WONG KWOK LEARN BALDWIN AND OTHERS v. INTERNATIONAL TRADING CO LTD

CACV70/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 70 OF 2009

(ON APPEAL FROM HCMP No. 2397OF 2008)

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BETWEEN

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J U D G M E N T

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Hon Tang VP :

1.  I have had the benefit of reading the judgment of Cheung JA in draft, I agree with it and have nothing to add.

Hon Cheung JA :

Background

2.  The late Mr. Wong Wing Seen who died in 1989 (‘the deceased’) was the father of Mr. Baldwin Wong (‘the 1^st plaintiff’) and Ms Shirley Wong (‘the 2^nd plaintiff’). The 2^nd plaintiff is the executrix of the estate of the deceased.

3.  The defendant company was set up by the deceased in 1939. The shareholders were the deceased, his wife who died in 1996, Mr. Baldwin Wong and Shirley Wong.

4.  The deceased during his lifetime was an accountant. Mr. Baldwin Wong was also an accountant. They were partners in an accountant firm called W S Wong & Co (‘the firm’). The firm had provided professional services to a bank known as Canton Trust & Commercial Bank Ltd (‘the Bank’). There was a run on the Bank in 1965 which subsequently went into liquidation. The Bank sued the firm for negligence. In order to prevent the Bank laying its hand on the shares of the deceased and Mr. Baldwin Wong in the company, the deceased decided to transfer their interest to two persons known as Hu Chi Peng and Hu Liu Shi in 1969 under a purported sale. It was not intended that the purchasers would have any beneficial interest in the shares and no consideration was paid by the purchasers for the shares. Hu Liu Shi is apparently the sister of a mistress of the deceased. She is the wife of Hu Chi Peng. As Mr. Baldwin Wong’s shares were given to him by the deceased, he abided by the deceased’s decision.

5.  Eventually the litigation with the Bank was settled by the firm paying compensation to the Bank in the 1970’s.

The present application

6.  On 29 November 2008, Mr. Baldwin Wong and Ms Shirley Wong issued proceedings seeking an order under section 52 of Trustee Ordinance (Cap. 29) that the shares of Hu Chi Peng in the company be vested in Mr. Baldwin Wong and the shares of Hu Liu Shi be vested in Ms Shirley Wong. They also asked for rectification of the register of members of the company pursuant to section 100 of the Companies Ordinance (Cap. 32).

The appeal

7.  The matter was heard by Chung J. He dismissed the application. Mr. Baldwin Wong and Ms Shirley Wong now appeal against the decision.

The Judge’s view

8.  The Judge held that

‘ 1.  This is a bold application which in effect sought the court’s approval of a scam.

.....

13.  ......  It is an action commenced in the hope of obtaining the court’s assistance to perfect title to properties which were earlier “disposed of” for admittedly illegal/improper purpose.’

The fundamental principle

9.  It is clear that the fundamental principle which is well established for over 200 years is that the Court will not lend its aid to a man who found his cause of action upon an immoral or an illegal act : Holman v. Johnson (1775) 1 Cowp. 341 at 343 per Lord Mansfield C.J. A modern affirmation of this principle is found in Tinsley v. Mulligan [1994] 1 AC 340 at 369 per Lord Browne-Wilkinson who said that neither at law nor in equity will the Court enforce an illegal contract which has been partially but not fully performed.

Reliance on resulting trust

10.  The plaintiffs recognized that the transfer of shares was carried out for an illegal or improper purpose, namely, to defraud creditors. However, they relied upon the resulting trust that arose from the voluntary transfer. They claimed that they are entitled to the relief sought because they are beneficial owners of the shares. They relied on the majority decision in Tinsley. In that case two women carried on a lodging house business. They used funds from the business to purchase a property as their residence. The property was registered in the sole name of the plaintiff but on the understanding that both were beneficial owners. The reason for registering the property in the sole name of one of them was to assist in a fraud practised on the social welfare assistance scheme, where the parties had made false claims for social assistance. Subsequently the defendant repented and disclosed the fraud. The parties fell out with the plaintiff claiming possession of the property against the defendant. The defendant counterclaimed for a declaration that the property was held by the plaintiff on trust for both of them. The House of Lords by a majority affirmed the decision of the Court of Appeal that the defendant was entitled to the declaration.

11.  Lord Browne-Wilkinson who delivered the majority judgment identified the following principles at page 370:

‘ From these authorities the following propositions emerge: (1) property in chattels and land can pass under a contract which is illegal andtherefore would have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged inevidence: if the plaintiff has acquired legal title under the illegal contract that is enough.’

12.  He further held that there was no distinction between property rights enforceable at common law and equity. He held that there was a presumption of resulting trust in favour of the defendant and she did not need to rely on illegality to support her claim. He stated the principle as follows :-

‘ Where the presumption of resulting trust applies, the plaintiff does not have to rely on the illegality.  If he proves that the property is vested in the defendant alone but that the plaintiff provided part of the purchase money, orvoluntarily transferred the property to the defendant, the plaintiff establishes his claim under a resulting trust unless either the contrary presumption of advancement displaces the presumption of resulting trust or the defendant leads evidence to rebut the presumption of resultingtrust.  Therefore, in cases where the presumption of advancement doesnot apply, a plaintiff can establish his equitable interest in the property without relying in any way on the underlying illegal transaction.’

13.  This approach was adopted by this Court in Loyal Luck Trading Ltd v. Tam Chun Wah [2008] 4 HKLRD 681. This Court (per Tang VP) further noted that in Nelson & Another v Nelson & Others (1995) 184 CLR 538, a decision of the High Court of Australia, Tinsley was not followed, but held that

‘ The potential conflict between Tinsley v Milligan and Nelson & Another v Nelson & Others can only be resolved by the Court of Final Appeal.  On the basis of Tinsley v Milligan, I agree with the learned Judge that it is not necessary for the plaintiff to plead or rely on an illegality.’

14.  Other Hong Kong cases which followed the Tinsley approach are Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866, per Yuen J (as she then was) at 874, Yue Shiu Ngam v Zen She Lin and another [1999] 2 HKLRD 21 (Beeson J).

Can Tinsley be distinguished?

15.  The Judge distinguished Tinsley as follows :

‘ 12.  The decisions in Tribe (i.e. Tribe v. Tribe [1996] Ch 107)and in Tinsley v. Milligan [1994]1 AC 340 cannot advance the plaintiffs’ case.  Both decisions concernedlitigants who were parties to the illegal transactions and who attempted tobenefit from them.  In Tribe, the court concluded that the illegaltransaction was not “carried into effect”; in Tinsley, the claimant repented and confessed the illegal transaction to the affected party.  It was in such circumstances the courts permitted the claimants in both decisions to set aside the illegal transactions.’

16.  I will address the case of Tribe later. It is sufficient to say that Tinsley was not decided on the basis that the defendant repented and confessed to the illegal transaction but rather on the basis that she did not need to rely on illegality to stake an interest in the property.

17.  The Judge addressed the issue of resulting trust as follows :-

‘ 14.  The plaintiffs also argued that they should be able to obtainrelief based on their alternative case of resulting trust; there is no need for them to rely on the illegality for such purpose.

15.  I disagree. There is no difference in substance between thetwo cases. In order to establish a resulting trust, the plaintiffs must ask the court to find that, despite its appearance, the “sale” was a mere scam in that title was never intended to pass, and the share price was never intended to be paid.’

18.  But, Tinsley is exactly on the point. The property there was registered solely in the name of the plaintiff in order to carry out the illegal purpose and at the time of the purchase there was also an understanding both were beneficial owners. Yet the defendant was entitled to rely on resulting trust to establish her claim. As observed by Lord Browne-Wilkinson at pages 374 and 376 respectively that the equitable right by way of resulting trust arose at the time at which the property was voluntarily transferred to the third party or purchased in the name of the third party; the defendant had no need to allege or prove why the property was conveyed into the name of the plaintiff alone : it was enough to show that the property was in fact vested in the plaintiff alone.

19.  In my view the reasoning applies in the present case as well. To begin with, there is no evidence in the present case to contradict the plaintiffs’ contention that the purchasers had not paid any consideration for the shares. That being the case a resulting trust arises by the voluntary transfer. The plaintiffs do not have to rely on the illegal purpose as to why the transfer of the shares was effected in the first place in order to claim a beneficial interest in the shares.

Illegality has not been carried into effect

20.  The Judge referred to Tribe where the plaintiff rented premises and operated a business there. The landlord of the premises served a claim on the plaintiff for repair work. The plaintiff would have to sell his business to raise funds for the repair. In order to protect his interest, the plaintiff transferred some shares to his son for a consideration which was not, and not intended to be paid by the son. The repair, however, was not carried out. The son refused to transfer back the shares to the plaintiff. As the transfer was by a father to his son, the presumption of advancement applied.

21.  The English Court of Appeal affirmed the decision that the plaintiff had rebutted the presumption of advancement and was entitled to the beneficial interest of the shares and the shares should be transferred back to him. The Court applied the principle which is stated to be an exception to the rule that the Court will not lend its assistance to a man who found his cause of action on an illegal act. The exception applies in cases where the illegal purpose has not been carried into effect. Such an exception was stated by Lord Goff of Chieveley in Tinsley at page 356 as

‘In particular, an exception to the principle is to be found in cases in which the illegal purpose has not been carried into effect.’

22.  This exception was also recognized by Lord Browne-Wilkinson in Tinsley at page 374

‘ There was originally a difference of view as to whether a transaction entered into for an illegal purpose would be enforced at law or in equity if the party had repented of his illegal purpose before it had been put into operation, i.e. the doctrine of locus poenitentiae.  It was eventually recognised both at law and in equity that if the plaintiff had repented before the illegal purpose was carried through,he could recover his property: see Taylor v. Bowers, 1 Q.B.D. 291; Symes v. Hughes, L.R. 9 Eq. 475.’

23.  The judge in Tribe found that the illegal purpose was to deceive the plaintiff’s creditors by creating an appearance that he no longer owned any shares in the company. He also found that it was not carried into effect in any way (Tribe page 121).

24.  Nourse L.J. agreed. At page 122 he held that

‘ It is the purpose which has to be carried into effect and that would only have happened if and when a creditor or creditors of the plaintiff had been deceived by the transaction.’

25.  In the present case the Judge held that

‘ 11.  The affidavit in this action falls far short of establishing suchan important matter:­

(a)  details about the Bank’s claim are totally lacking;

(b)  particulars were not given about the negotiations which led tothe settlement of the Bank’s claim;

(c)  in particular, nothing was mentioned as to why the Bankagreed to settle its claim;

(d)  likewise, nothing was mentioned as to whether the financial status of P1 and/or the deceased might have had any effect on the decision to settle, or why the Bank was not aggrieved or prejudiced.’

26.  In my view, there really is nothing to suggest that the Bank’s settlement with the firm was a result of the deceit practised on the Bank by the transfer of the shares to third parties. The plaintiffs have clearly stated that the litigation was concluded without resorting to the evasion of liability.

Delay

27.  There clearly has been a substantial lapse of time in bringing the present application after the transfer of shares. However, the plaintiffs have accounted for the delay, namely, during the life time of the deceased, he was in control of the company and nothing was done by him. After his death, his wife became the executrix of his estate and again nothing was done. After her death, the plaintiffs thought the action was time barred until they were advised that there was no time bar to bring proceedings in trust matters. Bearing in mind that the purchasers had never asserted any interest in the shares, I do not regard the plaintiffs’ case is affected by laches.

Diligent search made

28.  I am satisfied that the plaintiffs have made diligent search to locate the purchasers without success. Such steps included advertising the current proceedings in the newspaper as directed by this Court.

Conclusion

29.  In the circumstances the appeal must be allowed and there will be orders to vest the shares and rectify the register as sought by the plaintiff.

Costs

30.  There will be no order as to costs of the appeal and below.

Hon Yeung JA :

31.  I agree.