HUI KIN SANG v. KO LUI LTD

HCA 1608/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1608 OF 2011

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INTRODUCTION

1. This application arose from a failed agreement for the sale and purchase of the ground floor and cockloft of 140 Tai Nam Street (“No 140”) made between Hui Kin Sang (“the purchaser”) and Ko Lui Ltd (“the vendor”).  The formal agreement dated 31 May 2011 superseded the preliminary agreement of 17 May 2011.

2. The Order 14A summons sought the determination of the principal question whether the vendor had shown/given good title under the agreement with reference to four sub‑questions of law.  The answers to those questions would determine whether the purchaser would be entitled to the return of deposits paid with interest and costs.  They would also determine the third party claim made by the vendor against the firm of solicitors that had acted for the vendor when it acquired No 140 in 2007 and who was joined as such by an order of Master Hui on 12 August 2013.

3. By the time of the hearing, only two of the four sub‑questions remained live questions.  At the conclusion of hearing, the court gave its determination on the questions with written reasons to be handed down which I now do.

BACKGROUND FACTS

4. No 140 formed part of the estate of the late Lo Duen who died in 1989, leaving a widow (Madam Lo), a concubine (Madam Leung) and six sons (“the family”).  His executors were Madam Leung and one of the sons, Lo Yiu Kuen (“the executors”).

5. His estate comprised, inter alia, the ground floor and cockloft of Nos 136, 138 and 140 Tai Nan Street.

6. The testator made specific bequests of the ground floor only of each of the three properties he owned: No 136 went to two sons (Lo Yiu Kuen and Lo Kwok Kuen), No 138 went to Madam Lo and another two sons (Richard Tart Kuen Lo and Lo Wing Kuen) and No 140 went to Madam Leung and the remaining two sons (Lo Ying Kuen and Lo Yam Kuen).  None of the bequests mentioned the cocklofts.  The rest of his assets fell into his residuary estate which he bequeathed to his family in equal shares.

7. The executors executed assents dated 14 November 1991 in favour of the specific legatees named in the will.  However, the subject matter of each of the assents was not confined to the ground floor of the relevant property but, in each case, included the cockloft.

THE SUB‑QUESTIONS FOR DETERMINATION

(1)  Risk of challenge by the residuary beneficiaries

8. Mr Hoe who appeared for the purchaser submitted that as no specific bequest was made of the cockloft of No 140, it formed part of the testator’s residuary estate and, as such, there was a real risk of a claim being made by the residuary beneficiaries (other than the three who took under the assent of No 140) namely, the five remaining residuary beneficiaries (or any one of them) in respect of the cockloft of No 140.

9. Whether a real risk exists can only be assessed in context.  The relevant context consists of the circumstances peculiar to the particular case.  In the present case, §§4-7 above are some of the relevant circumstances and which can be said to be somewhat unique.

10. Prima facie, the residuary beneficiaries in a position to complain about the cockloft of No 140 would be only four of the five specific legatees of Nos 136 and 138.  That is because Lo Yiu Kuen, as one of the executors executing the assents, would hardly be in a position to complain.

11. As regards the remaining four residuary legatees, the fact of the matter is that each of them has had the benefit of a share of the cockloft of Nos 136 or 138 (as the case may be) that should have formed part of the residuary estate.  That aside, there is also the not unimportant fact that the residuary estate excluding the cocklofts constituted over 43% in value of the entire estate.  Therefore the cocklofts would have formed but an insignificant part of the overall residuary estate.

12. Also relevant is the long lapse of time since the assent of almost 20 years in the course of which a number of transactions not only of No 140 but also of Nos 136 and 138.  In conveyancing terms, their respective titles devolved from a common source such that all shared the same ‘risk’ (if any).  Yet, prior to this action, no purchaser of any of the properties has ever considered that there was any real risk.

13. Mr Hoe sought to extrapolate data from the land search records to show that despite being ascribed more or less the same value in the schedule of property disclosed for estate duty purposes, subsequent transaction records (referring to transactions that occurred in the period from 2004 to 2013) showed that Nos 136, 138 and 140 differed in value significantly and that No 140 appeared to be the more valuable of the properties.

14. As regards the disparity in value point, no meaningful comparison can be made from the transactions for a number of reasons.  Unless the transactions in question occurred more or less contemporaneously, given the known volatility of house prices in Hong Kong, one would not be comparing like with like and the comparison is unlikely to serve any useful purpose.  Then there is the question whether, in the intervening period since the assents, improvements have been made to the properties in question which would have an impact on their value but as to which there was no evidence.

15. In those circumstances, I do not accept that there is evidence to support the suggestion that the cockloft in No 140 is worth more than the other cocklofts and so render it more likely that a claim would be brought.

16. Approaching this question with reasonably robust commonsense, I have little hesitation in concluding that the risk is entirely fanciful.

17. Accordingly, the answer to the question whether there is a risk of challenge by the residuary beneficiaries towards the title of the defendant is “No”.

18. That answer effectively disposed of the case.  But if, contrary to my view, a real risk did exist, the remaining question would arise.

(2)  Are the residuary beneficiaries time‑barred from bringing an action against the defendant?

19. Mr Hoe submitted that it is at least arguable that any claim by a residuary beneficiary (presumably meaning the remaining four residuary beneficiaries mentioned in §13 above) would not be time‑barred.

20. He relied on section 20(1) of the Limitation Ordinance, Cap 347 which provides that:

“No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action:

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or a privy;

(b)  to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.”

21. But in Peconic Industrial Development Ltd v Lau Kwok Fai [2009] 2 HKLRD 537, the Court of Final Appeal explained that for limitation purposes a distinction is to be made between two kinds of constructive trustees: those who are fiduciaries and those who are non-fiduciaries.  It decided (at §23) that non-fiduciaries do not come within the definition of trustees in section 20 of the Ordinance.

22. The distinction between the two classes was made clear in the judgment of Lord Hoffmann at §19:

“First, there are persons who, without any express trust, have assumed fiduciary obligations in relation to the trust property; for example as purchaser on behalf of another, trustee de son tort, company director or agent holding the property for a trustee. I shall call them fiduciaries. They are treated in the same way as express trustees and no limitation period applies to their fraudulent breaches of trust. Then there are strangers to the trust who have not assumed any prior fiduciary liability but make themselves liable by dishonest acts of interference. I shall call them non-fiduciaries. They are also called constructive trustees but this, as Ungoed-Thomas J said in Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, p1582 is a fiction: ‘nothing more than a formula for equitable relief’. They are not constructive trustees within the meaning of the law of limitation.”

23. Mr Hoe sought to distinguish Peconic.  While accepting that Peconic applies to cases of knowing assistance as well as to knowing receipt, he contended that the present case is distinguishable.  It was said that because a knowing receipt claim does not arise without actual receipt of the trust assets (citing Agip (Africa) Ltd v Jackson [1990] Ch 265 at 291‑292), time only runs from the time when the recipient receives the property and not from when the breach of trust occurred.  On that analysis, time would run afresh with each new transfer or assignment.

24. Mr Josiah Lam for the vendor and Mr Paul Lam SC for the third party disagreed with Mr Hoe.  

25. Knowing assistance and knowing receipt are but two bases upon which a non-fiduciary (ie a person who had not previously assumed any prior fiduciary liability) may become liable.  As Mr Lam SC pointed out, for limitation purposes, time must run from the date of the alleged breach of trust and the defendant would be whoever happened to be holding the trust property.  The exact identity of the recipient of trust property is immaterial for the purposes of the action.

26. I do not accept that Peconic can be distinguished in the manner Mr Hoe suggested.  Clearly, for limitation purposes, the period must run from the date of the alleged breach of trust.  For a recent application of the Peconic principle to a knowing receipt case, see Rose Palace Ltd v Jung Christopher Lam [2013] 2 HKLRD 158, where time started to run from the potential claimant’s payment of one half of the deposits (giving rise to a resulting trust) and not from the time when the plaintiff acquired the property and became a recipient thereof.

27. Accordingly, the answer to the second question posed is “Yes”.

CONCLUSION

28. In view of the answers I have given to the sub‑questions, the answer to the principal question whether the vendor has shown/giving good title under the agreement must be answered in the affirmative.

29. It follows that:

(1) The plaintiff’s claim against the defendant is dismissed with costs to the defendant.

(2) The defendant is entitled to a declaration that it is entitled to forfeit the deposits paid by the plaintiff in the sum of HK$1,130,000 pursuant to clause 10 of the Agreement.

(3) The defendant’s claim against the third‑party is dismissed with costs to the third‑party.

30. The parties are directed to submit an agreed draft order for approval.