LING WING FAI BILLY AND OTHERS v. LING SHUI FAI AND OTHERS

HCA6853/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6853 OF 1999

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J U D G M E N T

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1.  This is the trial of preliminary issues as between the plaintiffs and the 1^st and 2^nd defendants pursuant to the order of Deputy Judge Gill dated 16 February 2007.  The 1^st plaintiff (who is also the 3^rd plaintiff) had been served with notice of the hearing, but did not appear.  The 2^nd plaintiff appeared in person.   The 1^st defendant passed away in August 2007 and his legal aid had to be discharged. In consequence, Miss Wong SC appeared for the 2^nd defendant only. 

Background

2.  The 1^st plaintiff and the 1^st defendant are brothers. Madam Wong King Shui (or Sui), deceased (“the Deceased”) was their mother. The 2^nd plaintiff is the wife of the 1^st plaintiff. The 2^nd defendant is the wife of the 1^st defendant.   The Deceased died on 14 September 1991. The 1^st plaintiff is the administrator of the Deceased under a Letter of Administration.  The 3^rd defendant is the purchaser under a Chinese Provisional Agreement for Sale and Purchase of the suit property.  

3.  The present action concerns a property at Flat No.1, Second Floor, Block F of Lok Nga Court, No.50 Chun Wah Road, Kowloon, Hong Kong (“the Property”).   The Property was part of a development of the Hong Kong Housing Authority (“HKHA”) under Phase VA of the Home Ownership Scheme (“HOS”). 

4.  By a sale and purchase agreement dated 17 November 1983 and an assignment dated 20 February 1984 made with the HKHA, the 1^st and 2^nd defendants become the registered joint owners of the Property. The purchase price was $225,000.

5.  Subsequently, the 1^st and 2^nd defendants entered into a provisional agreement dated 23 January 1997 (“the Provisional Agreement”) with the 3^rd defendant for the sale and purchase of the Property at $1.2 million. The Provisional Agreement was registered in the Lands Registry.  Neither defendant has taken any further step towards the further performance of the Provisional Agreement or to complete the sale and purchase of the Property.

6.  On 27 April 1999, the plaintiffs commenced this action against the defendants.  By the Statement of Claim, the plaintiffs seek declarations against the 1^st and 2^nd defendants that they are the beneficial owners of the Property and that the 1^st and 2^nd defendants have been holding the Property as their trustees. As against all defendants, the plaintiffs seek to set aside the Provisional Agreement and for declarations that it is void or had been terminated and is of no effect.  As a further alternative, the plaintiffs seek a declaration that the 3^rd defendant holds any interest he acquired in the Property as their trustees and for orders, inter alia, directing that the registration of the Provisional Agreement in the Land Registry be vacated.

The plaintiffs’ claim

7.  In gist, the plaintiff’s claim is that in about 1983, the Deceased intended to purchase a HOS flat for use as a residence of the members of the family. As a result, the family members, including the deceased, the 1^st plaintiff and the 1^st defendant, reached a consensus on the arrangement for effecting the application and the purchase (“the Arrangement”).

8.  The Arrangement that was pleaded in paragraph 5(b) of the Statement of Claim has the following aspects:

(1)	To increase the chance of success in the drawing of lots, two applications for purchase were to be lodged with HKHA, one in the name of the Deceased and the other in the name of the 1st and 2nd defendants.
(2)	The down payment and other initial expenses for the intended purchase would be paid by the Deceased.
(3)	The purchase price would be financed by a mortgage over the flat.
(4)	Members of the family who were to occupy the flat would have to pay for the monthly mortgage instalments and recurring expenses.
(5)	Those family members who had contributed to the purchase price would have pro tanto beneficial interest in the flat to the extent of their respective contributions.

9.  Pursuant to the Arrangement, two applications were made to the HKHA, one in the Deceased’s name and the other in the joint name of the 1^st and 2^nd defendants. Upon the drawing of lots, the lot fell on the 1^st and 2^nd defendants’ application and the Property was purchased and registered in their name. The purchase price was HK$222,500. 

10.  It is common ground that the deposit and the initial expenses for the purchase of the Property were provided by the Deceased. The balance of the purchase price in the sum of $200,000 was financed by a mortgage in favour of Sin Hua Trust, Savings and Commercial Bank Limited, which was repayable by monthly instalments over 15 years. The whole of the mortgage loan was paid off in about April 1999.

11.  The plaintiffs say that the Deceased paid the first five or six instalments, and the 1st and/or 2nd plaintiffs paid the rest of the instalments. The 1^st and/or 2^nd defendants had made no contribution to the purchase price or expenses for the acquisition of the Property.

12.  The 1^st and 2^nd defendants had resided in the Property until about March 1985. Thereafter, the 1^st plaintiff and the 2^nd plaintiff, after her marriage with the 1^st plaintiff, moved into the Property. It is also the plaintiffs’ case that the 1^st and 2^nd plaintiffs had incurred expenses totalling about $90,000 for decorating the Property.             

13.  On the basis of the above, the plaintiffs claim that they were and are the sole beneficial owners of the Property and the 1^st and 2^nd defendants hold the Property on trust for them. 

14.  As for the 3^rd defendant, the plaintiffs’ claim is that the 1^st and 2^nd defendants acted in breach of the trust in entering into the Provisional Agreement or that they did so for the purpose of defeating the trust over the Property. Consequently, it is said that the 3^rd defendant holds any interest he acquired in the property on constructive trust for the plaintiffs. Alternatively, the plaintiffs say that the Provisional Agreement is void by virtue of section 17B(1) and the Schedule of the Housing Ordinance, cap. 283 in that there were no payment of premium to HKHA to remove the statutory restriction against alienation of interest.

The defence of the 1^st and 2^nd defendants

15.  The 2^nd defendant had filed a Defence and Counterclaim, which was subsequently amended. It would seem that the 1^st defendant adopted the same defence.

16.  In essence, the 1^st and 2^nd defendants deny the existence of the Arrangement. They, however, admitted that the Deceased had paid for the deposit and the expenses for the purchase of the Property and that the 1^st and 2^nd plaintiffs had since moving into the Property, provided the money for the monthly mortgage repayments until the loan was fully paid off. The 1^st and 2^nd defendants’ case is that the Deceased made the payments for the purchase as gifts to them. They say that they had paid some of the mortgage instalments when they were residing on the Property. In respect of the mortgage payments provided by the 1^st and 2^nd plaintiffs, they say that they were fees or payments for use and occupation of the Property.  It is further pleaded that the 1^st and 2^nd plaintiffs occupied the Property pursuant to a licence granted by the 1^st and 2^nd defendants in early 1987, but the licence had been revoked in late 1991 or early 1992.

17.  The 1^st and 2^nd defendants contend that even if the Arrangement did exist, the agreement to it and its performance are void under the Housing Ordinance in that it amounts to an agreement to alienate and an alienation of beneficial interest in the Property, contrary to the statutory restriction.

Third Party action

18.  Subsequently, the 1^st and 2^nd defendants issued Third Party proceedings against the 3^rd defendant, claiming for, inter alia, declarations that the Provisional Agreement is void under section 17B of the Housing Ordinance or that they had been discharged from the obligations under the Provisional Agreement by reason of the 3^rd defendant’s failure to pay the agreed purchase price.

19.  On 15 March 2006, summary judgment was entered by consent against the 3^rd defendant in the Third Party proceedings for a declaration that the Provisional Agreement is void under section 17B of the Housing Ordinance and for an order that the registration of the Provisional Agreement in the Land Registry be vacated. The 3^rd defendant was granted leave to, and did issue, a counterclaim against the 1^st and 2^nd defendant in the Third Party proceedings for the return of the deposit and/or damages for failure to effect or proceed with the sale of the Property.

Trial of preliminary issue

20.      By summons filed on 24 April 2004 (and amended on 6 July 2004), the 1^st and 2^nd defendants applied for a direction that the issues of, inter alia, whether the Arrangement is void under section 17B(1) of the Housing Ordinance and whether the payments made by the Deceased and the 1^st and 2^nd plaintiffs with the alleged intention of acquiring beneficial interest in the Property are likewise void. The plaintiffs initially opposed the application. After they became unrepresented, they consented to the application and a consent summons was filed on 9 September 2004. After a hearing on 19 December 2006 at which the 1^st and 3^rd plaintiffs were absent, Master Lung refused to endorse the consent summons.  The 1^st and 2^nd defendants appealed against the decision.

21.  By the order of 16 February 2007, Deputy Judge Gill allowed the appeal and directed that the following questions or issues be tried as a preliminary issue before the trial of the other questions or issues in this action:

“	(1)	Whether the arrangement alleged to have been agreed and implemented as pleaded in paragraphs 5 to 11 of the Statement of Claim was void under section 17B(1) of the Housing Ordinance, Cap.283 (“the Ordinance”), the same being an agreement to alienate and/or a purported alienation of the beneficial interest in the suit property (“the Property”) in favour of the Plaintiffs in breach of the terms, covenants and conditions of the Schedule to the Ordinance;
	(1A)	Further or alternatively, whether the payments made by Madam Wong King Shui, deceased and the 1st and 2nd Plaintiffs towards the purchase and acquisition of the Property allegedly in the characters of purchasers with the intention of acquiring the beneficial interest in the Property was likewise void because the giving of effect thereto as claimed would result in an alienation or effective alienation of the beneficial interest in the Property in favour of the Plaintiffs in breach of the terms, covenants and conditions of the Schedule to the Ordinance;
	(2)	If so,
		(A)	whether it thereby affords the 1st and 2nd Defendants a defence to the Plaintiffs’ claim to the Property;
		(B)	whether the Plaintiffs are thereby debarred or otherwise prevented from asserting beneficial owner of the Property.”

22.  For the purpose of this trial on preliminary issues, neither the plaintiffs nor the 1^st and 2^nd defendants have filed evidence. Miss Wong SC asked the court to determine the issues on the basis of the facts as pleaded in paragraphs 5 to 11 of the Statement of Claim, a summary of which has been set out in paragraphs 7 to 12 above.

The defendants’ arguments

23.  In Miss Wong SC's submissions, all the questions or issues should be answered in the affirmative. There are two main planks in her submissions. The first is that by the Arrangement, the parties to it intended and agreed that, irrespective of the name(s) in which the Property was to be registered, all members of the family who made contributions to the costs of purchase of the Property could claim beneficial ownership of the Property in the ratio of their respective contributions. This amounts to a common intention constructive trust.

24.  The second plank is that the Arrangement and its subsequent implementation amount to an agreement to alienate and an alienation of the beneficial interest in the Property. This is because by the sale and purchase agreement, the 1^st and 2^nd defendants became the owners of the beneficial interest in the Property. Under the Arrangement, however, they agreed to cede a proportionate share of their beneficial interest in favour of other family members who would contribute to the purchase of the Property.  Further, as and when the Deceased and the 1^st and 2^nd plaintiffs contributed to the costs of the purchase and the mortgage repayments, the 1^st and 2^nd defendants would be ceding to them a proportionate share of the equitable estate in the Property.  

Common intention constructive trust

25.  I agree that insofar as the plaintiffs are relying on the Arrangement and assuming that it is proved, there will be no room for the application of a resulting trust. This is because the Arrangement affords evidence of the actual intention of the parties, especially that of the Deceased and the 1^st plaintiff. There is thus no need to resort to any presumption of resulting trust: see, for instance, Re Superyield Holdings Ltd [2000] 2HKC 90 at 106D-I, 111D-E and 116D-E.

26.  The claim of the plaintiffs against the 1^st and 2^nd defendants therefore falls to be considered under the common intention constructive trust. It is a trust imposed on property by equity “where it was the common but otherwise unenforceable intention (due to non-compliance with formalities requirements) or understanding, express or inferred (but not imputed) of the proprietor and the claimant that the claimant was to have some beneficial interest in the property and the claimant acted to his detriment in reliance thereon”: Underhill & Hayton, Law Relating to Trusts and Trustees, 17^th Edition (2006), p.509 article 35(1)(a).

27.  The beneficial interest under such a trust arises from the date of the detrimental conduct of the claimant: Underhill & Hayton, op. cit., p.528 at para.35.52.

28.  In the present case, the Arrangement is evidence of the common intention of the parties to it that the plaintiffs, with their contributions to the costs of the purchase of the Property, would have some beneficial interest in the Property. The Deceased and the 1^st and 2^nd plaintiffs acted to their detriment when they provided the money for the purchase of the Property and the mortgage repayments. By operation of law, they acquired some beneficial interest in the Property when they made the contributions. The extent of their beneficial interest grew with each further contribution.

The Housing Ordinance, cap.283 (“the Ordinance”)

29.  As to the second main plank of Miss Wong SC’s submissions, it is on the premise that the Arrangement and the implementation of it amount to an agreement to alienate and an alienation of beneficial interest in the Property that is in breach of the Ordinance. The starting point would be to consider the relevant provisions in the Ordinance. It has to be noted that these provisions had been amended and/or replaced since 1983 and 1984 when the 1^st and 2^nd defendants entered into the sale and purchase agreement and the deed of assignment.

30.  As at the dates of the 1^st and 2^nd defendants entering into the sale and purchase agreement and the assignment, the relevant part of section 17B read:

“	Where-
	(a)	any land in any estate is sold under section 17A to any person; or
	(b)	any land in respect of which the Authority is authorized to nominate purchasers is sold to a person nominated by the Authority,
	any alienation or conveyance or purported alienation or conveyance or any agreement to alienate or convey such land –
	(i)	by that person in breach of any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to such land; and
	(ii)	…
	shall be void.”

31.  Section 17B was replaced in 1995. Subsection (1) of the current version, which is relevant for present purpose, has the same effect as the previous version. It provides:

“	(1)	Where-
		(a)	(i)	land in an estate is sold under section 17A; or
			(ii)	land in respect of which the Authority is authorized to nominate purchasers is sold and the person selling the land acts without the written permission of the Authority; and
		(b)	the person to whom the land is sold purports to mortgage or otherwise charge the land or to assign or otherwise alienate it; and
		(c)	that person acts in breach of-
			(i)	any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to the land; or
			(ii)	the case of such a mortgage or other charge, any term authorized under paragraph 4(a) of the Schedule as regards the mortgage or other charge,
		the purported mortgage, other charge, assignment or other alienation, together with any agreement so to mortgage, charge, assign or otherwise alienate, shall be void.”

32.  Under section 17AA(1) of the Ordinance, the Director of Housing may stipulate, by notice in the Gazette, that the agreement for sale and purchase and the assignment shall be subject to the terms, covenants and conditions mentioned in the Schedule to the Ordinance and the terms, covenants and conditions so stipulated shall be part of the agreement and deed. Further, under section 17AA(2), any agreement for sale and purchase or any assignment made subject to the terms, covenants and conditions mentioned in the Schedule shall continue to have effect subject to any amendment to the Schedule.            

33.  As at the dates of the 1^st and 2^nd defendants’ sale and purchase agreement and assignment, paragraph 1 of the Schedule to the ordinance provide:

“	Subject to paragraph 4 of this Schedule, the purchaser shall not at any time alienate or convey, purport to alienate or convey, part with possession or enter into any agreement to alienate, convey or part with possession of the land sold other than to the Authority, or such person as the Authority may nominate, unless –
	(a)	either -
		(i)	a period of 10 years has elapsed from the date of the assignment to the purchaser; or
		(ii)	before that period has elapsed, the purchaser has offered to assign the land to the Authority and the Authority or its nominee has declined to accept the assignment; and
	(b)	the purchaser has first paid to the Crown an amount equal to that proportion of the full market value, as assessed by the Secretary for Housing, of the land at the time of that payment which is the same proportion of the full market value, as specified in the deed of assignment, of the land at the time of the sale to the purchaser which was not paid by the purchaser at the time of the assignment to him.”

34.  Apart from substituting the reference to Secretary for Housing by Director of Housing, this provision remained in force until 26 November 1992. In summary, its effect if that the purchaser is prohibited from alienating or entering into an agreement to alienate the property subject to two exceptions. The first is that within the first ten years from the date of the assignment to the purchaser and that the alienation is to the HKHA or person nominated by HKHA. The second exception applies when ten years had lapsed and the purchaser had first paid a premium to the HKHA. 

35.  The Schedule was replaced in 1992 by the Housing Ordinance (Amendment of Schedule) Order 1992, which became effective on 27 November 1992. The changes to paragraphs 1 and 4 had the effect of relaxing the restriction against alienation by the purchaser. Instead of requiring the purchaser to pay a premium to the HKHA before entering into any sale and purchase agreement, it was permissible for the parties to make provision for the payment of the premium in the agreement. 

36.  Paragraphs 1 and 4 of the Schedule were further repealed and replaced by Housing Ordinance (Amendment of Schedule) Order 1997, which came into effect on 5 June 1997.  The restriction has since been further relaxed by permitting a sale to a person certified to be eligible on terms authorized in writing by the HKHA.

37.  The upshot of all these is that at all material times, the 1^st and 2^nd defendants should not alienate or enter into any agreement to alienate the Property unless one or more of the exceptions provided in the successive versions of the Schedule to the Ordinance applies. It is not the plaintiffs’ case that any of these exceptions applies.       

Effect of the pleas in paragraphs 5 to 11 of the Statement of Claim

38.  This brings me to the critical issue in this trial. It is whether the Arrangement and the subsequent conduct of the parties as pleaded in paragraphs 5 to 11 of the Statement of Claim amount to a breach of the restriction against alienation stipulated by the Ordinance.

39.  On Miss Wong SC’s analysis, the Arrangement has the effect of an agreement to cede, hence alienate, the 1^st and 2^nd defendants’ beneficial interest in the Property to members of the family who would contribute to the costs of the purchase of the Property. Similarly, the subsequent conduct of the Deceased and the 1^st and 2^nd plaintiffs in making contributions to the down payment and costs of acquisition and redemption of the Property has the effect of ceding, hence alienating, the 1^st and 2^nd defendants’ beneficial interest in the Property to them. All these, she argued, amount to breach of paragraph 1 of the Schedule and are rendered void by section 17B and subsequently section 17B(1) of the Ordinance.

40.  In my view, the focus of the discussion should not be on the Arrangement. First, irrespective of whether it contravenes the statutory restriction against alienation, the Arrangement is incapable of being enforced as an agreement. At the time it was made, it was uncertain as to who apart from the Deceased would contribute to the costs of the purchase. It was also uncertain whether the applications for purchase would be successful. Any interest that the family members might have was contingent upon one of their applications being successful upon the drawing of lots.  The importance and the relevance of the Arrangement, however, lies in the fact that it evidences the common intention of the parties to it in relation to the property to be acquired.  It provides the basis for giving rise to a constructive trust over the Property.           

41.  Second, even without the Arrangement, it is possible for a trust to arise based upon the contributions made by the Deceased and the 1^st and 2^nd plaintiffs to the costs of the acquisition and redemption of the Property.  A “purchase money” resulting trust may be presumed.   

42.  The point is, and which is important, is that the passing of beneficial interest in the Property to the Deceased and the 1^st and 2^nd defendants upon their respective contributions occurred by operation of the law. It is not by any positive act of the 1^st and 2^nd defendants.  It is therefore not alienation by the 1^st and 2^nd defendants. It is clear from the wordings of the previous section 17B and the current section 17B(1) and the successive versions of paragraph 1 of the Schedule to the Ordinance that what is prohibited is alienation by the purchaser.  On the facts of this case, it is not a case of the 1^st and 2^nd defendants purporting to alienate or alienating the beneficial interest in the Property.  

43.  Plainly, the statutory restriction against alienation was to prevent abuses of the HOS, which is to enable certain sectors of the community to acquire residences at reasonably affordable prices, by ensuring that only those eligible could benefit from the scheme. It would not have been the legislative intent to nullify genuine family arrangements between husband and wife and among family members. It is a fact that in some cases, and I would venture to suggest in quite a number of cases, husbands and wives or family members have had to put their resources together in order to be financially able to acquire a HOS flat and/or to pay off the mortgage instalments. This is evident from the cases that Miss Wong SC had fairly drawn my attention to, in which the courts had applied the concepts of resulting or constructive trust arising from contributions to the purchase price or mortgage payments made by spouses or family members, where the subject matter in dispute is a HOS flat. In none of these cases, however, were section 17B and the Schedule to the Ordinance considered.

44.  I am therefore of the view that on the facts as pleaded in paragraphs 5 to 11 of the Statement of Claim, there is no alienation or agreement to alienate of the beneficial interest in the Property by the 1^st and 2^nd defendants as to be in breach of the terms, covenants and conditions of the Schedule to the ordinance.

Conclusion

45.  For the reasons set out above, the answers to Issues (1) and (2) are “No”. It follows that Issue (3) does not arise for determination.   

46.  There is also an order nisi that the costs of the trial on preliminary issues be to the plaintiffs against the 1^st and 2^nd defendants to be taxed if not agreed. The 1^st and 2^nd defendants’ own costs are to be taxed in accordance with the Legal Aid Regulations.