BEST SHEEN DEVELOPMENT LTD. v. THE OFFICIAL RECEIVER AND TRUSTEE OF THE PROPERTY OF LAI THOMAS, A BANKRUPT

HCMP 7250/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 7250 OF 1999

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JUDGMENT

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1. This is the Plaintiff's application by way of Originating Summons for a declaration against the Official Receiver as trustee of the property of Thomas Lai, a bankrupt ("the Bankrupt").

2. The Plaintiff claims that it is the beneficial owner of Section B of Lot No. 8 in Tso Wo Hang Village, Sai Kung, New Territories ("the Land").

3. The Court is asked to declare that a Declaration of Trust made by the Bankrupt dated 4 May 1993 is valid and subsisting, and that the Plaintiff was and is the sole beneficial owner of the Land and the Bankrupt had and the Official Receiver has been holding the Land as trustee for the use of the Plaintiff. The Plaintiff also seeks consequential orders, including an order for the vacating of a Receiving Order and an Order of Adjudication of Bankruptcy from the land register.

4. The matter was first heard in September 2000, when questions were raised as to the nature of the alleged agreement between the Plaintiff and the Bankrupt. The Plaintiff was a developer and had an agreement with the Bankrupt, an indigenous villager, for the latter to apply to the Government for a Building Licence to build a particular type of house on the Land (known as a "Ting house" or "Small House"). The Land was never owned or intended to be owned by the Bankrupt. The issue was whether, by making the declaration sought, the Court would be lending its aid to the enforcement of an illegal agreement between the Plaintiff and the Bankrupt to make a misrepresentation to Government in order to obtain concessionary terms in the Building Licence.

5. This led to an adjournment of the proceedings for further evidence to be adduced by the parties and for submissions on the new issue to be made at the adjourned hearing in January 2001.

Background

6. A brief summary of the facts follows.

7. On 26 March 1993, the Land was purchased by the Plaintiff, a developer, from a third party.

Assignment of Land to Lai

8. On 4 May 1993, the Plaintiff assigned the Land to Thomas Lai, an indigenous villager of the New Territories, purportedly in consideration of $250,000 paid by Lai. The assignment which was by deed contained an acknowledgment of receipt for this sum. The same solicitor represented both the Vendor and the Purchaser.

Lai's application for permission to construct Small House

9. On the same day, Lai applied to the Government pursuant to a policy known as the New Territories Small House Policy. According to a Lands Department publication exhibited by the Official Receiver, the Policy is "designed to allow an indigenous villager to apply for permission to erect for himself during his lifetime a small house within his own village" [my emphasis].

10. It further states that in the case of application for Building Licences and Exchanges (Surrender and Regrant) i.e. for building on private land (as opposed to Government land), the land under application must be registered in the applicant's name.

11. The fact that the Policy is personal to indigenous villagers can also be seen from the fact that applications for Small House grants on Government land from villagers living overseas would be refused unless the District Land Officer was satisfied that the applicant intended to return and reside in the village.

Evidence of scheme between Plaintiff and Lai

12. It is the Plaintiff's case that there was in truth no sale of the Land to Lai and the purported consideration of $250,000 was never paid. The Plaintiff and Lai were parties to what has been called a "development scheme". The scheme was that the Plaintiff would provide the land and bear all construction and other costs for the building of a Small House, Lai would apply to Government for a Building Licence for the construction of a Small House (for which the Plaintiff would pay him $160,000), and Lai would have no interest in the land or the house to be built on it.

Declaration of Trust

13. On the same day as the assignment and Lai's application for a Building Licence, he signed a Declaration of Trust. It recited that the Assignment had been executed before the Declaration and that the consideration of $250,000 "was in fact wholly provided by the [Plaintiff]". It has been asserted without demur from the Official Receiver that no money went through Lai's bank account. Lai then declared himself trustee to hold the Land upon trust for the Plaintiff.

14. The Declaration of Trust was attested by the same solicitor who had attested the assignment. However, unlike the assignment, this Declaration of Trust was not stamped or registered until 6 years later, after the Official Receiver had become the trustee of the Bankrupt's property.

Exchange of Lot

15. Although Lai had submitted his application for permission to construct a Small House on the Land in May 1993, negotiations were then entered into for an exchange of the Land for another lot, viz. Lot No. 376.

16. In May 1996, Government approved the exchange and in July 1996, Lai applied for permission to construct a Small House on Lot No.376.

Lai's Bankruptcy

17. In May 1997 however, a Receiving Order was made against Lai and in September 1997, he was adjudicated bankrupt. The Receiving Order and the Order of Adjudication were registered against the Land in 1997.

Abandonment of exchange

18. In 1998, solicitors said to be acting for Lai corresponded with Government to abandon the exchange previously negotiated and renewed the application for permission to construct a Small House on the Land.

Building Licence

19. In December 1998, the Bankrupt executed the Building Licence in respect of the Lot.

20. The Building Licence has not been executed by Government. In January 1999, the District Lands Officer became aware of the bankruptcy and the registration of the Receiving Order and the Order of Adjudication. In March 1999, the District Lands Officer, Sai Kung, stated Government's position thus:

"It appears from the Declaration of Trust made by LAI Thomas, the Bankrupt, dated 4.5.1993 that the Bankrupt is NOT the true owner of the captioned lot. In this circumstance, I have decided to withhold the execution of the Licence pending further clarification on the alleged trust arrangement".

Official Receiver's stance

21. In January 1999, the Plaintiff's solicitors engaged the Official Receiver in correspondence relating to the title in the Land.

22. The Official Receiver's stance, taken after interviewing Lai, was that Lai's position was not clear in that whilst he did not assert an interest in the Land, he did not accept that he was a trustee either. The Official Receiver indicated however that if it were to be found that Lai was a trustee of the Land for the Plaintiff, then the Land would not fall into his estate in bankruptcy. Presumably this was based on s.43(3) Bankruptcy Ordinance cap. 6 and for that reason no point was taken on priority of registration of the Receiving Order and the Order of Adjudication before the Declaration of Trust.

Issues

(1) Has the Plaintiff proven its case on the facts?

23. The first issue before me is whether, in light of Lai's ambivalent position, the Plaintiff has succeeded in proving its allegations of fact.

24. No receipt has been exhibited for the money alleged to have been paid by the Plaintiff to Lai. Whilst a Chinese document has been exhibited as, or evidencing, the agreement between the Plaintiff and Lai, parts of that document have been blanked out and it also appears to be incomplete. The Declaration of Trust, although dated the same day as the assignment to Lai, was not stamped or registered until 1999, after the Plaintiff became aware of Lai's bankruptcy.

25. However, I find that notwithstanding the above, the Plaintiff has proven that there was indeed a "development scheme" as alleged. I note that the Declaration of Trust was attested by the same solicitor who had attested the assignment.

26. Further, in July 1996, December 1997 and December 1998 respectively, the Bankrupt executed three General Powers of Attorney in favour of the Plaintiff as donee. Of course, only the first General Power of Attorney would have been valid as Lai had been made bankrupt in 1997. Further, in December 1998, Lai executed a Will appointing a director of the Plaintiff to be his sole executor and purportedly "bequeathed" the Land to the Plaintiff. The fact that Lai executed the General Powers of Attorney supports the Plaintiff's case. No other reason has been proffered by the Official Receiver as to why Lai would have signed it. There is no evidence that Lai has any interest in the Plaintiff Company or is in any way connected to it.

27. Finally, the most straightforward piece of evidence is a Statutory Declaration made by the Bankrupt in July 1999 in which he says that he had never paid the consideration money of $250,000 mentioned in the assignment. This is confirmed in an affirmation from the solicitor who dealt with the assignment. This sort of evidence if it had emanated from the Plaintiff itself would not be admissible as it contradicts what was set out in the deed of assignment. However, the evidence is from Lai, the party who would otherwise have been entitled to rely on the estoppel by deed.

28. I am satisfied on the above evidence that there was in fact a "development scheme" as asserted by the Plaintiff. However that is not the end of the matter.

(2) Would the Court be assisting the Plaintiff in enforcing an illegal agreement?

29. There is the further issue whether by making the declaration sought, the Court would be assisting the Plaintiff in enforcing an illegal agreement, when it is clear that the purpose of the "development scheme" was to misrepresent that Lai was the true owner of the Land, so as to enable the Plaintiff to obtain the concessionary terms in the Building Licence granted under the Small House Policy to individual indigenous villagers which, had the Plaintiff sought permission itself, it would not have got.

30. Before discussing this aspect, it should be noted that it does not matter to this determination that Government was acting in its capacity as a private landlord.

31. It was first submitted on behalf of the Plaintiff that the scheme was not unlawful because beneficial ownership of the Land was not a requirement for an indigenous villager to obtain the concessionary terms.

32. Counsel for the Plaintiff submitted that the Lands Department document states that for building on private land, the land under application must be "registered" in the applicant's name, and so, it is contended, legal ownership only is needed, and not beneficial ownership. I am not persuaded by that submission.

33. In my view, it is clear from the terms of the Building Licence that it was to be granted on the basis that the indigenous villager had both legal and beneficial ownership of the Land.

34. Clause 4 of the Building Licence provided:-

"(a) ... the Licensee ... having obtained this Licence on concessionary terms under the Small House Policy of the Government for indigenous villagers in the New Territories, shall not assign ... or otherwise dispose of the lot ... or any interest ... therein ... or enter into any agreement so to do, whether directly or indirectly ...

(b) After a period of five years has elapsed ... the Licensee without the consent of the District Lands Officer shall be at liberty ... to assign ... or otherwise dispose of the lot ... or enter into any agreement so to do".

35. Clause 4(c) even restricts the type of mortgage which the licensee can obtain.

36. The above restrictions would have no meaning or effect if the licensee needed only to be the legal owner of the land, and beneficial ownership could be divested and freely transferred to anyone at any time.

37. The view that the Building Licence was granted on the basis that the Bankrupt had both legal and beneficial ownership of the Land is shown in the Lands Department publication which states that the Policy is "designed to allow an indigenous villager to apply for permission to erect for himself during his lifetime a small house within his own village" [my emphasis].

38. Further, since the Plaintiff's claim of beneficial ownership of the Land was revealed, Government has withheld execution of the Building Licence.

39. It is therefore clear that the concessionary terms in the Building Licence would be obtained only by a misrepresentation to Government that the Bankrupt was the legal and beneficial owner of the Land, not just a mere nominee for the Plaintiff.

40. The Plaintiff has not asserted that it was not aware of the typical terms of the Building Licence. In the absence of any satisfactory explanation for the fact that the Declaration of Trust was not registered or stamped for 6 years until the Plaintiff became aware of Lai's bankruptcy, the only reasonable inference is that the parties were themselves aware that the revelation of the Plaintiff's beneficial ownership of the Land would jeopardize the grant of the Building Licence under the Small House Policy.

41. A further submission by counsel for the Plaintiff was that the scheme was not an unlawful agreement, by drawing an analogy with the situation where, after the grant of a Building Licence, there was then an agreement to dispose of an interest in the property before compliance with the conditions in the Licence.

42. I have been referred to Li Pui Wan v Wong Mei Yin [1998] 1 HKLR 84. In that case, Government had granted land to some indigenous villagers and they had obtained rights for construction of Small Houses. Some time later, the land together with the rights were assigned to TF, which entered into a joint venture with MF to develop the land. MF in turn entered into another development agreement with R, and R entered into an agreement to sell one unit in the house to A.

43. There was a dispute as to payment of premium and MF terminated R's rights to the house. The dispute between R and A was whether A should be entitled to the return of money she had paid R

44. It was held by the Court of Appeal that although the transaction was in breach of the conditions of grant, there was inadequate evidence in that case to show that the transaction was necessarily in breach of public policy. In any event, even if the transaction had an element of illegality because the parties had not obtained the government's consent, it did not constitute a breach of public policy because the contractual documents showed that the parties had intended to carry out and complete the transaction according to government requirements, including the payment of premium. As described by Chan HCCJ (as he then was), the transaction could only be regarded as "technically jumping the gun" (p90).

45. The present case is different. It is not a case of merely premature disposition of an interest in property which did belong to an indigenous villager and who was thus entitled to concessionary terms to build a house on the property. The Land in the present case was never Lai's to own, and the Plaintiff as the true owner would not have been entitled to the concessionary terms in the Building Licence, which were clearly rights of some value.

46. At heart, the "development scheme" was a contract between the Plaintiff and Lai which had as its object the deliberate commission of the tort of misrepresentation on Government as landlord, the misrepresentation being that Lai owned the Land. A contract to commit a civil wrong is illegal under common law (Chitty on Contracts 28th ed. General Principles 17-018).

47. If therefore this were a case where the Plaintiff was seeking to enforce the "development scheme" against the Bankrupt, it is clear to me that the Court would not do so, because it would then be lending its aid to the performance of an illegal contract which would be contrary to public policy. It matters not whether anyone would be "hurt" by the scheme. The concessionary terms were simply not available to the Plaintiff, the true owner of the Land, and the agreement was to commit a civil wrong to obtain those terms.

48. However, I am satisfied that a declaration that the Plaintiff is the beneficial owner of the Land does not amount to enforcement of the illegal contract.

49. This is because the Plaintiff is not forced to rely on the illegal contract for the declarations sought as to its property interests, even though the illegal contract explains why it came about that the Bankrupt was registered as the owner of the Land.

50. In Tinsley v Milligan [1994] 1 AC 340, H.L., Lord Browne-Wilkinson recognized that an express trust may be enforced by a party to the illegality (Ayerst v Jenkins LR 16 Eq 275). The Plaintiff can therefore rely on the Declaration of Trusts as an express trust.

51. 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.

52. In Tinsley, after referring to the law as to the enforcement of proprietary interests in common law (as opposed to equity) in situations of illegality (Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65), Lord Browne-Wilkinson concluded (p375):-

"In my judgment, ... the fusion of law and equity has led the courts to adopt a single rule (applicable both at law and in equity) as to the circumstances in which the court will enforce property interests acquired in pursuance of an illegal transaction viz. the Bowmakers rule. 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. In cases where the presumption of advancement applies, the plaintiff is faced with the presumption of gift and therefore cannot claim under a resulting trust unless and until he has rebutted that presumption of gift: for those purposes the plaintiff does have to rely on the underlying illegality and therefore fails".

53. In the present case, the transfer of the Land from the Plaintiff to Lai was voluntary in that no consideration was paid or intended to be paid. The relationship between the parties is not one where a presumption of gift would arise. In the circumstances, the Plaintiff has throughout retained the beneficial interest in the Land.

54. Further, even if it may be argued that the beneficial interest was not retained by the Plaintiff because of the effect of s.17 Conveyancing and Property Ordinance cap. 219 (which provides that "unless the contrary is expressed to the contrary in the assignment, an assignment shall operate to assign all the estate, right and interest in the land assigned which the assignor had in that land and which he had the power to assign"), in the present case the Plaintiff may still recover its property because the doctrine of locus poenitentiae would apply.

55. In Tribe v Tribe [1996] Ch 107, Millet LJ (as he then was) held (p124):-

"It is ... settled both at law and in equity that a person who has transferred property for an illegal purpose can nevertheless recover his property provided that he withdraws from the transaction before the illegal purpose has been wholly or partly performed. This is the doctrine of locus poenitentiae and it applies in equity as well as at law".

As for the application of the doctrine of locus poenitentiae, he held (p135):-

"I would hold that genuine repentance is not required. Justice is not a reward for merit; restitution should not be confined to the penitent. I would also hold that voluntary withdrawal from an illegal transaction when it has ceased to be needed is sufficient".

56. In the present case, the Building Licence has not been executed by Government and no house has been erected on the Land. The application for a Building Licence on the Small House Policy has been withdrawn. The Plaintiff has not benefitted from and would not be benefitting from the misrepresentation.

Order

57. I would therefore declare that the Plaintiff is the sole beneficial owner of the Land and that the Bankrupt had been and the Official Receiver has been holding the Land on trust for the Plaintiff.

58. I will also give the consequential orders in paragraphs (4) and (5) of the Originating Summons. As for paragraph (6), I have not been taken to any specific provision in the Land Registration Ordinance cap. 128 that would enable me to make the order sought, and in any event, even if the Official Receiver does not take steps to vacate the Receiving Order and Order of Adjudication, I would have thought that the registration of the declaration made would suffice to show that the Land does not fall within the Bankrupt's estate.

59. As for costs, Mis Sit from the Official Receiver's Office has asked for costs because the Official Receiver was entitled to put the Plaintiff to proof of its allegations, some of which were contrary to documents signed by the Plaintiff itself. Counsel for the Plaintiff has asked that there be no order as to costs.

60. In my view, these proceedings were of the Plaintiff's own making. It devised the scheme and concealed the trust for reasons which I have discussed above. In view of the inconsistent attitude taken by the Bankrupt, the Official Receiver as a third party to the scheme was acting properly when he required the Plaintiff to prove its case. I would therefore order that the costs of the proceedings be paid by the Plaintiff.