Family home legally owned by company controlled by one of the spouses

November 18, 2018

Introduction

Section 6 of the Matrimonial Proceedings and Property Ordinance (‘MPPO’) empowers the court, in divorce proceedings, to require the transfer  of the property of one party (A) to the other (B). This order can only relate to property to which A ‘is entitled, either in possession or reversion’.

How does this operate with regard to property legally owned by a company controlled by A? Does section 6 empower the court to order the company to transfer the property to B? If so, on what basis?

This was the question considered by the UK Supreme Court in Prest v Petrodel Resources Ltd ([2013] UKSC 34).  It is of considerable practical importance to B, especially where much of A’s wealth is tied up in the company. It is true that the court could order A to transfer the shares in the company to B but, as Lord Sumption observed, ‘ this will not always be possible, particularly in cases like this one where the shareholder and the company are both resident abroad in places which may not give direct effect to the orders of the English court.’ ([40]).

Thus, the court has to confront the important legal question as to whether it is entitled to pierce the corporate veil and whether there is any special jurisdiction to pierce the corporate veil in matrimonial proceedings.

No special jurisdiction to pierce the corporate veil in matrimonial proceedings

The UK Supreme Court laid to rest the idea that England’s family law courts had any special power to pierce the corporate veil. The English equivalent to section 6 of the MPPO (which is in identical terms to the Hong Kong provision) was not open to this interpretation ([37] – [42] Lord Sumption).

If the courts have the power to order the transfer of the property to B it will either be because: (i) the company holds the property on trust for A so that the order can relate to A’s equitable interest; or (ii) the case is one where it is appropriate, applying general principles, to pierce the corporate veil.

Where the company is trustee for A

In Prest, there were several properties which A had either transferred to a company controlled by him for no consideration or where A had supplied the company with the funds to make the purchase and there was no evidence that this was by way of loan or in return for shares in the company. Thus, on general equitable principles, the company held the properties on trust for A. A could be, and was, ordered to exercise his control over the company to procure the transfer of the legal title to the properties to B.

In an important passage, Lord Sumption said:

‘Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership’ ([52] emphasis added).

Similarly, Lady Hale said that the power in section 6 MPPO  ‘is a very specific statutory power to order one spouse to transfer property to which he is legally entitled to the other spouse. The argument is that that is a power which can, because the husband owns and controls these companies, be exercised against the companies themselves. I find it difficult to understand how that can be done unless the company is a mere nominee holding the property on trust for the husband, as we have found to be the case with the properties in issue here. I would be surprised if that were not often the case ([93] emphasis added).

Piercing the corporate veil

The Supreme Court rejected the idea that the English equivalent of section 6 of the MPPO created a right to pierce the corporate veil. The court could only pierce the corporate veil if there were some general principle that allowed it to do so. Lord Sumption thought that such a principle did exist:

‘I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality ([35]).

This principle did not come into play here. There was nothing on the facts of Prest that allowed the court to invoke this principle.

Michael Lower

 

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Does the voice of the trustee in bankruptcy of one co-owner carry greater weight when considering an order for sale?

October 18, 2018

In Lo Yau Shing (a bankrupt) ([2018] HKCFI 1574) the court was asked by the trustee in bankruptcy of one co-owner of a flat to grant an order for sale. This was resisted by the other co-owner.

B (the bankrupt) and F (his father) were joint tenants of the flat in which F lived with his wife. B’s bankruptcy gave rise to a severance of the joint tenancy (Re Dennis). B’s trustee in bankruptcy applied for an order for sale under section 60 of the Bankruptcy Ordinance and section 6 of the Partition Ordinance.

In Wong Chun Kei v Poon Vai Ching it was held that the court should make an order for sale unless either: (a) the order would not be beneficial to all co-owners; or (b) the order would result in very great hardship to one co-owner. The burden of proof was on the owner resisting the sale. Hardship could be physical or practical. The voice of the trustee in bankruptcy did not carry greater weight than that of the other co-owner.

The court refused to grant the order for sale. F and his wife were both very elderly and in very poor health. If the order were made:

‘The choices faced by Lo Senior and his wife will be to rent a modest room as residence, move into a residential home for the elderly run by charities (if one can be found) or hope for a big rise in social welfare payouts from the Government, which is unlikely.’ ([93])

In these circumstances, it would be unjust to make an order for sale, balancing the interests of F against those of the creditors. Further, it would cause very great hardship to F and his wife.

If the test were whether the circumstances were exceptional (Re Bremner; Everitt v Budhram) the outcome would be the same.

Michael Lower

No presumption of advancement between siblings

September 16, 2018

In Lee Yee Yan Eva v Lee Tak Gate Richard ([2018] HKCFI 1137) a flat was bought in the joint names of a sister and brother (E and R). E provided the entire purchase price. R refused to comply with E’s request to transfer the legal title into her sole name.

Peter Ng J. saw this as a classic purchase price resulting trust. He referred to Lord Browne-Wilkinson’s statement of the law:

‘Under existing law a resulting trust arises in two sets of circumstances: (A) where A … pays (wholly or in part) for the purchase of property which is vested … in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the … property is held on trust for A (if he is the sole provider of the money) … It is important to stress that this is only a presumption, which presumption is easily rebutted either by the counter-presumption of advancement or by direct evidence of A’s intention to make an outright transfer.’ (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 708A-B).

It all depended on E’s subjective intention ([38]) and, as to this, the evidence supported E’s case; there was no suggestion that she intended R to be an equitable co-owner.

Peter Ng J. also pointed out that there was no authority for the idea of a presumption of advancement between siblings ([27]).

R was ordered to convey the property to E.

Michael Lower

 

Waiver, mandatory injunctions and building schemes

August 18, 2018

Introduction

A building scheme (such as the scheme embodied in a Deed of Mutual Covenant) creates a local law for the estate it governs. The scheme may require owners of property within the scheme to obtain the consent of a common landlord (in a scheme established for leasehold properties) or of some other body (such as a Management Committee) before making alterations or additions to the property. This arrangement envisages the formal submission of plans as the start of a process leading to consent or refusal to give consent. Carrying work out without the requisite consent is a breach of covenant and can lead to an action for a declaration, damages and the grant of an injunction.

What if an owner makes alterations to property without obtaining the formal consent required but either: (a) the person or body with the capacity to give the consent knew of the work and failed to object to it; or (b) the person or body with the capacity to give consent has repeatedly failed to enforce the restriction with regard to alterations made to other properties within the scheme? Would it be inequitable either to allow the enforcement of the covenant or, if it is enforceable, to grant an injunction requiring the property to be reinstated?

These questions were considered by the Privy Council in Singh v Rainbow Court Townhouses Ltd ([2018] UKPC 19), on appeal from the Court of Appeal of the Republic of Trinidad and Tobago.

 

Singh v Rainbow Court Townhouses Ltd

Mrs. Singh owned a house in the Rainbow Court estate. She held the property under a lease for 199 years. The lease contained a recital to the effect that all of the units in Rainbow Court would be sold under a building scheme under which the covenants would be mutually enforceable. Rainbow Court Townhouses Ltd (‘the company’) was a company formed for the purpose of managing the development.

The lease contained a tenant’s covenant not to make any alteration or addition to the property without the prior written approval of the landlord and of the company. Mrs. Singh carried out works at her house without either consent. The company sought mandatory injunctions requiring Mrs. Singh to remove the alterations she had made.

 

Acquiescence or waiver

Mrs. Singh argued that the landlord and the company had acquiesced in the breach of covenant since: (a) (through its officers and employees) it knew of the work that was to be carried out for several days before it began and had not objected; and (b) the owners of ten other properties within the building scheme had carried out unauthorised alterations to their properties and neither the landlord nor the company had done anything to enforce the covenant against them.

On waiver, Lord Carnwath (with whom the other members of the Privy Council agreed) approved this statement:

‘It is in all cases a question of degree. It is in many ways analogous to the doctrine of estoppel, and I think it is a fair test to treat it in that way and ask, “Have the plaintiffs by their acts and omissions represented to the defendant that the covenants are no longer enforceable and that he is therefore entitled to use his house as a guest house.’

(Chatsworth Estates Co v Fewell [1931] 1 CH 224 at 231 per Farwell J.)

Lord Carnwath commented:

‘The issue was not whether breaches had been overlooked in individual cases but whether these omissions could be said to amount in effect to a representation that the covenants were no longer enforceable.’ ([32]).

The informal exchanges with the company’s employees and officers were not a waiver:

‘The mere failure of two officers to make immediate objection in October 2014 when notified of works due to start within in about a week, without any detailed information of their nature cannot be interpreted as a representation of any kind on behalf of the company.’ ([33])

The courts below had, however, failed to adequately investigate the allegations that the landlord and the company had not objected when other owners within the scheme had carried out unauthorised alterations:

‘On the face of the pleadings there was an arguable case that these were no different in kind to works which had been accepted without objection on other properties. Whether or not this gave rise to a case of waiver in the sense defined by Farwell J, they were at least arguably relevant to the scope of any mandatory order. It is difficult to see how fairness … would be served by an order which required the Appellant to carry out such works without any investigation of their significance, or how they compared to works accepted without objection on other properties on the estate.’ ([35])

The appeal was allowed and the case was remitted to the High Court.

Michael Lower

 

 

No oral modification clauses: Rock Advertising v MWB Business Exchanges Ltd (Part 2)

July 14, 2018

In Rock Advertising Ltd v MWB Business Exchanges Ltd ([2018] UKSC 24) the UK Supreme Court had to consider the effectiveness of a No Oral Modification (‘NOM’) clause (see here for Part 1 of the blog post about this case setting out the facts and the decision). This post considers the underlying principles that the judgments had to confront.

The clause in question provided:

‘This Licence sets out all the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

The UK Supreme Court had to consider whether the parties were bound by an orally agreed modification of the licence agreement between them.

There were two aspects to this question: (1) was the clause binding according so that oral modifications were of no legal effect; and (2) if the clause did not preclude oral modifications, whether a subsequent oral agreement purporting to modify the original agreement indicated an intention to dispense with the NOM clause.

When parties who have accepted a NOM clause agree to an oral modification, they have expressed two conflicting intentions. Which is to prevail? If the courts give effect to a NOM clause are they respecting or denying freedom of contract?

The essential objection to the idea that the clause always precludes effective oral modifications is that this would contravene freedom of contract: ‘Those who make a contract may unmake it. The clause which forbids a change may be changed like any other (Beatty v Guggenheim Exploration Co (1919) 225 NY 380, 387 – 388, Cardozo J.).

Nevertheless, Lord Sumption (and the majority of the Supreme Court) thought that the NOM clause was effective and that the subsequent oral modification was of no effect: ‘Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows … The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.’ ([11])

Lord Sumption saw three good commercial justifications for NOM clauses:

  1. ‘it prevents attempts to undermine written agreements by informal means’;
  2. ‘it avoids disputes not just about whether a variation was intended but also about its exact terms’; and
  3. giving effect to NOM clauses: ‘makes it easier for corporations to police internal rules restricting the authority to agree [variations]’.

Lord Sumption thought that these justifications should carry weight since ‘the law of contract does not normally attempt obstruct the legitimate intentions of businessmen except for overriding reasons of public policy’ ([12]).

If the parties were to act on an oral variation in the belief that it was effective then estoppel might come into play but:

‘the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA’ ([2003] 2 AC 51′ ([16]).

Lord Briggs took a different line on the first of the two questions. He thought that it was conceptually impossible for the parties to impose a formalities requirement on themselves, ‘not to be free, by unanimous further agreement, to vary or abandon [the contract] by any method, whether writing, spoken words or conduct, permitted by the general law’ ([26]).

On the other hand, turning to the second question, Lord Briggs was of the view that ‘an agreed departure [from the NOM clause] will not lightly be inferred, where the parties merely conduct themselves in a non-compliant manner’ ([27]). So normally, as in the present case, the approach of the majority and that of Lord Briggs would lead to the same conclusion.

Where, however, there are circumstances, such as an urgent need to agree a variation without waiting for the production of a written variation, then Lord Briggs thought that an agreement to depart from the NOM clause might be inferred ([30]).

Michael Lower

 

 

‘No oral modification’ clauses: Rock Advertising v MWB Business Exchanges Ltd (Part 1)

June 15, 2018

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd ([2018] UKSC 24) the UK Supreme Court had to consider the effects of a ‘no oral modification’ (‘NOM’) clause in a contract. This blog post (part 1) sets out the facts and the essential features of the judgments. The next blog post (part 2) will set out the underlying issues identified in the judgments.

Facts

MWB Business Exchange Business Centres Ltd (‘MWB’) operated serviced offices in central London. It entered into a contractual licence with Rock Advertising Ltd (‘Rock’) containing the following NOM clause:

‘This licence sets out all the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

Rock fell into arrears with payment of the licence fee.

Rock’s sole director spoke to a credit controller at MWB to propose a revised schedule of payments. It was found at first instance that an oral agreement had been concluded to vary the licence in accordance with the revised schedule.

 

Issues and conclusion

The question was whether this oral agreement was effective. This raised two fundamental issues in the law of contract: (1) whether the oral agreement could be effective given the NOM clause; and (2) whether Rock could be said to have given consideration for the variation.

The UK Supreme Court found in favour of MWB since the oral agreement was rendered ineffective by the NOM clause. While there was unanimity as to this conclusion, Lord Briggs did not wholly agree with the reasoning of the majority (who agreed with Lord Sumption).

The Court declined to consider the consideration issue. Given the conclusion as to the effect of the NOM clause, any discussion of the question of consideration would have been obiter.

 

The NOM clause: the majority approach

Lord Sumption (and the majority) concluded that:

  1. NOM clauses are effective: ‘the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation’ ([10]);
  2. ”if the collateral agreement is capable of operating as an independent agreement, and is supported by its own consideration, then most standard forms of entire agreement clause will not prevent its enforcement’ ([14]);
  3. ‘But if the clause is relied upon as modifying what would otherwise be the effect of the agreement which contains it, the courts will apply it according to its terms and decline to give effect to the collateral agreement’ ([14]);
  4. Estoppel might come into play where the parties have acted on the oral variation ([16]).

Lord Sumption declined to deal with the question as to whether or not Rock had given consideration for the variation: ‘[t]he reality is that any decision on this point is likely to involve a re-examination of the decision in Foakes v Beer … if it is to be overruled or substantially modified, it should be before an enlarged panel of the court and in a case where the decision would be more than obiter dictum’ ([18]).

 

Lord Briggs’ analysis

Lord Briggs reached the same conclusions as the majority but for different reasons. Lord Briggs was ready to accept that a contract containing a NOM clause could be orally modified. It all depended on whether the necessary unanimous intention to agree an oral variation despite the NOM clause could be shown.

This intention would not be inferred from the fact that the parties had reached an oral agreement. This intention will not be lightly inferred where the oral agreement was made without express reference to the NOM clause ([27]).

It might be inferred where there was evidence of necessity, where it could be shown that there was some urgent reason for the parties to agree to an oral variation before the written record could be made and signed. The same facts would be equally likely to give rise to an estoppel ([30]).

Michael Lower

Receipt clauses and contractual estoppel

May 14, 2018

Introduction

In Asgain Co Ltd v Cheng Ka Yam ([2018] HKEC 889, CA) Asgain assigned land to CKM and CKY as tenants in common in equal shares. CKM was Asgain’s sole shareholder.

The consideration for the transfer was HK$1.5 million. The memorandum of agreement and the transfer each contained a clause acknowledging Asgain’s receipt of the purchase price.

In fact, however, no payment was made to Asgain at the time of the assignment. CKY subsequently made payments totalling HK$67,000 towards the purchase price.

CKY was later ordered to pay Asgain HK$683,000 (the outstanding balance of her share of the purchase price). She appealed arguing:

(i) that the receipt clauses gave rise to a contractual estoppel in favour of CKY; and

(ii) Asgain’s claim was defeated by section 18(1) of the Conveyancing and Property Ordinance.

 

Contractual estoppel

Lam V-P referred to the Court of Final Appeal decision in Ming Shiu Chung v Ming Shiu Sum ((2006) 9 HKCFAR 334), that of the Privy Council in Prime Sight Ltd v Lavarello ([2014] AC 436) and that in Grundt v Great Boulder Proprietary Gold Mines Ltd ((1937) 59 CLR 641).

Lam V-P also referred to this statement from the 4th edition of Spencer Bower, Estoppel by Representation:

‘an estoppel by convention need not involve any misleading of a representee by a representor, nor is it essential that the representee shall be shown to have believed in the assumed state of facts or law. The full facts may be known to both parties; but if, even knowing those facts to the full, they are shown to have assumed a different state of facts or law as between themselves for the purposes of a particular transaction, then a convention will be established. The claim of the party raising the estoppel is, not that he believed the assumed version of facts or law was true, but that he believed (and agreed) that it should be treated as true’ (at p.197).

Any estoppel was, however, extinguished ‘by a counter estoppel arising from the part payments by [CKY]’ (at [18]). These payments showed that her payment obligation had not been discharged by the receipt clauses. Reliance is not an element of this type of estoppel ([24]).

The contractual estoppel plea failed.

 

Section 18(1) of the Conveyancing and Property Ordinance

Section 18 reads:

‘A receipt for consideration in the body of an instrument shall be a sufficient discharge to the person paying the consideration and, in favour of any other person acting on the faith of the receipt, shall be sufficient evidence of payment.’

The effect of section 18(1) is that a receipt is conclusive at common law but in equity it only gives rise to a rebuttable presumption of payment. The vendor can sue, despite section 18, if there is evidence of non-payment.

Michael Lower

 

Does acceptance of an obligation to fence off access to an easement amount to abandonment>

April 21, 2018

In Annetts v Adeleye ([2018] EWCA Civ 555) the English Court of Appeal had to consider whether a dominant owner’s acceptance of an obligation to fence off access from the dominant tenement to the servient tenement amounted to the abandonment of a right of way.

The dominant tenement (‘the strip’) had formerly been part of a larger portion of land (‘Summerhill’) with the same right of way. The owner of Summerhill imposed the covenant on the sale of the strip to the owner of a neighbouring property.

The court also to consider whether the right of access from Summerhill over the strip to the servient tenement would revive if Summerhill and the strip were again to come into common ownership.

 

Abandonment of an easement

The relevant legal principles are to be found in Gale on Easements which was cited with approval in Dwyer v Westminster CC ([2014] 2 P & CR 7):

‘a. whether a person intends an abandonment is not a subjective question; it is always a question of fact to be ascertained from the surrounding circumstances whether the act amounts to an abandonment or was intended as such;

b. abandonment depends on the intention of the person alleged to be abandoning the right of way as perceived by the reasonable owner of the servient tenement; to establish abandonment of an easement the conduct of the dominant owner must have beensuch  as to make it clear that he had at the relevant time a firm intention that neither he nor any successor in title of his should thereafter make use of the easement;

c. abandonment is not to be lightly inferred; owners of property do not normally wish to divest themselves of it unless it is to their advantage to do so, notwithstanding that they may have no present use for it;

d. non-user is not by itself conclusive evidence that a private right is abandoned; the non-user must be considered with and may be explained by the surrounding circumstances.’ (Arden LJ at [8])

 

The fact that the owner of the dominant tenement had no need for the time being to use the right over the servient tenement would also suggest that the right of way had not been abandoned (Arden LJ at [9] citing Dyer).

The search is for the objective intention of the dominant owner as reasonably perceived by the servient owner (Arden LJ at [10]).

Given the principles mentioned above, the question is whether the hypothetical servient owner would have concluded that the right of way from the strip had been abandoned (Arden LJ at [37]). The issue has to be determined at the date of the transfer ([54]).

 
The hypothetical servient owner has some knowledge of the law; this person knows that covenants to erect a fence (being positive covenants) do not run with the land and would not bind a later owner of the strip ([48]).

 

Application to the covenant to fence off access to the servient tenement

Whether building a fence to block access to the right of way is an abandonment has to be considered on a case by case basis in the light of the above principles.

Abandonment ‘is not to be lightly inferred … Even a major obstruction does not necessarily result in abandonment of a right of way’ (Arden LJ at [49]).

It was relevant that the servient owner, who had the most to gain from an abandonment, was not a party to the covenant to build the fence (Arden LJ at [51]).

There was no abandonment.

 

If Summerhill and the strip came into common ownership would the right to cross the strip to get to the servient tenement revive?

It would (Arden LJ at [56]). The position is similar to that where the dominant and servient tenement come into common ownership (Arden LJ at [58]).

Michael Lower

 

 

Seminar: Promissory estoppel as a cause of action? Luo Xing Juan v Estate of Hui Shui See

March 2, 2018

The Faculty of Law at CUHK will host this seminar on 19th March:

20180319_Promissory Estoppel_Poster