Registrability of agreement for the purchase of shares of a company whose only main asset is land
Hundred Gain International Holding Limited v Cheng Mei Holdings Limited ([2023] HKCFI 2705) concerned an agreement for the sale and purchase of the shares of Smart Edge Limited, a company whose main asset was a commercial building.
Hundred Gain International Holding Limited (‘Hundred Gain’), the purchaser, paid deposits under the agreement but was unable to complete the purchase. The vendors exercised their right to terminate the agreement. Smart Edge sold the building to a third party (Goldstone).
Hundred Gain registered the agreement to acquire the Smart Edge Shares and the proceedings to enforce it at the Land Registry. Were they registrable? Did the agreement and proceedings relate to the Smart Edge building (and not merely the Smart Edge shares).
When is an agreement registrable?
Section 2 of the Land Registration Ordinance provides for the registration of all ‘deeds, conveyances and other instruments in writing’ by which ‘any parcels of ground, tenements or premises in Hong Kong may be affected’ (emphasis added).
It is not enough for the agreement to be with a landowner; it must relate to land.
Lord Lane said in Anstalt Nybro v Hong Kong Resort Co Ltd that: ‘it is only where the agreement may create some interest legal or equitable in the parcel of ground that the instrument can be the subject of registration under the Ordinance.’
Registration warns potential buyers of claims against land and might make it unsellable. This makes it important that only agreements that truly relate to the land are registered. Otherwise, the system of registration would be open to abuse; it would allow land to be held hostage in non-land disputes.
Are agreements to buy shares registrable on the basis that the company’s only asset is land?
Was the agreement for the sale of the shares in Smart Edge Limited registrable?
The question is particularly important in Hong Kong with its long history of holding land through the medium of a limited company.
The obvious arguments for saying that the agreement was registrable were that the building was Smart Edge’s only asset and that any buyer of Smart Edge was, in effect, buying the building.
The fact remained, however, that the agreement was for the sale of shares in Smart Edge, not of the land owned by Smart Edge.
Hundred Gain pointed to clauses in the agreement in which the vendors promised that: the building would be delivered with vacant possession on completion; the title deeds would be delivered to Hundred Gain on completion; and that the risk of the building passed to Hundred Gain at the time of the agreement.
Surely these terms meant that the agreement affected land? Does not a promise to deliver vacant possession amount to an assignment?
The judge (Mr. Recorder Stewart Wong SC) disagreed with this proposition. Smart Edge (the owner of the building) was not a party to the agreement. How could the vendors of the shares in Smart Edge confer an interest in the building on Hundred Gain when they themselves had no proprietary interest?
Was the writ in the proceedings against Smart Edge registrable as a lis pendens?
Judgments that may affect land in Hong Kong are registrable under section 2 of the Land Registration Ordinance and section 14 of the Ordinance extends this to lites pendentes.
Section 1A defines a lis pendens as ‘any action or proceeding pending in a court or tribunal that relates to land or any interest in or charge on land’; it also covers bankruptcy petitions.
It is not enough that the defendant owns land, the action must ‘relate to’ land. If the litigation concerns a claim to an interest in land, then it clearly relates to land. So litigation to enforce a contract to sell land would be registrable.
The litigation might still be a lis pendens but the condition is that the thing that is required to be done, or the relief claimed in the action, ‘must be something which would otherwise bind or affect a subsequent purchaser or mortgagee, so that registration or otherwise may affect whether the latter takes free therefrom’ ([49]).
The attempt to enforce the agreement through litigation did not relate to land since the owner of the land was not a party to the agreement ([50] – [51]). Again, the proceedings concerned an agreement to purchase shares, not land ([62]).
Did Hundred Gain have a registrable purchaser’s lien?
Hundred Gain argued that having paid deposits under the share purchase agreement, it had a purchaser’s lien over Smart Edge’s property and that this lien was registrable.
It was accepted that the purchaser’s lien is a proprietary interest and that an action based on it is a lis pendens ([75]). There was, however, no purchaser’s lien over the land in this case ([84]). The deposits were paid under a contract for the purchase of shares not the land ([86]). Further, when deposits are forfeited in accordance with the terms of an agreement, equitable liens associated with them are extinguished ([89]).
Was Hundred Gain’s action to have Smart Edge’s sale of the property set aside as a transaction intended to defraud creditors a lis pendens?
Section 60 of the Conveyancing and Property Ordinance provides that dispositions of property made with intent to defraud creditors are voidable.
An action to destroy an interest in land (such as forfeiture proceedings) is a lis pendens (Selim Ltd v Bickenhall Engineering Ltd). Couldn’t it be said then that an action to have set aside Smart Edge’s sale of its property to a third party (Goldstone) was a lis pendens?
The court thought it could be. It did not matter that Hundred Gain would not get an interest in the land if the CPO s. 60 claim succeeded. It was enough that the title to land would be affected ([105]).
The problem in this case, however, was that the purchaser (Goldstone) was not a party to the proceedings. Its interest in the property would not, therefore, be affected by them ([106]). The CPO s. 60 claim was not a lis pendens ([108]).
Michael Lower