The Clinical Legal Education (“CLE”) team is delighted to share a successful case of appeal involving the legal principles of common intention constructive trust and the right of redemption exercisable by a beneficial owner of a mortgaged property following the mortgagor’s bankruptcy.
Madam Chan’s case
In 2016, Madam Chan approached the CLE office to seek legal advice on her divorce. The only family asset was a property in the name of her husband (“the Property”). At that stage, Madam Chan was concerned about the claim of the trustees in bankruptcy against the Property because while her divorce was ongoing, her husband petitioned for self-bankruptcy and was declared bankrupt in June 2016.
The next significant event was that the Property’s mortgagee bank (“the Plaintiff”) in October 2016 commenced a mortgagee action against Madam Chan’s husband as he had defaulted in the payment of the mortgage. On the ground that she had interest in the Property under a common intention constructive trust, Madam Chan joined the proceedings as 2nd Defendant to resist the Plaintiff’s application. She acted in person but was assisted by the CLE office.
All along, Madam Chan had made clear to the Plaintiff that she was willing to redeem the outstanding mortgage. She asserted that she had the right to do so as she had beneficial interest in the Property under a common intention constructive trust. The Plaintiff, however, disputed that Madam Chan had such a right.
The Master’s decision
The Master hearing the case found in favour of the Plaintiff and ordered that vacant possession be delivered. Feeling aggrieved, Madam Chan appealed against the Master’s decision to a District Judge (“the District Judge”).
Dismissal of Madam Chan’s appeal by the District Judge
While the District Judge accepted that a mortgagor and any other person with an interest in the Property (including a beneficial owner under a common intention constructive trust) could exercise the right to redeem the Mortgage, she held that Madam Chan had failed to produce sufficient evidence to show that she had a beneficial interest in the Property because there was no evidence that she had made any financial contribution to the purchase of the Property.
Further, the District Judge held that even if Madam Chan had the right to redeem, such would make no difference at the end of the day because the Property would still be sold for, inter alia, the following reasons: (1) The Property was the only asset of Madam Chan’s husband, and the right of redemption was vested in his trustees upon his bankruptcy; (2) Even if Madam Chan had a right of redemption, such right of redemption would be jointly held with the Trustees, and the Trustees had indicated that they intended to apply to the court for a sale of the Property under the Partition Ordinance (Cap 352) to utilise the proceeds of sale to pay the creditors; and (3) Unless Madam Chan redeems the whole Property and pays off all the creditors of her husband, it was inevitable that the Property would be sold, as Madam Chan had failed to adduce evidence to show that she could pay off all the debts and redeem the Property, which had a market value of over HK$4,000,000, in one go.
Helping Madam Chan to obtain legal aid and seek leave to appeal to Court of Appeal
After the appeal against the Master’s decision was dismissed by the District Judge, Madam Chan sought leave to appeal to the Court of Appeal. Since the same District Judge refused to grant leave to appeal, Madam Chan had to seek leave from the Court of Appeal. In order to assist Madam Chan’s appeal and her application for legal aid, the CLE office liaised with Ms. Audrey Eu SC and Mr. Martin Ho of Counsel who gallantly agreed to provide a pro bono Joint Counsel Opinion on the merits of Madam Chan’s appeal. The Court of Appeal, which had the benefit of the Joint Counsel Opinion, granted leave to appeal, following which legal aid was promptly granted in favour of Madam Chan. She was represented by Mr. Martin Ho in the appeal, leading Mr. Adrian Kwan who provided his assistance on a pro bono basis, while Mr. Tommy Tam of Messrs Sit Fung Kwong & Shum was assigned as instructing solicitor.
The Court of Appeal’s ruling on common intention constructive trust
On the question of common intention constructive trust, the Court of Appeal held that direct financial contribution to the acquisition of the property was not the only relevant consideration, particularly in the domestic context. Having set out the well settled principles in Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1 and Mo Ying v Brillex Development Ltd  2 HKLRD 985, the Court of Appeal reiterated that when considering the question of the parties’ common intention, the court should adopt what has been described as a “holistic approach” having regard to the context and a proper consideration of whether such a trust exists which would require a careful, objective consideration of the whole course of conduct of the parties.
In the present case, the factors included the fact that over the marriage, Madam Chan had devoted her earnings to the family; the oral discussions between Madam Chan and her husband; and the fact that when the property was bought, Madam Chan had borrowed a loan from a brother-in-law, although it turned out that the loan was unnecessary and was returned. As such, the District Judge should not have summarily determined against Madam Chan on this issue but should have held that she had produced sufficient evidence for this issue to be determined in a full trial.
The Court of Appeal held that the District Judge erred in thinking that the Property must be sold in any event
In gist, the Court of Appeal held that a beneficial owner’s right of redemption is a right of his/her own and is neither a right transferred from the trustees in bankruptcy nor a right that requires the trustees’ consent. Further, the law is by no means clear that the trustees’ wish to sell the property would prevail over the right of such a co-owner. Lastly, nothing suggests that a beneficial owner has to pay off the whole indebtedness of the bankrupt before he/she can exercise the right of redemption.
Outcome of appeal
The Court of Appeal set aside the Orders of the Master and the District Judge, and ordered in terms of Madam Chan’s application to pay an amount of $1 million into court pending a full trial of the action. Costs of the appeal were awarded to Madam Chan.
The CLE team would like to thank Ms. Audrey Eu SC, Mr. Martin Ho, Mr. Adrian Kwan and Mr. Tommy Tam for their generous and professional assistance.
About Clinical Legal Education at HKU
The CLE Programme was launched in January 2010 as the first and only live-client clinical legal education programme in Hong Kong. We run a Free Legal Advice Scheme (“FLAS”) on HKU Campus under the Duty Lawyer Service, offering free preliminary legal advice to members of the public facing legal problems involving the laws of Hong Kong. Our CLE team also assists clients in their applications for legal aid for the purpose of pursuing their civil and criminal appeals and, in exceptional cases, assists in arranging pro bono legal representation.
As of April 2023, we have handled over 2,650 cases with over 950 students involved.
Despite the high operating costs of the CLE Programme, the Faculty is committed to providing quality experiential learning for its law students across all years, from gaining exposure through court attendance at civil and criminal appeal hearings to developing practical lawyering skills through interviewing real clients and conducting legal research under the supervision of CLE teachers and qualified lawyers.
Please visit our website (https://www.law.hku.hk/cle/) for more details on our efforts in serving the public and providing quality teaching for our students.