KONG LIN YEUNG AND ANOTHER v. LAI IN PENG

HCMP 543/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 543 OF 2012

____________

________________

J U D G M E N T

________________

1.  This is a vendor and purchaser summons. The facts and law are not in dispute. It is a question of whether or not the plaintiffs have proved good title.

The facts

2.  By assignment dated 19 April 2006 Ma Hong Zheng (“the husband”) and Fung Po Ting Poty (“Fung”) became tenants-in-common of the subject property (“the property”).  The acquisition price was $2,460,000.

3.  Madam Kwok Mut Lee petitioned for divorce against the husband in FCMC 5077 of 2006.  On 3 July 2006, Deputy Judge Kot gave “leave to sell the property forthwith and the net proceeds of sale shall be paid into court pending further order” (“the Order”).

4.  On 31 August 2006, the husband and Fung contracted to sell the property to Tang Siu Lun Alan (“Tang”) at $1,750,000.

5.  On 23 October 2006, the husband and Fung as vendors and Tang as confirmor assigned the property to Cheung Siu Yee Judy (“Cheung”) at a consideration of $2,630,000.  It was discovered subsequently that by a trust deed dated 11 April 2007, Cheung declared that she had since the assignment held half share of the property on trust for the husband.

6.  On 15 June 2009, the property was sold to the plaintiffs at $3,118,000.

7.  On 30 December 2011, the plaintiffs sold the property to the defendant.  The plaintiffs were to prove title on 27 February 2012.  The defendant challenged title and refused to complete.

The issue

8.  The sole issue is whether, in selling to Tang at an apparently low price and then buying back through Cheung at a higher price, the husband had acted in breach of the Order and that the transaction was liable to be set aside as a sham transaction. 

The plaintiffs’ case

9.  The plaintiffs submitted that on the face of the evidence, there was no failure to comply with the Order.  The Order required the husband to sell the property forthwith and under such constraint, it was not surprising that it was sold at a low price.  The Order required the husband to report to the court on the use of the sale proceeds and so if there was any fraud, the wife should have been alerted after the sale and she should and could have taken steps to protect her interests.    The wife and the court would not simply accept the sale proceeds without checking the market price of the property.  If the wife has a complaint on the sale price, she can go against the husband but not the subsequent bona fide purchasers.

10.  Mr Simon Lam, counsel for the plaintiffs, also submitted that if anyone had benefitted, it was Tang and not the husband.  In buying back from Tang, the husband in fact had to pay higher price and stamp duty.  

The defendant’s case

11.  Mr Joseph Lam, counsel for the defendant, contends that the property was a trust property under the Order.   The husband had entered into a sham transaction at undervalue aimed at defeating the wife’s claim.  The husband was in breach of his fiduciary duty to the wife.  The husband had also breached the “self-dealing” rule.  The transaction might be voidable, rendering the title defective. 

The principles

12.  If a purchaser receives trust property with actual or constructive notice that it was trust property and that the transfer to him was in breach of trust, then he becomes a constructive trustee. Dishonesty is not a necessary ingredient to render a third party receiving property a constructive trustee.  Sun Sek Haw & ors v Au So Kum [1999] 3 HKLRD 12, per Rogers JA, at page 21A-B.

13.  In the field of conveyancing the law had historically set a very high standard.  The standard of knowledge was that a man had constructive notice of matters which he would have discovered if he had made those enquiries which he ought reasonably to have made.  Sun Sek Haw & ors v Au So Kum, above, per Rogers JA, at 21E-22D.

“Taking that test as a guideline, the question which should be asked is would the enquiries which a conveyancing solicitor would have made as a matter of prudence have revealed the fact which would have given the purchasers constructive notice.”

14.  In Sun Sek Haw & ors v Au So Kum, the wife died intestate, leaving the husband and 5 children, 4 of whom were minors.  The husband and the adult son as administrators conveyed the property to the husband for no apparent value.  The subsequent purchasers were purchasers for value.  The question on title was whether the conveyance to the husband was impeachable as it appeared to be in breach of trust and whether the children were barred by limitation from recovering the trust property.

15.  It was held to be manifestly made in breach of trust (pp. 18D, 21C).  There was a strong case that the purchasers of the flat subsequent to the conveyance to the husband took the property with notice of the rights of the under-age children of the intestate.  They had that knowledge because their solicitors had or should have had that knowledge.  They would therefore have become constructive trustees of the property and any cause of action against a purchaser holding the property by the under-age children would not be barred because of section 20 of the Limitation Ordinance Cap 347. (p.22H-I)

16.  The risk of such a claim being made may not be high, and the chances of its succeeding, if made, may not be good; but the vendor’s obligation was to show the purchasers a good title; not necessarily a perfect title, but one against which the purchasers could be sure that no adverse claim could successfully be made.  Good title was not shown.  Sun Sek Haw & ors v Au So Kum, above, per Godfrey JA at 19A, Rogers JA at 22 H-I.

17.  Further, a trustee is bound by the self-dealing rule against purchasing a property subject to trust without authorization from the court: Tang Ying-ki & ors v Maxtime Transportation Limited [1996] 1 HKLR 150, per Le Pichon J (as she then was).

“The law is clear: a mortgagee cannot sell to himself or to a trustee or an agent for himself or pursue any scheme for getting the property into his own hands under the guise of sale, see Farrar v. Farrars Ltd. (1888) 40 Ch.D.395; Henderson v. Astwood [1894] A.C.150 at p.162; Emmet on Title, 19th Edn. at para.25.047. The only exception to this bar is if the sale is made by court and the mortgagee obtains leave to bid. See Farrar v. Farrars Ltd. (supra); Fisher & Lightwood’s Law of Mortgage, 10th Edn. p.393; 32 Halsbury’s Laws of England 4th Ed. para.734.” (p.152H)

“On the authorities, it would seem that the bar is absolute save in the limited circumstance of a sale being authorised by the court and the mortgagee being authorised to bid at it. Where the rule applies, the sale may be set aside … It seems that the rationale for the rule is the fear of a sale at an undervalue.” (p.153E)

18.  It matters not that there was no proof of sale at undervalue, that the sale was made at an auction where the mortgagor was present, that the sale was made to the highest bidder, that the mortgagee had asked for and was given notice of the auction, and the balance of the sale proceeds was paid back to the mortgagor.  The transaction was still impeachable.  (pp.152I, 153A, 153J)

19.  The rule is similar in the context of a trustee purchasing trust property without authorization of the court. 

“Even in the context of the self-dealing rule, it is recognised that only in most extraordinary circumstances will the court refuse to set aside a purchase of trust property by a trustee at the instance of the beneficiary, other than in a case where the trustee had successfully raised against the beneficiary a defence of delay or laches.” (p.154J)

20.  It matters not that the likelihood of the claim being brought was not high and, even if brought, the claim would fail by reason of laches.  It is not for this court to say that because a defence of laches is possibly likely to be made out, the court ought to declare that the vendors have good title to the property. (p.155D-E)

Application of the law to the facts

21.  In the present case, the property was held under a trust by the husband to sell forthwith under the Order.  The property was sold by the husband and Fung at below the acquisition price.  The price increased by $880,000 on resale in a matter of 23 days.   The husband as trustee had indirectly purchased the property and infringed the self dealing rule.  The sales were not even by auction.  There was nothing to show that the wife was aware of them.  The trust was only disclosed 6 months after its creation.   There was substance in the argument that the husband might have engaged in a sham transaction to defeat the wife’s interest in the matrimonial proceedings.  It was not a question of breach of the Order but breach of trust liable to be set aside by the wife as a beneficiary.    

22.  The plaintiffs had constructive notice of the wife’s interest through proper land search on the property.  The question is not whether the wife can go against the husband but whether the wife may have a claim on the property and the answer is in the affirmative.  Although the impugned transaction was over 5 years ago, there was no limitation period to govern the recovery of the property by the wife.  It is not for this court to speculate if it is too late for the wife to apply to set aside the transaction.

23.  In Kan Wing Yau & anor v Hong Kong Housing Society [1988] 2 HKLR 187, at 188D, it was said that:

“The obligation on the vendor to prove good title meant that the title proved must be one which can at all times, and in all circumstances, be forced upon an unwilling purchaser in an action for specific performance. The court would not force a doubtful title on a purchase. A doubtful title was one which would expose the purchaser to risk or hazard. The court must be satisfied beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance. It was only if the blot on the title were purely theoretical and not a practical blot that it could be ignored.”

24.  The title is defective.  Subsequent purchasers are at risk of the wife’s claim against them for holding the property as constructive trustees with notice of the breach of trust by the husband.  Accordingly, the plaintiffs have not shown good title to the property on 27 February 2012.

Conclusion

25.  The Originating Summons is dismissed.

26.  Costs should follow the event and be to the defendant.  I make an order nisi accordingly and summarily assess the costs at $33,000.

27.  I thank counsel for their assistance.