Luo Xing Juan v Estate of Hui Shui See: common intention constructive trust and promissory estoppel

In Luo Xing Juan v Estate of Hui Shui See ((2009) 12 HKCFAR 1) Mr Hui had co-habited with Miss Luo. They lived in a property owned by Mr Hui’s company Glory Rise. Mr Luo proposed marriage to Miss Luo and was accepted. To give her financial security in anticipation of their marriage he transferred 35% of the shares in Glory Rise to her. He expressly assured her that she was to have a 35% interest in the property. Mr Hui died suddenly without making a will. His estate, as 65% owners of Glory Rise, sought to terminate Miss Luo’s licence to occupy the property.

The Court of Final Appeal rejected the possibility of a common intention constructive trust despite the findings of an agreement that Miss Luo was to have a 35% share in the property and of her detrimental reliance on that agreement. The corporate veil between Mr Hui and Glory Rise was the obstacle here:

‘There is certainly no reason – and none is alleged – to lift the corporate veil or for treating Glory Rise as anything other than a legal person distinct from its shareholders. The basic proposition that a shareholder has no legal or equitable interest in the company’s property (as opposed to a right to share in the profits of its business and to a distribution of any surplus on liquidation) therefore applies.’ (per Ribeiro PJ at para. 34)

The common intention constructive trust arises because of the impact of the agreement on the owner’s conscience but here the owner, Glory Rise, had given no assurance: A and B’s common intention cannot impose a constructive trust on the owner of the property C who is not party to and who does not unconscionably depart from the common intention (at para. 39 per Ribeiro PJ). The CFA preferred not to follow the English decision in Re Schupann ([1997] 1 BCLC 2556).

Ribeiro PJ went on, however, to consider the applicability of promissory estoppel. Proprietary estoppel was not available because Mr Hui was not the owner of the property (at para. 54).

Ribeiro PJ outlined the elements of promissory estoppel:

‘A promissory estoppel may be said to arise where (i) the parties are in a relationship involving enforceable or exercisable rights, duties or powers; (ii) one party (the promisor), by words or conduct, conveys or is reasonably understood to convey a clear and unequivocal promise or assurance to the other (the promisee) that the promisor will not enforce or exercise some of those rights, duties or powers; and (iii) the promisee reasonably relies upon that promise and is induced to alter his or her position on the faith of it, so that it would be inequitable or unconscionable for the promisor to act inconsistently with the promise.’ (at 55)

The CFA found that there was a clear and unequivocal promise given by Mr Hui that Miss Luo was to have a 35% equitable interest in the property. This time, the corporate veil was not an obstacle. Mr Hui had sufficient control over Glory Rise to ensure that it gave effect to his intentions (at para 63).

The central finding, then, is that:

‘[T]here was a clear and unequivocal promise made by the deceased to Miss Luo sufficient to found a promissory estoppel. The substance of the promise, expressed in terms which take into account the legal forms employed, was that the deceased would, as controlling shareholder of Glory Rise, secure for Miss Luo a 35% interest in the value of the Property if and when the same should be realised by the company and that, unless and until the Property was disposed of and her 35% entitlement duly provided for, Miss Luo would have the security of being allowed to occupy it as her home without interference by the company. Put negatively, the deceased was promising to forgo exercising his legal powers (as controlling shareholder of Glory Rise) to cause the Property to be disposed of without Miss Luo receiving a 35% share of the proceeds or to cause her to be evicted pending disposal.’ (at para 64)

Miss Luo had relied on the assurances and accordingly had an equitable claim (a personal or mere equity).  Ribeiro PJ noted that the court has a wide discretion as to the way in which the equity should be satisfied. The CFA ordered that Glory Rise should be wound up.The liquidator was to sell the property and then transfer 35% of the net proceeds of sale to Miss Luo. Miss Luo should be allowed to remain in occupation until the sale was complete (although the liquidator could require her to leave on reasonable notice to allow for a sale with vacant possession).

This is an extremely interesting judgment that respected the realities of the agreement between Mr Hui and Miss Luo. It shows a technical limitation on the applicability of the common intention constructive trust and proprietary estoppel where the promise is given by a controlling shareholder of the company which owns the property. The approach to the corporate veil is particularly interesting. The corporate veil is respected in the context of the  constructive trust / proprietary estoppel. There was no basis on which the corporate veil could be lifted; the property truly was owned by Glory Rise. On the other hand, in its consideration of the doctrine of promissory estoppel, the CFA took account of the fact that Mr Hui was in a position to give assurances as to how he would exercise his powers as controlling shareholder. It seems that, in effect, the doctrine of promissory estoppel has been used as the basis for Miss Luo to acquire an interest in land; this was achieved by construing Mr Hui’s promise as being a promise not to exercise his legal rights unless he had secured a proprietary interest for Miss Luo.

Michael Lower

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