SUN NGAI INTERNATIONAL INVESTMENT LTD v. ZHANG SUHUA

HCMP 594/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 594 OF 2008

----------------------

----------------------

----------------------

----------------------

J U D G M E N T

----------------------

Introduction

1.  The background to this is a now bitter and hard fought dispute over matrimonial finance between Mr Xi Yu, who is a director of the Plaintiff, and his wife the Defendant, Madam Zhang Su Hua.  The substantial issue in the matrimonial litigation is Madam Zhang’s contention that Mr Xi is the beneficial owner of 87.5% of the shares in a BVI company called New Asia International (Group) Limited (“New Asia”) which in turn owns 99.6% of a Hong Kong company called New Universe Holdings Limited (“New Universe”) and which, in turn, owns between 100% and 95% of five companies including 95% of the Plaintiff in this summons.

2.  Mr Xi’s case on the ownership of the shares in New Asia is that although he appears on the share register as owning 87.5%, he only holds those shares as trustee for the benefit of Madam Isabella Chu, who is his girlfriend of many years.  Madam Chu has applied and has been allowed to intervene in the matrimonial proceedings to enable her to be heard on this issue.  The remaining 12.5% of New Asia’s shares are owned by Madam Cheung Siu Ling and Mr Chu Yuk Ngai who are respectively, Madam Isabella Chu’s sister-in-law and brother.  There is no issue that they are the beneficial owners of that remaining shareholding.

3.  As I have already indicated, New Universe owns 95% of the Plaintiff’s shares with the remaining 5% being owned by Mr Xi which he holds on trust for New Universe.  He is also a director of the Plaintiff as are Madam Cheung Siu Ling and Mr Chu Yuk Ngai.  There is, at page 188 of the bundle, a corporate chart which helpfully sets out the various shareholdings and directorships of each company.

4.  What Madam Zhang is fearful of is that Mr Xi, by manipulating his shareholdings and directorships, will either attempt to mask the extent of his controlling beneficial interest in the New Asia group of companies and/or also dissipate assets owned by companies within the group thereby presenting a false picture of his true financial worth to the matrimonial court which will have to decide on what is the appropriate distribution of the available assets between him and Madam Zhang.

The Summons

5.  With a view to preserving assets which she says should properly be available for distribution in the matrimonial suit, Madam Zhang has, through her solicitors, attempted to register “lis pendens” cautions against the title to 11 properties in the ownership of the Plaintiff.  The Plaintiff, as one can see from the corporate chart at page 188, is one of five companies within the New Asia/New Universe group.  It is purely a property investment company within that group.  I am told by Mr Chan, who appears for the Plaintiff, that this is its only purpose.  The group is, from time to time, able to raise funds on the security of the properties that the Plaintiff holds in order to provide working capital for the trading activities of the four trading companies that it controls, all of these appearing with the Plaintiff on the bottom line of the corporate chart at page 188.

6.  Given the relatively buoyant state of the property market, the Plaintiff would wish to sell some of these properties to arms-length buyers at the best price that it can obtain in order to reduce its borrowing and to raise capital.

7.  As appears from the affirmation of Mr Chu Yuk Ngai [22-31] the Plaintiff decided to sell some of its properties in January 2008, including Peninsula Heights, Broadcast Drive, Kowloon and another at the Astoria, Argyle Street, Kowloon, both of these being residential properties.  At about the same time, it came to Mr Chu’s attention that Madam Zhang had tried to register a Notice of her application for ancillary relief against the title to all of the Plaintiff’s 11 properties.  Nevertheless, it appears that the Lands Registry was not satisfied that the Notice was a proper one to register in these circumstances and it has withheld registration and has placed the Notice under the column “Deeds Pending Registration” marked “Registration Withheld”, which, despite the withholding of registration by the Lands Registry, still has the effect of informing a potential buyer that someone is trying or had tried to register such a Notice which relates to a pending divorce ancillary relief application.  This has and will have the consequence of putting off potential buyers.

8.  As to the sale of the Astoria, the purchaser has decided to pull out and demanded a refund of the deposit of $650,000 and is claiming a further amount of $1,315,000 for alleged losses on the purchase.  In respect of the sale of Peninsula Heights, the purchaser has felt able to complete that but requires the Plaintiff to remove the Notice from the title.

9.  The summons of course seeks removal of the Notice in respect of all 11 properties, the basis of the application being that, as against the Plaintiff itself, Madam Zhang can have no locus by which she is able to register her Notice of Application for Ancillary Relief against the title to its properties. For her part, in opposing the summons, Madam Zhang has taken out a summons of her own to strike out the Plaintiff’s summons on the basis that it is frivolous, vexatious and amounts to an abuse of the process of the court.

The Plaintiff’s Case for Vacation of the Notice

10.  In setting out the argument, Mr Chan begins by emphasising the fact that although Mr Xi and Madam Zhang are opposing each other in the matrimonial proceedings [HMC 1/2007], Mr Xi is not a party to these proceedings and, for its part, the Plaintiff in these proceedings is in no way a party in the matrimonial suit.

11.  Whilst the matrimonial proceedings will determine the beneficial interest of the 87.5% of New Asia’s shares, these proceedings have nothing to do with the determination of that issue.

12.  As to the Plaintiff, it has no part to play in the divorce proceedings and it is submitted on its behalf that Madam Zhang should not be allowed to interfere with its day to day affairs by making it very difficult to sell such properties as it wishes to in its and the New Universe group’s ordinary course of business and in the group’s best commercial interests.

13.  Mr Chan has sought to distinguish this situation from the more commonly encountered case in the matrimonial courts where a Notice of Application for Ancillary Relief can be legitimately registered.  By way of example he has cited the case of real property which for example is undoubtedly registered in the husband’s name or where there is an allegation that the property is beneficially owned by him.  In that sort of case, the person claiming beneficial ownership against him would be allowed to register a lis pendens against the title.  In such a case, there is a registrable ‘lis’ between the parties that is amenable to registration.

14.  In the present circumstances, Mr Chan submits that Madam Zhang, qua wife in the matrimonial proceedings, can have no possible claim against any of the properties, owned as they are by the Plaintiff company, in the matrimonial proceedings and as such can establish no ‘lis’ between herself and the Plaintiff to justify registration of a caution.

Mr Clough’s Analysis on Behalf of Madam Zhang

15.  Mr Clough submits that in the divorce proceedings the wife is inter alia claiming a transfer of property order in respect of all 11 properties on the basis that Mr Xi is the beneficial owner through his 87.5% shareholding of New Asia which is the ultimate owner of the Plaintiff company which owns these properties.  The Notice which she seeks to register serves to inform third parties that she has, extant, a claim against these properties.

16.  It is submitted that by this registration, the status quo can be preserved pending the divorce court’s determination as to the beneficial ownership of the 87.5% in New Asia by, in the meantime, giving priority to the wife over any would-be purchasers of these properties.  Notwithstanding the Lands Registry’s refusal to register the Notice as a lis pendens the fact that it appears in the Deeds Pending Registration column marked “Registration Withheld”, still has the effect of alerting a prospective purchaser of the wife’s claim to the property in the divorce proceedings, with the consequence that such as purchaser would complete a purchase at his peril.

Conclusions

17.  What is ultimately determinative of this summons is whether, as a matter of law, this attempt to register the Notice by Madam Zhang is a good one by virtue of coming within the definition contained in section 1A Lands Registration Ordinance (“LRO’):

“A ‘lis pendens’ means –

(a) any action or proceeding pending in a court or tribunal that relates to land or any interest in or charge on land …”

Given this definition, Mr Chan submits that as between the Plaintiff and Madam Zhang it cannot properly be said that she has any “lis pendens” against this Plaintiff, a party that is completely unconnected with her rights against Mr Xi her husband who is responding to her application for ancillary relief in their divorce proceedings.

18.  Whilst that analysis is a compelling one, and in this regard I am bound by the terms of the LRO, the question remains whether it is necessary for this ‘lis’ to be one between the two parties before me or whether, it is sufficient for the ‘lis’ to be one pending in any proceedings to which, as in this case, the beneficial interest concerning the land in question is in issue.

19.  What Mr Chan’s submission comes to is that the Plaintiff company, being an independent legal entity should not be vexed by proceedings between husband and wife with which it is not concerned.  Whilst that is an attractive way of putting the matter this may have the effect of rendering unregistrable by spouses, claims against property held by companies controlled by, in this case, a husband.  This would have the effect of permitting such a spouse, during the pendency of, in this case his wife’s claim for ancillary relief against him, to sell property owned by a company that he may own or control and give good title to any purchaser of such a property provided the purchaser is a purchaser for value without notice of the spouse’s claim.  Of course it is this which Madam Zhang fears and which has prompted her to attempted registration of the Notice of Ancillary Relief.

20.  The Lands Registry has refused registration because it takes the view that there is no lis between the Plaintiff and Madam Zhang.  That decision cannot bind me nor is it persuasive because I need to form my own view of the matter.

21.  Mr Chan has referred me to a number of cases in order to assist me in coming to the correct conclusion.  None of them present a similar factual matrix and really I am left with deciding the matter on the basis of the terms of the LRO which provides the court with very little by way of exercising a discretion which requires any sort of balancing exercise.  The Notice is either registrable or it is not.

22.  May I say that I am very mindful of Mr Chan’s concern that by leaving the Notice as it presently is, visible on the title to a prospective purchaser, I may well be seriously obstructing the legitimate operation of a group of companies whose beneficial ownership may well in due course be shown to be in the hands of others, in this case Madam Chu, rather than Mr Xi.  To allow that to happen would cause an innocent third party a great injustice where, for example, a valuable sale may fall through because of the appearance of the Notice in the Deeds Pending Registration column.

23.  Whilst this is a proper concern, it can be addressed in other ways as I propose to demonstrate in a moment.

24.  I have decided that the Plaintiff’s summons for the vacation of the Notice must stand dismissed.  I do so because I am of the view that Madam Zhang’s Notice for Ancillary Relief is very wide in its reach seeking to attack all of Mr Xi’s assets including an alleged controlling shareholding in a company that is the ultimate owner of the Plaintiff and through that ownership of the 11 properties that stand in its name.  Viewed in this way, the application for ancillary relief comes within the definition of:

“any action or proceeding pending … that relates to land or any interest in or charge on land …”

It is not correct that the ‘lis’ needs to be one between the titleholder to the land and in this case the party seeking registration, Madam Zhang.  To rule in favour of that restrictive interpretation would amount to a triumph of form over substance and in any event that is not what the definition of lis pendens, as defined in section 1A, says.  It would also create a charter for less than honourable conduct where a spouse could transfer property to a company, perhaps in the hands of nominees and thereby prevent registration and also provide that spouse with the freedom to dissipate assets before the divorce court has had the opportunity to rule on how those assets should, in justice, be distributed.

25.  I appreciate that the divorce courts retain very strong powers to set aside dispositions within three years of divorce but such powers when eventually exercised may prove ineffective if the proceeds of any disposition have been disposed of before the court can do anything about it.

26.  This summons has been contested on a very narrow front between a company that is, of course, not a party to the Xi v. Zhang divorce and has therefore only presented a very partial view of the whole picture.  Now that the Plaintiff company has failed to remove the caution as it presently appears  on the Register those controlling it, which undoubtedly includes Mr Xi as its director, irrespective of the outcome of the issue on who is the beneficial owner of the 87.5% shareholding of the New Asia shares, will need to deal with this problem within Madam Zhang’s ancillary relief application where the court undoubtedly retains a much wider jurisdiction to maintain a proper balance between the parties pending the hearing of the final application.  Frequently a divorce court will be asked to lift a registration of a lis pendens to allow a particular sale to go through and will then direct how the proceeds of sale of an affected property will be disposed pending the hearing of the application for ancillary relief.  As matters presently stand, both Mr Xi and Madam Chu are parties to the ancillary relief application.  I have no doubt that the Plaintiff company will also be able to show sufficient locus to intervene in the ancillary relief application to lift the registration of a Notice on one or more than one property on an ad hoc basis, pending the final hearing in October, not that far away, of Madam Zhang’s financial application against Mr Xi.  In such circumstances, the court will be able to perform the balancing exercise, that such in application would entail, to do justice between the husband, the wife and the affected third parties, at present Madam Chu and the Plaintiff company should it choose to intervene.  This, it seems to me, is the correct way to proceed and is the way available for third parties to seek, as best as it can devise, the court’s protection and assistance in what are often difficult and finely-balanced interlocutory circumstances.  Whilst what I have just said has no relevance to the way that I have ruled on the summons, which concerns a clean point of law, I hope that my observations are of some help to the parties and that Madam Zhang will be reasonably accommodating to such applications, because she must realise that whilst she has a bona fide claim for ancillary relief and a perfectly good argument as to whether Mr Xi Yu is the beneficial owner of 87.5% of New Asia’s shares, the final outcome of which can only be decided once I have heard all of the evidence on this issue, she certainly has no claim on anything like all of Mr Xi’s assets. Pending the final outcome he and the New Asia group of companies must be given reasonable space within which to operate.

Costs

27.  Madam Zhang has succeeded.  Costs should go with the event and she must therefore have her costs of the summons.  As to her summons, which now becomes otiose, in fact it was quite unnecessary to have issued it, I will let those costs lie where they have fallen.  The costs orders will be, in the usual way, orders nisi.