PAN LISHAN v. MANY ART LTD

HCA 2306/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2306 OF 2007

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J U D G M E N T

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1.  This is an appeal by rehearing from a Master’s decision to dismiss the application that was before him; namely, to strike out the plaintiff’s statement of claim because it did not disclose any reasonable cause of action.

2.  As it reads, her claim is in equity, she having altered her position and acted to her detriment in reliance on representations made on behalf of the defendant.  The defendant having subsequently refused to acknowledge her interest in property which emerged from the representations, she now seeks relief as beneficiary under a constructive trust or resulting trust, or by virtue of proprietary estoppel.

History

3.  For this I turn to the statement of claim, whose contents for the purpose of this appeal I am bound to treat as truthful.

4.  The plaintiff whom I shall call from now on Lishan, is married to Lee Ngai Wang (Wang), although she has filed for divorce.  Wang has a brother called Lee Kun Wun (Wun).  Wun is married to Ng Tze Sang (Sang).  Key participants are Wang and Wun’s parents, called Lee Chi Ngok and Lin Ching.  I shall call them respectively the Father and the Mother or collectively the Parents.  They are key because they are the sole shareholders and directors of the Hong Kong company being the defendant (Many Art), and it is from them that the representations relied upon and acted upon by Lishan emerged.

5.  Since the 1980’s the Father had run a business dealing in textiles and textile quotas in Hong Kong and the PRC.  The proprietors of the business, as partners in equal shares, were Many Art and a sole proprietorship of the Father called Chi Wun Trading Co.

6.  Between 1993 and 1999 the Parents purchased three residential flats in Hong Kong.  The first is in a development called Sea Crest Villa, Kowloon.  The third is in Perth Apartments, Kowloon.  Both were purchased in the Parent’s joint names.  The second is focal to this action; it is in the development called Balwin Court, Kowloon.  It came to be registered in the name of Many Art.  The Hang Seng Bank provided some of the purchase price and registered a mortgage against the title.

7.  The representations coming from the Parents were formulated from a series of family meetings held in about May 1999.

8.  They said:

(1) That ownership of the three apartments would be divided among the three couples, to be owned and used by them jointly in equal shares.  Sea Crest Villa would be used and owned by the Parents and Perth Apartments would be used and owned by Wun and Sang.  Notwithstanding that Balwin Court was registered in the name of Many Art, it would be used and owned by Wang and Lishan.

(2) The business hitherto carried on by the Father jointly held by Chi Wun Trading Co. and Many Art would henceforth be run by Wang, Lishan, Wun and Sang as four equal partners.

(3) The revenue generated would be used to pay basic salaries of the partners, the daily expenses of the three families and those incurred in respect of the three flats including the mortgage instalments in Balwin Court.  Thereafter any profit remaining would be divided amongst the partners equally.

9.  The plan was put into effect.  In reliance on the representations, Lishan acted to her detriment by contributing to the business to generate the necessary revenue, and to permit that to be utilized in the manner the Parents had directed.  This included meeting the mortgage instalments on Balwin Court, which debt was fully repaid by November 2002.

10.  At about this time Wun and Sang retired from the business; thereafter it was run by Lishan and Wang, with some assistance from the Father.

11.  Then there was a development in October 2004 which led to Lishan filing for divorce three years later and a decision by the Parents then to exclude her from her entitlement to Balwin Court.  On that date Wang retired from the business and left Hong Kong to live in the PRC having formed a relationship with another woman in the PRC.

12.  After that departure, with consent of the Parents, Lishan became the sole remaining participant in the business, from which was derived the expenditure for Sea Crest Villa and Balwin Court.

13.  But then it was, in January 2007, that Lishan decided to file for divorce.  She told the Parents, whereupon they claimed that she was entitled to no further profits from the business, and they refused to admit to her beneficial interest in Balwin Court.  That gave rise to this action, filed in November 2007 brought against Many Art, as registered proprietor of Balwin Court.

14.  Lishan’s claim is formulated thus:

“By reason of the matters aforesaid:-

(1) It is unconscionable for the Defendant to deny and the Defendant is estopped from denying that the Plaintiff is entitled to half of the beneficial ownership of and interest in Balwin Court.  The Defendant is and was at all material times holding half of the beneficial ownership of and interest in Balwin Court on constructive trust for the Plaintiff.

(2) Alternatively, the Defendant is and was at all material times holding such portion of the beneficial ownership of and interest in Balwin Court on resulting trust for the Plaintiff in proportion to such contributions to the repayments of mortgage loan and the payments of household expenses made directly or indirectly by or otherwise attributable to the Plaintiff.”

And she prays for:

“(1)   A declaration that the Defendant holds half of the legal ownership of and interest in Balwin Court on constructive trust for the Plaintiff;

(2) Alternative to (1) above, a declaration that the Defendant holds such portion of the legal ownership of and interest in Balwin Court for the Plaintiff as this Honourable Court may find after trial;

(3) An injunction restraining the Defendant, whether by itself, its director, servants, agents or otherwise howsoever from:-

(i)    assigning, disposing of or otherwise parting with its ownership of or any interests in Balwin Court;

(ii)   creating any encumbrances or security interest in favour of anyone (including, but not limited to, charges and mortgages) over Balwin Court, and/or;

(iii) denying or otherwise restricting the Plaintiff from exercising her rights of exclusive possession, use and enjoyment over Balwin Court.

(4)   An order directing the Defendant to transfer half of the legal ownership of and interest in (or alternatively, such portion of the legal ownership and interest as this Honourable Court may find after trial) Balwin Court to the Plaintiff;

(5)   Costs;

(6)   Further and/or other relief.”

15.  It is this claim which by this appeal Many Art applies to be struck out, for failure to disclose a reasonable cause of action.

The Legal Principles

16.  I can be brief in dealing with these.  They are well settled and as both counsel have done I need only to make up a summary from extracts from the White Book at 18/19/3, 18/19/4 and 18/19/6.

17.  First, that no evidence is generally permitted.  The court is obliged to deal with a pleading on the assumption that the facts therein alleged are true and correct.  Secondly, it is only in plain and obvious cases that the court should exercise its summary powers to strike out a claim and drive the plaintiff from the judgment seat.  The claim must be obviously unsustainable, and the pleadings unarguably bad and it must be impossible, not just improbable, for the case to succeed before a court will strike it out.  The burden falls on the applicant for a strike out to demonstrate that plainly and obviously the claim is bound to fail.

Company Law is a Bar

18.  The primary ground as argued by Mr Brian Wong representing Many Art, is that it is his client, a corporate entity, that is the registered proprietor and owner of Balwin Court.  It acquired the flat with no intention then made to assign rights of ownership to anyone else.  It raised mortgage finance from the Hang Seng Bank to whom it was liable for repayment of the mortgage debt.  It did not make the representations upon which Lishan relied and upon which she now claims.  It was never required to ratify the assignment contained therein.

19.  In short, by virtue of the separateness of an incorporated company from its shareholders and directors, even from a shareholder or shareholders in full ownership and control of it, Many Art is not bound by a representation made by a member.

20.  I was referred to the Hong Kong case Good Profit Development Ltd v Leung Hoi [1993] 2 HKLR 176.  This was an appeal from a Master’s decision not to strike out a claim against a company, which had moved there was no cause of action against it.  The appellant owned a property (its only asset) and the claim arose because the appellant’s shareholders orally agreed to dispose of the property by selling their shares.  It was common ground that the appellant was not a party to the agreement nor had the shareholders represented it as agents.

21.  The appeal was allowed.  It was held that the agreement for the sale of the shares in the appellant had nothing to do with the appellant.  There was no privity of contract; the appellant had no shares in itself to sell.  It was “plain and obvious” there was no cause of action against the appellant.  That the shareholders had absolute control was neither here nor there.

22.  Referring to the appellant as the 3^rd defendant, and the shareholders as the 1^st and 2^nd defendants, Woo J (as he then was) said at p.181:

“The normal rule is that a company does not hold property as an agent or trustee for its members and a fortiori it does not hold property as agent or trustee for its directors.  If the 3^rd defendant is treated as holding the property as a bare trustee for the 1^st and 2^nd defendants, they would be entitled to demand the conveyance of the property to them with the effect of depriving the 3^rd defendant and therefore its creditors of this only substantial asset for payment of its debts, and with impunity from liability for any possible breach of fiduciary duties on their part as directors towards the 3^rd defendant or for misappropriation of the 3^rd defendant’s assets.  Neither the creditors of the 3^rd defendant, nor a liquidator in the case of a winding up, could in such a case lay hands on the property or make any claim against the 1^st and 2^nd defendants.”

23.  Mr Wong made the point that in this case his client’s position is stronger, because Many Art is not merely a company whose express raison d'etre is to hold a property; it is a trading company, whose creditors should not by a stroke be deprived of protection of a claim against the debtor company’s assets.

Company Law is not a Bar

24.  This was argued with some force and clarity by Mr Anson Wong representing Lishan.  He made a number of points.  But that which I find most compelling is that where a claim is based on equitable principles, as here, the court is more inclined to adopt a flexible approach in deciding whether a representation is made on behalf of another.  A court of equity is prepared to impute words of the representor to a defendant which entrusts him to handle the transaction or otherwise acquiesces in the making of the representation.  That much is clear from the judgment of Scarman LJ in the Court of Appeal case of Crabb v Arun District Council [1976] 1 Ch.179 at p.193.  In this case it is at least (he contends) arguable that the Parents having represented the change of ownership in Balwin Court in the capacity of owning all the shares in and controlling the registered proprietor, Many Art acquiesced by permitting the new partnership to pay off its debt to the Hang Seng Bank.

25.  He found himself readily able to distinguish Good Profit on the facts, the issue there being as to whether the company was holding the property the subject of the claim as bare trustee for the shareholders.

Is Company Law a Bar to the Claim?

26.  My view is that Many Art has through counsel failed to demonstrate that it is plain and obvious that the case of Lishan is bound to fail. 

27.  I am satisfied that it is at least arguable that the Parents made the representations as agents of Many Art, and that Many Art may be held liable for them.

Has a Claim Been Made Out of a Constructive Trust or a Resulting Trust, or of Estoppel?

28.  Taking me to Lewin on Trusts 18^th edition, at para.7-11, Mr B Wong noted that constructive trusts are classified as “institutional” and “remedial”. 

29.  Institutional constructive trusts arise from some pre-existing fiduciary relationship, before and apart from any breach of trust or duty. 

30.  Remedial constructive trusts arise where persons have accepted or assumed the duties of a trustee not impeached by the claimant independently of and preceding any breach of duty.

31.  In the statement of claim there is no averment of an existing fiduciary duty owed by Many Art to Lishan.  There is the representation from the Parents; that is all and it is quite inadequate.

32.  Equally, he submitted, there is no remedial trust.  There is no averment that Many Art assumed the duty of holding Balwin Court on trust for Wang and Lishan.  Again the representation does not commit Many Art.

33.  As for what amounts to a resulting trust, he took me to Equity and the Law of Trusts, 9^th edition at p.166:

“Whenever someone buys either real or personal property and has it conveyed or registered or otherwise put into the name of another, or of himself and another jointly, it is presumed that the other holds the property on trust for the person who has paid the purchase money.  The classic statement of the law is to be found in the judgment of Eyre CB in Dyer v Dyer.

The clear result of all the cases, without a single exception, is that the trust of a legal estate, whether freehold, copyhold, or leasehold, whether taken in the names of the purchasers and others jointly, or in the names of others without that of the purchaser; whether in one name or several; whether jointly or successive — results to the man who advances the purchase-money.”

34.  But this does not help Lishan’s case, because there is nothing to support that she contributed to the purchase, nor that Balwin Court was purposively assigned into the name of Many Art.

35.  Finally, he raised the possible claim of estoppel, given that Lishan avers that Many Art is estopped from denying her entitlement to a half interest in Balwin Court.  Once again he points to the independence of Many Art from those who have stated they no longer recognize her claim; the Parents.  Many Art played, and plays, no part in that refusal to admit her entitlement.

The Contrary View

36.  Mr A Wong read out the closing paragraphs of the statement of claim, noting that three causes of action are raised; namely, common intention constructive trust, proprietary estoppel and resulting trust.

37.  The common intention constructive trust is one of many types and is distinguishable from those raised by Mr B Wong.  Taking me to Underhill v Hayton’s Law Relating to Trusts and Trustees, 17^th edition, he noted that a constructive trust may be imposed on specific property (whether at the time of the purchase or subsequently) by common intention of the parties.  An example of this is where the husband in a marriage takes title to the matrimonial home and thereafter evinces an intention shared with the wife that he holds on behalf of them both, leading thus the wife to act to her detriment in reliance on that intention.  The ingredients being the common intention and the claimant acting to her detriment being essential ingredients, both have been pleaded by Lishan.

38.  The issue of separateness of Many Art as a corporate entity from its shareholders does not arise because Lishan pleads that the Parents, wholly owning and controlling Many Art, represented to her that she and Wang would own Balwin court jointly.

39.  In respect of the doctrine of proprietary estoppel, Mr Wong took me to Snell’s Equity, 31^st edition, para.10-15, wherein it is recorded that it protects the interests of a claimant who has been induced to invest in or improve a property owned by another either as a consequence of his own mistake (acquiesced in by the owner) or by direct encouragement or informal agreement, whose rights are no longer recognized. 

40.  These elements, he submits, are all pleaded.

41.  Thirdly is the pleading of a resulting trust.  Mr Wong submitted that the cases show that where common intention is absent, substantial payments by a party towards the purchase of a property, including payment of mortgage instalments and housekeeping, is sufficient to give rise to a resulting trust in his favour.

42.  He referred me to the local case Lui Kam Lau & Anor v Leung Ming Fai [1994] 3 HKC 477.  This was a claim by the executors of the estate of a woman to recover from the defendant premises registered in her name.  The defendant, in occupation and refusing to give up possession, claimed as the deceased’s de facto husband that the estate held the property in trust for him.  He pleaded that he had paid significant amounts towards the mortgage instalments and that before she died the deceased had promised to transfer the property into his name, though she never got around to doing this.

43.  A particular issue that the judge, being Deputy Judge Tong QC, grappled with was whether it had been demonstrated on the facts that there was a common intention between the parties that the deceased before she died would make over the property to the husband.  That could have given rise to a common intention constructive trust.  If not, where on a finding of fact there was insufficient to give rise to an agreement to that effect, whether payments by the husband to pay off the mortgage were intended by both to give him a share of the property.

44.  Of this the judge said at p.485:

“The other alternative contention of the defendant is that by making the monthly mortgage payments and redeeming the mortgage, there was and is in favour of the defendant a resulting or constructive trust of that part or share of the premises which represents the contributions made by the defendant.

Since I am concerned here with the situation where a person advances money to purchase a property registered in another’s name, I think I am more concerned with the principle of resulting trust rather than constructive trust.  However, it hardly matters what label one uses.  What the court is concerned with is a trust implied by law of the premises or part thereof held by the registered owner, the deceased, when she was alive and her estate upon her death, in favour of the defendant.”

45.  Mr Wong submitted that the alternative plea of a resulting trust in this case is well founded, or at least arguable.

Is There an Arguable Case for a Constructive Trust a Resulting Trust and/or Proprietary Estoppel?

46.  I am satisfied there is.

47.  I have paid heed to the competing arguments and, in particular, to Mr B Wong’s counter to those mounted by Mr A Wong.

48.  In essence his submissions are based on the premise that it was not Many Art that made the representations.  Nor has it been pleaded that the Parents made them speaking for or otherwise representing Many Art.

49.  I have already found it to be at least arguable that in equity the Parents could be said to have bound the company.  It is not otherwise argued that the three causes of action are plainly and obviously bad.

50.  That really is the end of it.

The Result

51.  Many Art having failed to establish that Lishan has an unsustainable case, the appeal against the Master’s order to dismiss its application for a striking out is dismissed.  Costs, nisi, are to Lishan, taxed if not agreed.