AMPLE TREASURE LTD v. EIGHT GAIN INVESTMENTS LTD

1992, No. M.P.973

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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

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

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

J U D G M E N T

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

1. This is a vendor and purchaser summons.

2. The plaintiff is the vendor and the defendant the purchaser under a sale and purchase agreement dated 16th March 1992 whereby the plaintiff agreed to sell to the defendant the property known as 1/8th part or share of and in Section B of New Kowloon Inland Lot 1046 which is situated at No.363 Castle Peak Road, Ground Floor ("the property") at the price of HK$6.63 million. The plaintiff is required under the agreement to show good title to the property. According to the relevant title deeds, the property was assigned by one Leung Chun as donor to one Ho Kwai Ming as donee by means of a Deed of Gift dated 28th March 1981. By a sale and purchase agreement dated 16th May 1990, the donee agreed to sell the property to two persons who subsequently nominated the plaintiff to take up the assignment. The assignment was executed on 1st June 1990. The plaintiff now agrees to sell the property to the defendant.

3. The defendant's solicitors have raised a requisition in respect of the Deed of Gift saying that there is no evidence as to whether the donor is still alive and if she is not, when she died. They require evidence that the property is not subject to any charge or estate duty implication pursuant to the Estate Duty Ordinance, Cap.111. In response, the plaintiff's solicitors point out that the only possible situation when an estate duty charge would be imposed is where the donor died within three years from the date of the gift and the estate is not exempted from estate duty and any estate duty is not paid. They also say that the deed of gift was executed more than 10 years ago and that at the time the plaintiff purchased the property, it had no knowledge of such situation or of any estate duty charge. The defendant's solicitors, not satisfied with this, argue that the plaintiff had knowledge of the deed of gift at the time of the purchase.

4. Having raised the requisition, solicitors for the defendant have made various enquiries with the following results. First, the solicitor who represented the plaintiff in the sale and purchase between the donee and the plaintiff in 1990 confirmed that at the time of that transaction he and the plaintiff did not know whether the donor had died within three years of the deed of gift or not. Second, the donee had moved out of his last known address about two years ago and was said to have emigrated to Canada. Third, enquiries made at the last known address of the donor revealed that a Ho family (the donee was surnamed Ho) had also moved out of that address about two years ago. Fourth, an enquiry was made at the Registry of Deaths as to whether a person by the name of Leung Chun (that is, the donor) had died and if so, when. The Registry replied that it would not be easy to find this out without the exact date of death. Fifth, the Probate Registry was also approached. It was found out that two persons by that name had died within three years since the deed of gift and that Probate or Letters of Administration had been granted in respect of their estates. But further enquiries revealed that these two persons were not the donor in this case.

5. The issue raised before me is whether the plaintiff has sufficiently answered this requisition and since that is the only outstanding requisition, whether a good marketable title has been shown. A further point has been raised and that is : even if the plaintiff's title is defective, whether the defendant, as purchaser from the plaintiff, can still acquire title free from such defect. These issues have arisen from the parties' concern that the title to the property may be affected by a possible charge for the payment of estate duty if the donor had indeed died within three years since the deed of gift.

6. Counsel for the plaintiff submitted that up to now there was still no registration of any estate duty charge since the execution of the deed of gift in 1981 and that in the circumstances of this case, a very strong inference could be drawn to the effect that there was no such charge. Even if the Commissioner of Estate Duty was to impose a charge now, it would be absolutely null and void by virtue of s.3(2) of the Land Registration Ordinance, Cap.128, as against his client being a subsequent bona fide purchaser for valuable consideration. He further argued that mere notice of the deed of gift was not sufficient notice within the proviso to s.18 of the Estate Duty Ordinance, and that something more was required. Counsel for the defendant submitted that the Limitation Ordinance did not apply to proceedings by the Crown for the recovery of tax or duty and that if the donor had indeed died within three years of the gift the Commissioner could still have a valid claim for estate duty and hence the risk of an estate duty charge on the property being registered by the Commissioner even at this stage was not removed merely by the lapse of time. Counsel further argued that even if the plaintiff did not have a good title, the defendant could still be regarded as a bona fide purchaser for valuable consideration without notice and could avail himself of the proviso to s.18 of the Estate Duty Ordinance. Both counsel referred me to the recent case of Lee Siu Man v. Chu Chi Wing & another, M.P. No.91 of 1992 (unreported).

7. The root of the problem is the possibility of an estate duty charge on a property and its effect on the title to the property in a sale from the donee to a purchaser and the title upon resale. It is perhaps useful if I am now to summarise the effect of the relevant provisions of the Estate Duty Ordinance.

8. Property which is the subject matter of a gift inter vivos made within three years prior to the death of a deceased is caught by s.3(1)(c) of the Estate Duty Ordinance. Estate duty is leviable on such property under s.5 of that Ordinance. Such property (i.e. property which was given away by the deceased within three years prior to his death) is not property which passes to the executor as such. Section 18(1)(a) of the Ordinance therefore applies and the estate duty on such property shall be a first charge on the property in respect of which estate duty is leviable. Since liability to pay estate duty arises upon the death of a deceased, the statutory charge can only arise and does arise upon death. Such a charge is imposed by statute on the property as a security for the payment of the relevant estate duty by the responsible person (either the donee of the property or the executor) to the Commissioner of Estate Duty. Any person who acquires the property from the donee in a case where the donor had died within three years from the gift is affected by the statutory charge and his title to the property may be tainted. However, protection from the statutory charge is given to a bona fide purchaser for valuable consideration without notice under the proviso to s.18(1) of the Ordinance. For such purchaser, the property "shall not be chargeable" and therefore he takes the property free from any charge. There can be different types of property which do not pass to the executor as such and are affected by s.18(1). They include landed properties. For leasehold properties (most of the landed properties in Hong Kong), notice of the statutory charge may be given by the Commissioner of Estate Duty by registering a memorial in a special format at the Land Office (s.18(2)). Such notice in writing is treated under s.18(3) as an instrument for the purpose of the Land Registration Ordinance, Cap.128.

9. In my view, the presence of s.18(2) and (3) is important. For while a s.18(1) charge is a charge created by statute and per se is not registrable, a notice in writing of such charge in the special format is registrable instrument. Sections 18(2) and (3) were clearly enacted with the provisions of the Land Registration Ordinance in mind and it must have been intended that by virtue of these 2 sections, the statutory charge created by s.18(1) of the Estate Duty Ordinance would be affected by the Land Registration Ordinance. That being the case, the priority of the statutory charge will be governed by s.3(2) of the Land Registration Ordinance, that is to say, if it is not registered, it shall be absolutely null and void as against a subsequent bona fide purchaser for valuable consideration. I accept that the Commissioner of Estate Duty is usually at a disadvantage because very often he may not be aware of the existence of the gift and/or death. But that only means that he may find it difficult to rely on the statutory charge as a security for the payment of estate duty. His right to claim estate duty on the gift is not affected.

10. What then is the position of a person who purchases directly from the donee?

11. The only relevant authority on this issue is the decision of Godfrey, J. in Lee Siu tan v. Chu Chi Wing & another, supra. That was a case where a purchaser purporting to purchase from a donee within three years from a deed of gift while the donor was still alive raised requisition and required the donee to put up security against the possible estate duty charge. The donee refused. The learned judge took the view that the purchaser's objection to the title was well founded because in the circumstances of that case there was a "latent" charge which the Commissioner of Estate Duty could not register because the donor had not died. He said at p.6 of his judgment:

"But where the charge remains 'latent' and incapable of registration, I am of the opinion that a purchaser who takes notice of the facts cannot rely on the proviso to escape the charge. Notice of .the facts gives him notice of the contingent liability to the charge. In my judgment the reference to 'notice' is not to be read as limited to notice of facts giving rise to a subsisting charge.

In the result I conclude that the purchaser here was entitled to object to the title. It disclosed a gift made within the period of three years last past. Unless proper provision were to be made for getting over the difficulty to which that gives rise, the title was one which the purchaser was entitled to reject."

12. The learned judge declared that the purchaser's requisition had not been sufficiently answered by the donee (vendor) and that the purchaser was entitled to annul the sale and to claim refund of his deposit. However, he did not make any general declarations as to title. But if the purchaser was entitled to reject title, it would follow that the title was defective unless the donee (vendor) was prepared to provide sufficient security to overcome the difficulty arising from the latent charge. Further, since the donor was still alive, liability to pay estate duty had not arisen and no statutory charge existed. Hence, there was no encumbrance on the property although there was a defect in title.

13. While it is reasonable to require the donee vendor to put up a security, conveyancers, I was informed, have encountered some difficulties as a result of this decision. This may well be the case. First, a donee vendor may find it difficult to provide sufficient security. The amount of estate duty leviable on the property in question depends not only on the value of such property at the time of a death which has yet to happen but also on the overall principal value of the estate of the donor at that time. Both these values are not easy to ascertain at the time of the purchase as it involves an assessment of the future market conditions. Furthermore, estate duty is levied at graduated rates according to the principal value of the estate of the donor at the time of his death. This makes the calculation of a reasonable amount of security little more than a guess. Second, if the purchaser decides to sell the property again within the three year period, will he have to put up a security to his subsequent purchaser? The answer is presumably in the affirmative because there is a defect in the title and the subsequent purchaser again cannot rely on the proviso in s.18(1). And if the purchaser has to put up a security, then how would he do it? There may not be any ready answers to these questions.

14. Be that as it may, it appears from the decision of Lee Siu Man's case that where a purchaser buys from a donee within three years from the gift, if the donor is still alive, the title is defective because of the latent charge for estate duty. However, if the donor has already died, then the latent charge would become a subsisting charge. In such a case, the title is also defective because of the encumbrance. The purchaser will take the property subject to the charge unless he can rely on the proviso to s.18(1) of the Estate Duty Ordinance because if he is a bona fide purchaser for valuable consideration without notice, the property "shall not be chargeable". But whether or not he falls within that proviso, if, for whatever reason, the personal representative of the deceased donor has not applied for Probate or Letters of Administration, the Commissioner of Estate Duty may not even know of the death, let alone the gift and it is unlikely that the statutory charge would have been registered at the Land office. In such a situation, the purchaser would take free from the charge under s.3(2) of the Land Registration Ordinance if he can register his assignment in time or at least before the Commissioner registers the statutory charge. The purchaser's notice of the charge appears to be irrelevant. I derive some support for this from the judgment in the Lee Siu Man's case. That case invloved a latent charge which was not registrable and s.3(2) of the Land Registration Ordinance did not arise. But at p.6 of his judgment, the learned judge said :-

"If the Commissioner has not registered the charge (being a subsisting charge capable of registration) before the completion of the purchase, it may by that in that case the purchaser would take free from charge even though he may have had actual notice of the facts giving rise to the charge."

15. The situation may seem somewhat anomalous. For if the donor is still alive, the title is defective even without an actual charge and the purchaser can reject title. On the other hand, if the donor has already died, the title is also defective because of the statutory charge, but the purchaser can gain priority by immediately completing the transaction and registering the assignment. Strangely enough, he may not be able to reject the title. It is also interesting to note that while the proviso to s.18(1) of the Estate Duty Ordinance requires the purchaser to be without notice, s.3(2) of the Land Registration Ordinance does not.

16. This apparent anomaly is, I think, the combined effect of the relevant provisions of the 2 Ordinances. In my opinion, where a donor has died within three years after the gift, even if the purchaser cannot avail himself of the protection under the proviso to s.18(1) of the Estate Duty Ordinance, he can still seek to rely on s.3(2) of the Land Registration Ordinance.

17. The present case is clearly different from the Lee Siu Man's case. The plaintiff here purchased from the donee outside the three year period. There are again two possibilities. First, the donor did not die within the three year period. There is then no question of any liability to pay estate duty, and hence no statutory charge arising. Second, the donor had died within the three year period. In such case, a purchaser who purchases outside the three year period is, in my view, in the same position as one who purchases within that period. Liability to pay estate duty has already arisen and s.18(1) of the Estate Duty Ordinance operates to impose a charge on the property since the time of death. In order to take free from it, the purchaser must avail himself of the proviso to that section. He certainly has notice of the deed of gift because he is purchasing from the donee. Is that sufficient to deprive him of the protection under the proviso? In my view, that is not. In the case of an existing liability, notice means notice of facts which give rise to the liability to pay estate duty. The deed of gift alone does not give rise to such liability. It is the deed of gift together with the fact that the donor had died within the three year period which give rise to the liability to pay estate duty. It follows that if the purchaser is not aware of the death of the donor if it did happen within the three year period, then he cannot be said to have notice of the facts giving rise to the liability to pay estate duty. That being the case, the property shall not be chargeable for estate duty. And the purchaser can take a free title. If, on the other hand, he has actual or constructive notice of the death of the donor within the three year period, the situation is different. In such a case the estate duty shall become a first charge on the property. His title to the property is therefore encumbered by the estate duty charge. And unless he can pray in aid the provisions of the Land Registration Ordinance, I am afraid his title will be tainted. If, therefore, at the time of his purchase, the Commissioner of Estate Duty has still not registered the statutory charge. then the purchaser is saved by s.3(2) of the Land Registration Ordinance, and he takes the property free from the charge.

18. In the present case, the deed of gift was executed in 1981. The plaintiff purchased the property from the donee in 1990, nine years after the gift. Notwithstanding the enquiries made, there is no evidence before me to the effect that the donor had died within three years after the deed of gift. There is, in fact, no evidence to the effect that he or she has died. Further, even if the donor had in fact died within the three year period, there is no evidence before me that the plaintiff had any notice of that, whether actual or constructive. In addition, the most recent land search reveals that there has been no estate duty charge registered by the Commissioner of Estate Duty. In these circumstances, I think it is more likely than not that the donor is still alive or that if he or she had died, he or she died outside the three year period and that there is therefore no liability to pay estate duty and no estate duty charge on the property. However, I would not base my decision solely on this. From the evidence adduced before me, I have also come to the conclusion that even if the donor had indeed died within the three year period, there is no evidence that the plaintiff had any notice of such death and hence notice of the facts giving rise to the estate duty charge at the time the plaintiff purchased the property. That being the case, the plaintiff is a bona fide purchaser for valuable consideration without notice within the ambit of the proviso to x.18(1). Further, even if I am wrong on this and that is, even if the plaintiff should have actual or constructive notice of such facts, the statutory charge is null and void under x.3(2) of the Land Registration Ordinance as against the plaintiff being a bona fide purchaser for valuable consideration.

19. For the reasons set out above, I am of the opinion that the plaintiff has shown a good title to the property and that the requisition raised by the defendant has been sufficiently answered. In view of this conclusion, I do not think it is necessary for me to express any conclusive views on whether the defendant as a subsequent purchaser falls within the proviso to x.18(1) of the Estate Duty Ordinance.. I am inclined to think that he does provided that he has no notice of facts giving rise to the liability to pay estate duty. In the circumstances of this case, I would make the declarations as sought in the originating summons. The parties have indicated to me that whatever the result of the present application, they have agreed that there should be no order as to costs.