HKCB FINANCE LTD v. YUEN YI WAN SANDY AND ANOTHER

DCMP 2017 / 2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. DCMP 2017 OF 2002

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J U D G M E N T

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Introduction

1.  This is an action by the Plaintiff, as mortgagee bank, against a deserted spouse for possession of property occupied by her and her children which had been purportedly sold by her deserting husband Au Chi Pang (“Au”) to a confirmor and then to the 1^st Defendant who purportedly paid the purchase price of the property with a loan from the Plaintiff secured by means of a legal charge over the property.

2.  Au first acquired the property with one Tse Yuk Lin in 1975.  In 1977, Au became the sole registered owner of the property which had been mortgage-free since 1978.  In 1979 Au married the 2^nd Defendant in China.  They have two children out of that wedlock.  In 1994, the 2^nd Defendant was granted a single entry permit to come to Hong Kong.  She lived with Au in the property as their matrimonial home.  In 1995, the two children also came to Hong Kong and lived in the property.

3.  The matrimonial relationship broke down in 2000 when Au developed an extra-marital affair in China and deserted the 2^nd Defendant.  Following the 2^nd Defendant’s complaint to the Chinese authority, Au was convicted of bigamy in China on 30 March 2001.  He was sentenced to 18 months imprisonment but was released shortly afterwards on account of his poor health.  Au was then seventy-one years old.

4.  Unknown to the 2^nd Defendant, Au entered into an agreement with one Wong Lo Tim (“Wong”) dated 4 May 2001 for the sale of the property at a price of $350,000.  On the same day Wong, as confirmor, sold the property to the 1^st Defendant for $700,000.  On the following day, the 1^st Defendant applied for a loan of $360,000 from the Plaintiff to be secured by means of a legal charge over the property. The sale and purchase was completed on 23 May 2001 with the loan obtained from the Plaintiff on the security of a legal charge over the beneficial interest of property. 

5.  In June 2001, the 2^nd Defendant was granted legal aid to commence divorce proceedings against Au.  She made a claim in respect of the property in the ancillary relief proceedings.  Upon discovering the above transactions as a result of a land search in respect of the property, the 2^nd Defendant filed a Notice of Avoidance of Disposition under section 17 of the Matrimonial Proceedings and Properties Ordinance on 9 June 2001 to set aside the dispositions made by Au to Wong and thence to the 1^st Defendant. A few months after that, the 1^st Defendant started to default in paying monthly instalments.  On 15 July 2002, the Plaintiff instituted mortgagee action in accordance with Order 88 of the Rules of District Court against the 1^st Defendant.  The 2^nd Defendant was granted leave to join as a defendant in this action on 4 October 2002.  Subsequently, the Plaintiff obtained judgment against the 1^st Defendant on 14 November 2002.  At a hearing in respect of the matrimonial proceedings on 19 December 2002 in which Au was absent, HH Judge Gill of the Family Court ordered: (1) the disposition made by Au on 4 May 2001 by entering into an agreement for sale and purchase with Wong in respect of the property be set aside, (2) the disposition made by Au in respect of the property by an assignment dated 23 May 2001 made between Au as vendor, Wong as the confirmor and the 1^st Defendant as purchaser be set aside and (3) Au to transfer all his interest in the property to the 2^nd Defendant to take effect on decree absolute.

6.  The Plaintiff’s claim in this action is based on the legal charge executed by the 1^st Defendant.  The 2^nd Defendant’s defences are: (1) she is entitled to the beneficial ownership of the property by virtue of an order under section 17 of the Matrimonial Proceedings and Property Ordinance; (2) she has acquired an unregistrable equitable interest in the property because of her contribution to the family; (3) the 1^st Defendant as the purchaser of the property and the Plaintiff as the legal chargee had actual or constructive notice of the interest of the 2^nd Defendant as the wife of Au in the property and (4) the legal charge, being part and parcel of the fraudulent dispositions by Au is tainted with illegality and void.  I should note that the 2^nd Defendant’s interest as pleaded in her defence is an “occupation right” in the property.However, at the end of the trial, Ms Tsui confirmed that the 2^nd Defendant is not relying on a deserted wife’s right to remain in the matrimonial home but only on her contribution to the family.  If that was a concession, it was one that was properly made in view of the decision of the House of Lords in National Provincial Bank Ltd v Ainsworth [1965] AC 1175.

7.  This is a case of rivalry between two competing interests: the interest of the 2^nd Defendant as a deserted spouse who has made contribution to the family and that of the Plaintiff as legal chargee of the property. The issues raised by the Plaintiff’s claim and that the 2^nd Defendant’s defence are interlocked.  But all these issues revolved around two central issues: (1) whether the 2^nd Defendant has acquired any interest in the property prior to the creation of the legal charge by reason of her contribution to the family and the order made under section 17 of the Matrimonial Proceedings and Property Ordinance and (2) whether the legal charge in favour of the Plaintiff is illegal or unenforceable as having been tainted by illegality of the two dispositions in respect of the property.

The 2^nd Defendant’s contribution to the family - The facts

8.  It is common ground that the 2^nd Defendant never contributed to the purchase price of the property. Au was the unencumbered owner of the property when he married the 2^nd Plaintiff in 1979.  Since moving to Hong Kong in 1994, the 2^nd Defendant resided in the property as of right.  Prior to that, she had also lived in the property whenever she visited Au in Hong Kong. The 2^nd Defendant’s case is that though she did not contribute to the purchase price of the property or repayment of its mortgage, she made monetary contribution to the family in the amount of $230,000 shortly after she moved to Hong Kong and thereafter she contributed substantially in financially supporting the family, in performing the household chores, in upbringing the children and in giving money to Au to prevent the property from being sold.  Since moving to Hong Kong in 1994, she worked as a hawker, a baby sitter and a labourer in a hotel to support the family and to give money to Au.  She explained that she gave money to Au because Au had retired and was in need of money to spend and Au threatened to sell the property if she did not give him money.  For fear that she and the children would be deprived of a roof over their heads and because Au had told her that she would have a share in the family asset, including the property, she complied with Au’s demand.  Hence, she worked hard and contributed her saving to the upkeep of the family or to give money to Au. 

9.  The 2^nd Defendant accounted for the $230,000 contribution as follows.  In about 1992 or 1993, she contributed $60,000 as her half share in Au’s investment with his partners in a brick factory in China. The business failed and was closed down. On 20 May 1999, a sumofRMB118,649representing the balance of their investment was deposited into Au’s account with the Quanzhou branch of the Development Bank of China, which was opened on the same day.  Almost the entire amount in the account was withdrawn in three lots between 1 and 13 July 1999.  It is not clear how much and when the withdrawals were made as the entries in the bank passbook were over printed. The 2^nd Defendant said she remitted the funds to Au’s bank account in Hong Kong.  This is supported by a deposit of $100,000 in Au’s account with Sin Hua Bank Ltd in Hong Kong on 13 July 1999.  Her share in that remittance was therefore $50,000. 

10.  The 2^nd Defendant said she accumulated savings from her income as a garment worker in China earning RMB500 a month, the maintenance Au gave herover the years and the compensation of about RMB40,000 for the land in her village resumed by the Chinese government.  She estimated these savings to be about $110,000.  Since moving to Hong Kong in 1994, she said she had been giving Au sums of several thousand dollars which she or her daughterbroughtfrom China.  She produced a handwritten note which she said she found from Au’s personal belongings recording the sums Au received from her.  The note recorded three sums received on 2 October 1994, 6 February 1995 and 9 May 1995 in the amount of $12,000, $29,000 and RMB45,000 respectively, making a total of about $86,000. 

11.  The 2^nd Defendant had an advantage over the Plaintiff in that Au was not here to contest the proceedings.  Understandably, the Plaintiff could offer no evidence to challenge her evidence.  Miss Lan could only attack the 2^nd Defendant’s credibility by way of cross examination and submission on credibility. 

12.  Miss Lan referred to the discrepancy between the 2^nd Defendant’s pleading and her evidence in court.  The 2^nd Defendant pleaded in paragraph 6 of her defence that she gave Au $100,000.  But in her evidence, she enlarged that to $110,000.  This $110,000, which she allegedly brought from China shortly after she moved to Hong Kong, represented her life-long savings.  But she offered no credible reason why she gave them all to Au.  Her evidence flies in the face of common sense because according to her evidence Au was not paying for the upkeep of the family.  It is hardly credible that in the circumstances she would have given away all that she had to Au without keeping any for her and her children’s future needs especially in view of Au’s irresponsible attitude.  The way how the money was brought into Hong Kong is also incredible.  She said the money was brought in small sums of a few thousand dollars each time by herself or by her daughter during their trips from China. She said as she was familiar with the bank in China where her money was kept the bank allowed her daughter to withdraw money from her account to bring to Hong Kong.  Again, it defies common sense that a bank would be so casual with its client’s money as to allow a child to withdraw from the account of her parent huge sums of money without proper authorisation. This is not credible. Next, her discovery of a note from Au’s personal belongings recording the three receipts totalling $86,000 is also too convenient to be true. There was no reason why Au should have made such a note of any money he received from the 2^nd Defendant and that the note would have been so conveniently and timeously found seven years later from Au’s personal belongings. More fatally, this note is inconsistent with her evidence that the money was brought into Hong Kong in small sums of a few thousand dollars each time.  Certainly, the 2^nd Defendant must have transferred all her savings to Hong Kong, whatever was the amount, at the latest in 1995 when her children moved to Hong Kong.  But given the unsatisfactory state of her evidence, I am not satisfied that she had a saving of $110,000 or that she had given them all to Au.

13.  In respect of the proceeds from the investment in the brick factory, the 2^nd Defendant was wrong about the year when the proceeds were paid and remitted to Au.  Her witness statement is misleading in that she purported to say she gave Au a separate sum of $100,000 in 1998, which as the evidence turned out was the proceeds of their investment in the brick factory which she allegedly remitted to Au in 1999.  The confusion is probably due to an honest mistake as the transaction has been disclosed in her affirmation filed in the matrimonial proceedings.  Though the amount withdrawn in Reminbei corresponded with the deposit in Hong Kong dollars, the three withdrawals from Au’s account with the Development Bank of China were inconsistent with the one deposit into Au’s account in Sin Hua Bank Ltd in Hong Kong.  The 2^nd Defendant was unable to explain why the money was not remitted in three sums or withdrawn in one lump sum.  It appears that she was a stranger to these transactions.  But in view of the lack of evidence in rebuttal, I accept that she had given to Au her share of the investment in the sum of $50,000.

14.  The 2^nd Defendant’s evidence that since coming to Hong Kong she contributed to the family expenditure is inconsistent with her own affirmation filed in the matrimonial proceedings.  She said in her affirmation:

“Since I came to Hong Kong, the Respondent [Au] would not pay for my expenses, not even pocket money.  He would only pay for food and the children’s expenses.  I therefore had to work to meet my own needs.”

Her own admission in the affirmation that Au paid for food and the children’s expenses is inconsistent with her evidence that Au had been unemployed since the traffic accident in 1980’s and had not contributed to household expenses.  This affirmation which was made in August 2002 casts serious doubts on the veracity of her oral evidence in court today.  Though I have no doubt that in view of Au’s extra-marital affairs Au would have ceased contributing to the family expenses since 2002 or probably even earlier, I reject the 2^nd Defendant’s evidence that she provided substantially for all the family expenses since she moved to Hong Kong.  She probably contributed partially to the family expenses as did Au but neither solely nor substantially.  Her evidence about the extent of her contribution is clearly an exaggeration.

15.  The 2^nd Defendant’s evidence about Au’s promise that she would have a share of whatever Au had and about her giving money to Au to prevent the property from having to be sold was under severe and critical attack by Miss Lan.  Here, Miss Lan took a pleading point.  There was no mention in the defence about Au’s promise to the 2^nd Defendant or about the threat to sell the property.  Hence Miss Lan submitted that any evidence regarding the promise or the threat should be excluded.  Ms Tsui was content to rest the defence on the 2^nd Defendant’s equitable interest in the property created by her contribution and did not seek to enlarge it by pleading estoppel or other defences.  The evidence is very important to the defence. I do not think the Plaintiff would suffer any prejudice as a result of the admission of such evidence as the Plaintiff had no witness to call in any event.  I therefore admit what the 2^nd Defendant said about the promise and the threat in evidence.

16.  Here, I have to return to the 2^nd Defendant’s evidence in Court that she gave Au altogether $230,000 shortly after she moved to Hong Kong.  She could not account for the entire amount.  At the highest, she could only account for $110,000 being her savings she brought over from China and $100,000 being the proceeds of their joint investment, of which her share was only $50,000.  Thus the amount of her contribution at the highest was $160,000.  The amount is not of great importance.  What is more important is her overall credibility.  This amount of $230,000 was never disclosed in any of her affirmations filed in connection with the matrimonial proceedings, the defence or her own witness statement prepared for the purpose of contesting the Plaintiff’s claim for possession in these proceedings just a few months before this hearing.  Not only that, Au’s promise that the 2^nd Defendant would have a share in the beneficial interest in the property and Au’s threat to sell the property if she did not give him money were never disclosed in any of these affirmations, defence or statement.  I find this extraordinary. 

17.  I find the 2^nd Defendant’s evidence confusing, inconsistent and in many respects incredible.  She repeatedly added to or departed from her pleaded defence, her affirmations and her witness statement in very important issues of facts in respect of which there was no reason why she would have overlooked and which those advising her would not have carefully and extensively enquired of her or verified from her. I am fully alert to the fact that the 2^nd Defendant is obviously not a highly educated and intelligent person. She is obviously not a sophisticated witness. She may even have been careless, casual and incomprehensive when giving her instructions to her solicitors. But even after allowing for all these possibilities and taking into account the part of her evidence which I have no doubt, I am not satisfied that she was an honest and credible witness.  She impressed me as a person who was determined to exaggerate or to concoct anything for the purpose of furthering her claim for a beneficial interest in the property. Though I accept her evidence that she must have brought her savings from China to Hong Kong and that she contributed partially to the family expenses since moving to Hong Kong, I do not believe that she gave all her savings in the amount of about $110,000 to Au and that she provided substantially for the family expenses since she moved to Hong Kong.  I reject, in particular, her evidence about the alleged promise by Au of a share of whatever Au had including the property and the alleged payments she gave to Au from her income in Hong Kong as a result of Au’s threat to sell or mortgage the property.  These are obvious recent concoctions.

18.  As a result of the above finding of facts, the 2^nd Defendant could only argue her case on the basis of her contribution in financially supporting the family, the upbringing of the children and her performance of the household chores and the sum of $50,000 she gave to Au.  I have to disregard Ms Tsui’s argument about the alleged promise by Au and the 2^nd Defendant’s payments to Au to prevent the property from being sold or mortgaged.  Ms Tsui submitted that though the 2^nd Defendant did not directly contribute to the purchase price of the property or repayment of its mortgage, her contribution to the family was substantial and an equity must arise in her favour.  Having made the above finding of facts, I now turn to the law.

A deserted wife’s contribution to the family - The law

19.  As a matter of matrimonial law, a deserted wife as such is not entitled to a share in the beneficial interest of the matrimonial home acquired by the husband and held in the husband’s name: see National Provincial Bank Ltd v Ainsworth.  A beneficial interest in the matrimonial home could only arise (i) by express declaration or agreement; (ii) by resulting trust where the wife has directly provided part of the purchase price: see Hall v Hall (1982) 3 FLR 379; or (c) from the common intention of the parties: see Pettitt v Pettitt [1970] AC 777. It is common ground that there was no declaration of trust or agreement that the 2^nd Defendant shall have a beneficial interest in the property and that she had not contributed to its purchase price.  Thus the only way in which an equity could arise in her favour is from the common intention of Au and the 2^nd Defendant. 

20.  In Pettitt v Pettitt, Lord Reid approach the question of common intention as follows at 795:

“But it is, I think, proper to consider whether, without departing from the principles of the common law, we can give effect to the view that, even where there was in fact no agreement, we can ask what the spouses or reasonable people in their shoes, would have agreed if they had directed their minds to the question of what rights should accrue to the spouse who has contributed to the acquisition or improvement of property owned by the other spouse.  There is already a presumption which operates in the absence of evidence as regards money contributed by one spouse towards the acquisition of property by the other spouse.  So why should there not be a similar presumption where one souse has contributed to the improvement of the property of the other?  I do not think that it is a very convincing argument to say that, if a stranger makes improvements on the property of another without any agreement or any request by that other that he should do so, he acquires no right. The improvement is made for the common enjoyment of both spouses during the marriage.  It would no doubt be different if the one spouse makes the improvement while the other spouse who owns the property is absent and without his or acquiesces in the other making the improvements in circumstances where it is reasonable to suppose that they would have agreed to some right being acquired if they had thought about the legal position, I can see nothing contrary to ordinary legal principles in holding that the spouse who makes the improvement has acquired such a right.”

21.  In Gissing v Gissing, Lord Reid explained the difference between inferring an agreement and imputing an intention in the absence of an agreement.  He summarized the distinction as follows at 897:

“Returning to the crucial question there is a wide gulf between inferring from the whole conduct of the parties that there probably was an agreement and imputing to the parties an intention to agree to share even where the evidence gives no ground for such an inference.  If the evidence shows that there was no agreement in fact then that excludes any inference that there was an agreement. But it does not exclude an imputation of a deemed intention if the law permits such an imputation.  If the law is to be that the court has power to impute such an intention in proper cases then I am content, although I would prefer to reach the same result in a rather different way.  But if it were to be held to be the law that it must at least be possible to infer a contemporary agreement in the sense of holding that it is more probable than not there was in fact some such agreement then I could not contemplate the future results of such a decision with equanimity.”

22.  In Pettitt v Pettitt, Lord Diplock also took a similar approach.  He referred to his earlier decision in Ulrich v Ulrick and Felton [1968] 1 WLR 180 and said that in the absence of evidence that spouses formed any actual intention as to their respective proprietary rights in a family asset or matrimonial home acquired as a result of their concerted action but held in the name of one of them, generally the court would impute a common intention that the other spouse would have a beneficial interest in the asset.  In Ulrich v Ulrick and Felton, Lord Diplock said at 188-189:

“When these young people pool their savings to buy and equip a home or to acquire any other family asset, they do not think of this as an ‘ante-nuptial’ or ‘post-nuptial’ settlement, or give their minds to legalistic technicalities of ‘advancement’ and ‘resulting trusts.’  Nor do they normally agree explicitly what their equitable interests in family asset shall be if death, divorce or separation parts them. Where there is no explicit agreement, the court’s first task is to infer from their conduct in relation to the property what their common intention would have been had they put it into words before matrimonial differences arose between them.  In the common case today, of which the present is a typical example, neither party to the marriage has inherited capital, both are earning their living before having children.  They pool their savings to buy a house on mortgage in the husband’s name or in joint names and to furnish and equip it as the family home.  They meet the expenses of its upkeep and improvement and the payments of instalments on the mortgage out of the family income, to which the wife contributes so long as she is earning.  In such a case, the prima facie inference from their conduct is that their common intention is that the house, furniture and equipment should be family assets …”

Then Lord Diplock summarised the situation as follows at 824-825 in Pettitt v Pettitt:

“I think it fairly summarises the broad consensus of judicial opinion disclosed by the post-war cases (none of which has reached your Lordship’s House), as to the common intentions which, in the absence of evidence of an actual intention to the contrary, are to be imputed to spouses when matrimonial homes are acquired on mortgage as a result of their concerted acts of a kind which are typical of transactions between husband and wife to-day.  And I firmly think that broad consensus of judicial opinion is right.  The old presumptions of advancement and resulting trust are inappropriate to these kinds of transactions, and the fact that the legal estate is conveyed to the wife or to the husband or to both jointly though it may be significant in indicating their actual common intention is not necessarily decisive since it is often influenced by the requirements of the building society which provides the mortgage.

In imputing to them a common intention as to their respective proprietary rights which as fair and reasonable men and women they presumably would have formed had they given their minds to it at the time of the relevant acquisition or improvement of a family asset, the court, it has been suggested, is exercising in another guise a jurisdiction to do what it considers itself to be fair and reasonable in all the circumstances and this does not differ in result from the jurisdiction which Lord Denning, in Appleton v. Appleton [1965] 1 WLR 25, considered was expressly conferred on the court by section 17 of the Married Women’s Property Act 1882.”

23.  Such common intention could be imputed as in these and other cases where the wife contributed directly to the repayment of the mortgage or to substantial improvement to the property.  Such common intention could also be imputed where the husband and wife pooled their income together to purchase the property, paid its mortgage and the family expenses so long as the wife was earning.  But the cases have shown that anything less than direct contributions to the purchase price or mortgage instalments by the spouse who is not the legal owner cannot support such a common intention.  I know of no case where contribution to family expenses alone justified such common intention to be imputed.

24.  The question whether such common intention could be imputed from the contribution to household expenses by the wife who did not directly contribute to the purchase price or the mortgage repayments was considered in Burns v Burns [1984] 1 Ch 317.  In that case, the matrimonial home was purchased and conveyed in the sole name of the husband who financed the purchase price out of his own money and by way of a mortgage.  The wife did not contribute to the purchase price or repayment of the mortgage.  She remained at home to look after the children and to perform domestic duties.  About ten years later, the wife started working and used her earnings to pay utility expenses, to buy fixtures, fittings and domestic chattels for the house.  She also redecorated the interior of the house.  Five years later, the wife left the husband and commenced proceedings against him claiming a beneficial interest in the house by reason of her contributions to the household over the seventeen years they had lived together.  Her claim was dismissed.  Her appeal to the Court of Appeal was also dismissed.  In dismissing her appeal, Fox LJ said at 329:

“If there is a substantial contribution by the woman to family expenses, and the house was purchased on a mortgage, her contribution is, indirectly, referable to the acquisition of the house since, in one way or another, it enables the family to pay the mortgage instalments.  Thus, a payment could be said to be referable to the acquisition of the house if, for example, the payer either (a) pays part of the purchase price or (b) contributes regularly to the mortgage instalments or (c) pays off part of the mortgage or (d) makes a substantial financial contribution to the family expenses so as to enable the mortgage instalments to be paid.”

25.  May LJ shared the same view.  He said at 345:

“Finally, when the house is taken in the man’s name alone, if the woman makes no “real” or “substantial” financial contribution towards either the purchase price, deposit or mortgage instalments by the means of which the family home was acquired, then she is not entitled to any share in the beneficial interest in that home even though over a very substantial number of years she may have worked just as hard as the man in maintaining the family in the sense of keeping the house, giving birth to and looking after and helping to bring up the children of the union.”

26.  In Lloyds bank Plc v Rosset [1991] 1 AC 107, a property in semi-derelict condition was purchased by the husband with funds from the husband’s family trust.  The wife personally carried out decoration work almost daily and urged on the builders doing the renovation work.  The wife’s claim for a beneficial interest in the matrimonial home by reason of her participation in decoration work of the home was rejected by the House of Lords.  The House of Lords held that it is at least extremely doubtful whether anything less than direct contributions to the purchase price by the partner who is not the legal owner, whether initially or by payment of mortgage instalments, will justify the inference necessary to the creation of a constructive trust.  Lord Bridge said at 132:

“The first and fundamental question which must always be resolved is whether independently of any inference to be drawn from the conduct of the parties in the course of sharing the house as their home and managing their joint affairs, there has at any time prior to acquisition, or exceptionally at some later date, been any agreement, arrangement or understanding reached between them that the property is to be shared beneficially.  The finding of an agreement or arrangement to share in this sense can only, I think, be based on evidence of express discussions between the partners, however imperfectly remembered and however imprecise their terms may have been.  Once a finding to this effect is made it will only be necessary for the partner asserting a claim to a beneficial interest against the partner entitled to the legal estate to show that he or she has acted to his or her detriment or significantly altered his or her position in reliance on the agreement in order to give rise to a constructive trust or a proprietary estoppel.

In sharp contrast with this situation is the very different one where there is no evidence to support a finding of an agreement or arrangement to share, however reasonable it might have been for the parties to reach such an arrangement if they had applied their minds to the question, and where the court must rely entirely on the conduct of the parties both as the basis from which to infer a common intention to share the property beneficially and as the conduct relied on to give rise to a constructive trust.  In this situation direct contributions to the purchase price by the partner who is not the legal owner, whether initially or by payment of mortgage instalments, will readily justify the inference necessary to the creation of a constructive trust.  But, as I read the authorities, it is at least extremely doubtful whether anything less will do.”

27.  Thus, in considering a claim by one spouse of a beneficial interest in the matrimonial property used and enjoyed by the spouses in common but held in the name of the other spouse, the first and fundamental question is whether there has at any time prior to acquisition, or exceptionally at some later date, been any agreement, arrangement or understanding reached between the spouses that the property is to be shared beneficially.  Where there was neither express nor implied agreement, the court shall ascertain whether there was any common intention that the property so held in the name of one of the spouse was intended to be shared beneficially by both of them. The court may impute such a common intention from the conduct of the parties in the course of sharing the matrimonial property as their home and managing their joint affairs from which a resulting trust arises and to which the courts will give effect.  The test is to ask what the spouses, or reasonable men and women in their shoes, would have agreed had they directed their minds to the question as to what right each of them should have acquired in respect of the family asset held in the name of either of them.  In answering that question, all the conduct of the spouses and all the circumstances must be taken into account.  The asset must be one which is used and enjoyed in common by the family as a family asset. It must have been acquired or preserved or improved by the concerted effort of the spouses.  Where a spouse has contributed to the purchase price or to the repayment of the mortgage, an equity would be created under the principle of resulting trust.  Where a spouse has not, he or she must have otherwise contributed substantially to the improvement or preservation of the property during the marriage and with the knowledge and consent of the other spouse.  The burden of proving common intention rests on the spouse who seeks to claim an equitable interest arising from that common intention. 

28.  Whether such a common intention is to be imputed to the parties of the marriage and whether the contribution by a spouse who has not contributed to the purchase price or repayment of the mortgage is substantial are questions of fact to be determined by the tribunal of fact. Other forms of monetary contribution may be sufficient, such as a wife paying for the costs of building another floor to a property owned by the husband or paying for substantial renovation costs or rebuilding costs which significantly enhances the value of the property.  Usually, as was held by May LJ in Burns v Burns, contribution to household expenses, performing household chores, looking after children and the pain of childbearing and labour of giving birth are insufficient.  This may seem discriminatory and too harsh to the wife who in having to look after the children and the home is deprived of the opportunity of earning an income to make monetary contribution to the mortgage repayments and to earn her equity in the matrimonial home.  However, both parties to the marriage have a duty to look after the matrimonial home, bring up the children, provide accommodation for the family, pay for household expenses and work to make money available for that purpose.  It is difficult to quantify or give a value to the contribution by the parties to a matrimonial union to these obligations which are the usual and necessary incidence of sharing a life together.  It is difficult to assess whether the contribution by one spouse matches that by the other. But the acquisition of a beneficial interest in land as distinct from merely providing accommodation for the family is treated as something substantial and outside the realm of these mutual obligations.  In order that a spouse may acquire an interest in the property purchased by the other spouse, that spouse has to match the purchase price paid by the other spouse with a substantial contribution which is over and above that of his or her share of their mutual obligations in the upkeep of the family. It may well be that the law finds it convenient to ignore a spouse’s contribution to these mutual obligations when deciding whether the contribution is substantial as would justify the common intention to be imputed to the parties. 

29.  In Lloyds bank Plc v Rosset Lord Bridge said in very strong but less absolute term than the Court of Appeal in Burns v Burns that “it is at least extremely doubtful whether anything less” than direct contribution will do.  Whether the contribution is substantial must be a question of fact. While the usual contributions to the mutual obligations are to be ignored, a wife’s contribution in looking after the home and in bringing up the children which is over and above that normally expected from husband and wife sharing a life and a home together must be one of the factors to be considered in determining whether her contribution is substantial.  If a wife gives up work in order to look after the family and the children at the request of the husband or to look after children who, because of their special condition, require additional and particular attention, these are factors which should be taken into account in the weighing exercise.  If the property was purchased by funds wholly provided by the husband, the wife’s contribution in looking after the home and the children weighs little in the balance.  However, it may be different if, for example, the wife has to work to support the family otherwise the property would have to be sold to provide for the household expenses and medical expenses for the husband or a member of the family who is suffering a long term illness.  Whether the contribution is substantial as would enable the court to impute the common intention is a question of fact for the tribunal of fact which has to be answered by considering all the circumstances of the particular case.  Thus, I do not think the cases, in particular, Burns v Burns should be taken as having laid down any principle of law that indirect contributions, not being contribution to the initial purchase price or payment of mortgage instalments, will never justify the imputation necessary to the creation of a constructive trust, resulting trust or implied trust, whatever it is classified. 

Whether the 2^nd Defendant acquired any interest in the property as a result of her contribution to the family

30.  On the facts I do not accept the 2^nd Defendant’s evidence about Au’s promise and threat and that she gave Au about $110,000 when she came to reside in Hong Kong in 1994.  Thus the 2^nd Defendant’s case could only be argued on the basis of her contribution to the family expenses after 1994 and her share of the proceeds from the sale of the brick factory in the amount of $50,000 which she gave to Au.

31.  Though Au is not here to contest the evidence of the 2^nd Defendant, in view of what the 2^nd Defendant said in her affirmation made in August 2002 for the purpose of the matrimonial proceedings, I have no doubt that Au paid the food and expenses of the children though not the 2^nd Defendant’s expenses and her pocket money.  Au did so until 2001 or sometime before that when he started to develop an extra-marital affair.  It could not be disputed that the 2^nd Defendant performed household chores, looked after the children and worked to contribute to the household expenses and for her own accretion of wealth.  Both spouses have a duty to contribute to the household expenses of the family. Au contributed by providing rent-free accommodation, food and expenses for the children.  What the 2^nd Defendant contributed is no more than what would be expected of married people living and sharing a home together.  She was contributing her share of the mutual obligations.  It cannot be regarded as substantial when weighed against the fact that Au acquired the property before his marriage with the 2^nd Defendant and Au also contributed to the household expenses. 

32.  As for her share of the proceeds from the investment in the brick factory given to Au, I am also far from being satisfied that the 2^nd Defendantgave them to Au for the purpose of pooling their resources together in a concerted action to improve the property or to prevent the property from having to be sold.  The money was not referable to the property.

33.  Applying the test that I set out above to the very limited facts which I find in favour of the 2^nd Defendant, I am unable to come to the conclusion that reasonable men and women in the shoes of Au and the 2^nd Defendant would have formed any common intention that by reason of the 2^nd Defendant’s contribution to the household expenses and the $50,000 she gave to Au she should acquire an interest in the property which she has never contributed anything for its acquisition.  The 2^nd Defendant’s case is no stronger than that of the wife in Burns v Burns.  Accordingly, I find thatthe 2^nd Defendant has not acquired any beneficial interest in the property. She is therefore left with the interest conferred to her by the order under section 17 of the Matrimonial Proceedings and Property Ordinance.

The effect of an order under section 17 of the Matrimonial Proceedings and Property Ordinance

34.  HH Judge Gill’s order was made pursuant to Section 17 of the Matrimonial Proceedings and Property Ordinance upon the application of the 2^nd Defendant.  That section provides:

“	(1)	Where proceedings for relief under any of the relevant provisions of this Ordinance (hereafter in this section referred to as “financial provision”) are brought by a person (hereafter in this section referred to as “the applicant”) against any other person (hereafter in this section referred to as “the other party”), the court may, on an application by the applicant –
		(a)	if it is satisfied that the other party is, with the intention of defeating the claim for financial provision, about to make any disposition …
		(b)	if it is satisfied that the other party has, with the intention aforesaid, made a disposition to which this paragraph applies and that if the disposition were set aside financial provision or different financial provision would be granted to the applicant, make an order setting aside the disposition and give such consequential directions as it thinks fit for giving effect to the order (including directions requiring the making of any payment or the disposal of any property);
		(c)	…
		and an application for the purposes of paragraph (b) shall be made in the proceedings for the financial provision in question.
	(2)	Paragraph (b) and (c) of subsection (1) apply respectively to any disposition made by the other party (whether before or after the commencement of the proceedings for financial provision), not being a disposition made for valuable consideration (other than marriage) to a person who, at the time of the disposition, acted in relation to it in good faith and without notice of any such intention as aforesaid on the part of the other party.
	(3)	Where an application is made under this section with respect to a disposition which took place less than three years before the date of the application or to a disposition or other dealing with property which is about to take place and the court is satisfied -
		(a)	in a case falling within subsection (1)(a) or (b), that the disposition or other dealing would (apart from this section) have the consequence, or
		(b)	in a case falling within subsection (1)(c), that the disposition has had the consequence,
		of defeating the applicant’s claim for financial provision, it shall be presumed, unless the contrary is shown, that the other party disposed of the property with the intention aforesaid or, as the case may be, is, with that intention, about to dispose of or deal with the property.

35.  I have two observations to make. Firstly, under section 17(1), an application may be made against “any other person”, referred to as “the other party”, if he or she is about to make or has made a disposition of family assets under paragraphs (a), (b) and (c) of section 17(1). Such assets may be disposed of by the other spouse or by a third party.  The words “the other party” in section 17 must have been carefully chosen by the legislature to cover parties other than parties to the marriage. Thus such an application may be made by an applicant against his or her spouse who is about to make or has made a disposition of family assets or against a non-spousewho for whatever reason may have received family assets which he is about to dispose of or has disposed of. A non-spouse may, for example, have become the legal owner of family assets as a trustee of one of the spouses, or may have acquired legal title of family assets under a voluntary or a sham transaction, or may have acquired an interest over the assets as a chargee in respect of money advanced to one of the spouses.  In those circumstances, an application may be made against the spouse or a non-spouse restraining him from disposing of the assets or setting aside the disposition by him.  The disponee or other parties interested in the disposition such as a bank which has advanced money on the security of the family assets may be made a party to such proceedings as interveners.  In the case now before me, the 2^nd Defendant has not made any application to set aside the legal charge which was a disposition by the 1^st Defendant.  The order setting aside the conveyance as against Au is therefore not binding on the Plaintiff.  The legal charge in favour of the Plaintiff has not been set aside in the matrimonial proceedings.  It remains as a valid legal charge.

36.  Secondly, this section gives the Family Court jurisdiction to set aside any disposition to which that section applies.  Under section 17(2), the section applies to any disposition made by the other party not being one made for valuable consideration to a third party who at the time of the disposition acted in relation to it in good faith and without notice of the disponor’s intention to defeat the spouse’s claim for financial provision.  Whether the disponee has given any valuable consideration and has notice of the disponor’s intention to defeat the spouse’s claim for financial provision are the only two determining factors to be considered in setting aside a disposition.  Thus, obviously the purpose of the section is to preserve family assets which a spouse may have access to for the purpose of seekingfinancial provision.  In Kemmis v Kemmis [1988] 2 FLR 223 Purchas LJ said in relation to the equivalent section 37 of the Matrimonial Causes Act 1973 as follows:

“The clear purpose of s. 37 is to give power to the court to prevent a party acting so as to diminish the assets of the family which would otherwise be available for consideration by the court when making orders for financial relief.  It is important to notice that the purpose of this section is to protect the family assets and is not to protect the interest, if any, enjoyed by the applicant party in any of those assets.”

As the purpose of the section is to protect family assets and not to protect the interest enjoyed by the applicant party, the section could not have been intended to affect any third parties’ interest in the property, whether legal or equitable, except to the extent as is necessary for the purpose of setting aside the disposition.

37.  Whether the order has the effect of rendering the disposition thus set aside void ab initio or just void as at the date of the order is a matter of construction of section 17.  The general rule is that an order takes effect on the date it is made and not retrospectively unless stated to be so and authorised by the statute giving jurisdiction to the making of the order. I cannot find any provision in the Matrimonial Proceedings and Property Ordinance which suggests that section 17 shall have retrospective effect.  Furthermore, where a conveyance is on the face duly executed and valid but for the order made under this section setting it aside, third parties may act on it in good faith.  As an order may not be made with respect to a disposition to a person who at the time of the disposition acted in good faith and without notice of any intention to defeat the spouse’s claim for financial provision, it could not have been the intention of the legislature that third parties who acted on that disposition also in good faith, for value and without notice of the disponor’s intention to defeat a claim by a spouse for financial provision should be affected by an order made under this section.  To hold otherwise would deprive a third party entirely of the protection under section 17(2) which it could rely on if it were possible for the proceedings to be brought against the third party under section 17. That could not be right.  Thus, it could not have been the intention of the legislature that an order made under this section shall have retrospective effect and render the disposition thus set aside void ab initio as would prejudice the interest of a third party acting in good faith on the validity of the disposition.  I am therefore of the opinion that on a proper construction of section 17, the effect of an order made under that section is to render the disposition thus set aside void as of the date of the order and to re-vest the interest in the property to the disponor with effect from the date of the order so that as between the party applying and the disponor their position remains exactly the same as if no disposition has ever been made. 

38.  What then is the effect of the order on third parties who have acquired an interest on the property from the disponee under a disposition which has not been set aside?  The general rule is first in time prevails. In National Provincial Bank, Ltd v Ainsworth, which involved a similar factual situation as the present case, the husband had purchased the matrimonial home and then left the home to live with his mother.  He incorporated his business and conveyed the matrimonial home and another business property to his company.  The company then charged both properties to a bank to discharge the husband’s liability to the bank.  The bank was not aware of the husband’s desertion and made no inquiries at the matrimonial home as to the wife’s occupation at the time the charge was created.  The husband failed to repay the loan and the bank sought possession of the matrimonial home.  The wife then obtained an order under section 2 of the Matrimonial Causes (Property and Maintenance) Act 1958 setting aside the disposition by the husband to the company.  As in the present case, the wife had not made any application to set aside the legal charge to the bank, which is a disposition between third parties.  In respect of the bank’s claim for possession, Cross J held the bank’s mortgage was not invalidated by the order of the Divorce Division setting aside the conveyance by the husband to the company.  This ruling was upheld by the Court of Appeal.  The case went on appeal to the House of Lords, but this ruling was not subject to appeal and the House of Lords agreed with Cross J’s reasons for his ruling. At 1218, Lord Hodson said:

“… the order of the Divorce Division only operated to re-vest in the husband any beneficial interest in the house immediately previously held by the company and did not affect the legal charge to the appellant [bank], a purchaser for value without notice of any intention on the part of the husband to defeat the wife’s claim for financial relief.”

39.  In approving Cross J’s view about the effect of the order on a disposition by a third party, Lord Hodson seemed to have assumed that even where no application has been made to set aside the legal charge, the legal charge would be affected by the order if the chargee was not a bona fide purchaser for value without notice of the intention to defeat the spouse’s claim for financial relief.  It is not clear from the report what was the legal basis on which Cross J imported the notion of a bona fide purchaser without notice from the 1958 Act into a resolution of priority between the interest re-vested in a spouse under the order and the interest acquired by a third party under a disposition which has not been set aside by an order under the 1958 Act.  However, I am in agreement with that approach as equity acts upon the conscience.  Though the interest under the legal charge was first in time as compared with the spouse’s re-vested interest, if the legal chargee was not a bona fide purchaser for value and had notice that the prior disposition was made by the disponor with intention to defeat his spouse’s claim for financial provision which was a statutory protection given to the spouse in respect of family assets, his conscience is bound by that knowledge and he must realise that the interest he acquired is a precarious one.  The court in the exercise of its equitable jurisdiction will have his interest deferred to that of the spouse. 

40.  Accordingly, I am of the opinion that the effect of an order under section 17 of the Matrimonial Proceedings and Property Ordinance is to render the disposition thus set aside void with effect from the date of the order.  It does not have the effect of rendering the disposition void ab initio as would affect third parties acting in good faith in relation to that disposition without notice of the disponor’s intention to defeat the spouse’s claim for financial provision.  What is therefore re-vested in the other party or the disponor must be whatever interest that other party has subject to whatever interest any third party may have acquired in the intervening period between the date of the disposition and the date of the order in good faith for value and without notice of the disponor’s intention to defeat the spouse’s claim for financial provision. 

41.  In the present case, the legal charge was created before HH Judge Gill’s order re-vesting the beneficial interest in the property in Au and the legal charge has not been set aside by any order of the court.  On the above analysis and on the authority of National Provincial Bank, Ltd v Ainsworth, this is not fatal to the 2^nd Defendant because the priority of the Plaintiff’s legal charge may be deferred if the Plaintiff had notice of Au’s intention to defeat the 2^nd Defendant’s future claim for financial provision.  In the case of an application under section 37 of the Matrimonial Causes Act 1973, in setting aside a disposition made to a third party the party applying to have the disposition set aside bears the burden of proving that the third party in whose favour the disposition has been made must have acted without good faith or in the knowledge of the disponor’s intention to defeat the spouse’s claim for financial provision at the time of the disposition: see Kemmis v Kemmis.  Likewise, if a spouse to whom the re-vested interest in the family asset has been transferred by an order of the court made under the Matrimonial Proceedings and Property Ordinance seeks to argue that the interest over the family asset acquired by a third party under a disposition which has not been set aside by the court should be deferred to his interest, that spouse must bear the burden of proving that the third party is not a bona fide purchaser for value without notice of the disponor’s intention to defeat the spouse’s claim for financial provision.  Thus the 2^nd Defendant bears the burden of proving that the Plaintiff had knowledge of Au’s intention to defeat her future claim for financial provision.  In Kemmis v Kemmis, Purchas LJ also held that the disponor’s intention to defeat the spouse’s claim had to be a subjective intention and proof of constructive knowledge on the part of the disponee of that intention is sufficient for the purposes of section 37 of the Matrimonial Causes Act 1973.  I think these principles are equally applicable to a disposition which is not the subject matter of an application under section 17 of the Matrimonial Proceedings and Property Ordinance.

42.  On my analysis of the facts, it clearly was Au’s intention to drain the value out of the property and to leave the 2^nd Defendant with the property encumbered by a legal charge (see paragraphs 53 to 54 below).  According to the 2^nd Defendant, she complained of Au’s bigamy to the Chinese authorities because of Au’s refusal to have a divorce.  In the circumstances, what Au did after his release from prison from China must be done with the intention of defeating the 2^nd Defendant’s possible claim for financial provision in matrimonial proceedings which would be imminent.  But it could hardly be argued that the Plaintiff had actual knowledge of Au’s intention.  The question is whether the Plaintiff had constructive knowledge of that intention.

43.  In Kemmis v Kemmis, Purchas LJ said at 238:

“Even bearing in mind the development of the doctrine of constructive notice when applied in this field to be detected from the speech of Lord Wilberforce in Boland’s case, already cited in this judgment, it is still necessary to establish tow elements:

(1)     that the facts actually known by the disponee should have put him on enquiry, e.g. when the disponer is not in occupation to enquire whether his wife had any claim against the asset to be charged;

(2)     that the results of those enquiries would, within the criteria in Hunt v Luck (above), give the disponee knowledge of the disponor’s intention to frustrate the wife’s claims for financial relief, at the time of the disposition.”

44.  Thus in order to fix the Plaintiff with constructive knowledge of Au’s intention to defeat the 2^nd Defendant’s future claim to financial provision in matrimonial proceedings, it is necessary for the 2^nd Defendant seeking to set aside the disposition to establish: (1) that the facts actually known by the Plaintiff should have put the Plaintiff on enquiry; and (2) that the results of those enquiries would give the Plaintiff knowledge of Au’s intention to defeat her claim for financial provision at the time of the disposition of the property. 

45.  The sale and sub-sale of the property were carried out under very suspicious circumstances with the two provisional agreements being concluded on the same day but with a 100% increase in the purchase price and the 1^st Defendant who purchased from Wong and signed on behalf of Wong in the provisional sale and purchase agreement was related to Wong and shared the same address (see paragraphs 53 and 54 below).  Though the Plaintiff had no knowledge of the provisional sale and purchase agreement and did not know of the sub-sale arrangement, it had imputed knowledge of the sale and sub-sale arrangement through the actual knowledge of its solicitor Messrs T L Ip & Co who had copies of these documents.  But according to Ms Wong of Messrs T L Ip & Co who handled the sale and sub-sale transaction in the solicitor’s firm, she had asked Au if there were others living in the property, but Au did not mention there were any.  There is nothing to contradict that evidence.  In addition, Au warranted in Clause 24 of the sale and purchase agreement that there was no person other than himself who was occupying the property and had interest whether legal or equitable in the property.  There was a similar clause in the sub-sale and sub-purchase agreement in which Wong made a similar warranty.  Though these clauses were drafted by Messrs T L Ip & Co, they had been explained to Au and Wong and assented to by them.  Ms Wong did not know that Au was not in occupation of the property and did not know about his matrimonial discord.  On the face, the transactions were just a confirmor sale of the property with vacant possession, with the vendor confirming that there were no other occupiers in the property. In my view, though suspicious in other aspects, there was nothing to put the Plaintiff on enquiry as to whether Au’s wife, i.e. the 2^nd Defendant, had any claim against the property for financial provision.

46.  It is said that a purchaser or a mortgagee has a duty to inspect the property to be purchased and if he fails to inspect he would be fixed with constructive notice of the interest of any occupier in the property which such an inspection would have revealed.  Inspection is the standard of care required to be discharged in investigating title of the property.  If an order under section 17 has been obtained, the spouse has acquired an interest in the property.  But until then, her possible future claim for financial provision is not even an equity.  Even though there is a duty on a purchaser or a mortgagee to inspect the property and enquire about equitable interests with no less diligence than about legal interests, there is no general duty to enquire about equities.  The duty to enquire only arises when the facts actually known by the purchaser or mortgagee are such as should have put him on enquiry.  In National Provincial Bank, Ltd v Ainsworth, the House of Lords made no criticism of the bank’s failure to inspect the property at the time of creation of the charge.

47.  In her argument that the Plaintiff had constructive notice of the 2^nd Defendant’s equitable interest in the property, Ms Tsui referred to the Law Society Circular 92-125.  In that context, I did not consider it necessary to consider that argument on my finding that the 2^nd Defendant did not have any equitable interest in the property.  But I shall consider that argument in the present context.  The following practice note was annexed to the circular:

“Purchase

1.      In any purchase of residential property, the purchaser should be advised to inspect the property to ascertain the identity of those residing on the property. …

2.      Enquiries should also be made of the vendor’s solicitors to ascertain the identity of those residing on the property, and their ages and relationship to the vendor. …

3.      If t here are discrepancies between what is revealed by the inspection and what is revealed by inquiries, then the purchaser should be advised to make appropriate inquiries of the vendor and also of the occupiers, and if considered appropriate, a further inspection should be carried out, so that the identity of those residing on the property could be verified.

4.      it is prudent to obtain from all persons who have been identified as residing on the property as a result of inspection and/or inquiries and who are not a party to the sale, confirmations in an appropriate form …

5.      The purchaser should be advised, preferably in writing, of the effect of not inspecting the property and ascertaining the identity of those residing.

6.      The purchaser should be advised to make an inspection of the property on the day of completion to ensure that the property has been vacated and to inform his solicitors of the outcome of such inspection immediately.

7.      …

8.      …

Mortgages

9.      When acting for a mortgagee advancing money for the purchase of residential property, it will be prudent to ensure that the procedures set out in paragraphs 1-6 above have been carried out by the purchaser and / or the mortgagee.

10.    When acting for a mortgagee taking security over property already owned and occupied by the borrower, …”

48.  Ms Tsui criticised the failure on the part of Messrs T L Ip & Co to inspect the property.  While I share Ms Tsui’s criticism of the way Messrs T L Ip & Co handled the transactions, I do not think a solicitor is under a duty to inspect the property whether he acts for a purchaser or the mortgagee.  That is basically the purchaser’s or the mortgagee’s duty.  A solicitor acting for a purchaser has a duty to advise the purchaser the need to inspect the property and the effect of not inspecting: see paragraph 1, 5 and 6 of the above practice note.  Where he acts for a mortgagee, the solicitor’s duty under paragraph 9 of the practice note is to ensure the procedures set out in paragraph 1 to 6 of the practice note have been carried out.  Even if upon an inspection of the property, the Plaintiff discovered the presence of the 2^nd Defendant, there was no duty on the Plaintiff to enquire from her if she would be making any claim in respect of the property for financial provision.  Of course, on the facts of the present case, as Au, Wong and the 1^st Defendant had conspired to defraud the bank by misrepresenting to the bank that the property was sold with vacant possession and that Au was in occupation, Wong’s and the 1^st Defendant’s lack of response to such advice would not put Messrs T L Ip & Co and accordingly the Plaintiff on notice of Au’s intention to defeat the 2^nd Defendant’s claim for financial provision.  Of course, had that been sufficient to put the Plaintiff on enquiry and had the Plaintiff inspected the property, the presence of the 2^nd Defendant on the property would have been discovered and the 2^nd Defendant would have told the Plaintiff that she was contemplating divorce proceedings against Au and would make a claim in respect of the property.

49.  The present case is on all fours with National Provincial Bank, Ltd v Ainsworth.  I am not satisfied that the Plaintiff had constructive notice of that the dispositions were made by Au with the intention to defeat the 2^nd Defendant’s future claim for financial provision.  Accordingly, I find that the order under section 17 of the Matrimonial Proceedings and Property Ordinance had the effect of re-vesting in Au the beneficial interest in the property immediately previously held by the 1^st Defendant as at the date of the order.  As the Plaintiff’s legal charge has not been set aside by any order of the court and the legal charge was made for value without notice of Au’s intention to defeat the 2^nd Defendant’s future claim for financial provision, the interest so re-vested in Au and transferred to the 2^nd Defendant is subject to the Plaintiff’s legal charge.

Whether the two dispositions were void for illegality

50.  Ms Tsui sought to attack the legality of the Plaintiff’s legal charge in a number of ways.  Firstly, she argued that the 1^st Defendant’s interest in the property is a sham one because the two dispositions were sham transactions and have been set aside by an order made under section 17 of the Matrimonial Proceedings and Property Ordinance.  Thus Ms Tsui submitted that the legal charge must be avoided as the 1^st Defendant had no interest in the property on which to create a charge.  As I have found that the order setting aside the two dispositions only took effect on the date of the order and did not render the dispositions void ab initio, Ms Tsui could only base her argument on the illegality of the two dispositions.  Secondly, she argued that the legal charge and the conveyance by assignment were one indivisible transaction and should be set aside along with the conveyance to the 1^st Defendant.  Thirdly, she argued that even if the legal charge was a distinct and separate transaction, it is unenforceable as having been tainted by the illegality of the two dispositions.  In my view, the crucial issue is whether the two dispositions were illegal.  If they were, the 1^st Defendant has no interest in the property on which to create a legal charge.  When the interest in the property was re-vested in Au and transferred to the 2^nd Defendant pursuant to the order under section 17 of the Matrimonial Proceedings and Property Ordinance, the 2^nd Defendant takes the property free from the legal charge and the Plaintiff would be left with a personal remedy against the 1^st Defendant only. There would be no need to consider the second and third of Ms Tsui’s arguments.  On the other hand, if the dispositions were legal, there would also be no basis on which Ms Tsui may raise her arguments that the legal charge is part of an illegal transaction or is tainted by illegality of the two dispositions.  The 2^nd Defendant would have to take the property subject to the legal charge. 

51.  Counsel for both parties agreed that as HH Judge Gill declined to give any reasons or ruling on his finding when setting aside the two dispositions, the illegality of the two dispositions have to be re-visited.  The nature of the proceedings before HH Judge Gill in the Family Court is very much different from and has little bearing on the proceedings now before me. In making an order under section 17, the court is assisted by the presumption under section 17(3). If the court is satisfied that a disposition made within three years of an application made pursuant to that section has the effect of defeating the applicant’s claim for financial provision, it shall be presumed, unless the contrary is shown, that the other party disposed of the property with the intention of so defeating the applicant’s claim for financial provision.  That finding would be sufficient for the court to make an order under section 17.  The two dispositions were made within three years of the application by the 2^nd Defendant and the therefore presumption applies.  At the hearing of the application before HH Judge Gill, Au was absent.  There was no evidence to rebut the presumption.  In other words, if HH Judge Gill was satisfied that the dispositions have the effect of defeating the 2^nd Defendant’s claim for financial provision, which he must be, he may make the order. That finding of HH Judge Gill, even if expressly made, would not be of assistance to the parties for the purpose of these proceedings. In view of the 2^nd Defendant’s defence, the legality or otherwise of the two dispositions must be re-visited.  The burden is on the 2^nd Defendant to prove illegality.

52.  The 2^nd Defendant pleaded illegality and fraud in paragraph 14 and 14A of her defence as follows:

“14.   By the matters pleaded in paragraph 9 above, the whole series of transactions between Au, the said Wong Lo Tim and the 1^st Defendant raised a doubt of genuineness of the transactions.  Both the 1st Defendant as the ultimate purchaser and the Plaintiff as the legal chargee had actual or constructive notice of the interest of the 2^nd Defendant as the wife of Au in the Property.

14A.  Further or in the alternative, the transactions referred to in paragraph 9 herein are of a fraudulent nature and therefore void for illegality.  The Legal Charge being part and parcel of the transaction is thereby tainted with illegality and is void.

Particulars of Fraud

(1)     There were 2 provisional sale and purchase Agreements entered into on the same day purportedly by Au and Wong and Wong and the 1^st Defendant;

(2)     The 1^st Defendant signed on behalf of Wong in the provisional sale and purchase Agreement and was therefore a party to both the first and second provisional sale and purchase Agreements;

(3)     Wong and the 1^st Defendant were obviously related.  They were seen to be sharing the same address in the subsequent formal sale and purchase Agreement dated 5^th May 2001.

Paragraph 9 of the defence refers to the sale and purchase between Au and Wong, the sub-sale and sub-purchase between Wong and the 1^st Defendant and the legal charge made by the 1^st Defendant in favour of the Plaintiff.  Thus the illegality alleged by the 2^nd Defendant are “a doubt of genuineness of the transactions” and fraud.

53.  The following facts are not in dispute.  On 25 April 2001, which must have been shortly after Au’s release from prison in China, Au entered into a provisional sale and purchase agreement with Wong in respect of the property at a price of $350,000.  This was a private sale without an intermediary estate agent.  The 1^st Defendant signed on behalf of Wong in the provisional sale and purchase agreement. On the same day, through an estate agent, Wong entered into a provisional agreement for a sub-sale as confirmor to the 1^st Defendant at $700,000.  On the following day, the 1^st Defendant applied to the Plaintiff for a mortgage loan.  Messrs T L Ip & Co was instructed to act in the sale, sub-sale and the mortgage transactions for all the parties.  The formal sale and purchase agreement and the formal sub-sale and sub-purchase agreement were entered into on 4 and 5 May 2001 respectively.  The sale and sub-sale were both completed on 23 May 2001 with Messrs T L Ip & Co as agent of the Plaintiff releasing the major part of the loan to Au in payment of the purchase price by Wong.

54.  I am satisfied that the particulars of fraud alleged are proved.  Indeed there are more suspicious circumstances on the facts as I have found them than as pleaded in the particulars.  Not only that Wong and the 1^st Defendant were obviously known to each other and used the same address, the 1^st Defendant signed on the provisional sale and purchase agreement on behalf of Wong from whom she purchased on the same day but at a 100% increase in price.  If the 1^st Defendant was keen to buy the property, why did she not buy direct from Au but chose to buy at double the price from the confirmor for whom she signed the provisional sale and purchase agreement made in a private sale?  Why did the parties find it necessary to make the sub-sale and sub-purchase through an estate agent when essentially the same parties were able to enter into a private sale agreement?  Neither Wong nor the 1^st Defendant inspected the property.  Instead of Wong paying Au in the sale and then the 1^st Defendant paying Wong in the sub-sale with the mortgage loan from the Plaintiff, the mortgage loan for the sub-sale was released by Messrs T L Ip & Co direct to Au in payment of the purchase price from Wong to Au.  Though Messrs T L Ip & Co was instructed to act in the sub-sale, the payment of the balance of the sub-purchase price by the 1^st Defendant to Wong, net of the deposit and the mortgage loan so released was not made through Messrs T L Ip & Co, but was purportedly paid direct by the 1^st Defendant in cash to Wong and evidenced by a handwritten receipt in the amount of $276,280 signed by Wong and the 1^st Defendant.  Thus, in effect, the mortgage loan for the purpose of financing the sub-purchase was directly released to Au (not Wong) and Wong received paper receipts for his 100% profit from a confirmor sale made within the same day of the initial sale.  I have no difficulties to infer from the suspicious circumstances that the two dispositions were just paper transactions entered into for the purpose of passing the legal interest in the property to the 1^st Defendant and that effectively no money changed hands between Au, Wong and the 1^st Defendant.  The mortgage loan obtained from the Plaintiff was paid to Au, leaving the property with a legal charge in favour of the Plaintiff.

55.  The 2^nd Defendant pleaded that the circumstances of the dispositions raised “a doubt of genuineness of the transactions”.  But she failed to show what was not genuine about these dispositions.  The paper transactions may not be genuine in the sense that no money changed hands under the disposition from Au to Wong or from Wong to the 1^st Defendant.  The price for the sub-sale was inflated, likewise the price for the sale was undervalued by reference to the valuation of the Plaintiff.  But nobody was deceived by these prices.  The parties to these transactions could not have been deceived, while the Plaintiff acted on its own valuation. As such they did not render the two dispositions illegal.  Indeed such paper transactions are often carried out on a much larger scale by companies for tax avoidance purposes by re-distributing profits between associated companies.  The dispositions could not have been illegal or invalidated as such had they been made expressly by way of gift.  Thus I fail to see how the fact that these dispositions were paper transactions could affect their legality.  The two dispositions were nevertheless genuine in the sense that the legal estate in the property was intended to pass and did pass upon the assignment to the 1^st Defendant pursuant to the sale and purchase agreement and the sub-sale and sub-purchase agreement.  The transaction relating to the legal charge is genuine in that the Plaintiff advanced $360,000 for the purpose of completing the sub-purchase in consideration of the legal charge over the interest in the property.  Thus despite the very suspicious circumstances surrounding these dispositions, I am quite unable to find these dispositions were not genuine.

56.  Turning to the allegation of fraud, I fail to see how the particulars of fraud pleaded amounted to any fraud.  The particulars may be evidence of a fraud. But what was the fraud? The 2^nd Defendant pleaded short of an allegation to defraud her or to defeat her claim for financial provision in any anticipated matrimonial proceedings.  The 2^nd Defendant caused Au’s imprisonment in China. These transactions were effected shortly after Au’s release from prison.  Against the background of matrimonial discord between Au and the 2^nd Defendant and in the light of the very suspicious circumstances, the only reasonable inference to be drawn is that these transactions were part of a scheme to enable Au to drain the value out of the property by way of a loan from the Plaintiff for Au’s benefit and to the exclusion of the 2^nd Defendant by leaving her with the property encumbered by a legal charge in favour of the Plaintiff bank.  The transactions might have been intended to defeat the 2^nd Defendant’s possible future claim for financial provision.  Could that amount to a fraud against the 2^nd Defendant who had no interest, legal or equitable, in the property?  Such a disposition is not made criminal by any law.  Au was the absolute owner of the property. His disposition of the property even if by way of gift is not prohibited by statute.  The purpose of Section 17 of the Matrimonial Proceedings and Property Ordinance, as I have said earlier, is to give the court power to prevent a party from diminishing the assets of the family which would otherwise be available for consideration by the court when making orders for financial provision. The section could not be invoked until matrimonial proceedings have been instituted.  The jurisdiction to set aside the dispositions is not mandatory but is a matter of discretion of the court.  The court may not necessarily set aside the disposition, for example, if there are other assets available to the spouse applying for the order.  I have earlier reached the conclusion that the effect of the section is not to render any disposition set aside void ab initio.  For all these reasons, I am therefore of the view that the section does not have the effect of making any disposition made with the intention to defeat a spouse’s claim, present or future, for financial provision illegal. 

57.  “Illegality” is a word which has been loosely used to include any form of unlawfulness. The illegality can arise either from statute or the common law.  It includes a wide range of activities such as commission of a crime which are overtly illegal but others which are less so, such as acts done in contravention of any statute, or contrary to public policy, or without compliance with certain legal formality.  Not all illegalities would render a contract unenforceable for illegality. The seriousness and turpitude of the illegality which renders a contract unenforceable varies considerably.  In my view, the purpose for the dispositions could not have been honourable, but was insufficient to make them illegal.  Even if it could, any illegality so created could not be of such a turpitude as would render the dispositions unenforceable for illegality. 

58.  Accordingly, I hold that though the two dispositions were paper transactions, they were neither fictitious nor illegal.  They were genuine transactions and had the effect of passing the legal interest in the property to the 1^st Defendant.  I further hold that though the dispositions were made with the intention of defeating the 2^nd Defendant’s possible future claim to financial provision, they are neither fraudulent nor void.  As such, the legality of the legal charge is not affected.

Whether the legal charge is part of the conveyancing to the 1^st Defendant and tainted with illegality

59.  In view of my conclusion that the two dispositions were not illegal, it is unnecessary for me to consider Ms Tsui’s second and third arguments. I shall, however, make a few observations on those arguments.  Ms Tsui submitted that as the legal charge was granted solely pursuant to the conveyance of the property by Au to the 1^st Defendant the conveyance by assignment and the legal charge should be seen as one indivisible transaction and should be set aside together with the conveyance.

60.  Ms Tsui referred to Abbey National Building Society v Cann [1991] 1 AC 56 in support of her one-transaction argument.  In that case, the son applied to the plaintiff building society for a loan to be secured on a mortgage of a leasehold dwelling house which he proposed to buy purportedly for his own occupation but his intention was that it should be occupied not by himself but by his mother and her boyfriend whom she subsequently married.  The son defaulted in payment and did not defend the proceedings by the plaintiff.  The defence of the mother and her husband was based on provisions of the Land Registration Act 1925 which has no application in Hong Kong.  But Ms Tsui relied on the following passage of Lord Oliver’s speech at 92 in support of her one-transaction argument:

“In neither In re Connolly nor the Security Trust Co case could the charge which was given priority have been created unless and until the legal estate had been obtained by the chargor.  In both cases the chargee had notice of the existence of the charge which failed to achieve priority.  Both necessarily rest therefore upon the proposition that, at least where there is a prior agreement to grant the charge on the legal estate when obtained, the transactions of acquiring the legal estate and granting the charge are, in law as in reality, one indivisible transaction. …

Of course, as a matter of legal theory, a person cannot charge a legal estate that he does not have, so that there is an attractive legal logic in the ratio in Piskor’s case.  Nevertheless, I cannot help feeling that it flies in the face of reality.  The reality is that, in the vast majority of cases, the acquisition of the legal estate and the charge are not only precisely simultaneous but indissolubly bound together.  The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them.  Indeed, in many, if not most, cases of building society mortgages, there will have been, as there was in this case, a formal offer and acceptance of an advance which will ripen into a specifically enforceable agreement immediately the funds are advanced which will normally be a day or more before completion.  In many, if not most, cases, the charge itself will have been executed before the execution, let alone the exchange, of the conveyance or transfer of the property.  … The reality is that the purchaser of land who relies upon a building society or bank loan for the completion of his purchase never in fact acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise.  The “scintilla temporis” is no more than a legal artifice and, for my part, I would adopt the reasoning of the Court of Appeal in In re Connolly Brothers Ltd (No 2) [1912] 2 Ch 25 and of Harman J in Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901 and hold that Piskor’s case was wrongly decided.”

61.  From the last sentence of the above dicta, it is clear that in adopting the reasoning of the Court of Appeal in In re Connolly Brothers Ltd (No 2), Lord Oliver was approving the proposition of the law as found by the Court of Appeal in In re Connolly Brothers Ltd (No 2), that is at least where there is a prior agreement to grant the charge on the legal estate when obtained, the transactions of acquiring the legal estate and granting the charge were one indivisible transaction.  It is important to note that the proposition was made in the context of In re Connolly Brothers Ltd (No 2) and Abbey National Building Society for the purpose of determining when legal interest is vested where there was a prior agreement to grant the charge on the legal estate when obtained.  In my view, his Lordship was not laying down a general proposition applicable to any situation for all intents and purposes and less so was his Lordship saying that the conveyance and mortgage formed one transaction in the sense that these two transactions have no identities of their own for all intents and purposes. The parties, their respective rights and obligations and subject matter under the two transactions are obviously different.

62.  In Abbey National Building Society,the son fraudulently represented his intention of purchasing the property, which was registered land, for his own use and occupation.  The contract for sale and purchase was vitiated by his fraud.  But no argument was raised that the mortgage was tainted by illegality. If that was a sustainable argument, it is surprising that the point had not been taken all the way to the House of Lords.  Certainly Abbey National Building Society is not an authority for the proposition that where one transaction of a series, namely the conveyancing transaction, is illegal the entire series of transactions, namely the conveyancing together with the mortgage transactions, is void for illegality.

63.  In further support of her one-transaction argument, Ms Tsui quoted the following passage from Halsbury’s Laws of England Vol 32 para 878 and 879:

“878.   Related agreements: illegal contracts.  A contract or security not in itself illegal will be tainted with illegality and hence be unenforceable if it is founded upon another, illegal, contract.  Thus the following contracts or securities have been held unenforceable: a bond given in consideration of future illicit cohabitation; a deed given as security for payment of the purchase price of land conveyed for an illegal purpose; an indenture assigning a policy of assurance as security for payment of a bill of exchange given in fraud of creditors; and half of a bank note given by way of pledge to secure payment for a debauch in a brothel.  The principle is not confined to transactions between the parties to the original illegal contract, for the following have been held to be unenforceable: a policy of insurance on an illegal voyage; a guarantee of a debenture which was illegal as involving financial assistance by a company in the purchase of its own shares; and a loan by A to B to enable B to pay off an illegal loan from C.  However, where a third party is involved, he may enforce the agreement or security if he had no knowledge of the illegal object or nature of the original contract.  (My emphasis) 

Notwithstanding the general rule, the second contract will be enforceable if though factually connected with the original illegal contract, it is remote from it and cannot be said in reality to spring from, or be founded on it. …

879.    Related agreements: void contracts.  With the important exception of certain betting transactions (which are governed by special statutory rules), a contract or security which is connected with another contract which is merely void but not illegal is not thereby necessarily invalidated. However, where the original, void contract was substantially the whole consideration for the related agreement or the related agreement was intended to be dependent upon the validity of the original contract, then the related agreement would also be unenforceable.”

I do not think the above passage from Halsbury’s Laws of England supportsMs Tsui’s one-transaction argument.  From the part I highlighted, it is implicit that the mortgage transaction is separate from the conveyancing transaction.  This passage probably supports Ms Tsu’s argument based on collateral contract, which I shall turn to later.

64.    With respect, I think Ms Tsui has misinterpreted the dicta of Lord Oliver.  In my view, as a general rule, whether the conveyance and the mortgage form one transaction for any intents and purposes is a question of fact of the particular case. The transactions are one if the parties to the two transactions participated in one common design in the sense that with full knowledge of all the circumstances of the other transaction the parties to the conveyance and the parties to the mortgage intended their respective transactions to be part and parcel of one design and intended to perform their transaction as part of that design.  Prima facie, the two transactions are separate and distinct transactions.  The burden of proof must be on the party asserting they are one. 

65.  On the facts of the present case as it was in Abbey National Building Society, I have no doubt that the parties intended the legal charge to be created only if the legal estate is conveyed to the 1^st Defendant.  In that context, the two transactions form one transaction for the purpose of determining when legal interest in the property is vested but not for other purposes.  In determining whether the two transactions form one transaction for the purpose of the present case, the crucial issue is whether the Plaintiff had full knowledge of all the circumstances of the disposition to the 1^st Defendant at the time when the legal charge was created and intended the legal charge to be part and parcel of the design to defeat the 2^nd Defendant’s future claim to financial provision.  This knowledge must be actual knowledge.  Constructive knowledge is not sufficient.  A very crucial circumstance is that the two dispositions were made for the purpose of defeating the 2^nd Defendant’s claim for financial provision in any future matrimonial proceedings.  It can hardly be argued that the Plaintiff had actual knowledge of Au’s purpose of defeating the 2^nd Defendant’s future claim for financial provision because at the time the legal charge was created, the 2^nd Defendant had not even commenced the divorce proceedings.  Accordingly, the legal charge and the conveyance are separate transactions.  Even assuming that the two dispositions were illegal, that does not render the legal charge unenforceable.

66.  I now return to Ms Tsui’s third argument based on collateral contract.  The legal charge is a third party transaction.  As correctly stated by the learned authors of Halsbury’s Laws of England, a third party may enforce a collateral agreement or security if he had no knowledge of the illegal object or nature of the original contract.  For the same reason as stated above, the Plaintiff had no knowledge of Au’s purpose to defeat the 2^nd Defendant’s claim. The legal charge is not rendered unenforceable.

Conclusion

67.  In conclusion, I find that the 2^nd Defendant has not acquired any equitable interest in the property and that the legal charge created by the 1^st Defendant in favour of the Plaintiff is valid and binding.  The effect of the order made under section 17 of the Matrimonial Proceedings and Property Ordinance setting aside the two dispositions by the 2^nd Defendant’s husband Au Chi Pang to Wong Lo Tim and thence to the 1^st Defendant was to re-vest in Au Chi Pang the interest in the property subject to the legal charge. Thus, the interest in the property so transferred to the 2^nd Defendant under the order is subject to the Plaintiff’s legal charge.

68.  Accordingly, I grant the Plaintiff an order for possession of the property and costs to be taxed on a party and party basis with certificate for counsel.  The 2^nd Defendant’s own costs shall be taxed in accordance with Legal Aid Regulations.

69.  I also make a further order that there shall be stay of execution for up to three months from the date of this judgment on condition that the 2^nd Defendant pays within 14 days the monthly interest due in respect of the outstanding capital of the loan and thereafter monthly in advance.  For that purpose, there shall be liberty to apply.