MAN FONG HANG v. MAN PING NAM AND OTHERS

CACV 104/2004

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 104 OF 2004

(ON APPEAL FROM HCA NO. 7935 OF 1998)

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J U D G M E N T

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Hon Cheung JA :

Man Shek Chung Wui

1.  Man Shek Chung Wui (文石涌會) (‘the Wui’) is a traditional landholding institution in the New Territories within the meaning of section 15 of the New Territories Ordinance (‘the Ordinance’).  Broadly speaking it belonged to the Man’s clan in the San Tin area.  It was managed by three managers who are the defendants in this case.

The sale

2.  The Wui owned a large piece of land (‘the land’) of over three million square feet near the Mai Po area in the border between Hong Kong and the Mainland.  On 4 August 1997 the managers sold the land to a company called Earning Youth Investments Limited (‘Earning Youth’) for $336,000,000.  Earning Youth also agreed on the completion of the sale to pay a sum of $6,675,710.40 to a fund called San Tin Man Sze Families Fund (新田文氏家族基金) (‘the fund’).  The managers said the fund was to be used for the welfare of the Man’s clan.  The two sums added together was $342,675,710.40.

3.   Within 17 days of this sale, Earning Youth resold the same piece of land for $446,066,597.  The buyer was System Link Development Limited (‘System Link’) a subsidiary of Henderson Land Development Company Limited (‘Henderson’), one of the major Hong Kong developers.

4.  The difference in price of the original sale (even taking into account the fund) and the resale was an astounding $103,390,886.60 and this was achieved within 17 days of the original sale.

5.  The plaintiff, the administrator of one of the members of the Wui was naturally upset about this.  He accused the managers of breach of trust by selling the land at an undervalue.  He also accused the managers of securing for themselves secret profits in the form of the fund.  The plaintiff commenced proceedings against the managers.

The judgment

6.  Lam J. after a long hearing of 23 days found for the plaintiff.  He held that the managers were in breach of their duties by failing to fetch a proper price for the sale.  The managers were ordered, among other things, to pay equitable compensation of $2,756,354.39.  The judge did not find the fund to be secret profits for the managers.  However, he ordered the managers to render an account of the fund.  Two of the managers (the 1^st and 2^nd defendants) now appeal against the decision.

Breach of duty

7.  In my view the judge was clearly right in his decision. In administrating the trust properly, and in dealing with it, a trustee is required to use the same degree of diligence and care in the execution of his office that a man of ordinary prudence would exercise in the management of his own affairs : Lewin on Trusts 17^th Ed Para 34-01A and Speight v. Gaunt (1883) 9 App. Case 1 HL. The managers had simply failed to ensure that the price they obtained was the true market price.  They failed to cause any valuation of the land to be made before the sale.  They had failed to market the land properly.  Between 1993 and 1996 there were sporadic interests to buy the land.  But by 1997, the managers were aware of competing offers and yet they chose to sell the land to Earning Youth without even making inquiries with the competing offerors whether they were prepared to offer something more.  They did not bargain with Earning Youth about the price of the land. 

8.  No doubt the decision to sell the land to Earning Youth was motivated by their decision to sell their own beneficial interest in the Wui to Earning Youth.  They were first approached to sell their beneficial interest which constituted 22% share in the Wui.  They then agreed to sell the land to the same purchaser.  The agreements for sale were executed on the same day.  While the managers might choose to dispose of their own interest without causing any valuation or proper marketing to be done, this does not mean that this is what a man of ordinary prudence would have done in the first place.  Clearly a higher burden is imposed on them as trustees of the Wui.

Scope of duty

9.  It was argued by Mr. Neoh S.C., Counsel for the managers that the managers were traditional folks in a traditional setting who were not accustomed to the dealings of a modern society and their conduct should be judged in this context.

10.  I disagree.  First, the managers had in fact previously retained a solicitor who had offered professional advice on matters of sale.  It is not as if the managers were ignorant of the availability of such assistance.  Second, in my view their duties must be judged in the context of the duties imposed by law on a trustee notwithstanding the traditional setting of this case.  The requirement of appointing managers to represent the Wui and the supervision by the Government under Section 15 of the Ordinance reinforced the argument that the well recognized duties of a trustee must be imposed on the managers.  Their duty could not be any less.  These duties must include the requirement to obtain a proper price for the sale of the land.  This price should represent the true market value of the land : see Cuckmere Brick Co. Ltd. and Another v. Mutual Finance Ltd.[1971] 1 Ch. 949 at page 966 per Salmon L.J.

The significant factor

11.  In this case the most significant factor that clearly shows the managers had not obtained a proper price for the land is the huge price difference that Earning Youth was able to obtain for itself in the resale of the land.  This was done within the same month of the original sale.  The resale was, of course different from the original sale in that it was a sale with vacant possession.  Clearly a discount has to be given for this mode of sale.  There was ample evidence in this case that a 10% adjustment will take care of the difference. 

12.  However, even with this adjustment, there is still a huge gap between the two prices.  No doubt the difference will include the profit element that Earning Youth was able to achieve for itself.  But this profit margin only means a buyer in the market was prepared to pay for this extra sum in order to obtain the land. 

13.  The time limit imposed on the delivery of vacant possession upon the completion of the resale was related to the validity of the consent given by the District Office for the sale rather than any strict requirement of obtaining vacant possession within a specific time.  Further, in my view, the fact that only a small number of buyers were interested in these types of land makes no significant difference to the market value. 

Burden of proof

14.  Much has been said about the burden of proof in this case.  Mr. Jat, S.C., counsel for the plaintiff, had referred to Underhill & Hayton, Law Relating to Trust and Trustees (16^th ed) page 581-583 where the authors said that the onus is on the trustee to prove he has acted reasonably.  See also Skipton Building Society v. Stott Causation [2001] Q.B. 261 and Potomek Construction Ltd. v. Zurich Securities Ltd. TLC 73/02. 

15.  Mr. Neoh argued that the cases cited by Underhill & Hayton in support of such a statement do not support the proposition.  These cases were Norris v. Wright (1851) 14 Beav 291, Campbell v. Walker 5 Ves. Jun 678, Oliver v. Court 8 Price 127 and In re Cooper and Allen’s Contract for Sale to Harlech (1876) 4 Ch. D. 802.  Mr. Neoh further argued Skipton Society and Potomek had to be considered in their context.  He maintained that he who asserts must prove and the plaintiff had failed to prove that the managers would have obtained a higher price even if they had done all the steps required of them in this case.

Evidence clear

16.  I do not find it necessary to visit the principle set out in Underhill & Hayton.    This is not a case to be decided on the incidence of burden of proof.  This is not a case where the evidence is ambiguous.  The case is not concerned with a slight or moderate fluctuation of say 5% to 10% of the price.  Sometimes a buyer may well be prepared to pay a little bit more to secure a deal.  The managers may in such circumstances with righteous indignation argue that even if they carried out all the valuation and marketing exercise, they still would not be able to reach such an increase.  But here the increase is over 30%.  An increase of over $103,000,000 in price on the same piece of land in the same period of time on a resale cannot be a fluke, particularly if the market was cornered by some powerful players like Henderson.  Proceeding on the basis that the plaintiff is required to establish the breach of trust, in my view he has clearly demonstrated that the managers have failed in their duties.  Had they discharged the duties properly, I have no doubt that a higher price would be obtained.  The $103,000,000 price increase is the best indication of what the market was prepared to pay at the time of the original sale.  There was no significant development in the short period between the two sales.  The resale price can only point to one conclusion, namely, that was indeed the true market value that a purchaser was prepared to pay.  There was no other evidence to rebut this. 

Causation

17.  The judge was clearly aware of the requirement of a causative loss before a trustee could be held in breach of trust : see Target Holdings Limited v. Redferns [1996] 1 A.C. 421.  The failure to obtain this higher price was caused by the managers’ breach of duty to properly value or market the land.  The cause of the loss is as clear as night follows day.

Damage

18.  The damages awarded to the plaintiff is based on the difference between the resale price less 10% i.e. $401,459,937.30 on the one hand and the original price plus the fund i.e. $342,657,710.40 on the other hand.  This represented the loss to the Wui.  Since the plaintiff’s share in the Wui is 1.5/32^th share, his loss is $2,756,354.39.

19.  In my view this is correct.  The 10% adjustment is due to the vacant possession requirement in the resale.  As pointed out earlier, there was ample evidence to support such an adjustment being adopted in this case.

Conclusion

20.  I will dismiss the appeal with a costs order nisi in favour of the plaintiff.

Hon Yuen JA:

21.  The three main points on appeal were whether the trial judge had erred in finding that:

(a)	the managers had breached their duty of care;
(b)	the breach caused loss to the Wui of $58,802,226.90 (being the sub-sale price of $446,066,597 reduced by 10%, less the sale price of $336,000,000 together with the fund of $6,675,710.40); and
(c)	the managers should not be relieved from personal liability under s.60 Trustee Ordinance, Cap.29.
There was also a short point on the order the judge made for accounts.

(A)  Breach of duty of care

22.  That the managers owed a duty of care to the Wui was not challenged.  What was submitted by Mr Neoh SC on their behalf was that they had complied with that duty. 

23.  The standard of care the law requires of a trustee is that of the ordinary prudent man of business (Lewin on Trusts 17^th ed. §34-01A).  In my view, the trial judge was entitled to find on the evidence that the managers had failed to attain that standard. 

24.  The property in question was the only asset of the Wui.  By virtue of the sheer size of the property (over 3 million square feet), it was a unique and valuable asset. 

25.  The members had unanimously agreed to sell it specifically on the basis that it would be sold to the highest bidder.  The concern expressed by at least some of the members that the managers should adopt a specific procedure designed to achieve the highest price was shown by the negotiations and meetings concerning the method of sale and procedure to be adopted (e.g. the proposals in, and subsequent to, the 1994 Circular), which led to the District Officer’s consent being withheld between 1992 and 1996.  

26.  In February 1997, unsolicited offers (or technically, invitations to treat) were made by three different parties (not including Earning Youth) within the space of four days, either for the purchase of individual memberships or for the property, at increasing prices.  However the managers did not seek to engage any of these parties in negotiations.  They said that was because they regarded these offers as "probing exercises" to see the price at which they would be prepared to sell, but the managers by their own admission in examination did not know the "right price" of the property and did not have a particular price in mind.  Yet they did not seek to engage these parties in negotiations at all and did nothing to maintain their interest in the property.

27.  Then in March 1997, the meeting of the Wui was aborted in controversial circumstances.  Whatever the reasons behind the break-up of the meeting, clearly the signs were that the sale of the property was engendering interest from different quarters. 

28.  The managers, who were aware of the above facts, could not therefore have been in any doubt that prudence was called for before deciding on the sale of the property. 

29.  The managers were also aware of the availability of professional assistance in ensuring that the sale was conducted prudently so as to achieve the market value.  They had earlier instructed a solicitor Mr George Yip, then of Messrs Robert W.H. Wang & Co., to advise them on the procedure concerning a sale of the property.  Mr Yip gave written advice on the procedure of public tenders.  Subsequently, when instructed that the property might be sold by private treaty, Mr Yip had also advised them on the obtaining of members’ consent and on procedural guidelines. 

30.  Although the managers continued to instruct Mr Yip in the matter of obtaining consent for sale from the District Office, when the time came for the managers to consider the sale of the property to Earning Youth, they did not consult Mr Yip (or any other professional advisers) as to how best to assess the offer so as to ensure that they would achieve the market value of the property (e.g. sale by public tender or inviting competing offers), or at least to ensure that the members were satisfied with the price offered by private treaty (e.g. by way of a resolution on a  price acceptable to the members).  The judge found the 1^st Defendant Man Ping Nam to be evasive when cross-examined about the advice the managers had received from Mr Yip (Judgment §92).  Indeed, when they accepted Earning Youth’s offer, instead of going back to Mr Yip, they went to a solicitor recommended by Earning Youth. 

31.  In light of the above facts, the trial judge was in my view clearly entitled to find that the managers were in breach of their duty of care when they accepted the offer from Earning Youth in the way they did.  Although they admitted that in March 1997 they did not know the "right price" of the property, they took no steps to assess the market value.  They did not seek a professional valuation or other professional assistance to ascertain it.  They did not undertake a public tender, although they had previously received advice on this method of sale.  Having presumably decided on sale by private treaty, they did not engage other parties who had shown interest in the property in any negotiations or otherwise maintain these other parties’ interest.  They did not invite competition by reverting to those other parties to test the price offered by Earning Youth and admitted they did not attempt to negotiate the price with Earning Youth prior to accepting its offer.  In my view, the trial judge had more than sufficient evidence to warrant the finding that they fell far short of the standard of care expected of the ordinary prudent man of business.

(B)  Breach caused loss

32.  The more interesting issue on appeal was whether the trial judge was correct to find that the managers’ breach of duty caused loss.  This centred on whether the sub-sale by Earning Youth to System Link, a Henderson Land subsidiary, was relevant as evidence of the market value of the property.  Prima facie that would be the best evidence of market value, as no shifting in market sentiment was suggested to have taken place in the 17 days between the sale and the sub-sale.  (It should be noted that by reason of the shifting in market sentiment after October 1997, the evidence of the terms of the Supplemental Agreement between Earning Youth and System Link in December 1997 should be received with caution). 

33.  The main point taken by Mr Neoh was that the sub-sale did not represent the market value of the property in the managers’ hands because the sub-sale was on the basis of vacant possession, which the managers were not prepared to procure (there being various tenants holding over, although there was no evidence of adverse possessors).  However, there was expert evidence on which the trial judge was entitled to find that the difference in value between a property with vacant possession and that without vacant possession was 10%.  This evidence came from the managers’ own expert report.  The trial judge also tested this percentage against other evidence in the case (discussed later in this judgment) - the result was that the 10% downward adjustment was a larger reduction for the lack of vacant possession than would be justified by the other evidence.  In my view, the trial judge was entitled to find on that evidence that the Wui’s loss was the difference between the market value of the property (after a downward adjustment of 10%) and the price at which the managers sold the property to Earning Youth.  

34.  Mr Neoh submitted that the adjusted market value was not a realistic value because System Link was not prepared to purchase the property without vacant possession, even with a 10% reduction in price.  He relied on the evidence from Mr Allen Yam, System Link’s solicitor.    

35.  Even if one were to assume that there could not have been a direct sale between the managers and System Link, so that middle-man confirmors could not be eliminated, in my view all that shows is that System Link itself would not have been in the market.  That does not mean that there was no market for the property without vacant possession.   

36.  The market comprised of middle-men prepared to buy the property without vacant possession and to sell it with vacant possession to interested developers (Henderson, Sun Hung Kai and New World being some of the names mentioned at trial).  That there was such a market, i.e. more than one party (Earning Youth) interested in buying the property without vacant possession, could be seen by the fact that there were unsolicited offers even for interests in the Wui only (in which sales, vacant possession of the property would obviously not have been a condition). 

37.  The market value was thus what the middle-men would have been prepared to pay for the property without vacant possession.  The fact that the market was made up of middle-men does not nullify the evidence that the difference in market value between a  property with and without vacant possession was 10%.  The managers’ expert report (Appendix 1) indicated that the 10% took into account the cost of dislodging occupiers, which would include, but was not stated to be limited to, sums paid to occupiers for early termination of their tenancies.  At trial, the managers’ expert accepted in cross-examination that the sub-sale could be used as a comparable subject to adjustment for the lack of vacant possession, and sought only to disqualify the sub-sale on the ground that System Link was a "special interest" purchaser (Transcript p.356J - 357K).  He did not seek to suggest that the 10% adjustment he applied to other properties did not apply to the property in question.  

38.  The 10% adjustment in this case amounts to $44,606,659.70.  This sum was in fact $5m - $19m more than the sum shown by other evidence to be the cost of obtaining vacant possession.

(a)	System Link paid $39m more in deposits to Earning Youth than what Earning Youth paid to the Wui before completion.  According to Mr Yam’s evidence, this extra sum was paid by System Link to enable Earning Youth (on Mr Yam’s evidence, "a mere  shell company") to secure vacant possession before completion.  The 10% adjustment ($44m.) was therefore $5m more than what was estimated by Earning Youth and System Link to be the cost of obtaining vacant possession.
(b)	The difference is even greater when one recalls that Earning Youth had used $14m to pay the managers for their interests in the Wui.  Deducting this $14m from the $39m, that would have left only $25m as the cost of obtaining vacant possession.  The 10% adjustment ($44m.) was therefore $19m. more than what Earning Youth considered to be necessary for obtaining vacant possession.

39.  Another piece of evidence pointing to the difference between the value of the property with vacant possession and without vacant possession was this: in the sub-sale agreement between Earning Youth and System Link made in September 1997, they agreed (cl. 37) that should Earning Youth fail to deliver vacant possession by date of completion, System Link would be entitled to withhold from Earning Youth $10 for each square foot of occupied land, the sum to be stakeheld until vacant possession was delivered post-completion.  On the basis of 3,328,552  square feet, the reduction on account of lack of vacant possession was therefore only $33,288,552.  Of course System Link was in law entitled to terminate the sub-sale if Earning Youth failed to deliver up vacant possession at completion, or even after completion pursue the other rights and remedies provided for under clause 37 of the sub-sale agreement, but those were not realistic remedies (as Mr Yam confirmed in evidence) as System Link would not likely be able to recoup from Earning Youth (a "mere shell company") the payments it had already made to it.

40.  In the light of the above evidence, the downward adjustment of 10% suggested by the managers’ expert for the lack of vacant possession was generous to the managers and it is difficult to see how the trial judge could be criticized for adopting it.

41.  If the managers’ case was that there should be a further reduction in the market value (beyond 10%) for a (larger) profit for the middle-men, in my view, it was for them to show what that further reduction should have been.  The managers had of course failed at the material time to put the property on offer by public tender, or to invite competing offers from other interested parties, which steps would have shown what the middle-men were prepared to pay for the property without vacant possession.  It has been said that "uncertainties as to market value are to be resolved against a party whose breach of duty precluded a precise figure from being established by market sale at auction",  to which one could add "or market sale by public tender, or by properly conducted negotiations for sale by private treaty" (Potomek Construction Ltd v Zurich Securities Ltd [2004] 1 All ER Comm 672, §60). 

42.  At trial, the managers did not adduce evidence from any middle-men to show that the profit margin they expected would have reduced the market value of the property without vacant possession by more than the 10% stated in the expert’s evidence.  Indeed, such evidence as there was went the other way.  Mr Yam’s evidence at trial was that he found the price differential (between the sale and sub-sale) so large that he was put on inquiry (Transcript p.13 S-U) and he warned his client about it (Transcript p.14 P-Q)

43.  Mr Neoh asked in the alternative for an inquiry as to damages, even though this had not been sought at the trial.  I would pause here to distinguish the present case from Cuckmere Brick Co. v Mutual Finance Ltd [1971] 1 Ch 949, on which Mr Neoh relied.  In that case, mortgagees repossessed a vacant lot, which had planning permission for both houses and flats, and sold it at auction.  The advertisement for the auction omitted to state the planning permission for flats.  The mortgagors sued.  The trial judge found the mortgagees had breached their duty in having failed to advertise the planning permission for flats.  He found that there was a market for the sale of land with planning permission for flats.  He was asked by both parties to assess the damages, but the judge having rejected (wrongly as the Court of Appeal held) the mortgagees’ evidence on valuation, the only valuation left, proffered by the mortgagors’ valuer, was a residual valuation.  In relation to the residual valuation, there was no evidence to establish the assumed starting price of developed flats or the assumed rate of sale, both of which were relevant to the accuracy of the residual valuation (981 B-C).  In addition, Cairns LJ noted that the mortgagors had called no flat-developer to say that he would have offered as much as £65,000, which was the residual valuation.  The Court of Appeal set aside the trial judge’s assessment of damages and ordered a fresh inquiry as to damages. 

44.  In his skeleton submissions, Mr Neoh relied on this case to show that an individual feature (e.g. planning permission) may affect price.  That is not exceptional but nothing follows from that.  In the present case, the trial judge had taken into account the feature of vacant possession as affecting the market value of the property and had made a downward adjustment to reflect it.

45.  Mr Neoh also relied on Cuckmere in support of his alternative case for an inquiry.  However, it should be noted that it was only in the context where there was no evidence supporting essential components of the residual valuation, and no other evidence of the sort suggested by Cairns LJ, that the Court of Appeal ordered an inquiry as to damages. 

46.  Another submission made on behalf of the managers was that the sub-sale should not have been taken into account because System Link, as a Henderson subsidiary,  was a "special interest purchaser".  After cross-examination, this was (ultimately) the only ground asserted by the managers’ expert for excluding the sub-sale from his assessment of the market value (Transcript p.357).  I am afraid I do not understand that argument.  All that the evidence showed was that Henderson was a very active player in the market in that area.  That is no ground for excluding a sale to it from an assessment of market value.  In any event, I do not see why, in a valuation performed otherwise than for compulsory acquisition compensation, the value offered by a "special interest purchaser" should not be taken into account in assessing market value (see Skipton Building Services v Stott [2001] QB 261, §25 where in a sale by mortgagees, the Court of Appeal accepted that there should be an increase in value by reason of the "special interest factor" ).

(C)  Relief under s.60 Trustee Ordinance

47.  Section 60 Trustee Ordinance gives the court power to relieve a trustee from personal liability.  This is a judicial discretion and therefore an appellate court would not usually interfere with the trial judge’s decision, unless it is shown that the judge erred in law, or was under a misapprehension of material facts, or if he has taken into account some matter which he should not have taken into account, or has left out of account some matter which he should have taken into account, or if the decision was so plainly wrong that it must have been reached by a faulty assessment of the weights of the different factors which have to be taken into account.

48.  Having considered the judgment below, which if I may say so with respect, was unimpeachable, I fail to see how it can be said that the judge had erred in the exercise of his discretion.

49.  The burden of showing that they have acted honestly and reasonably lay on the managers.  Mr Neoh emphasised that the managers had sold their own interests in the Wui at exactly the same price (although surprisingly they did not inform the members about that sale until September) .  However it has been said that a trustee would not be regarded as having acted honestly and reasonably and could fairly be excused as a trustee merely because he had acted in exactly the same way with respect to his own interests.  "The fact that he has acted with equal foolishness in both cases will not justify relief under this statute" (per Farwell J in In re Lord De Clifford’s Estate [1900] 2 Ch 707, 716).

50.  Mr Neoh has also submitted that these were unpaid trustees, elderly villagers who were not sophisticated people.  Man Ping Nam in examination at trial said that he was "only a villager" and they were not aware of land prices.  However since they were aware of their own ignorance, that only serves to accentuate their folly in accepting Earning Youth’s offer in the way they did, choosing to dispense with the available services of professional advisers, when:

(a)	they had themselves informed the District Office as early as 1993 that they would consult legal advisers and would sell the property by tender through solicitors as a fair way to sell the property at the highest price (Judgment §85);
(b)	the 1994 circular, sent out under their own hand, focussed on the method of tenders;
(c)	they only had to consult Mr Yip who had previously advised them on appropriate methods of sale.

51.  It is difficult to see in these circumstances how it can be said that the court should relieve them from personal liability for the  substantial loss of more than $58 million suffered by the Wui and I can see no error in the trial judge’s process of reasoning which would justify this court’s interference.

Accounts

52.  Finally, in relation to accounts, Mr Neoh’s short (and only) point was that the Plaintiff had not made any demand for verification prior to the action, and if such a demand had been made, it would have been complied with.  An application to the court and an order were therefore not necessary.  Mr Neoh’s submission does not however accord with the trial judge’s findings of fact at paragraph 261 of the judgment. 

53.  For the reasons given above, I too would dismiss the appeal with an order nisi that the Plaintiff (Respondent) is to have the costs of the appeal.

Hon A Cheung J :

54. I agree.