LO MAN YAU v. CHIU SUNG FAI AND ANOTHER

CACV 198/2017

[2018] HKCA 387

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 198 OF 2017

(ON APPEAL FROM DCCJ NO 2516 OF 2013)

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J U D G M E N T

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Hon Poon JA (giving the Judgment of the Court) :

INTRODUCTION

1.     The plaintiff is the registered owner of the suit property, namely, Flat B7 and B8 on 3/F, Tung Lee Building, Nos 1C, 1D, 1E, 1F, 1G, 1H, 1J and 1K Water Street, Nos 1 – 15 On Ning Lane, Hong Kong (“the Property”).  He bought the Property from its then registered owner, South Sea Holdings Limited (“South Sea”).  The sale and purchase was completed on 11 January 2013.

2.  The plaintiff commenced the action below against the defendants for vacant possession of the Property and mesne profits at the monthly rate of HK$30,000 from 2 March 2013 or 1 June 2013 until delivery up of vacant possession of the Property, on the ground that they were trespassers on the Property.

3.  In defending the plaintiff’s claims, the 1^st defendant asserted that he had a 37.24% beneficial interest in the Property by virtue of a resulting trust or constructive trust; and that he had a life interest in the Property by virtue of two agreements dated 25 September 2009 and 29 November 2011.  He counterclaimed for various declaratory reliefs mirroring his assertions.

4.  The trial took place before Deputy District Judge Lawrence Ng (“the Judge”).  By a judgment handed down on 14 February 2017 (“Judgment”), the Judge dismissed the plaintiff’s claims and entered judgment on the defendant’s counterclaim by making a declaration that the 1^st defendant is entitled to 30.77% beneficial interest in the Property under a resulting trust.  He also ordered, on a nisi basis, the plaintiff to pay the 1^st defendant’s costs, which order was made absolute by a decision on costs dated 12 May 2017, dismissing the plaintiff’s application to vary the costs order nisi.

5.  By an order dated 31 August 2017, this Court (Lam VP and Yuen JA) gave leave to the plaintiff to appeal against the Judgment on this ground only :

“ The Judge erred in finding that the 1^st defendant has 30.77% beneficial interest in the Property by way of resulting trust in that there was no or no sufficient evidence to prove that the payments by the 1^st defendant were contributions to the purchase price of the Property. On the undisputed evidence including contemporaneous documentary evidence adduced by the 1^st defendant himself, the Judge ought to have found that the payments by the 1^st defendant were loans to South Sea which had subsequently been repaid to the 1^st defendant by way of cheques which the 1^st defendant accepted.”

6.  On its face, the ground of appeal focused on the Judge’s finding that the payments by the 1^st defendant were contributions to the purchase price of the Property.  However, as had become clear in the course of the hearing before us on 24 May 2018, it raised a further and more fundamental question, which is this.  Even if the Judge’s said finding was correct, was he correct in finding that a resulting trust in favour of the 1^st defendant arose?

7.  We now hand down our judgment.

PROCEEDINGS BELOW

8.  The protagonists in the action below are the 1^st defendant, his two siblings, Ms Chiu Shuk Ha (“Shuk Ha”) and Mr Chiu Sung Leung (“Sung Leung”), their mother Madam Lam Ching Fun (“Madam Lam”) and Shuk Ha’s husband Mr Daniel Ng Kin Man (“Daniel”).

9.  The background facts leading to the action below were not in dispute.  They were set out by the Judge set out at [7] – [28] of the Judgment, which I shall not repeat here. For present purposes, it is sufficient to state those which are pertaining to this appeal as follows.

“ 9. On 9 January 2002, South Sea was incorporated, with the 1^st defendant and Shuk Ha, each holding one of its two issued shares. Its directors were the 1^st defendant, Shuk Ha and Madam Lam. The 1^st defendant was also appointed as its secretary.

10. On 12 May 2004, South Sea entered into a provisional sale and purchase agreement to purchase the Property at $1.5 million.  The purchase was completed on 19 June 2004, on which date South Sea entered into a mortgage in favour of DBS Bank (Hong Kong) Limited.

11. Soon after the Property was purchased, the 1^st defendant, his girlfriend, Sung Leung, Sung Leung’s wife and Madam Lam had been living in the Property even after the commencement of the action and at the time of the trial below.  And the 1^st defendant had been paying all the outgoings of the Property including management fees, government rates and utility charges etc.”

10.  Based on the parties’ list of agreed issues, the Judge identified 6 issues for determination and made a number of findings accordingly.  Relevantly, the Judge found that :

(1) The 1^st defendant and his witnesses, Sung Leung and Madam Lam, were truthful witnesses whose evidence he accepted. On the other hand, he was not impressed by the plaintiff, whose evidence he found to be unsatisfactory and implausible.

(2) The 1^st defendant had contributed HK$558,534 to the purchase of the Property, giving rise to a resulting trust in the Property held by South Sea in proportion to the 1^st defendant’s contributions to the purchase of the Property, which he found to be 30.77%.

(3) The plaintiff ought to have but failed to make inquiry of the 1^st defendant and Madam Lam.  Because of such failure, the Judge found that the plaintiff took the Property subject to the 1^st defendant’s beneficial interest in the Property.

11.  I shall return to the Judge’s reasoning on (2) in greater detail below.

APPLICABLE PRINCIPLES

12.  The present case concerned a property held by and in the name of a limited company but the purchase price partly came from the funds provided by its shareholder.  In such a context, the legal principles governing how a resulting trust may arise can be briefly stated as follows.  The summary below is largely taken from the judgment of Madam Recorder Linda Chan, SC in Re Fortune King Trading Limited, HCCW 432/2012, unreported, 19 May 2017, at [24] – [26] and [31].

(1) It is axiomatic that a company is in its own right a legal person having a separate and distinct identity from its shareholders.  Therefore, as a general rule, a company does not hold property as an agent or trustee for its shareholder.   Put differently, as a general rule, a shareholder has no legal or equitable interest in the company’s property, as opposed to a right to share in the profits of its business and to a distribution of any surplus on liquidation.  See Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1, per Ribeiro PJ at [34].

(2) It follows that when the purchase of a property is made in the name of a company, the starting point is that the purchase was intended to vest both the legal and beneficial interest in the company.  This is true even if the funds for the purchase are provided by a shareholder.

(3) Both (1) and (2) are general propositions. Combined together, they give rise to a normal, but rebuttable, inference that the beneficial interest of the property acquired in the name of the company with funds provided by its shareholder was intended to pass to the company. When the shareholder claims that by providing the funds, the equitable interest in the property was intended to be vested in him personally by way of a resulting trust, he bears the burden to rebut the inference by proving that the legal interest and the equitable interest of the property were so vested in the company and him separately.

(4) The time to take stock of the respective interest taken by the company and the shareholder in the property is the time of its acquisition.  The focus is on the parties’ intention at the time of purchase : whether the parties intended to vest the beneficial interest of the property in the shareholder as the provider of the funds, having regard to all the circumstances.

13.  Contrast such a corporate context with a non-corporate context.  In the latter, the rebuttable presumption is that the provider of the funds of the purchase of the property has a beneficial interest in the property by virtue of a resulting trust.  As the Judge noted at [31] of the Judgment, quoting from Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, per Lord Browne-Wilkinson at pp 708-709, the law is :

“ Where A makes a voluntary payment to B or pays (wholly or in part) for the purchase of property which is vested either in B alone or in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the money or property is held on trust for A (if he is the sole provider of the money) or in the case of a joint purchase by A and B in shares proportionate to their contributions.”

14.  And as further pointed out by the Judge at [32] of the Judgment, the presumption of resulting trust can be rebutted by proof that A did in fact intend B to take property as beneficial owner.  Ordinarily, B bears the burden to rebut the presumption.

THE JUDGE ERRED

15.  Mr Erik Shum, with Mr Victor Cheung, for the plaintiff, first took a pleading point.

16.  In the defence and counterclaim, the 1^st defendant pleaded :

“ 3. The 1^st defendant avers that :

(a) The Property is a conjoined one comprising of 2 residential flats;

(b) Insofar as the 2^nd Defendant is concerned, the present occupants of the Property include, among others, Madam Lam Ching Fun (the 1^st defendant’s mother) (“Madam Lam”) and the 1^st defendant’s family members (his elder brother Mr Chiu Shung Leung, his elder sister-in-law Ms Cheung Yin Mui, and his girlfriend Ms Chan Hoi Lan);

(c) Since the acquisition of the Property by South Sea in about 2004, the 1^st defendant, Madam Lam and the 1^st defendant’s family have been occupying the Property.

   4. The 1^st defendant further avers that :

(a) On about 9^th January 2002, South Sea was incorporated in the HKSAR with a share capital of 2 shares;

(b) The 1^st defendant and Madam Chiu Shuk Ha (the 1^st defendant’s sister) (“Madam Chiu”) were respectively the founding shareholders (each holding 50% of the shares of South Sea) and director of South Sea;

(c) Upon incorporation, South Sea was used solely to hold a residential property to be acquired by the 1^st defendant;

(d) On about 12^th May 2004, South Sea entered into a provisional sale and purchase agreement to purchase the Property for a consideration of HK$1.5 million;

(e) Of the HK$1.5 million purchase price for the Property, the 1^st defendant (from his own funds) paid a total of HK$558,534 in respect of the costs and expense in relation to the purchase of the Property;

(f) The purchase of the Property was also financed by a mortgage of the Property to DBS Bank (Hong Kong) Limited;

(g) The Property was registered in the name of South Sea.

   5. In the premises, the 1^st defendant avers that by virtue of his monetary contributions of HK$558,534 which was equivalent to about 37.24% of the total purchase price of HK$1.5 million and notwithstanding that the Property was subsequently registered in the sole name of South Sea :

(a) The 1^st defendant is the beneficial owner of the Property to the extent of about 37.24% under a resulting trust;

(b) Further or alternatively and on the basis pleaded here below in relation to the 1^st and 2^nd Compromise Agreements, South Sea and Daniel Ng were the constructive trustees of the 1^st defendant in respect of the Property vis-à-vis the 1^st defendant’s 37.24% beneficial ownership in the Property.”

17.  Referring solely to paragraph 5(a), Mr Shum argued that the only basis upon which the 1^st defendant raised the resulting trust is the averment that he contributed to the purchase of the Property.  With respect, Mr Shum’s reading takes paragraph 5(a) out of context.  Paragraph 5(a) must be read together with paragraphs 3 and 4.  So read, it is clear that the 1^st defendant was in substance pleading that because (i) the Property was to be acquired by him; and (ii) South Sea was used solely to hold the Property so acquired by him, he made the contributions to the purchase of the Property.  Mr Shum’s pleading point fails.

18.  The second point taken by Mr Shum is more formidable.  He relied on the principles on resulting trust in a corporate context, as summarized above, and argued that the Judge erred in his finding that a resulting trust in favour of the 1^st defendant arose.

19.  At [45] – [49] of the Judgment, the Judge gave detailed reasons to support his finding at [50] that the 1^st defendant had paid HK$558,534 towards the purchase of the Property.  Those are sound reasons which cannot be flawed.  So is his finding on the 1^st defendant’s contributions to the purchase of the Property.  There is simply no basis for us to disturb those findings.

20.  However, the matter does not stop there.  For the Judge went on to say :

“ Applying the law set out in Section D above, I find that a resulting trust existed in favour of the 1^st defendant to the extent of his contribution to the purchase price and that South Sea held the Property on a resulting trust for itself and the 1^st defendant in proportion to their contributions to the purchase price.”

21.  In Section D of the Judgment, the Judge set out what he considered to be the applicable principles on resulting trust.  There he referred only to those applicable to a non-corporate context.  In other words, he had proceeded on the basis that where it was proved, as he so found, that the 1^st defendant had contributed to the purchase of the Property, a rebuttable presumption that a resulting trust in his favour would arise.  The Judge must have also found that that presumption of resulting trust in favour of the 1^st defendant was not rebutted.

22.  With respect, the Judge erred.  He had failed to apply the legal principles for a corporate context. Under those principles, as a starting point, the rebuttable inference is that both the legal and beneficial interest of the Property vested in South Sea and the burden is on the 1^st defendant to rebut the inference.  The Judge ought to have assessed all the circumstances to determine whether the 1^st defendant had rebutted the inference by showing that the parties intended at the time of purchase to vest the beneficial interest of the Property in him personally.  In particular, in respect of the 1^st defendant’s contributions, the Judge ought to have approached them against his pleaded case as set out in paragraphs 3 to 5 of the defence and counterclaim and any evidence relevant to the parties’ intention at the time of purchase of the Property.

23.  In consequence, the Judge’s finding on the resulting trust in favour of the 1^st defendant is erroneous, being based on a misapprehension as to the law, and cannot stand.

DISPOSITIONS

24.  Ms Jennifer Tsui, for the 1^st defendant, submitted that there was evidence to show that at the time of purchase, the beneficial interest of the Property corresponding to his contributions was intended to be vested in the 1^st defendant. If that is true, the Judge failed to deal with such evidence, which means the matter has to be canvassed at a re-trial.  As we understand him, Mr Shum is not seriously opposing an order of re-trial.

25.  In the circumstances, we allow the plaintiff’s appeal, and set aside the Judge’s judgment and costs order.  We direct that the matter be remitted to the Judge for a retrial on this issue only, namely, whether the claim of resulting trust as pleaded by the 1^st defendant arose, bearing in mind that, as found by the Judge, the 1^st defendant did make contributions of HK$558,534 towards the purchase of the Property.

26.  On costs, we make an order nisi (a) that the plaintiff do have the costs of the appeal; (b) that the costs below be in the costs of the retrial; and (c) that the 1^st defendant’s own costs of appeal and below be taxed in accordance with Legal Aid Regulations.