POLYSON JEWELLERY CO. LTD. AND ANOTHER v. CARLOS LIU SONG

CACV 953/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 953 OF 2001

(ON APPEAL FROM HCA NO. 12666 OF 1997)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a judgment of Kwan J handed down on 18 May 2001. The action before the judge was for a declaration that the defendant had not sufficiently answered requisitions raised by the plaintiff in respect of the title to a non-residential property which was the subject of the sale and purchase agreement. The judge made the declaration that the requisitions had not been satisfactorily answered and that good title had not been shown. The judge ordered the return of the deposit of $556,500, which constituted 30 per cent of the purchase price. The plaintiffs were awarded $9,200 in respect of investigation of title and $18,550 in respect of the estate agent's fees. On this appeal the defendant challenged the judge's primary finding that the requisitions had not been satisfactorily answered and that good title had not been shown. At the conclusion of the hearing, this court indicated that its decision would be handed down in writing, which we now do.

Background

2. By a provisional sale and purchase agreement dated 21 August 1997, the plaintiffs contracted to purchase the property in suit, namely, Flat F, 7th Floor with flat roof of Lisa House, 33 Nelson Street, Kowloon ("the Property").

3. A formal sale and purchase agreement ("the agreement") was signed between the parties dated 29 August 1997. Under the agreement the defendant was required to show and give good title to the Property pursuant to section 13 of the Conveyancing and Property Ordinance, Cap. 219 ("the Ordinance").

4. Requisitions or objections on title were required to be delivered to the defendant's solicitors within 7 working days after the receipt of the title deeds by the plaintiffs' solicitors and any further objection or requisition arising upon any reply had to be delivered within 7 days of the reply (clause 10). It might be observed that the defendant did have an opportunity of annulling the sale by giving 3 working days notice in writing to the plaintiffs (clause 10(2)).

5. The conditions, other than condition 7, in Part A of the Second Schedule to the Ordinance were incorporated as part of the contract save and except insofar as the terms and conditions of the sale and purchase agreement specified otherwise (clause 9).

The requisitions

6. The title deeds supplied by the defendant's solicitors included two documents in particular. The first was the Deed of Mutual Covenant dated 29 March 1973 (the "DMC"). The other was an indenture dated 12 September 1977 ("the indenture").

7. There were three parties to the DMC: Pathway Company Limited, Nay Loy Investment Company Limited and Au Miu Ying, who was apparently to be the owner of Flat D on the 19th Floor. It is to be observed that Lisa House appears to have been built upon a number of different lots. It appears that, initially, some of those lots were owned by Pathway Company Limited and the others by Nay Loy Investment Company Limited.

8. Apart from providing for the maintenance of the building, the DMC, of course, specified the areas of the building to which the respective parties were to be entitled to exclusive use and occupation. It is, therefore, an important document in relation to title. In the First Schedule to the DMC, the 7th Floor is treated as one unit having 669 undivided shares out of a total of 20,276.

9. In the recital to the indenture it is stated that Roceil Limited had contracted to purchase the 7th Floor for $1,277,000 and to resell Flat F to Koo Siu Man for $128,000. The indenture, therefore, named Roceil as the confirmor, the assignment was to be direct from Central Enterprises Limited acting as vendor to Koo Siu Man.

The requisitions

10. On 22 September 1997, the plaintiffs' solicitors wrote to the defendant's solicitors in the following terms:

"Please provide copy sealing clause of the companies in column A to prove due execution of the documents in Column B as all were executed by one signatory only on behalf of the relevant companies:"

Amongst those companies were Pathway Company Limited and Roceil Company Limited, the DMC and the indenture, respectively, being the relevant documents.

11. The defendant's solicitors replied on 15 October 1997 taking the point, first of all, that the request related to matters beyond the required fifteen years root of title. However, amongst other things, they sent a copy of the sealing clause relating to Roceil Limited. After a further request in respect of Pathway Company Limited, the relevant extract from the articles of that company were provided on 21 October.

12. The defendant's solicitors' letter then took two points. First, that Roceil Limited executed the indenture as confirmor and that "... its mode of execution of the relevant of the Assignment m/N.1439107 did not affect the passing of the legal title of the subsequent Purchaser for value." The other point taken was that the assignment was executed and had been registered at the Land Registry for twenty years and that any right of action was statute barred. It was said that any likelihood of future litigation was illusory. Reference was also made to the rule in Turquand's case.

13. In respect of the execution of the indenture by Roceil Limited the plaintiffs' solicitors pointed out that the execution did not conform with the sealing clause. Although the matter was not elaborated, this was clearly a reference to article 20 in the Articles of the Association which read:

"Every document required to be sealed with the Seal of the Company shall be deemed to be properly executed if sealed with the Seal of the Company and signed by the Chairman of the Board of Directors, and countersigned by the Secretary of the Company."

14. In the same letter, on 21 October 1997, the plaintiffs' solicitors drew attention to the fact that the articles of Pathway Company Limited required any document executed under seal to be signed by either the managing director or any two directors. The DMC had been signed by one director of Pathway. In relation to the point taken in respect of Roceil Limited being a confirmor, the plaintiffs' solicitors disagreed that the document did not relate to the passing of title and required clarification as to the execution of the document not conforming with the Articles of Association.

15. The correspondence appears to have paused until 19 November. On that day, following a reminder from the plaintiffs' solicitors, the defendant's solicitors wrote taking the same points in respect of Pathway Company Limited's execution of the DMC as they took in respect of Roceil's execution of the indenture. In relation to the indenture, again, they took the point that that related to matters beyond the intermediate root of title.

16. On the following day the plaintiffs' solicitors repeated their requests in respect of due execution of the two documents. That was met with the reply that the requisitions had been satisfactorily answered. The plaintiffs' solicitors then suggested that time for completion of the sale should be extended by 7 days in order to enable the defendant's solicitors to answer the requisitions satisfactorily. There was further correspondence in which the point in relation to no legal title being passed by Roceil acting as confirmor was repeated. The only new point which appears to have been taken is that the defendant's solicitors stated:

"We are satisfied that Mr Wu Chung is the Managing Director of the said Pathway Company Limited unless the contrary has been proved. Further, we are not in a position to send you the relevant board resolution as requested pursuant to Turquand rules."

17. There was no relevant reply to a request to justify the allegation as to the stated satisfaction as to Mr Wu Chung's position as managing director.

18. Nothing further of relevance emerges from the exchange of correspondence. It suffices to say that completion did not take place on the day specified. On the following day, 22 November, the plaintiffs' solicitors wrote indicating that they had instructions to commence proceedings to recover the deposit which had been forfeited.

The judgment in the court below

19. In relation to the defendant's solicitors' point that the requisitions related to the pre-intermediate root of title the judge below held that their argument was clearly wrong. The defendant's obligation was to give good title down to the ultimate root of title. Although, in accordance with section 13 of the Ordinance, the defendant might only have to show good title to the intermediate root, if the purchaser were to discover a suspected defect in the pre-intermediate root of title he was entitled to raise requisitions thereon.

20. In relation to the point taken in respect of the rule in Turquand's case, the internal management rule, the judge pointed out that it could have no application in respect of Roceil Limited's execution of the document since the articles required both the chairman and the secretary to sign the deed. In the relevant document there was only one signature, that of a person described as a director. In relation to the DMC, again, the document had to be signed either by the managing director or any two directors. The signature only purported to be that of a director.

21. In relation to the DMC being a contractual document and not one that affected title the judge, again, in my view, correctly rejected that. Clearly the DMC does affect title. It is the document by which the individual owners can claim the right of exclusive possession.

22. The judge also dismissed the argument that the signature of Roceil Limited as confirmor did not affect the passing of legal title. She pointed out that four matters were concerned in relation to that document:

A. A request and direction to the vendor to assign the Property to the purchaser;

B. an acknowledgement of the receipt of the amount paid by the purchaser;

C. an assignment to the purchaser of such interest in the Property which the confirmor had; and

D. a covenant that the confirmor had not created a defect or incumbrance affecting the purchaser's title to the Property.

23. There remained finally the point taken that the likelihood of litigation was illusory. The judge below pointed out that apart from the fact that the documents had been executed some 20 years earlier, there were no other relevant assertions. She also pointed out that the period of limitation of 20 years did not apply to an action to recover trust property and she held that the requisitions had not been properly answered in this respect.

This appeal

24. On this appeal, as in the court below, the defendant appeared in person. One of his primary complaints was that the judge below had not listened to his arguments, particularly those he raised at the end of the hearing. We have had the benefit of a transcript of the final part of the hearing in the court below. It is clear that the argument in the court concluded without objection from the defendant. Very shortly after the judge had risen she returned to court, apparently at the defendant's request made through the judge's clerk. The argument advanced when the judge returned did not appear to take the matter any further. I see no merit in the defendant's complaint in this regard.

25. As background to the matter the defendant was at pains to point out, more times than once during the course of his address, that the sale had involved a delayed completion during which time the property market had dropped sharply. Although this might be a good prejudicial point, the relevant matter for decision in this case is whether the plaintiffs had raised a valid requisition and whether that had been properly answered.

26. In relation to the execution of the documents, the defendant has not sought to contend that the execution of the documents complied with the Articles of Association of the two companies. Had the defendant's solicitors been able to show by reference to company documents or otherwise that Mr Wu had been the managing director of Pathway Company Limited the matter might have been different in relation to the DMC. That they did not do.

The DMC

27. The main point taken by the defendant in relation to the DMC was that by 1997 it had been in existence for over 20 years. The defendant alleged that in the intervening time nobody had challenged it although, on instructions, Mr Yeung, who appeared on behalf of the plaintiffs, disputed that. Be that as it may, it has to be said that the point was not taken in correspondence.

28. One of the leading cases in relation to whether a defect could be disregarded on the basis that a purchaser would not be at risk of a successful assertion against him of a relevant incumbrance is M.E.P.C. Ltd v Christian-Edwards [1981] AC 205. The other members of the House of Lords concurred in the speech of Lord Russell. It was a case in which there had been a contract for the sale of the particular property in 1912. The purchaser under that contract was the lessee of the premises. The contract had been referred to in a deed in 1930 but thereafter had never been referred to, in particular in circumstances where reference to it would have been expected. The 1930 document referred to performance of the contract being suspended. The purchaser under the contract had carried on a business at the premises in partnership with one of his brothers. Rent had been paid by the partnership to trustees who held the property on behalf of other relatives. A company had been formed in 1933 to take over the business of the partnership. The purchaser apparently died some 30 years before the relevant date; he was thought to have left 2 children. There had been no grant of representation of his estate and his children had not been traced. In all those circumstances, Lord Russell was able to say at page 220 C-D:

"In my opinion if the facts and circumstances of a case 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."

29. I would also refer to the statement of Litton PJ in Mexon Holdings Ltd v Silver Bay International Ltd (2000) 3 HKCFAR 109 at 117 D-E. He there stated that a good title does not mean a perfect title, i.e. one that is free from every possible blemish. In a case which was by no means parallel on its facts to the present, he referred to the question in that case being approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their bargain.

30. There was included in the appeal bundle a copy of a notice under section 291(6) of the Companies Ordinance, Cap 32 published on 14 January 2000 that Pathway Company Limited had been struck off. Mr Yeung, on behalf of the plaintiffs, asserted that this document was new and had not been before the court below. Although the defendant asserted that this had been before the court below as indeed had the documents showing that Roceil Limited had been wound up by special resolution on 21 June 1988 and a final winding up meeting held on 13 September 1988, a perusal of the court file does not reveal any reference to any of these documents. In the circumstances, there is no indication whatever that these documents were introduced into the case at any other time than now.

31. Despite that, however, it seems to me that there is considerable force in the defendant's argument that the DMC had been in existence for almost a quarter of a century. The schedule of the different flats in Lisa House in the First Schedule of the DMC refers to more than 80 different flats or properties within Lisa House. If the DMC were to be held invalid, the right of exclusive possession of those flats might also be brought into question. There are, thus, third party rights which would be involved in any challenge to the validity of the DMC. There is also the position of the owner of the other lots upon which Lisa House was built, Nay Loy Investment Company Limited. Again, if the execution of the DMC were held to be invalid Nay Loy Investment Company Limited's rights might also be prejudicially affected.

32. There might, therefore, have been circumstances which could have been brought forward in correspondence to support the bare assertion that the likelihood of future litigation was illusory. However, that assertion was made simply on the basis of there being a 20-year gap. That, on its own, in my view, is not sufficient. It seems to me that if those answering a requisition wish to rely upon the absence of a realistic possibility of successful litigation, it is not sufficient simply to assert a bald proposition. As shown in the speech of Lord Russell, all the surrounding circumstances leading to such a conclusion have to be taken into consideration. The key points should at least be referred to in the correspondence. In this case, one of those factors would be whether the form of execution of the DMC by Pathway had caused difficulties previously.

The indenture 12 September 1977

33. In respect of the indenture, it must be borne in mind that it is dated less than 20 years prior to the agreement. The dissolution of Roceil Limited was not mentioned in correspondence. Indeed, even at the hearing below the judge below was unaware that Roceil Limited had been dissolved 9 years prior to the sale and purchase agreement. It might also be mentioned that, in appropriate circumstances, it is possible to restore a company and further inquiries would have had to have been made to demonstrate that that would not or could not have happened. In those circumstances, the judgment below was, in my view, clearly right. The due execution by the confirmor was relevant. As a practical matter it was no doubt unlikely that litigation would ensue and that any claim would be made in respect of any alleged interest on behalf of Roceil Limited. Nevertheless, this was a matter upon which the plaintiffs were entitled to raise a requisition and in the absence of a satisfactory answer this was not a title which the court could force upon an unwilling purchaser.

34. In my view, the fact that, according to the documents informally produced before this court, Roceil Limited can now be taken to have been dissolved 9 years before the relevant day would not have affected the ultimate decision. The result in this case turns upon whether the requisition is valid and has been adequately answered. It is after all upon the answer to the requisition that a purchaser has to decide whether to accept the vendor's title. If his advisers tell him, correctly, that the title offered is not "good title", he is justified in refusing it. The fact that the vendor, some years later, can bring forward facts to show the title is good, is of no relevance. No doubt, also, many purchasers would be prepared to accept such title as the plaintiff can offer on the documents which have been revealed.

Conclusion

35. In the circumstances this appeal must be dismissed and I would make an order nisi of costs in favour of the plaintiffs.

Hon Le Pichon JA:

36. I agree.

Hon Cheung JA:

37. I agree.

Hon Rogers VP:

38. There will therefore be an order as set out in paragraph 35.