Archive for the ‘Illegality’ Category

Illegal sale of ding rights: Tinsley v Milligan re-affirmed

March 9, 2016

In Kan Wai Chung v Hau Wan Fai ([2016] HKLRD 632, CFI) developers entered into cooperation agreements with the plaintiffs (villagers with ding rights). The developers transferred title to parcels of land in a village to the plaintiffs. The agreement provided that the villagers held the lots as nominees and on trust for the developers. The developers and villagers worked together to exploit the ding rights. It was accepted by all of the parties that this aspect of the agreement and the actions done in pursuance of it were illegal.The houses were built and the developers entered into sale contracts (‘the first contracts’) with third parties; the villagers were nominally the vendors in those agreements. The villagers then entered into their own contracts with another purchaser for the sale of the same lots (‘the second contracts’). The developers brought proceedings seeking an injunction to prevent the second contracts from being completed so as to interfere with performance of the first contracts. These proceedings were ultimately settled in such a way as to allow the developers to complete the first contracts and retain the proceeds of sale. The villagers now brought proceedings against the developers and the solicitors who had prepared the first contracts alleging that they amounted to an unlawful conspiracy. This had caused them loss in the form of their own legal costs in defending the injunction proceedings and the costs order made against them.

This was a trial of two preliminary issues. The first of these was whether the villagers had any equitable interest in the property. If they did not then they could not be said to have suffered any loss as a result of the outcome of the earlier proceedings ([33] per Anthony To J). The villagers had not given any consideration for the transfer of the land to them (though the  assignments to them stated otherwise). On the face of it, therefore, the developers could rely on the presumption of resulting trust. The villagers argued that the developers could not rely on the presumption because of the illegality of the agreement concerning the ding rights. This failed since the case fell squarely within the approach laid down by the House of Lords in Tinsley v Milligan ([39] to [48]). The developers could rely on the presumption to establish their proprietary interest and had no need to plead the illegality.

There was some discussion as to whether the High Court of Australia’s approach to illegality in Nelson v Nelson was to be preferred to Tinsley. Anthony To J. considered that he was bound by several Court of Appeal decisions to accept that Tinsley was the approach taken in Hong Kong. It would be for the Court of Final Appeal to reconsider this if asked to do so in some later proceedings ([45]).

Michael Lower

 

Presumption of advancement and participation in an unlawful scheme

April 22, 2015

In Yip Wai Hong v Yip Kai Tong ([2015] HKEC 501, CFI) a father transferred a village house to each of his two sons.  The consideration referred to in the assignments was never paid. The father now contended that the sons each held their village house on resulting trust for him. The sons sought to rely on the presumption of advancement and Deputy Judge Burrell decided that they were entitled to do so. It did not matter that the defence made no specific reference to the presumption. It was enough to show that there had been a transfer from father to son for the presumption to arise ([34] – [38]). The father also argued that the presumption is now a ‘weak  concept’. This was rejected: Tribe v Tribe from the UK and Calverly v Green from Australia show that the presumption is still alive and well ([41] – [42]).

The father could not rebut the presumption. One reason for this was that in order to do so he would need to rely on evidence of an illegal scheme. The houses were among several built on land owned by the plaintiff under a scheme which involved indigenous villagers selling their ‘Ting’ rights to allow the houses to be built under the Small House Policy. The father alleged that the sons, like the other villagers, had simply sold their ‘Ting’ rights. The overall scheme was undoubtedly unlawful. The sons had to make statutory declarations that they ‘had no intention at present to make any private arrangement for any rights under the Small House Policy to be sold to other individual / developer’ and that they were each the sole owner of the relevant house ([44]). These would be untrue if the sons were not the sole legal and beneficial owners. Although the father was not the maker of the false declarations, his knowledge  that the scheme was unlawful was enough to prevent him from relying on the scheme to rebut the presumption. Further, his actions in making the allegedly false declarations possible by transferring ownership to the sons would be illegal ([54]).

Michael Lower

Common intention constructive trusts where the agreement is formed for an unlawful purpose: does Tinsley v Milligan apply?

December 15, 2014

In O’Kelly v Davies ([2014] EWCA Civ. 1606, CA (Eng)) the parties cohabited for many years. Title to the first family home had been in joint names at first. Title was then transferred into O’s sole name. When they moved to a second home, title to this was also in O’s name. D alone made all the mortgage payments. This was done to allow O to make fraudulent claims to state benefits. There was no express agreement that D was to have an equitable interest but both the first instance judge and the English Court of Appeal found that an agreement was to be inferred from the whole course of conduct between the parties relating to the property ([29] per Pitchford LJ).

The question was whether public policy prevented D from enforcing his claim to an equitable interest given the unlawful agreement upon which his claim rested. Did Tinsley v Milligan apply to a common intention constructive trust case where there was no presumption of resulting trust to help D? The Court of Appeal held that Tinsley v Milligan was equally applicable in this context. Since D needed only to plead the facts that gave rise to the implied agreement, and had no need to plead the unlawful purpose, he was entitled to rely on the Tinsley v Milligan approach:

‘It was not necessary for the respondent to advance his unlawful agreement in order to make good his claim to a constructive trust. As in Tinsley v Milligan the merits as between the parties are all one way. The issue is whether public policy should intervene to prevent the respondent from enforcing his interest. The conduct identified by the judge was not the making of the unlawful agreement (which was about purpose and not about shared equitable interest) but the course of dealing between the parties relating to their financial contributions to the purchases. While it is no longer appropriate to think in terms of an evidential presumption as to intention, the very conduct that, formerly, would have created that presumption supported the inference drawn by the judge and, in my judgment, for that reason the intervention of public policy is avoided.’ ([32])

This case can be contrasted with Barrett v Barrett where there was a need to plead the unlawful purpose given the equally plausible explanations advanced as to the reasons for which the payments had been made ([33]).

Pitchford LJ’s judgment is also worth reading as an example of the approach taken to implying a common intention after Jones v Kernott.

Michael Lower

Tenancy void for illegality

May 31, 2013

In Li Wing-Sun v Wu Man ([1978] HKLR 575, CA) L was a licensee of the Government. The licence prohibited any ‘transfer’. In breach of the licence terms, L granted a lease to T. The question was whether the lease was valid (the proceedings were L’s claim for rent arrears and mesne profits). The Court of Appeal pointed out it had been admitted that there was a tenancy so, on the face of it, the decision could not rest on the contention that there was not.

At the time that the tenancy agreement was entered into, however, it was an offence to occupy Government land without a permit. The lease clearly envisaged that T would occupy the land (even though it had no permit) and so was illegal. The tenancy was void and L could not recover rent or mesne profits.

Michael Lower

Part performance: contract unregistered and in breach of New Grant

May 6, 2013

In Silver Hope Ltd v Chan Kwai Wah Alice ([2013] 1 HKLRD 823, CFI) W had entered into a contract to purchase the property in 1996. The contract amounted to a breach of the New Grant covenants concerning the property. W paid the entire purchase price and entered into possession. The contract was stamped but not registered. In 2012, P obtained a charging order in respect of the property and later an order for sale. W now sought to be joined as a defendant to the proceedings and to stay the execution of the order. To succeed, W needed to show that there was an arguable case that he had an equitable interest in the property. W was met by two arguments. First, that the contract was unlawful and so void (because it was formed in breach of covenant). Second, that the charging order (which had been duly registered) had priority over the unregistered contract.

W succeeded in being joined as a party. He was not relying on the contract but on the equity that arouse out of his having paid the entire purchase price and gone into possession (presumably this is on the basis of the doctrine of part performance). Hence, it could be argued that W would not need to plead the unlawful contract (see Tinsley v Milligan).

As for registration, after Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd, it is clear that the court can look at the substance of the competing interests (and then consider the impact of registration or a failure to register). This could be seen as a contest between two equitable interests (Hong Kong Civil Procedure 2012 50/9A/17). Thus, it is arguable that W’s equitable interest has priority over the charging order notwithstanding the failure to register it.

Tribe v Tribe: illegal purposes and rebutting the presumption of advancement

November 7, 2012

In Tribe v Tribe ([1996] Ch. 107, CA (Eng)) a father was worried that he would have to sell the shares in his business to meet the claims of creditors (landlords alleging substantial dilapidations for which the father would be liable as tenant). To put the shares out of their reach (and to give them the impression that he was less wealthy than he was in reality) he transferred his shares to his son on the understanding that they would be transferred back to him when the danger had passed. In fact, however, no creditor ever knew of the transfer so there had been no actual deception. The father was able to resolve the difficulties with the creditors. He then asked his son to transfer the shares back to him but the son refused. The father sought a declaration to the effect that he was entitled to the entire beneficial interest and succeeded. He was able to show that a resulting trust had arisen.

He had to rebut the presumption of advancement and, to do so, had to give evidence of the unlawful purpose (putting assets beyond the reach of creditors) that underlay the scheme. Normally, this would not be possible but there is an exception where the unlawful purpose has not been carried into effect (where no attempt has been made to deceive any actual creditor). The exception applies even though the reason for not carrying out the unlawful purpose is that the danger has passed. The policy underlying the exception is to encourage people to pull back from fraudulent schemes even though they have put the foundations in place. Once the unlawful purpose has been implemented (an attempt has been made to deceive a creditor) then it is too late to invoke the exception.

Millett L.J. pointed out that even where the presumption of advancement does not apply transferors should not be lulled into a false sense of security by Tinsley v Milligan. Where there is no presumption of advancement a presumption of resulting trust will arise:

‘But the transferee cannot be prevented from rebutting the presumption by leading evidence of the transferor’s subsequent conduct to show that it was inconsistent with any intention to retain a beneficial interest. Suppose, for example, that a man transfers property to his nephew in order to conceal it from his creditors, and suppose that he afterwards settles with his creditors on the footing that he has no interest in the property. Is it seriously suggested that he can recover the property? I think not. The transferor’s own conduct would be inconsistent with the retention of any beneficial interest in the property. I can see no reason why the nephew should not give evidence of the transferor’s dealings with his creditors to rebut the presumption of a resulting trust and show that a gift was intended. He would not be relying on any illegal arrangement but implicitly denying it. The transferor would have to give positive evidence of his intention to retain a beneficial interest and dishonestly conceal it from his creditors, evidence which he would not be allowed to give once the illegal purpose had been carried out.’ (129)

Tinsley v Milligan: resulting trusts arising out of unlawful schemes

November 6, 2012

In Tinsley v Milligan ([1994] 1 A.C. 340, HL) T and M carried on a joint business. A property was acquired with all of the funds needed for the down payment and mortgage instalments coming from the profits of the business. Title to the property went into T’s name alone to facilitate M’s purpose of making fraudulent social security claims. When T and M fell out, T sought an order for possession. M claimed a share under a resulting trust. The question was whether she could make this claim given the unlawful purpose that led to title being in T’s name.

The majority of the House of Lords (Lord Goff dissenting) held that she was entitled to claim an interest under a resulting trust since she did not need to plead her unlawful purpose. Lord Browne-Wilkinson said:

‘A party to an illegality can recover by virtue of a legal or equitable property interest if, but only if, he can establish his title without relying on his own illegality. In cases where the presumption of advancement applies, the plaintiff is faced with the presumption of gift and therefore cannot claim under a resulting trust unless and until he has rebutted that presumption of gift: for those purposes the plaintiff does have to rely on the underlying illegality and therefore fails.’ (at 375)

No equitable interest where the claimant would need to rely on an unlawful agreement

August 17, 2012

In Barrett v Barrett ([2008] EWHC 1061) T and J were brothers. T owned the freehold of a house. T was declared bankrupt. J acquired the house from the trustee in bankruptcy and some years later he sold it. T claimed that J held the title to the house in trust for him. He alleged that he and J had agreed that J would be the ‘paper’ owner, holding the property on trust for T who would meet all of the outgoings (which would be chanelled through J). The aim was to avoid T’s trustee in bankruptcy having any claim to T’s beneficial interest.

The judge thought that this could not be a resulting trust case since T had not directly contributed to the mortgage payments or purchase price. He paid J and J made the payments ([24]). There were alternative explanations for the payments made by J to T (J alleged that they were rent payments). So there was a need to show that the payments were referable to the unlawful agreement (unlawful because it was entered into to avoid s333(2) of the Insolvency Act 1986). The common intention constructive trust claim failed because of the unlawful purpose. The same problem would be fatal to claims based on the agreement to found a claim of an express trust, proprietary estoppel or a Pallant v Morgan equity.

As David Richards J. explained:

‘Without that [unlawful] purpose the agreement or arrangement has no rational explanation. Thomas needs to allege and prove it in order to establish the agreement, but in doing so he relies on his own illegal purpose and thereby renders his interest unenforceable.’ [25]

Nor was the unlawful purpose too remote from the creation of the alleged beneficial interest. The whole purpose of the alleged agreement was to deprive the trustee in bankruptcy of the opportunity to acquire T’s beneficial interest in the property.

Michael Lower

Resulting / constructive trust of Ting house

June 8, 2012

In Lau Kwai Kiu v Bian Xintian ([2012] 2 HKLRD 954) O applied for land by way of private treaty grant in Lok Lo Ha Village near Shatin under the Small House Policy. He was successful. He paid the premium and a grant of land in the village was made to him. At that time, the Lands Department did not require applicants to sign a declaration to the effect that they had not entered into an agreement to sell the land, hold the property on trust or sell it (the Department later did insist on such declarations).

O had agreed to sell the land to P before making the application. P had supplied the funds for the premium. Once the grant was made, she supplied the funds for the construction of the house and she and her family lived in it from the time of the issue of the certificate of compliance. O had written letters to P confirming that he would give the property to her and would transfer the title to her after five years. This would require a further application to the Government and payment of a premium to lift the restriction on alienation in the grant to O. This application was never made because P could not afford the additional premium. O died and the question of P’s interest in the land had to be decided.

O’s wife argued that P had no interest in the land and that any resulting or constructive trust there might have been was unenforceable on the grounds that the arrangement was illegal or contrary to public policy.

It was held that P had an interest under either a resulting and / or a common intention constructive trust because of the payments and the agreement set out in the letters (signed by the parties and, in the case of one letter, witnessed). There was no illegality on the facts of this case. Even if there were, P had no need to plead it since she could rely on the payments she had made to establish her beneficial interest; she did not need to rely on the letters at all (see Tinsley v Milligan). Nor was the arrangement contrary to public policy since there had been no false declaration. The express agreement envisaged that the necessary application to the Government would be made and the additional premium for the lifting of the restriction of alienation would be made.

The Court of Appeal held that the land was held on a resulting and / or a common intention constructive trust (but expressly subject to the Government’s rights).

Michael Lower

The meaning of ‘alienation’

November 30, 2011

(Overturned by the CFA). An agreement giving rise to a common intention constructive trust is an alienation (eg for the purposes of section 17B(1) of the Housing Ordinance) even if entered into before the relevant property had been acquired.

In Ling Wing Fai Billy v Ling Shui Fai ([2010] 6 HKC 434, CA) the defendants were a married couple. They agreed with the husband’s mother (and brother and sister-in-law) that if their application for a flat from the Hong Kong Housing Authority were successful then they would all contribute to the mortgage installments and the mother would provide the deposit. In return, the beneficial ownership of the flat would be shared between them. The principal question was whether this was an unlawful ‘alienation’ for the purposes of section 17B(1) of the Housing Ordinance.

It was argued that an alienation requires a positive act while the beneficial interests here arose by operation of law. This was rejected. The defendants had engaged in positive acts (the agreement itself, using the money received to make the relevant payments and allowing the other family members to live in the flat and make contributions as agreed). The fact that the interests had arisen by operation of law did not mean that they were not the result of these positive acts (para. 26). The Court of Appeal referred to the description of ‘alienation’ in Re A Solicitor ([2000] HKCU 1003, CA): an alienation was described as the creation and grant of rights over property impinging upon the most important features of ownership.

This was an alienation. It did not matter that the arrangement was entered into before the flat had been acquired (para. 30). The fact that the arrangement was one made between family members was irrelevant (para. 32).