Ling Wing Fai Billy and Others v. Ling Shui Fai and Others

CACV 99/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 99 OF 2008

(ON APPEAL FROM HCA NO. 6853 OF 1999) 

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Before: Hon Tang Ag CJHC, Yuen JA and Kwan JA in Court

Date of Hearing: 7 September 2010

Date of Judgment: 8 October 2010

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JUDGMENT

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Hon Tang Ag CJHC (giving the judgment of the Court):

Introduction

1.This appeal concerns a property at Flat No.1, Second Floor, Block F of Lok Nga Court, No.50 Chun Wah Road, Kowloon, Hong Kong (“the flat”), which was part of a Home Ownership Scheme (“HOS”). 

2.By a sale and purchase agreement dated 17 November 1983 and an assignment dated 20 February 1984 made with the Hong Kong Housing Authority (“HKHA”), the 1^st and 2^nd defendants, a husband and wife, became the registered joint owners of the flat.  The purchase price was $222,500.  The 1^st defendant passed away in August 2007.  The 2^nd defendant, who is on legal aid, has been represented by Miss Liza Wong, SC throughout. 

3.The 1^st plaintiff was the brother of the 1^st defendant.  The 1^st plaintiff, as the administrator of the estate of his mother Wong King Shui (or Sui), deceased (“the Mother”), who died on 14 September 1991, is also the 3^rd plaintiff.  The 2^nd plaintiff is the 1^st plaintiff’s wife.  The 1^st plaintiff has been served with a notice of proceedings but has not taken any part in the proceedings.  The 2^nd plaintiff appeared in person.

4.The 3^rd defendant is the purchaser under a Chinese Provisional Agreement for Sale and Purchase of the flat from the 1^st and 2^nd defendants.  By a provisional agreement dated 23 January 1997 (“the Provisional Agreement”), the 1^st and 2^nd defendants agreed to sell the flat to the 3^rd defendant for $1.2 million.  This has become the subject of third party proceedings with which we are not presently concerned.

5.The present claim was commenced by the plaintiffs against the defendants on 27 April 1999.  The plaintiffs claimed that they, personally, and the 1^st plaintiff as the administrator of the Mother’s estate, are the beneficial owners of the flat and that the 1^st and 2^nd defendants held the flat as their trustees.  The plaintiffs’ case is that in or about 1983, the Mother wanted to purchase a HOS flat for use as a residence of members of the family.  As a result, the family members, including the Mother, the 1^st plaintiff and the 1^st defendant, entered into an arrangement that was pleaded in paragraph 5(b) of the Statement of Claim (“the Arrangement”).

6.The Arrangement was that:

“ (1) To increase the chance of success in the drawing of lots, two applications for purchase would be lodged with HKHA, one in the name of the Deceased and the other in the name of the 1^st and 2^nd Defendants.

(2) The down payment and other initial expenses for the intended purchase would be paid by the Deceased.

(3) The balance of the purchase price would be financed by a mortgage over the flat.

(4) Members of the family who were to occupy the flat would have to pay for the monthly mortgage instalments and recurring expenses, such as rates and utility expenses.

(5)    Those family members who had contributed to the purchase price would have pro tanto beneficial interest in the flat to the extent of their respective contributions.”

7.Pursuant to the Arrangement, two applications were made to the HKHA, one in the Mother’s name and the other in the joint name of the 1^st and 2^nd defendants.  The 1^st and 2^nd defendants’ application was successful, resulting in the purchase of the flat.

8.It is common ground that the deposit and the initial expenses for the purchase of the flat were provided by the Mother.  The balance of the purchase price in the sum of $200,000 was financed by a mortgage in favour of Sin Hua Trust, Savings and Commercial Bank Limited, which was repayable by monthly instalments over 15 years.  The whole of the mortgage loan was paid off in about April 1999.

9.The defendants denied the existence of the Arrangement, although they admitted that the Mother had paid the deposit as well as the expenses for the purchase of the flat.  They claimed the payments were gifts from the Mother to them.  They also admitted that the 1^st and 2^nd plaintiffs had paid some of the mortgage installments when they were residing in the flat, but they said they were fees or payments for use and occupation of the flat.  They also claimed that the 1^st and 2^nd plaintiffs occupied the flat pursuant to a licence in early 1987, which was revoked in late 1991 or early 1992.

10.More importantly, for the present purpose, the 2^nd defendant contended that even if there was indeed the Arrangement, the Arrangement amounted to an agreement to alienate and an alienation of beneficial interest in the flat, contrary to section 17B(1) of the Housing Ordinance, and is void.

11.Section 17B of the Housing Ordinance at the time of the sale and purchase agreement in 1983 provided:

“ Where-

(a) any land in any estate is sold under section 17A to any person; or

(b) any land in respect of which the Authority is authorized to nominate purchasers is sold to a person nominated by the Authority,

any alienation or conveyance or purported alienation or conveyance or any agreement to alienate or convey such land‑

(i) by that person in breach of any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to such land; and

(ii) by a mortgage of such land in breach of any terms on which the mortgage was authorized by the Director of Housing,

shall be void.”

The current version of section 17B is of similar effect.

12.By an order of 16 February 2007, Deputy Judge Gill ordered that the following questions or issues be tried as preliminary issues before the trial of the other questions or issues in this action:

“ (1) Whether the arrangement alleged to have been agreed and implemented as pleaded in paragraphs 5 to 11 of the Statement of Claim was void under section 17B(1) of the Housing Ordinance, Cap.283 (‘the Ordinance’), the same being an agreement to alienate and/or a purported alienation of the beneficial interest in the suit property (‘the Property’) in favour of the Plaintiffs in breach of the terms, covenants and conditions of the Schedule to the Ordinance;

(1A) Further or alternatively, whether the payments made by Madam Wong King Shui, deceased and the 1^st and 2^nd Plaintiffs towards the purchase and acquisition of the Property allegedly in the characters of purchasers with the intention of acquiring the beneficial interest in the Property was likewise void because the giving of effect thereto as claimed would result in an alienation or effective alienation of the beneficial interest in the Property in favour of the Plaintiffs in breach of the terms, covenants and conditions of the Schedule to the Ordinance;

(2) If so,

(A) whether it thereby affords the 1^st and 2^nd Defendants a defence to the Plaintiffs’ claim to the Property;

(B)    whether the Plaintiffs are thereby debarred or otherwise prevented from asserting beneficial owner of the Property.”

13.These preliminary issues were heard by Chu J who held that:

“45. … the answers to Issues (1) and (2) are ‘No’. It follows that Issue (3) does not arise for determination.”

The Appeal

14.This is the 2^nd defendant’s appeal.

15.The matter first came before us on 23 January 2009 when we were told by Madam Lam, the 2^nd plaintiff, that her appeal against refusal of legal aid was heard on 16 December 2008, but she was still awaiting the result.  Because of the important legal issues involved, we adjourned the hearing and told the parties that if legal aid was refused, Madam Lam should try the Bar Free Legal Service Scheme; failing both, the court would appoint an amicus curiae.

16.By letter dated 9 April 2009, Messrs Chong, So & Co, solicitors for the 2^nd defendant, informed the court that Madam Lam’s application for legal aid had been refused, however because Madam Lam was busy, she had not approached the Bar Free Legal Service Scheme.

17.By a letter dated 27 April 2009, the court informed Madam Lam that she should try the Bar Free Legal Service Scheme.

18.By letter dated 30 October 2009, Messrs Chong, So & Co informed the court that Madam Lam had informed them that because she was busy, she had neither the time nor the inclination to seek help from the Bar Free Legal Service Scheme.

19.In November 2009, Mr Anderson Chow, SC, was instructed as amicus curiae.  The matter returned to us for hearing on 7 September 2010. The 2^nd plaintiff has not made any submission, and we would have had considerable difficulty but for Mr Chow’s assistance, for which we are grateful.

Alienation

20.It is obvious that the critical question is, whether the Arrangement amounted to an alienation, purported alienation, or agreement to alienate the flat (for brevity sake, I shall refer to them collectively as alienation except where the context requires differentiation between them). 

21.As Mr Chow pointed out the words or expressions “alienation” or “agreement to alienate” are not defined in the Ordinance.  He has referred us to:

(1)   Stroud's Judicial Dictionary, 7^th Ed (2006), Vol. 1, at pages 102 to 103, where it is said that -

“‘Alienation’ is as much to say, as to make a thing another mans; or to alter or put the possession of lands, or other things, from one man to another ... It is the making over of land or an interest therein ... but not the making over of a mere personal right, not in the nature of property.”

(2)    The New Shorter Oxford English Dictionary (1993), where, at page 51, the word “alienate” is stated to mean “Transfer to the ownership of another” or “Turn away, divert”; and the word “alienation” is stated to mean “The action of transferring ownership of anything” or “The state of being held by other than the proper owner”.

22.Mr Chow submitted that one gathers from the above, “alienation” or “agreement to alienate” generally involves the disposition or transfer of some right or interest in property by an owner to another person, or an agreement to do so.  He submitted that a common characteristic is that they involve some positive act by the person making the alienation effecting a transfer or creation of some right of ownership of property. 

23.Mr Chow submitted that:

“No constructive trust could have arisen as at the date of the Arrangement. However, as soon as the 1^st and 2^nd Defendants, having utilized the money of the Deceased to make the down payment, became the legal owners of the property by virtue of the Assignment, they would in equity be regarded as holding the property on a constructive trust for the family members in accordance with the Arrangement.”

24.Chu J decided against the defendant because:

“ 42. The point is, and which is important, is that the passing of beneficial interest in the Property to the Deceased and the 1^st and 2^nd defendants upon their respective contributions occurred by operation of the law. It is not by any positive act of the 1^st and 2^nd defendants. It is therefore not alienation by the 1^st and 2^nd defendants. It is clear from the wordings of the previous section 17B and the current section 17B(1) and the successive versions of paragraph 1 of the Schedule to the Ordinance that what is prohibited is alienation by the purchaser. On the facts of this case, it is not a case of the 1^st and 2^nd defendants purporting to alienate or alienating the beneficial interest in the Property.

43. Plainly, the statutory restriction against alienation was to prevent abuses of the HOS, which is to enable certain sectors of the community to acquire residences at reasonably affordable prices, by ensuring that only those eligible could benefit from the scheme. It would not have been the legislative intent to nullify genuine family arrangements between husband and wife and among family members. It is a fact that in some cases, and I would venture to suggest in quite a number of cases, husbands and wives or family members have had to put their resources together in order to be financially able to acquire a HOS flat and/or to pay off the mortgage instalments. This is evident from the cases that Miss Wong SC had fairly drawn my attention to, in which the courts had applied the concepts of resulting or constructive trust arising from contributions to the purchase price or mortgage payments made by spouses or family members, where the subject matter in dispute is a HOS flat. In none of these cases, however, were section 17B and the Schedule to the Ordinance considered.

44.   I am therefore of the view that on the facts as pleaded in paragraphs 5 to 11 of the Statement of Claim, there is no alienation or agreement to alienate of the beneficial interest in the Property by the 1^st and 2^nd defendants as to be in breach of the terms, covenants and conditions of the Schedule to the ordinance.”

25.It is true that if a property is conveyed to A but B paid the purchase price in the character of a purchaser, a resulting trust will be presumed.  But here, as Chu J has correctly pointed out, there is no need to resort to a resulting trust, because the actual intention of the parties could be gathered from the Arrangement.  Chu J went on to say that the plaintiffs’ claim against the 1^st and 2^nd defendants fell to be considered under the concept of common intention constructive trust, and that the beneficial interest under such a trust arises from the date of the detrimental conduct of the claimant: Underhill and Hayton, Law Relating to Trusts and Trustees, 17^th ed.,page 528.  However, it was critical to Chu J’s decision that there was no positive act by the 1^st and 2^nd defendants.

26.With respect, Chu J has overlooked the positive acts by the 1^st and 2^nd defendants.  Firstly, by making the Arrangement; secondly, by using the money provided by the Mother to pay the deposit and the initial expenses; and, thirdly, by permitting the plaintiffs to reside in the flat and make installment payments.  The fact that the Arrangement or the payments resulted in beneficial interests in the flat being vested in the plaintiffs or the Mother by operation of the law does not mean that they were not the consequence of the 1^st and 2^nd defendants’ action. 

27.In Re a Solicitor, CACV 117/2000 (Rogers VP, Keith JA and Le Pichon JA) (unreported, dated 8 December 2000), Keith JA, in giving the judgment of the court said at para. 14:

“14. The fact that the word ‘alienation’ is grouped together with the words ‘conveyance’ and ‘parting with possession’ is also an indication of what it was intended to cover. The sale of a Housing Authority flat would amount to its conveyance. The grant of a tenancy or an exclusive licence in respect of such a flat would amount to parting with possession of the flat. The word ‘alienation’ must have been included for a reason, and it must therefore have been intended to cover something other than the sale of the flat or the grant of a tenancy or exclusive licence in respect of the flat. That ‘something’ must have related to the creation and grant of rights over the flat, which did not involve either its sale or the grant of a tenancy or exclusive licence in respect of it, but which impinged upon the most important features of ownership.”

28.Re a Solicitor was concerned with disciplinary proceedings against a solicitor in which it was necessary for the court to decide whether the creation of an unauthorized legal charge amounted to an alienation of the property within the meaning of section 17B.  However, Keith JA’s explanation is wide enough to cover the present situation, since it was the 1^st and 2^nd defendant’s participation in and the carrying out of the Arrangement which resulted in the “creation and grant of rights over the flat” in favour of the plaintiffs.

29.It is unfortunate that the matter had proceeded by means of preliminary issues.  The consequence is that we have to take the facts as pleaded in para. 5 of the Statement of Claim.  We have also to assume that in entering into the Arrangement, the members of the family had intended to enter into legal relations.  The issue is whether in the circumstances there has been an alienation by the 1^st and 2^nd defendants of any interest in the flat.  Mr Chow accepted that if the 1^st and 2^nd defendants had entered into a similar arrangement subsequent to the sale and purchase agreement or the assignment, for example, in return for payment of the purchase price or part of it they would hold all or part of the beneficial interest in the flat for the payer, such an arrangement would have amounted to an alienation within the meaning of section 17B.  Also, if the 1^st and 2^nd defendants had, after they had acquired the flat, agreed to charge it to their mother in return for a loan, that would be covered by the decision in Re a Solicitor and is void. 

30.Suppose, an applicant for a HOS flat, who, after learning that his application was successful, agrees to sell his “right” to a third party who would then make all necessary payments.  Could it be said that because by operation of law the applicant would hold the beneficial interest in the flat upon signing of the sale and purchase agreement upon trust for the third party, there was no alienation within the meaning of section 17B, because the successful applicant never had any beneficial interest to “alienate”?  Suppose an intended applicant agrees with another person that he would apply for a HOS flat which he would hold for the other person, and his application was successful, and the other person then makes all the payments.  Can it be said that there has been no alienation, purported alienation or agreement to alienate within the meaning of section 17B?  We think not.

31.Nor do we think the fact that the Arrangement was made amongst family members makes any difference.  It may be that, as Chu J had remarked, some families have to and do pool their resources.  If the arrangement was meant to be binding in honour only, we can see no difficulty.  There would have been no alienation. But if family members entered into a legally binding arrangement, they should not be treated differently from friends or strangers. 

32.Mr Chow submitted that it is not possible on the material before us to decide how much of the beneficial interest in the flat could be said to have been acquired by the Mother.  From the pleaded arrangement it seems clear that it was not the plaintiffs’ case that by contributing the entirety of the 10% deposit and the initial expenses, the Mother had acquired the entire beneficial interests in the flat.  Rather it was the plaintiffs’ case that the beneficial interest in the flat was acquired piecemeal, first 10% and such further percentage as represented by the initial expenses by the Mother and then subsequently by the 1^st and 2^nd plaintiffs, whenever they made a mortgage payment. 

33.On such basis, Mr Chow sought to rely on the tentative views expressed by Johnson Lam J in Chan Chui Mee v Mak Chi Choi [2009] 1 HKLRD 343 where he said at 356 in para. 40:

“… in a case where the initial common intention is to have the share distribution to be quantified later, the beneficial interest of A and B can be regarded as indeterminate and the increase and decrease in its size during the course of the dealings will not be treated as the disposition of any beneficial interest. In that sort of scenario, C cannot contend for any priority over B simply because the extent of B’s interest has increased over time.

41.   On the other hand, if it is a case of change of common intention which led to change in the share distribution, it must be regarded as a disposition of beneficial interest.  If C acquired an equitable interest prior to such disposition (and assuming his interest is equal to that of B in the eyes of equity), he would be able to claim priority over B’s increase in beneficial ownership.”

34.The context for the above statements was:

“Suppose the common intention at the beginning was that A and B will be beneficial owner in equal shares. In the course of dealings, that intention was changed to a distribution between A and B of 25:75. If the equitable interest of C cannot be fully satisfied by 25% of the property and if that equitable interest was acquired by C prior to the change in common intention, should C have priority over B? The answer to that question depends on the correct analysis on the effect of the change in common intention: whether it is a disposition of beneficial interest or it merely enlarges the extent of an indeterminate existing beneficial interest.”

35.With respect, the tentative views of Lam J have no bearing on the meaning to be attributed to alienation under section 17B.

36.Mr Chow also submitted that since alienation covered by section 17B is a crime under section 27A, the court should read the expression restrictively and be careful not to give a meaning to alienation which an ordinary person would not recognize.  With respect, we believe there is no danger of that with our approach.

Instrument of Fraud

37.Mr Chow submitted that if the Arrangement is held to be void, section 17B would be used as an instrument of fraud.

38.The principle that a statute which was designed to prevent fraud should not be allowed to be used as an instrument of fraud is normally stated and applied in the context of the statutory requirement of writing under sections 40 and 53 of the Law of Property Act 1925 (and the former Statute of Frauds), see Snell's Equity, 31^st Ed, paras. 15-09 and 20-14.

39.In the leading case of Rochefoucauld v Boustead [1897] 1 Ch 196, a property was purchased by the defendant which the court found to have been on the basis as trustee for the plaintiff.  The defendant resisted the plaintiff s claim on the ground of, inter alia, absence of writing.  This defence was rejected. Lindley LJ, giving the judgment of the Court of Appeal, stated at page 206 as follows:

“It is further established by a series of cases, the propriety of which cannot now be questioned, that the Statute of Frauds does not prevent the proof of a fraud; and that it is a fraud on the part of a person to whom land is conveyed as a trustee, and who knows it was so conveyed, to deny the trust and claim the land himself. Consequently, notwithstanding the statute, it is competent for a person claiming land conveyed to another to prove by parol evidence that it was so conveyed upon trust for the claimant, and that the grantee, knowing the facts, is denying the trust and relying upon the form of conveyance and the statute, in order to keep the land himself.”

40.In Bannister v Bannister [1948] 2 All ER 133 at 136, Scott LJ stated the principle more generally:

“It is, we think, clearly a mistake to suppose that the equitable principle on which a constructive trust is raised against a person who insists on the absolute character of a conveyance to himself for the purpose of defeating a beneficial interest, which, according to the true bargain, was to belong to another, is confined to cases in which the conveyance itself was fraudulently obtained. The fraud which brings the principle into play arises as soon as the absolute character of the conveyance is set up for the purpose of defeating the beneficial interest, and that is the fraud to cover which the Statute of Frauds or the corresponding provisions of the Law of Property Act, 1925, cannot be called in aid in cases in which no written evidence of the real bargain is available... We see no distinction in principle between a case in which property is conveyed to a purchaser on terms that the entire beneficial interest in some part of it is to be retained by the vendor (as in Booth v Turle (4)) and a case, like the present, in which property is conveyed to a purchaser on terms that a limited beneficial interest in some part of it is to be retained by the vendor.”

41.Mr Chow relied on the fact that the same principle has been applied to statutes which were not designed to prevent fraud such as section 34(4) of the Land Registration Act 1925 which would enable a transferee of the registered title to take free from any encumbrance which had not been registered.  In Lyus and Anor v. Prowsa Developments Ltd. [1982] 1 W.L.R. 1044 Dillon J said at page 1054:

“It seems to me that the fraud on the part of the defendants in the present case lies not just in relying on the legal rights conferred by an Act of Parliament, but in the first defendant reneging on a positive stipulation in favour of the plaintiffs in the bargain under which the first defendant acquired the land. That makes, as it seems to me, all the difference. It has long since been held, for instance in Rochefoucauld v. Boustead [1897] 1 Ch. 196, that the provisions of the Statute of Frauds 1677 (29 Car. 2 c. 3), now incorporated in certain sections of the Law of Property Act 1925, cannot be used as an instrument of fraud, and that it is fraud for a person to whom land is agreed to be conveyed as trustee for another to deny the trust and relying on the terms of the statute to claim the land for himself. Rochefoucauld v. Boustead was one of the authorities on which the judgment in Bannister v. Bannister [1948] 2 All E.R. 133 was founded.”

42.We do not believe this principle can have application here.  The objects/purposes of section 17B and the other legislation under consideration are very different.  The purpose of section 17B is not to prevent fraudulent claims to an interest in land.  The purpose of section 17B is to ensure that HOS flats should go to qualified persons in accordance with the HOS rules.  HOS flats are subsidized and they are not meant to be traded as if they were outside the HOS. The strong measures introduced by section 17B and section 27A to prevent unlawful alienation is to us, compelling reason to reject Mr Chow’s submission.

43.With respect, if the Arrangement amounted to an alienation, we find it difficult to see how the court could disapply section 17B.  Mr Chow did not contend that section 17B could be disapplied if we are concerned with an outright sale. Why is section 17B an engine of fraud, if one should be permitted to deny a secret trust, or a constructive trust, but not if it is an outright sale?  When the legislature has seen fit to render an alienation void, we do not believe the court can ignore it.  Mr Chow submitted that here the prohibition is not absolute, alienation could take place, e.g. with permission or after a certain time. That may be so, but it is sufficient for our propose that otherwise the prohibition is absolute.

44.For the above reasons, we would answer the issues as follows:

(1)      Yes;

(1A)   Yes;

(2A)   Yes;

(2B)   Yes.

45.It follows that we would allow the appeal with costs against the 2^nd plaintiff.  The costs are to be taxed in accordance with the Legal Aid Regulations.

Ms. Lisa Wong, SC instructed by Messrs Chong, So & Co. assigned by Director of Legal Aid for the 2^nd Defendant.

The 1^st and 3^rd plaintiffs, in person, absent.

The 2^nd plaintiff, in person, present.

Mr. Anderson Chow, SC as Amicus Curiae.

(I) Please refer to FAMV36/2011 for the relevant appeal(s) to the Court of Final Appeal. (II) Please refer to FACV11/2011 for the relevant appeal(s) to the Court of Final Appeal.