SINO-GLORY (HOLDINGS) LTD v. IMPRESSIVE INVESTMENTS LTD

HCA 1357/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1357 OF 2002

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J U D G M E N T

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1. In this action, the Plaintiff claims against the Defendant for the sum of $2,600,000, being initial and further deposits paid for the purchase of a residential property. The claim turns on the validity of a requisition raised by the Plaintiff's solicitors about a claim by a third party to have a interest in the property and their contention that the Defendant failed to prove and show good title, pursuant to Clause 3 of a Provisional Agreement for Sale and Purchase ("PASP").

2. The parties entered into a PASP dated 3 November 2000, the Plaintiff as purchaser and the Defendant as vendor. The original date of completion was 5 December 2000. Clause 2(a) of the PASP required an initial deposit of $1 million and clause 2(c) a further deposit of $1,600,000 to be paid on the signing of a formal Agreement for Sale and Purchase ("ASP"). Clause 3 of the PASP provided that the Defendant sell the premises to the Plaintiff "free from encumbrances, including but not limiting to Writ of Summons M/n 8233146 and all claims and demands therein and with good title deeds". (emphasis supplied)

3. Clause 7 provided that should the purchaser fail to complete the purchase the initial deposit would be forfeited to the vendor who should be entitled at his discretion to sell the premises. Clause 8 provided that should the vendor, after receiving the initial deposit, fail to complete the sale, the vendor was immediately to compensate the purchaser by refunding the initial deposit, together with a sum equivalent to the amount of the initial deposit.

4. The Plaintiff contended that the Defendant had failed to prove and show good title pursuant to Clause 3 of the PASP, by failing to prove it was able to sell the premises free from encumbrances, namely the action threatened by Writ noted therein.

5. The Writ in HCA 9852/2000, was issued on 8 November 2000 and registered against the title of the suit property. In that action, the Plaintiff, Strait Peaceful Reunification Association Limited ("Strait") claimed against Miu Nam (D1), the Defendant company (Impressive Investments) (D2) and another company (D3), for a declaration that it was the lawful owner of the suit property and another residential property. The endorsement claimed that Miu Nam was in breach of trust and/or fiduciary duty in depriving Strait of the 2 properties which were to be transferred to Strait or its nominee, by causing the transfer of the premises in about September 2000 to the 2nd and 3rd Defendants acting as Miu Nam's nominee and/or agent and/or servant and/or in concert with him.

6. The remedies sought were an injunction to restrain dealings with the properties; a declaration Strait was lawful owner of the properties; an order that the properties be transferred to the Plaintiff or its nominees; an account of profits; payment to Strait of any proceeds of sale; tracing remedies and profits and damages.

7. HCA 9852/2000 was discontinued on 13 November 2000, pursuant to Order 21 rule 2(1). However, the solicitors acting for Strait wrote to the Plaintiff on 23 November 2000 giving specific notice of Strait's rights and interests as pleaded in the Writ. The Plaintiff was told that the Defendants in HCA 9852/2000 had admitted and accepted that Strait had such rights and interests and it was consequent on this admission and acceptance that Strait had discontinued the action.

8. After receiving this letter, the Plaintiff raised a requisition on the topic, and sought the comments of the solicitors for Strait on the answers. A course of correspondence ensued and the requisitions, the answer and the solicitors' comments were examined in the course of this hearing. A number of other requisitions were raised and, overall, were dealt with to the satisfaction of the Plaintiff's solicitors.

9. On 29 November 2000, the Plaintiff's solicitors forwarded a copy of the letter of 23 November 2000 from Strait's solicitors to the Defendant and asked whether the sale described had been duly approved by Strait and whether their client consented to payment of the sale proceeds to Strait as requested. The Defendant's answer on 30 November 2000 was to enclose a sealed copy of Writ of Summons Memorial Number 8233146, a certified copy of the Notice of Discontinuance and a copy of their letter of 1 December 2000 to Strait's solicitors disputing Strait's claim.

10. The Plaintiff's solicitors replied that the letter was self-serving and could not remove the blot on title imposed by the letter from Strait's solicitors. They reiterated their request for a letter from Strait's solicitors confirming withdrawal of the claim, or a court order to that effect. The same day, Strait's solicitors wrote again, asserting their client's rights and interests, stressing that any sale had to be consented to by their client in writing and the sale proceeds paid to their client direct.

11. A copy of that letter was sent to the Defendant's solicitors. By two letters, both dated 5 December 2000, the Defendant pointed out the Writ had been withdrawn by the Notice of Discontinuance; alleged Strait's claim was frivolous, unfounded and groundless and did not amount to a valid claim of any interest and disagreed it was a blot on the title. The second letter said that Strait's solicitors had not provided any grounds to substantiate their allegations and repeated that the demands were groundless.

12. On 6 December 2000, the Plaintiff's solicitors replied that they did not consider the previous correspondence sufficient answer, and pointed out they were not able to judge, in the absence of other evidence, whether Strait's assertions or demands were unfounded. They requested written confirmation from Strait's solicitors of their irrevocable withdrawal of the claims, or alternatively a court order to that effect.

13. On 7 December 2000, 2 days after the stipulated date for completion, the Defendant's solicitors wrote to the Plaintiff asserting that as they had fully and satisfactorily answered all requisitions and proved good title, the Plaintiff was bound to complete the purchase. They stated again that Strait's claim was unfounded. They argued that clause 3 of the PASP obviously meant any claim or demand should be a valid one in that it must relate to the Writ of Summons and must amount to an encumbrance on the property. As the Writ of Summons had been withdrawn, this was evidence that the subsequent claim had no basis. Completion was requested by 5 o'clock next day, failing which their client would have no alternative but to consider the PASP had been wrongfully repudiated.

14. The Plaintiff's solicitors replied, the same day, that they considered Strait's solicitor had given notice of prior equitable interests in the property by a third party, which would put them on inquiry as to the nature of beneficial ownership of the property and the existence of a breach of trust. Without prejudice, they asked that completion take place within 3 working days after proof of good title if done before 11 December 2000 and within 5 days after proof of good title if done after 12 December. Strait issued a Writ in exactly the same terms as the earlier one and registered it at the Land Registry by Memorial No. 8258010 on 8 December 2000.

15. By a letter dated 8 December 2000, the Defendant's solicitor gave a lengthy reply to the Plaintiff's solicitors as to their accepting that the letters from Strait's solicitor constituted actual notice of a third party's prior equitable interest in the property. It pointed out that Strait had adduced no evidence it had any beneficial interest. Second, if Miu Nam was really in breach of trust or fiduciary duty, the only action Strait could take would be a personal action against Miu Nam for breach of trust, but it would not have any beneficial or equitable claims against the property. There was no allegation in the Writ that the previous owners, the Wongs, were holding the property on trust for Strait. There was no allegation of any agreement by the Wongs to sell the property to Miu Nam or to Strait. Even if there were such agreement, it was void against the Defendant as it was unregistered. Further, Strait's solicitor had never adduced documentary evidence to prove their clients' equitable interest. The letter concluded with a demand for completion by 5:00 p.m. the same day.

16. The same day, the Plaintiff's solicitors received a letter from Strait's solicitors repeating their claim and stating that the Defendant on 12 November 2000 had admitted and accepted the rights and interests of Strait in the property. On 9 December 2000, the Plaintiff's solicitors were served with the second Writ.

17. Overall, the Defendant's answer to the requisition was to repeat the assertion that Strait's claim was unfounded. Second, the Defendant denied it had ever accepted and admitted Strait's rights and interests in the property. The assertion that Miu Nam was in breach of trust and/or fiduciary duty in depriving Strait of the property gave rise, at best, only to a personal action against Miu Nam; it would not have a beneficial or equitable claim against the premises. Fourth, it was asserted that as the purchase of premises was from the Wongs, not Miu Nam, there could be no allegation that the Wongs held the premises on trust for Strait. There is no allegation in the Writ of any agreement by the Wong's to sell the premises to Miu Nam or to Strait. Further, the Wongs had sold to the Defendant who had paid the purchase price and was the sole registered owner. For those reasons, there could be no risk at all of Strait succeeding in a claim against the Plaintiff for any interest in the premises.

18. The parties agreed that the applicable test as to whether the Defendant had shown and proved good title, was that laid down in M.E.P.C. Ltd v Christian-Edwards & Another [1981] A.C. 205, "if the facts and circumstances, are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance, the court should declare in favour of a good title shown (Lord Russell at 220 C-D).

19. The Plaintiff accepted that not every third party assertion of rights and interests in a property constitutes an encumbrance, but contended the facts suggested Strait's claim went beyond mere assertion. It had taken out a Writ on that basis and further, Strait claimed the Defendants named in that Writ, including the Defendant in the present case, on 12 November had accepted and admitted the rights and interests of Strait pleaded in the Writ. On that basis, Strait discontinued the Writ on 13 November 2000. It continued to assert its claim however, and, when the Defendant denied Strait's interests, the second action was commenced in identical terms.

20. The Plaintiff submitted that the endorsement in High Court Action 9852/2000 did not confine Strait's claim to a personal action against Miu Nam, pointing out that Strait's case was based on a breach of trust by Miu Nam in relation to his dealing with the properties. The arrangements between Miu Nam and Strait giving rise the alleged trust were matters of fact which had to be pleaded in the Statement of Claim and proved by evidence at trial.

21. In the endorsement, Strait claimed the Defendant acted as Miu Nam's nominee, agent or servant, or in concert with Miu Nam, in transferring the premises to Defendant. What was not known, or had not been explained, were the arrangements and relations between the Wongs as vendor, and Miu Nam as trustee or fiduciary for the Defendant. Nor was there an explanation of the circumstances in which the premises were transferred from Wongs to the Defendant. Those facts would have to be decided as a result of Strait's claim. Whether or not the Wongs held the premises in trust for Strait was not the only circumstance which would give rise to claim in equity by Strait.

22. The Defendant agreed it was bound to answer the requisition and provide good, title but argued it was the Plaintiff who was in breach in failing to complete the transaction.

23. As an alternative argument, if any encumbrance did exist, it did not bind the Defendant so as to be a blot on the title. Reasons advanced were:

(a) the basis of the claim against Defendant was not specific;

(b) the two writs were identical, only generally endorsed and, on their face, concerned an alleged relationship only between Strait and Miu Nam;

(c) the Defendant was the registered owner of the property having purchased it for money consideration and Strait did not allege the Defendant was holding the property on trust for Strait;

(d) in the absence of a legal relationship between Strait and the Defendant and because Strait could not substantiate a claim against the Defendant it had no claim that could create an encumbrance on the title;

(e) even if there was such a claim against Miu Nam and the Defendant, it would be a monetary one and would neither have priority, nor be a lawful and registrable interest capable of affecting the title (s. 5 Conveyancing and Property Ordinance (Cap. 219));

(f) even if an instrument or document existed which supported Strait's claim, it was unregistered and void. (s. 3 Conveyancing and Property Ordinance (Cap. 219))

Counsel for the Defendant submitted that it would be wrong if the Defendant's position was affected by bare allegations and that all the answers to the requisition had been given in the correspondence. The Plaintiff was wrong to say Strait's allegation was capable of amounting to a breach so as to prove good title, particularly when at completion date i.e. 5 December 2000, the second Writ had not issued.

24. As to forfeiture of the deposit, counsel for the Defendant submitted that as it was the Plaintiff, who was in breach of the PASP, the Defendant was entitled to forfeit the deposit. As $2.6 million was 10% of the purchase price, it was contended that was a reasonable amount to forfeit.

25. Assuming, for this purpose, that it was the Plaintiff who was in breach, this contention must be wrong. The PASP refers to forfeiture by the Vendor (Defendant) in Clause 7 and refers clearly to the "initial deposit". The initial deposit was $1 million and, if forfeiture by the Defendant was justified at all, that was the limit of the amount that could be forfeited.

26. Although in support of this point, the Defendant relied on Silverpole Ltd v China Pride Investment Ltd [1994] 2 HKC 52, I note that the facts of that case differ and there the court had to make a finding as to the amount of deposit, because such amount was not clearly specified as it was in Clause 7.

27. Completion was to be 5 December 2000. By that date the Plaintiff had not accepted that the main requisition had been answered. Other requisitions raised had been satisfied, although by completion date there was still dispute about whether a Statutory Declaration was in proper form. The Plaintiff said it required amendment and the Defendant, though stopping short of agreeing, nevertheless undertook such amendment. Further, a certified copy of a Power of Attorney the Plaintiff had requested was still outstanding.

28. As a result the time for completion was perforce extended by 3 days to 8 December 2000. The defence position at trial was that it had not insisted on completion on 5 December 2000, but denied any waiver, or any specific agreement to extend.

29. The Plaintiff's case proceeded on the basis that the Defendant was entitled to insist on completion on 5 December 2000, but did not. The Plaintiff submitted that in fact Defendant was not in a position to insist on the original completion date, as it had not satisfied the main requisition. As the completion date was thus at large the contract became an open one any new date must be a reasonable time after Defendant had discharged its duty to show good title.

30. Strait issued a fresh writ on 7 December 2000 and registered it on 8 December 2000. Thus by that date the Plaintiff had constructive notice of the new writ, although it had actual notice only on 9 December. Leaving aside the validity of the Defendant's arguments disputing Strait's claim, by the time the second writ was filed Strait's claim had crystallised and the Plaintiff could not complete the purchase without being forced into a lawsuit.

31. The Plaintiff relied on Nottingham Patent Brick and Tile Company v Butler [1886] 16 QB 778 to support its argument that it was both likely, and undesirable, for it to be forced into a law suit. At 787 Lord Esher M R reviewing the position of the Plaintiff in that case stated:

"a title depending upon evidence of matters of fact is a title which is capable of being disputed in a Court of Law, and, although the plaintiffs would in point of law, if the alleged fact was true, get the property free from the restrictions, yet in all probability, or almost certainty, they would be buying a law suit in order to get their title clear. Under such circumstances, where the rectitude of the title depends upon facts which very probably will be disputed, and are certainly capable of being disputed, a Court of Equity will not, as I understand, enforce the contract."

32. The reality of the Plaintiff's position is that the claim by Strait overshadowed the transaction from the time the PASP was entered into. Although the action was discontinued, the threat of revival was ever-present, particularly as Strait's solicitors insisted the action was discontinued only because of the alleged admission and acceptance, by the Defendant company, of their clients rights.

33. The Defendant did nothing to allay the Plaintiff's fears other than deny the allegations. Only after the original completion date had passed did the Defendant make a better attempt at an answer, but by that time Strait had filed the second writ. Any attempt at completion thereafter would be complicated by the writ registered against the title and was likely to be delayed until such time as the action had been withdrawn, or disposed of by trial.

34. The Defendant did not seek any declaration as to ownership and, apart from repeated denial of Strait's interest, did not explain satisfactorily why the discontinuance did not result from the agreement and admission, as Strait claimed. Without lifting the corporate veil the standard company documents would have shown the Plaintiff that there was sufficient commonality amongst the directors and shareholders of Strait and the Defendant to make possible the scenario suggested by Strait.

35. Leaving aside the question of how Strait's claim might be pursued and resolved, there existed still the likelihood that the Plaintiff would be compelled to await the outcome of the action between Strait and the Defendant, or would itself be forced into litigation to achieve the transfer of the property.

36. Unlike the cases which were cited in argument the blot on Defendant's title is a matter of immediate concern.

37. In M. E. P. C. v Christian-Edwards the court found beyond reasonable doubt that a contract of sale mentioned in 2 deeds of 1912 and 1930, and which had been suspended was in all likelihood abandoned from 1933 and certainly from 1936. Thus no possibility existed of any case for specific performance being established against the trustees of the property in 1973.

38. That is not the position in this case. On the facts this court cannot be satisfied beyond reasonable doubt that Strait's claim cannot or will not be pursued, or is impossible to establish. This was not an instance of a 'mere possibility' of a claim which the Plaintiff could ignore this was a claim Strait was pursuing and a claim the Defendant had failed to explain away satisfactorily, or at all, in terms of the Plaintiff's requisition. Having considered the facts and counsels' submissions I am of the view that the Defendant failed to answer the requisition raised in respect of Strait's action and that as a result the Defendant was not entitled to forfeit either the initial or the further deposits.

39. Accordingly I order that the Defendant return the deposits totalling $2.6 million to the Plaintiff.

40. Although the Plaintiff sought damages no such claim was substantiated at trial. However, Clause 8 of the PASP provides that where the Vendor has failed to complete the sale the Purchaser shall be entitled to the return of the initial deposit and, in addition to a sum equivalent to the initial deposit. This provision mirrors an equivalent one (Clause 7) which benefits the Vendor where the Purchaser has failed to complete.

41. In the circumstances I order than the additional sum of $1 million be paid by the Defendant to the Plaintiff.

42. Interest is ordered to run on the sum of $1.6 million from the date of forfeiture, to date of judgment.

43. Interest at judgment rate is to run on the total sum of $3.6 million from date of judgment until payment in full.

44. There will be an order nisi for costs in favour of the Plaintiff, such order to become final 14 days after the date of this judgment.