Archive for the ‘good faith’ Category

Equity’s darling revisited

October 13, 2011

In Ng Luk  Mui v Shiu Tsun Wai Vincent ([2011] HKEC 1325, CA) a grandmother bought a flat as an investment. As she was in poor health and elderly, she assigned it to her grandson to hold on trust for her. He (in breach of trust) transferred it to his wife in return for the considerable amount of money that she had given him to cover his gambling debts (the wife wanted  to save the marriage). The wife did not know of the trust. She renovated the property and intended to let it to a tenant. When she brought a potential tenant to visit the property, she found the grandmother and mother living there and they refused to leave. The grandmother and mother sought a declaration that the assignment to the wife was in breach of trust and an order that the wife transfer the title into the names of the mother and grandmother. The wife argued that she was not subject to the plaintiffs’ rights under the trust as she was a bona fide purchaser for value without notice of the equitable interest. The Court of Appeal agreed with her. She was a purchaser (this is a term of art not limited to a sale and purchase). She had clearly given value; there was some question as to whether or not she had paid the full market value but this is not the correct test. She was in good faith; it is difficult to think of a situation in which someone with no notice of the trust can be in bad faith (though one can be in good faith even with notice of the trust).

Receivers are subject to equitable duties when exercising the power of sale

December 1, 2010

When a receiver exercises the power of sale he owes a duty to subsequent mortgagees to act in good faith and for the purpose of securing the mortgage debt. He does not owe a general duty of care in tort.

In Downsview Nominees Ltd v First City Corp. Ltd ([1993] 2 WLR 86, PC) a second debenture holder appointed a receiver. The holder of an earlier debenture (with priority over the second debenture) itself appointed a receiver and these replaced the receivers appointed by the second debenture holder. The receivers then continued to run the business in an attempt to trade out of the financial difficulties. They only succeeded in making things worse. The second debenture holder offered to pay off the prior debenture by making full repayment of the amount due but the first debenture holder unlawfully rejected the offer.

Lord Templeman explained that a receiver exercising a power of sale owes duties of good faith and to act for the purpose of obtaining the debt due to the mortgagor. These duties are owed to the mortgagor and to all subsequent encumbrancers in whose favour the mortgaged property has been charged (at 312). The receiver does not owe a general duty of care in negligence. (at 315).

In this case there was abundant evidence that the receiver had been motivated by an improper purpose. Further the second debenture holder had a right to take a transfer of the first debenture in return for paying the amount secured by it. The first debenture holder had no right to reject the offer. The second debenture holder was entitled to compensation for the loss arising from the breach of duty.

Good faith

October 2, 2010

The concept of ‘good faith’ is relevant to the law of priorities in two ways. First, an equitable interest in land can be defeated by a bona fide (good faith) purchaser for value of a legal estate without notice of the earlier equitable interest. Second, section 3(2) of the Land Registration Ordinance provides that a transaction that should have been registered but has not been is void as against ‘any subsequent bona fide purchaser or mortgagee for valuable consideration’.

What does good faith mean? How is it different (if at all) from the concept of notice? In Midland Bank Trust Co Ltd v Green (No 1) Lord Denning MR said in the Court of Appeal ([[1980] Ch 590) that bad faith is ‘any dishonest dealing done so as to deprive unwary innocents of their rightful dues.’ (at 625).

In the House of Lords ([1981] AC 513), Lord Wilberforce said:

‘I think it would generally be true to say that the words “in good faith” related to the existence of notice. Equity, in other words, required not only absence of notice but genuine and honest absence of notice. As the law developed this became crystallised in the doctrine of constructive notice”. (at 528)

Lord Wilberforce went on to say, however, that ‘good faith’ is not only concerned with the doctrine of notice:

‘Equity still retained its interest in and power over the purchaser’s conscience.’ (at 528)

Michael Lower