TANG YING KI AND OTHERS v. MAXTIME TRANSPORTATION LTD

1996, No.MP407

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H E A D N O T E

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Sale by mortgagee to himself - purchase made at auction - whether transaction impeachable

Section 43 of the New Territories Ordinance No.34 of 1910 - whether sale by mortgagee to himself an irregularity - effect when purchaser has notice of irregularity

The self-dealing rule - scope - when transaction not set aside

Laches or acquiescence - whether conclusive after a lapse of 58 years - whether sufficient to satisfy test in MEPC Ltd. v. Christian-Edwards

1996, No.MP407

IN THE SUPREME COURT OF HONG KONG

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HIGH COURT

(Miscellaneous Proceedings No. 407 of 1996)

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J U D G M E N T

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1. This is an application by the Plaintiffs for a declaration that they have sufficiently answered the requisitions raised by the Defendant who is the Purchaser under a contract of sale concerning Lots Nos.339 and 1411 in Demarcation District No.109 and Kat Hing Wai House Lots Nos.151-154 ("the property"). They also seek a declaration that they have shown and/or proven a good title to the property in question.

2. Under a contract entered into on 28 November 1995, the Defendant agreed to purchase the property for $3.2 million. There are two remaining requisitions, one relating to the identity of the Vendors' predecessor-in-title and the other relates to a transaction concerning the property that took place in 1938.

Identity

3. In 1939, by three separate conveyances, one Ip Chung purchased three different lots of land which together comprise the property that is the subject matter of the contract. Ip Chung died in 1950 and a manager was appointed on 24 November 1954 for the estate of Tang Pak Kau. The question is whether Ip Chung and Tang Pak Kau was one and the same person.

4. There is evidence from the Plaintiffs who are respectively the son, the daughter-in-law and the grandson of Tang Pak Kau to the effect that it was very common for males of Tang Pak Kau's day to have more than one name and Tang Pak Kau is also known as Ip Chung. According to Letters of Administration granted on 6 February 1952 to the estate of Tang Pak Kau, the deceased had five aliases including that of Tang Ip Tsung. Although the English translation of "Tsung" is not the same as that shown in the various conveyances, the two Chinese characters representing "Ip Chung" and "Ip Tsung" are identical. According to the memorial recording the appointment of a manager dated 24 November 1954, Tang Pak Kau is also shown to have a number of aliases including that of Tang Ip Tsung. There is evidence from Tang Pak Kau's grandson to the effect that his grandfather was also known as Tang Ip Tsung. In the circumstances, I agree with the submission of leading counsel for the Plaintiffs that this requisition has been satisfactorily answered.

Sale by mortgagee to himself

(a) The facts

5. The requisition arises out of a transaction that occurred in 1938. The facts are that in 1921, the land at Lots Nos.151 and 152 were mortgaged by one Tang Chak Lam to Tang Shiu Tai for $40. Tang Shiu Tai was of course one of the aliases of Tang Pak Kau. On 26 November 1937, the mortgagee served on the mortgagor a notice requiring the mortgagor to repay the loan within a month of the notice failing which he would sell the land pursuant to the "New Territories Land Ordinance 192_". Pausing here, I note that the Chinese version of this notice differed in one respect : the Ordinance referred to was expressed to be the "New Territories Land Ordinance 1905" rather than an unspecified Land Ordinance passed in the 1920s.

6. There is an annotation in manuscript made on a copy of the notice kept at the District Office to the District Officer to the effect that the mortgagee had reported that the mortgagor had not repaid and had asked for notice of the auction of the property. The District Officer's approval for the issuance of the notice was sought. The annotation is dated 2 March 1938.

7. A notice from the New Territories Commissioner dated 4 March 1938 was posted up at Kam Tin Town to notify Tang Chak Lam of Kam Tin Village who owed Tang Shiu Tai of Kam Tin a capital sum of $40 that the properties would be sold to the highest bidder at a reserve price of $40 with interest to be calculated separately in the event of the borrower failing to repay the debt within the prescribed time. The auction duly took place.

8. There is another manuscript annotation made on the copy of the notice of 4 March to the effect that the mortgagor was absent at the auction and Ip Tsung, bidder, paid $204.40; that the property was transferred to Ip Tsung and the balance of $1 after repayment of capital and interest was paid back to the mortgagor. This annotation was dated 7 April 1938. There is a Memorial dated 23 April 1938 recording this sale from Tang Shiu Tai as mortgagee to Ip Tsung as purchaser for the consideration stated.

9. Of course Tang Shiu Tai and Ip Tsung was one and the same person. The question therefore arises as to whether the sale was valid.

(b) The applicable rule

10. 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.

11. Leading counsel for the Plaintiffs submitted that in the present case there was no proof of any sale at an undervalue. The sale was made to the highest bidder and the mortgagee had asked for and was given notice of the auction. The Plaintiffs relied on the fact that the auction took place at the District Office, that the mortgagee bid for the relevant lands and the balance of the proceeds of sale was paid back to the mortgagor. But the practical effect or the reality of the transaction was that the mortgagee, after writing off the mortgage, bought the property for $1.

12. Of course, there is little evidence now of what happened at the auction save that the mortgagee's bid of $204.40 was the highest bid. It is not known if there were competing bids or whether anyone else attended the auction. There was a reserve price of $40 which was the amount of the original loan secured by the mortgage, "with interest to be calculated separately". It is not known who fixed the reserve, but it would appear to cover not only capital but also interest outstanding on the mortgage. The total proceeds were fortuitously sufficient to repay the original loan of $40 and interest of $163.40 and the balance of $1 was repaid to the mortgagor. However, on the authorities, these facts would not prevent the rule from applying, with the consequence that the transaction is impeachable.

13. The fact that the property was sold at auction does not of itself render the sale proper : Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349 at 1355G, PC. In Martinson v. Clowes (1882) 21 Ch.D.857, on appeal (1885) 52 LT 706, the mortgagee which was a building society put a property up for sale when the mortgagor fell into default. The property was purchased by the secretary of the building society for himself. When the purchaser commenced bidding, all prior bidding came to an end. Thus the presence of the mortgagee or an officer, as was the case of the building society, could interfere with the process of an ordinary auction. Notwithstanding the fact that it was found that there had been no proof of any undervalue and although there was no intention on the part of the purchaser to act unfairly or dishonourably, the sale was set aside. That case establishes the proposition that a mortgagee exercising a power of sale cannot purchase on his own account.

14. In Hodson v. Deans [1903] 2 Ch.647, the defendant who was a member of the committee of a friendly society that was selling the property as mortgagee was the principal bidder at the auction. It was held that the effect of his presence might be to discourage the sale. It made no difference that the plaintiff mortgagor was actually present at the auction and in fact bid against the defendant. That fact did not prevent him from applying to set aside the sale.

15. 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 as in Hodson v. Deans or it may be ignored, see Henderson v. Astwood [1894] A.C.150 at 162. It seems that the rationale for the rule is the fear of a sale at an undervalue. See Supplement to Fisher and Lightwood at A85. Thus the rule may not apply to quoted securities and shares for which there is a readily ascertainable market price : see Stubbs v. Lister [1841] 1 Y & C Ch.Cas.81.

16. It was further submitted on behalf of the Plaintiffs that there is evidence in the present case to the effect that at the time Kam Tin was a small village with about 100 inhabitants. Ip Chung, the mortgagee, was well known and appeared to have been a significant land owner in the area. It was submitted that by the time of the auction, the District Officer who was present at the auction must have known that the mortgagee was the bidder. Although the mortgagor was absent at the auction, he was paid the balance of the purchase monies. Given the very special position occupied by the District Officer, the Court was invited to conclude that had there been any impropriety, he would have raised the point. Reference was made to the decision of the Full Court in Lai Chi Kok Amusement Park Co. Ltd. (No.2) v. Tsang Tin-sun [1966] HKLR 124 where it was stated (at p.130) that :

"The position of the Land Officer carries with it a deep significance in the eyes of the people of the New Territories : he is not only a government official but is regarded by them as the pater familias of every clan, family or t'ong. It may therefore be said that his consent to the transaction is to be given in that capacity as pater familias as much as it is given in his capacity as a government official."

Whilst I accept that the District Officer may have occupied a special position and that the observations made in the Lai Chi Kok case were accurate, I do not see how in this case the defect in title had there been one could have been remedied by the mere presence of the District Officer at the auction. The authorities show that the rule is such that even the presence of the mortgagor at the auction would not have prevented him from subsequently applying to set aside the sale. See Hodson v. Deans.

(c) New Territories Ordinance No.34 of 1910

17. Reliance was also placed on s.43 of the 1910 Ordinance which provides :-

"When a sale is made under a power of sale conferred by this ordinance the title of the purchaser shall not be impeached by reason that no case had arisen to authorise the sale, or that due notice was not given, or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorised, improper, or irregular exercise of the power of sale shall have his remedy in damages against the person exercising the power."

This section was the re-enactment of s.29 of the New Territories Land Ordinance 1905. It was accordingly submitted that the title of a purchaser under a sale pursuant to s.43 is expressly protected and preserved notwithstanding that the power had been improperly or irregularly exercised. From the form of the notice of sale, it was submitted that there is a strong inference that the sale was made pursuant to s.42.

18. Even assuming that it were, it is unclear that s.43 has the effect that is contended for. Section 42 sets out the circumstances in which the power of sale arises and the procedure for effecting a sale. But s.43 is referable to s.42. On its proper construction, I do not think that the reference to an improper or irregular exercise of the power can encompass a case where the rule against a mortgagee purchasing the property applies. A purchaser is not protected if he has notice of the irregularity : Lord Waring v. London and Manchester Assurance Co. [1935] Ch.310 at 318; 1 Wolstenholme & Cherry's Conveyancing Statutes, (1972 Ed.), annotation to section 104(2) of the Law of Property Act 1925 at p.213. Section 43 could not have remedied what would otherwise have been a defect in title of which the Defendant has notice.

(d) The self-dealing rule

19. The Plaintiffs further submitted that the rule under consideration is analogous to the self-dealing rule which arises where a trustee purchasing trust property. It would appear that the rationale of the self-dealing rule is indeed similar. In Ex parte Lacey (1802) 6 Ves.625 Lord Eldon L.C. explained that in such a purchase, because the fiduciary is both vendor and purchaser, it is impossible to determine from the evidence whether or not he has obtained an advantage from the purchase; hence, the court has no option but to set aside the sale at the instance of the principal.

20. Prima facie, this rule also appears to impose an absolute bar to the transaction. However, the view has been expressed that, in principle, there seems no reason why a trustee should not purchase trust property without the authorisation of the court if all the beneficiaries agreed, provided that they are all sui juris and between them absolutely entitled to the whole of the beneficial interest in the property. Thus, the court will not upset a sale where the beneficiaries had genuinely agreed to it. For such agreement to be effective, the trustees would have to disclose to the beneficiaries all the information which they have about the property. See Parker & Mellows on the Modern Law of Trusts, 6th Edn. at p.223.

21. Nevertheless, it was recognised by the learned authors that there are two serious practical objections for an unimpeachable sale to take place. First, the burden of proof lies on the trustee purchaser to show that the beneficiaries were given all the relevant information and that they gave their consent freely. Second, the property may be virtually unmarketable thereafter. The liability to have a sale set aside affects subsequent purchasers with notice. Consequently, in those cases it is almost impossible to sell land where the title shows that the vendor formerly held it as a trustee. 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. Tito v. Waddell (No.2) [1977] 2 WLR 496 at 627-628.

22. In the present case, there are no such exceptional circumstances in my view as would prevent the self-dealing rule from applying. The only question left therefore is whether the trustee can successfully raise against the beneficiary a defence of delay or laches. The self-dealing rule is "applied stringently" where the trustee concurs in a transaction which cannot be carried into effect without his concurrence and who also has an interest in or holds a fiduciary duty to another in relation to the same transaction. See Re Thompson's Settlement [1985] 3 WLR 486 at 497.

(e) Laches or acquiescence

23. In the present case, is the fact that no complaint has been made for 58 years sufficient? Leading counsel for the Plaintiffs submitted that it was. Whilst a beneficiary having full knowledge of the facts may waive his rights and affirm the purchase by the trustee, and after a long period of acquiescence will be deemed to have done so under the equitable doctrine of laches, the mere lapse of time will not be enough, though it may be some evidence of laches. As I understand counsel's submissions, the Court is invited to conclude from the fact that no complaint has been made in the last 50 or 60 years that the likelihood is that a defence of laches or acquiescence will be made out.

24. That may well be the case but nonetheless it is not for this Court to rule on the question of laches and acquiescence. The fact of the matter is that the Plaintiffs' title is impeachable. It may well be that the likelihood of a claim being brought now is not high and if it were brought, the claim would fail by reason of laches. But that is sheer speculation. Whilst a purchaser may reasonably conclude that it is a risk that is worth running, 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. The test in MEPC Ltd. v. Christian-Edwards [1981] AC 205 only applies where the facts and circumstances are so compelling that a court would conclude that it is beyond reasonable doubt that the purchaser would not be at risk of a successful assertion against him of the incumbrance. That is not the case here. Rights have been held not to have been lost notwithstanding long periods of acquiescence : see for example Aberdeen Town Council v. Aberdeen University (1877) 2 App.Cas.544, HL (80 years); Re Sherman [1954] Ch.653 (19 years).

Conclusion

25. The Defendant in this case took a neutral stance and expressed itself content to abide by any ruling of this Court. Accordingly, it did not seek to argue that the Vendors have an impeachable title.

26. However, for the reasons set out above and despite the fact that I did not have the benefit of hearing counsel on either side on many of the authorities cited in this judgment because they were not referred to in argument, I have to conclude that the Vendors have an unimpeachable title. I am therefore unable to make the declarations sought.

27. It is of course open to the Plaintiffs, in separate proceedings, to seek appropriate declarations under the Limitation Ordinance. If the mortgagor or his successors in title cannot be found (after due advertisement if necessary), in all probability, the Vendors will obtain the necessary declarations. But that is not a matter of which I am seised in the present proceedings notwithstanding the fact that for reasons not readily apparent, these proceedings are intituled in the matter of the Limitation Ordinance.

28. The Plaintiffs' application is dismissed. I will make an order nisi that the Defendant is entitled to the costs of the application.