  The purchase money came from either the Yulin Library or the Yulin Foundation.  The property would be leased out and the rental income after deducting reasonable costs would be given to the Yulin Foundation for charitable purposes.  After the setting up of the New HK Charity, the defendant would transfer the property to the New HK Charity unconditionally as a gift for charitable purposes.  I so find. 

28.  I would observe that at paragraph 13 of its defence, the defendant has admitted that the purchase money for the purchase of the property was transferred by the HK Management Company and admits that it holds the property as trustee for the New HK Charity to be set up in Hong Kong.  However, the defendant has averred that if the New HK Charity cannot be set up in Hong Kong and the trust fails, then the property should be held on a resulting trust in favour of the entity that provided the purchase money.

29.  Importantly, at paragraph 15 of the defence, the defendant has admitted that the property was not intended as a gift to it and that it has no beneficial interest in the property.

30.  The defendant’s plea at paragraph 13 of its defence that it holds the property on trust for the New HK Charity to be set up cannot be sustained.  A trust cannot exist if there is no beneficiary and will fail for uncertainty of objects.  The New HK Charity was, at the time of the purchase of the property, an entity to be established in future.

31.  If trusts that are declared that fail at the outset, for e.g. uncertainty, a resulting trust arises.  If a person transfers property to a person to hold upon trust that are to be declared in the future, a resulting trust will arise upon the transfer and will subsist until the trusts have been effectively declared (paragraphs 8-004 and 8-005 Lewin on Trusts, 19th edition).

32.  It seems to me, and I so find, that the purchase money was transferred to the defendant to be used for the purchase of the property.  Undoubtedly, the defendant was not intended to beneficially own the property.  I also find that it was intended that the property was to be transferred at some future time to the New HK Charity to be set up.  It was not in existence at the time of the purchase.  As this was to be a trust in favour of a future entity, the trust failed at the outset. 

33.  Another way of looking at the matter is that if the trust was only to be declared in the future when the New HK Charity was to be set up, then the beneficial interest was not effectively disposed of at the outset, and would result back to the settlor.  There would be a resulting trust of the beneficial interest in the property in favour of whoever owned the purchase money. 

34.  I would refer to what Lord Upjon said in Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 at page 313:

“If A intends to give away all his beneficial interest in a piece of

property and thinks he has done so but, by some mistake or accident

or failure to comply with the requirements of the law, he has failed

to do so, either wholly or partially, there will, by operation of law,

be a resulting trust for him of the beneficial interest of which he

had failed effectually to dispose. If the beneficial interest was in

A and he fails to give it away effectively to another or others or on

 charitable trusts it must remain in him”

35.  As to issue (1), I accept Mr Lam’s submission and find that the legal effect of the arrangement whereby the defendant became the registered owner of the property was that there was a resulting trust of the beneficial interest in the property in favour of whoever owned the purchase money. 

The beneficial owner of the purchase money

36.  The evidence shows that the purchase money came from the bank account of the HK Management Company.  However, as I have said, the defendant accepts that the beneficial owner of the purchase money was either the Yulin Library or the Yulin Foundation.

37.  I was referred to the defendant’s audited accounts, Exhibit P8 to P11.  In the audited accounts for the year ended 31 March 2009 (Exhibit P8), signed by two directors including Poon, it is clearly stated that it was the Yulin Library that donated the funds for the acquisition of the property by the defendant.  I would observe that it was not stated that it was the Yulin Foundation that provided the funds for the acquisition.  Clearly, the defendant acknowledged in its audited accounts that the funds came ultimately from the Yulin Library and not from the Yulin Foundation.  This is repeated in the audited accounts of the defendant for the subsequent years (Exhibit P9 to P11).

38.  Also, the authorisation letter, Exhibit P3, dated 20 July 2006 for the use of the funds for the purchase of the property was issued not by the Yulin Foundation but by the Yulin Library.

39.  As pointed out by Mr Lam, the Yulin Foundation was only set up on 16 June 2006 as is evidenced by the decision dated 16 June 2006 from the Department of Civil Affairs, Shaanxi Province.  The purchase money was transferred to the defendant on 24 July 2006 as shown in the bank passbook Exhibit P13.  The bank passbook does not show any deposit into that account of the purchase money of HK$3,100,000 between 16 June 2006 and 24 July 2006 when the purchase money was transferred to the defendant.  This provides strong support for the view that the purchase money was not provided by the Yulin Foundation. 

40.  As to issue (2), it seems to me, and I so find, that the purchase money was beneficially owned by the Yulin Library. 

41.  I am satisfied and find that the beneficial ownership of the property all along remained with the Yulin Library. 

The 2012 assignment

42.  The defendant pleads at paragraph 17 of its defence that the Yulin Library has no power to assign the interests in the property without the approval of the Yulin Government.  In my view, there is no merit in this defence.

43.  Fung’s evidence is that he personally negotiated with the Yulin City Government in about May 2011 as to the purchase of the property together with 21 units in Tai Chi Court.  He dealt with Liu Ya Zhong (“Liu”) of the Yulin City Government. 

44.  It is clear from the evidence of Fung, which I accept, that the Yulin Government did approve of and consented to the 2012 assignment made in favour of the plaintiff.  He produced a letter from Liu dated 13 May 2011 (Exhibit P8) to show that the Yulin Government approved of and consented to the purchase of, inter alia, the property by the plaintiff.

45.  As to issue (3), it seems to me, and I so find, that the 2012 assignment was validly executed.

46.  As the defendant was absent at trial, no evidence was adduced to support the defendant’s allegation that the consideration for the assignment to the plaintiff by the 2012 assignment was at an undervalue.  As to issue (4), the defendant has failed to establish this allegation. 

Conclusion

47.  In my judgment, the plaintiff is entitled to the relief claimed.

48.  By the 2012 assignment, the Yulin Library assigned to the plaintiff:

“all rights, interests and benefits [the ‘Interests’] in [the property]

... and transfers [the property] and the Interests to [the plaintiff]

for possession by [the plaintiff] absolutely but [the property] shall

not include any and all monies [including but not limited to deposits,

rents, licence fees, management fees and/or other fees] previously paid

by the existing lessees of [the property] to [the Yulin Library] and/or

 [the defendant].”

49.  I accept Mr Lam’s submission that by the 2012 assignment the plaintiff is also entitled to the profits derived from the property, including rental income, save for rents previously paid by the then existing tenant of the defendant.

50.  I give judgment to the plaintiff against the defendant for:

(1) a declaration that the plaintiff is the sole beneficial owner of the property;

(2) an order that the defendant do transfer the legal title of the property to the plaintiff;

(3) an order that an account be taken by a Master of the profits that the defendant derived from the property and payment of all sums found due to the plaintiff; and

(4) costs of the action.