HOWIN INDUSTRIAL LTD (In liquidation) v. CHINA GROUP GLOBAL LTD AND OTHERS

HCMP 2551/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2551 OF 2016

____________

____________

_________________________________

REASONS FOR JUDGMENT

_________________________________

1.  This is an application by way of originating summons for:

(i) an order to rescind the Deed of Settlement (“the Settlement Deed”) signed between the Plaintiff and the 1^st Defendanton 29 April 2008 on the ground of misrepresentation;

(ii) declarations that the 1^st Defendant was never a bona fide purchaser for value without notice of the 12 sections of land known as Sections B, E, F, G, H, J, K, L, M, P, R and S of Lot No.83 in DD No.7, Tai Po, New Territories (“the Lands”); and that the 12 assignments of the Lands signed between the 1^st Defendant and the 2^nd to 13^th Defendants(“the 2006/2007 Assignments”)were void for illegality and could not transfer titles of the Lands to the 1^st Defendant;

(iii) a declaration that the Plaintiff was and is the sole beneficial owner of the Lands and that the 2^nd to 13^th Defendants held the Lands on trust for the Plaintiff; and

(iv) a declaration that the Plaintiff is the only party entitled to claim and receive compensation payable by the Government(“the Compensation”)for the resumption of the Lands (“the Resumption”).

2.  Out of the 13 Defendants, the 1^st, 4^th and 7^th Defendants have filed Acknowledgement of Service (“the AS”) stating that they do not intend to contest the proceedings.  The other Defendants have not filed any AS nor responded.  No affirmation has been filed by any of the Defendants.  As there are no triable issues, the Plaintiff seeks a summary determination of its claim.

3.  In the hearing on 11 January 2017, I allowed the Plaintiff’s application and I now give my reasons.

Background

4.  The Plaintiff was a company engaged in property development before it was wound up by the Court on 13 June 2001.  Mr Haughey and Mr Lai of Deloitte Touche Tohmatsu were appointed as the Plaintiff’s joint and several liquidators (“the Liquidators”)on 15 October 2001.

5.  The Plaintiff purchased the RP of Lot 83 and Lot 82 in DD No.7 on 7 March 1994 and 7 March 1995 respectively.  On 5 October 1995, the Plaintiff divided the said Lots into 20 sections and assigned 12 sections, ie the Lands, to each of the 2^nd to 13^th Defendants (“the 1994/1995 Assignments”), with each of them being made the registered owner of one section.

6.  The 2^nd to 13^th Defendants are male indigenous villagers (“the Dings”) entitled to a concessionary grant (“the Ding Rights”) to build a Small House for their own habitation.  The 1994/1995 Assignments were made for exploiting such entitlements.  Books and records of the Plaintiff show that no money had in fact been paid by the Dings to the Plaintiff under the 1994/1995 Assignments, despite the receipt clause stating that $250,000 had been received by the Plaintiff.

7.  During investigation, the Liquidators found that the Dings had executed Declarations of Trust (“the Declarations”) on 5 October 1995 confirming that they held their respective sections as trustees for the Plaintiff.  The Declarations were not registered with the Lands Registry. Further, the Dings had each executed a General Power of Attorney appointing Yim Tung Hoi (“Yim”), a former director and shareholder of the Plaintiff, to handle matters relating to the building of the Small Houses.

8.  The Plaintiff was wound up before the Small Houses were built.  In 2006, notices of the Resumption were issued by the Government.  Unbeknown to the Liquidators, in 2006 and 2007, by way of the 2006/2007 Assignments, the Dings had purportedly assigned the Lands to the 1^st Defendant.  The 1^st Defendant was incorporated for the sole purpose of claiming the Compensation.  The solicitors firm which acted for the 1^st Defendant as purchaser and the Dings as vendors was Peter Lau & Co (“PLC”).

The Settlement Deed was induced by misrepresentation

9.  Upon learning of the Resumption, between October 2007 to early 2008, the Liquidators had corresponded with the 1^st Defendant and it’s solicitors PLC.  PLC denied knowledge of the Declarations on the part of the 1^st Defendant or PLC.  The Liquidators’ staff, Wong Kai Yuen Michael (“Wong”), also met with Li Wan Fong Vincent (“Li”), a former director and shareholder of the Plaintiff, who failed to provide any information.

10.  Wong had also met and talked over the phone with, inter alia, Peter Lau (“Lau”),the sole director and shareholder and alter ego of the 1^st Defendant and the sole proprietor of PLC.  Lau represented to Wong that he had no knowledge of the Declarations or any trust arrangement or the Plaintiff was the beneficial owner of the Lands, and that the 1^st Defendant was a bona fide purchaser of the Lands for valuable consideration without notice (“the Misrepresentations”).

11.  On the basis of such allegations, and in reliance on the Misrepresentations of the 1^st Defendant made by Lau, on 29 April 2008, the Liquidators (on behalf of the Plaintiff) and the 1^st Defendant entered into the Settlement Deed in which the 1^st Defendant would pay the Plaintiff $1.3 million out of the Compensation payable from the Government as full and final settlement of the Plaintiff’s claim against the 1^st Defendant and the Government for the Resumption.

12.  Subsequent to execution of the Settlement Deed, the Liquidators learnt that ICAC was investigating Lau, Yim and Li in relation to the sale of the Lands from the Dings to the 1^st Defendant.  The Liquidators thus held back the settlement with the 1^st Defendant.

Rescission of the Settlement Deed on ground of misrepresentation

13.  There is no doubt that the Misrepresentations were false and Lau was aware of the falsity.  In the subsequent criminal proceedings (DCCC 1047/2009), HH Judge Geiser in his Reasons for Sentence dated 1 November 2010 (“the DC Reasons”) held that Lau knew that the Lands belonged to the Plaintiff, and was aware that the Dings could never have sold the beneficial ownership of the Lands to the 1^st Defendant.

14.  Judge Geiser rejected Lau’s evidence that he had no knowledge that the Dings were holding the Lands on trust for the Plaintiff and that he only knew that they were not the true owners when the Liquidators produced the Declarations.  The learnt Judge drew the inference that Lau must have known that, despite the 1994/1995 Assignments, the title of and the interest in the Lands were not with the Dings but with the Plaintiff.  Lau was found to be a party to the conspiracy to defraud the Liquidators, the Plaintiff’s creditors and the Government by causing the transfers of the Lands from the Dings to the 1^st Defendant to enable the 1^st Defendant to claim for the Compensation.

15.  The Liquidators entered into the Settlement Deed in reliance of the Misrepresentations, even though there was some reservation on the truthfulness of the Misrepresentations.  Under the Settlement Deed, the Liquidators agreed to accept $1.3 million out of the total Compensation of over $3.3 million, and hence stood to lose $2 million.

16.  Lau, Yim and Li were subsequently convicted for conspiracy to defraud in the case of DCCC1047/2009 on 1 November 2010.  It was only through the Reasons that the Liquidators were able to confirm that the Misrepresentations were fraudulently made by Lau on behalf of the 1^st Defendant to deliberately conceal the true facts.

17.  As mentioned above, the Liquidators had done as much as they reasonably could to investigate the accuracy and ramifications of the Misrepresentations, and they even sought legal advice from T S Tong & Co, who opined on 15 February 2008 that on the face of it the 1^st Defendant was the bona fide owner without notice of the Declarations.

18.  Under such circumstances, the period of limitation should not have begun to run until the Plaintiff had discovered the fraud or concealment on 1 November 2005 (see: s 26(1), Limitation Ordinance, Cap 347).

19.  In Zurich Insurance Co Plc v Hayward [2016] 3 WLR 637, the United Kingdom Supreme Court held that, in order to set aside a compromise on the basis of fraudulent misrepresentation, the defrauded representee merely has to show that he had been influenced by those misrepresentations.  He does not have to prove that he settled because he believed that the misrepresentations were true.  Based on the facts above, I am satisfied that the Liquidators had been influenced by the Misrepresentations in making the Settlement Deed and so the same should be rescinded.

The 1^st Defendant was not a bona fide purchaser for value without notice and the 2006/2007 Assignments were void for illegality and could not transfer title

20.  Lau appealed against the conviction but failed. In the judgement of the Court of Appeal (“the CA Judgment”), Yeung VP held that the 1^st Defendant “could not be regarded as a bona fide purchaser for valuable consideration without notice as the 2006/2007 Assignments were ‘sham’ transactions.” (see: para 164 of the CA Judgment). 

21.  The 2006/2007 Assignments purported to show that the Dings, as vendors, had sold the Lands registered in their names for $30,000 to $70,000 to the 1^st Defendant.  The Dings did not receive the payment as suggested in the 2006/2007 Assignment, and thought that the money they received only related to the “selling” of their Ding Rights.  The Dings were unaware of the nature of the documents that they had signed (see: paras 27-28 of the CA Judgment). 

22.  The 2006/2007 Assignments were indeed false assignments created by Lau, Yim and Li, and were used as part of the illicit scheme for the former to claim Compensation from the Government which they knew that they were not entitled to (see: paras 2-3 of the DC Reasons). 

23.  Further, the 1994/1995 assignments only gave the appearance of vesting legal title of the Lands in the Dings in purported transactions for sale and purchase. As the 1994/1995 assignments were sham transactions and did not vest the title of the Lands in the Dings, the 2006/2007 assignments could not operate to transfer the title from the Dings to the 1^st Defendant.

The Plaintiff is the sole beneficial owner of the Lands

24.  As stated in paras 94 and 95 of the CA Judgment, the judge in the court below (Judge Geiser) found that despite the 1994/1995 Assignments, the consideration of $250,000 was not paid and the Dings were not the true owners as they were only holding the Lands on trust for the Plaintiff, who remained the beneficial owner.  The learnt Judge noted that the Declarations were not registered because if the Lands Department were aware of the true position, namely that the Dings had in fact sold their Ding Rights to the Plaintiff, their applications to build Small Houses would not be approved.

25.  Yeung VP held at para 164of the CA Judgmentthat in so far the “sham” transaction between the Plaintiff and the Dings might affect the interest of the Government, the Liquidators and creditors of the Plaintiff, the “sham” transactions, as far as the interests of the Dings are concerned, can be completely ignored and therefore the ownership of the Lands remained throughout with the Plaintiff, and upon its winding up, with the Liquidators and its creditors, with or without the Declarations.

26.  In Best Sheen Development Ltd v Official Receiver and Trustee of Lai Thomas [2001] 1 HKLRD 866 at 874D-F, a developer in a similar position to the Plaintiff sought a declaration that he was the beneficial owner where a Ding had executed a declaration of trust that the developer was the beneficial owner of the land.  Yuen J (as she then was) granted the declaration because she was satisfied that a declaration that the developer was the beneficial owner of the land did not amount to enforcement of an illegal contract, the developer was not forced to rely on the illegal contract for the declarations sought as to its property interest, even though the legal contract explained why it came about that the “Ding” was registered as the owner of the land.  

27.  In reaching the decision, the learnt Judge relied on Tinsley v Milligan [1994] 1 AC 340, in which Lord Browne-Wilkinson said: “… A party to an illegality can recover by virtue of a legal or equitable property interest if, but only if, he can establish his title without relying on his own illegality …”

28.  The learned Judge further held that: “Even if it may be argued that the declaration of trust was somehow invalid because the plaintiff had not in truth ‘provided’ money to pay itself, the plaintiff would still be entitled to rely on its beneficial interest under a resulting trust, which may be implied where an attempted express trust fails”.

29.  Applying the principles in Best Sheen, the court should therefore grant the declarations that the Plaintiff is the sole beneficial owner of the Lands and that the Dings have been holding the Lands on trust for the Plaintiff.

The Plaintiff’s entitlement to the Compensation

30.  While the Lands Department has not released any compensation to the 1^st Defendant, they require a Court Order confirming that the Compensation for the Resumption should be made to the Plaintiff.

31.  By virtue of s 6(1)(a) of the Lands Resumption Ordinance, Cap 124 (“LRO”), former owner and any person having an estate or interest in the land immediately before reversion under an instrument registered in the Land Registry are entitled to claim compensation.

32.  Under s 2 of the LRO, “‘owner’ means the person registered or entitled to be registered in the Land Registry in respect of any land sought to be resumed, or, if such person is absent from Hong Kong, or cannot be found, or is bankrupt or dead, his agent or representative in Hong Kong.”

33.  Though the Lands were transferred to the 1^st Defendant by way of the 2006/2007 Assignments, the 1^st Defendant is not a bona fide purchaser for valuable consideration without notice of the Plaintiff’s interest and the 2006/2007 Assignments were false instruments.  Hence, the 1^st Defendant cannot be a ‘former owner’ entitled to claim or receive the Compensation.

34.  It was indeed affirmed by Kwan JA at para 200 of the CA Judgment that the 1^st Defendant “did not acquire good title to [the Lands] and was not entitled to receive compensation for the resumption of [the Lands].”

35.  In relation to the Dings, despite the 1994/1995 Assignments, they did not and were never intended to have any interest in the Lands.  The Plaintiff, under the “arrangement” with the Dings, retained absolute and full control of the Lands according to the various documents that had been executed by the latter (see: para 155 of the CA Judgment).  Hence, the Dings cannot be “the former owners” entitled to claim the Compensation.

36.  As the Plaintiff has the beneficial interest and is the real owner of the Lands, the Plaintiff is the “former owner” under the meaning of the LRO.  I accept that the Plaintiff is the only party who is entitled to claim the Compensation.

37.  For the above reasons, I allowed the Plaintiff’s application and granted the relief as sought by it.