Master Universe Development Ltd v. Mass Ocean International Ltd and Others

HCA 1295/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1295 OF 2015

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HCA 1849/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1849 OF 2015

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HCA 1850/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1850 OF 2015

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D E C I S I O N

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Introduction

1.On 12 September 2016, I handed down my decision in HCA1295/2015, HCA1850/2015 and HCA1849/2015 (“Decision”). For the sake of convenience, I shall adopt the abbreviations in the Decision.

2.By the Decision, I dismissed the summonses issued by D2-4 in HCA1295/2015 and by D2 in HCA1849/2015 and HCA1850/2015 on 30 September 2015, ie the 1295/15, 1849/15 and 1850/15 Summonses, being combined applications under Order 14A and Order 18 rule 19(1)(a) of the RHC for inter alia:

(a) the claims against D2-4 to be disposed of on a point of law;

(b) the claims against D2-4 to be struck out as not disclosing any reasonable cause of action; and

(c) judgment on their counterclaims

(collectively “Orders”).

I also granted costs orders nisi against D2-4 in HCA1295/2015 and D2 in HCA1849/2015 and HCA1850/2015 to pay P costs of the 1295/15, 1849/15 and 1850/15 Summonses (including all costs reserved if any) to be taxed forthwith if not agreed. Such costs orders nisi had since become absolute.

3.By 3 summonses in the Actions filed on 26 September 2016 (“1295/15, 1849/15 and 1859/15 Leave Summonses” or collectively, “Leave Summonses”) with draft Notices of Appeal annexed thereto (“Draft Notices”), D2-4 in HCA1295/2015 and D2 in HCA1849/2015 and HCA1850/2015 applied for leave to appeal against the Orders. The hearing of the Leave Summonses came before me on 9 November 2016.

4.For the present purpose, as in the Decision, I shall focus on HCA1295/2015 as there was no dispute that the Leave Summonses would stand and fall together.

Legal principles

5.The Orders were interlocutory orders, and it was incumbent upon D2-4 to persuade this court to grant leave to appeal.

6.An appeal against a judge’s decision pursuant to Order 14A and Order 18 rule 19(1)(a) of the RHC is to ask the Court of Appeal to interfere with the exercise of a discretion. It is well established that the Court of Appeal will not do so unless the first instance court has erred in principle or is sufficiently plainly wrong that he/she must be taken to have exercised his/her discretion wrongly.[1]

7.Under section 14AA(4) of the High Court Ordinance Cap 4, leave to appeal shall not be granted unless the court is satisfied that the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard. In SMSE v KL,[2] Le Pichon JA pointed out that such leave to appeal is not lightly granted. Reasonable prospect of success involves the notion that the prospect of succeeding must be “reasonable” and therefore more than “fanciful”, without having to be “probable”.[3] Furthermore, it is pertinent to bear in mind that even if there is a reasonable prospect of success on appeal, the court still retains a discretion whether to grant leave to appeal, although the fact that there is, ex hypothesi, a reasonable prospect of success would heavily influence the court’s exercise of discretion.[4]

Decision

8.By the Decision, I have found such interests as MUL might have acquired under the 1295/15 TAs could only have subsisted as equitable interests in respect of which D1 had agreed to grant a lease (paragraph 32).

9.As regards D2-4’s interests under the Leases, Mr Yin, counsel for D2-4, conceded that for the purpose of the 1295/15 Summons each of D2-4 as lessee under the respective Lease had vested in it an interesse termini, so strictly speaking its legal estate was not fully constituted until it made actual/symbolic entry into possession of the relevant Subject Lands. Given such concession, I have found the question of law posed under Order 14A of the RHC in the 1295/15 Summons to be not quite correct since such question as posed by D2-4 rested on whether as a result of priorities the “legal estate” vested in the Leases was not affected by any notice of the 1295/15 TAs (paragraphs  33-35).

10.Going further to consider more substantive matters in the assumed scenario, I considered D2-4 as lessees under the Leases had sufficient proprietary right under interesse termini to support an action for ejectment/possession even though they would not have been able to maintain an action for trespass until after entry into possession (paragraph 50).

11.I also held it was settled law that in the absence of fraud, sections 3-4 of the LRO are to make an unregistered instrument null and void as against the registered deed of a subsequent bona fide purchaser for value even though the latter had, at the time of registration, notice of the former unregistered instrument (paragraph 57). But I also held that the priority provisions in the LRO do not preclude an anterior challenge against the validity of the transaction which goes to the question of whether or not the subsequent purchaser had any interest in land at all. After all, “the invalid could not be perfected by registration” (paragraph 68). Hence, the question was whether there was “actual fraud” which sections 3-4 of the LRO cannot cure (paragraph 57).

12.By the Decision, I dismissed the 1295/15 Summons by holding MUL essentially raised an issue of fraud, ie whether the Leases were in fact not true leases between D1 and D2-4 but sham or non-genuine transactions under a scheme concocted for the primary purpose of defeating the prior interests of MUL under the 1295/15 TAs, or to put it in another way, whether the grant of the Leases to D2-4 purportedly to take effect as concurrent leases was in fact not a grant of true/real leases but sham transactions that falsely operated as a “mask to avoid recognition by the eye of equity” with the dishonest intent to “defeat or injure” MUL’s legitimate interests (paragraph 71). My reasons for the coming to such conclusions were essentially set out in paragraphs 75, 77, 78, 79, 80, 82 and 84 in the Decision.

Draft grounds of appeal

13.Mr Yin agreed the priority provisions in the LRO do not preclude an anterior challenge against the validity of the transaction. Having studied with some care the Draft Notice for HCA1295/2015 which set out 8 draft grounds of appeal against the Decision/Order as well as the summary in Mr Yin’s written submissions, it appeared all these grounds attacked the conclusions in the Decision summarised in paragraph 12 above. So like Mr Yin and Mr Wong, solicitor for P, in their submissions, I will consider the draft grounds of appeal on an overall rather than individual basis.

14.Mr Yin submitted that on MUL’s pleadings it was not open for MUL to advance a case that D2-4 did anything other than to take the concurrent Leases with knowledge of MUL’s unregistered interest for the purpose of defeating the same. Relying on Kwok Siu Lau v Kan Yang Che[5] and Midland Bank Trust Co Ltd & anor v Green,[6] Mr Yin suggested there was no basis for holding D2-4 liable for fraud or conspiracy as MUL alleged. Mr Yin submitted I erred in proceeding on the assumption that the Leases granted to D2-4 could be nullified and treated as “sham” transactions or that a charge of fraud or conspiracy could be made against D2-4 (as opposed to D1/Wong) merely by showing (a) the close connection between Wong, D1 and D2-4, and (b) a dishonest design and intent on the part of D1/Wong to renege on the 1295/15 TAs when they had earlier induced MUL not to register the 1295/15 TAs.

15.First, Mr Yin submitted MUL merely pleaded that in purporting to execute the Leases and registering them at the Land Registry D2-4 acted in collusion and conspired with D1 (who acted wrongfully in breach of its obligation as landlord under the 1295/15 TAs) for the unlawful purpose of defeating and injuring the legal/equitable estate of MUL as tenant in possession of the relevant Subject Lands, and the pleaded particulars merely set out the closely connected and involved relationships amongst Wong, Ho (D2), LL Yu (D3) and CS Chan (D4) as detailed in paragraph 14 of the Decision.

16.It appeared Mr Yin’s essential complaints were (a) the absence of averment in MUL’s pleadings or allegations in the CY Chan Affs that D2-4 were parties to a fraudulent design by D1/Wong to induce MUL not to register the 1295/15 TAs (as opposed to simply taking a grant of the concurrent Leases from D1 and registering the same with the intention of defeating MUL’s prior unregistered interests), (b) even on MUL’s own case D2-4 were recently acquired by/for D1/Wong so there could not have been any fraudulent design by D1/Wong to induce MUL not to register the 1295/15 TAs.

17.Even bearing in mind the threshold for granting leave to appeal, I am not persuaded by such arguments. As Mr Wong submitted, MUL’s complaint was not about D1/Wong inducing it not to register the 1295/15 TAs in the first place. As seen from the CY Chan Affs, there was no complaint about such arrangement as it was part of MUL’s mutual business arrangements with D1. The fraud asserted by MUL was otherwise, and I simply set out paragraph 79 of the Decision:

“...... The essence of MUL’s complaint was that Wong being the sole director of D1 (ie the landlord under the 1295/15 TAs) had in place a scheme to defeat and injure MUL’s interests under the 1295/15 TAs, and this was achieved by D1 acting in concert with D2-4 (which were D1’s alter egos and therefore imputed with D1’s knowledge) as masterminded by Wong through the device of sham transactions masquerading as concurrent Leases. According to the CY Chan Affs, the fraud lay, not just in relying on legal rights conferred by the LRO, but in D1 (or Wong being its sole director and/or mastermind of the such scheme) reneging on its inducement to MUL not to register the 1295/15 TAs so as to facilitate the task by MUL’s CY Chan to assist D1 in obtaining vacant possession of lands in San Tin (and thereby to serve D1’s interest), and yet with knowledge of such fact D1 entered into the sham transactions (purporting to be the concurrent Leases) with D2-4 (who were D1’s alter egos and imputed with D1’s knowledge) under Wong’s orchestration and quickly registered them in order to destroy MUL’s prior equitable interests.”

On such basis, the recent acquisition of D2-4 became pertinent, and it paved the way for the concern that there were allegations of fact or interwoven issues of fact and law that could call for a trial such as to make disposal on point of law or by striking out inappropriate.

18.Mr Yin submitted the plea that D2-4 were alter egos of D1 was inconsistent with any suggestion that D2-4 had conspired with D1 given that a conspiracy could only be entered into between different parties. But I have explained in the Decision the impugned scheme by D1 was for D1 to work in concert with D2-4 (being its alter egos) to put in place the sham transactions, so MUL pleaded that D2-4 “have acted in collusion ...... with [D1] for the unlawful purpose of defeating and injuring” MUL’s interests by “purporting to execute [the Leases] and registering [them] in the Land Registry”. This is not a matter of “lifting the corporate veil”, especially in light of the discussion in paragraphs 19-24 below on “sham transactions”.

19.Secondly, Mr Yin submitted it was not open to MUL to advance a case that the grant of the Leases to D2-4 were not true/real leases but sham transactions on the state of the pleadings. Mr Yin suggested that any intention to defeat or injure a prior unregistered interest could not of itself render a transaction void of legal effect or turn it into a sham, and MUL failed to expressly plead that the parties never intended D2-4 to acquire a leasehold in their own right.

20.But I note MUL did expressly plead the Leases were “purported” leases that were “null and void” “sham transactions” and made with unlawful intent to defeat/injure MUL’s interests as tenants in possession under the 1295/15 TAs. Mr Yin submitted it would not avail MUL because the motive for executing and registering the concurrent Leases for the purpose of defeating MUL’s unregistered interests under the 1295/15 TAs was legally permissible “inasmuch as the parties had obviously intended the concurrent Leases to take effect according to their tenor in order to take advantage of sections 3-4 of the LRO by vesting a legal interest in D2-4 free of MUL’s unregistered interests under the [1295/15 TAs]”.

21.In my view, Mr Yin’s premise that D1 and D2-4 “obviously intended the concurrent Leases to take effect according to their tenor” was at the heart of the pleaded dispute for MUL’s pleadings took express issue on this and raised a fundamental challenge by averring that the Leases were not genuine leases that were “to take effect according to their tenor” but were “sham transactions” that were “null and void”. Mr Yin’s arguments that D2-4’s motive to defeat MUL’s prior equitable interest did not matter rested on the premise that the Leases were true leases that were to take effect according to their tenor. But MUL’s pleadings pulled the carpet from under such arguments by pleading the Leases were not genuine/real leases but sham transactions achieved through D1 acting in concert with its alter egos D2-4, and such non-genuine nature of the transactions cast the motive to defeat MUL’s prior interests in a sinister and “unlawful” light (when, according to Mr Yin, it might have been otherwise if the Leases were true leases intended “to take effect according to their tenor”).

22.In his oral submissions, Mr Yin brought me through the first instance judgment of Oliver J in Midland Bank Trust Co Ltd & anor. I have summarised the facts and decision of Oliver J in paragraph 59 of the Decision. It is true the son pleaded that the conveyance was pursuant to a conspiracy to defraud and injure him by completing the sale and depriving him of the benefit of the option, and he averred that the conveyance was a “fraudulent or colourable transaction or sham”. Mr Yin was quick to point out that such pleas did not avail the son.

23.However, it must be remembered that this was a decision after trial, and Oliver J carefully analysed and weighed the evidence of the relevant events as well as the evidence upon which the state of mind of the parties at the time of conveyance was inferred (which in that case was the crucial dispute of fact). Such evidence included the instructions to the solicitors, the advice given, the unseemly haste in concluding the transaction, the genuine payment of the expressed consideration and an acceptance of that payment, the conduct of the parents after the conveyance and the father’s affidavit, and it was after careful consideration of such evidence that Oliver J found the conveyance to the mother was not a sham and was a genuine sale by a vendor to a “purchaser” for money or money’s worth, and it was on such premise that the learned judge held that motive to defeat the son’s interest did not matter. This was borne out by Oliver J’s concluding remark at p 614 that “...... so far as the evidence before me goes, it seems to me that the merits are all one way” (my emphasis), and it was on such premise that he applied the priority provisions that defeated the son’s option. I am unconvinced the first instance judgment in Midland Bank Trust Co Ltd & anor would change the landscape. It perhaps reinforced the view that the question as to whether the Leases were genuine or sham transactions had to be resolved on the evidence before one could usefully consider the applicability of the priority provisions to give effect to frustration of prior interests.

24.Perhaps anticipating this, Mr Yin suggested that the plea on “sham transactions” was defective as MUL failed to expressly plead the parties never intended D2-4 to acquire any leasehold in their own right. Although MUL did not use those exact words, its pleadings were clear. By averring the Leases were “purported” leases that were “sham transactions” for which relief was sought to declare them “null and void”, it was a plain statement that the Leases were not true/real leases (and it necessarily followed those deeds being non-genuine transactions were never intended to pass any leasehold interest to D2-4). I am not persuaded this intended broad ground of appeal had sufficient merits to meet the requisite threshold.

25.Thirdly, Mr Wong submitted the legal question for D2-4’s application under Order 14A of the RHC was wrong insofar as the interests held by in D2-4 was an interesse termini and not a legal estate. Mr Yin brushed aside this point as a technical one that ought not to be allowed to detract from the real question as to whether D2-4’s interest (be it interesse termini or otherwise) should prevail as a result of the law on priorities, and suggested MUL could not be heard to complain now as it did not insist on an amendment at the hearing.

26.In the Decision, I noted the question of law posed for D2-4’s application under Order 14A of the RHC is not correct given Mr Yin’s concession at the hearing that D2-4 only had an interesse termini and not a legal estate. I agree with Mr Wong that the onus to properly frame or amend the relevant question of law is on D2-4 rather than MUL. But whilst I see the force of Mr Wong’s complaint (especially in the context of D2-4 seeking a draconian order to prematurely arrest MUL’s case against them at this interlocutory stage), I note that in view of the striking out application this court did go further to consider the impact of the LRO, and given my conclusions above D2-4’s failure to amend had no material impact on the outcome.

27.Fourthly, Mr Yin submitted that in any event the question of whether someone in the position of D2-4 could be prevented from taking advantage of sections 3-4 of the LRO is a question of law of great and general public importance which called for a definitive ruling from the higher courts, so there was good reason why the appeal should be heard if only to clarify the law.

28.Whilst I accept first instance courts should be careful not to stifle beneficial opportunities for the Court of Appeal to clarify unsettled law, I find the law in this area quite settled. The outcome turned not on a matter of the legal principles but on the particular pleadings and evidence in each case (which for the present purpose I have dealt with in the Decision and herein).  I do not consider there was any significant question of law, but perhaps the Court of Appeal would be much better placed to determine whether leave to appeal should be granted on this ground.

Conclusion

29.In all the circumstances, I decline to grant leave to appeal. I therefore dismiss the 1295/15 Leave Summons, 1849/15 Leave Summons and 1850/15 Leave Summons. Mr Wong and Mr Yin helpfully put forward agreed position on costs depending on the outcome of the Leave Summonses. I therefore order that:

(a) in HCA1295/2015, D2-4 do pay MUL’s costs of the 1295/15 Leave Summons (including all costs reserved if any) to be taxed forthwith if not agreed;

(b) in HCA1849/2015, D2 do pay FGIIL’s costs of the 1849/15 Leave Summons (including all costs reserved if any) to be taxed forthwith if not agreed; and

(c)  in HCA1850/2015, D2 do pay MUL’s costs of the 1850/15 Leave Summons (including all costs reserved if any) to be taxed forthwith if not agreed.

Mr David Wong, of Wong, Hui & Co, for the plaintiff

Mr Michael Yin, instructed by Haldanes, for the 2^nd, 3^rd and 4^th defendants