Author - Michael Lower
The inference of a trust when the family home is owned by a company controlled by a spouse In Prest v Petrodel Resources Ltd the UK Supreme Court established that English family law (specifically section 24 of the Matrimonial Causes Act) does not give the court any special power to pierce the corporate veil in the case of disputes concerning the family home owned by a company controlled by one of the spouses.
In an important passage of his judgment, however, Lord Sumption suggested that, 'in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company.' This beneficial interest would count among the spouse's assets when dealing with ancillary relief.
Other forms of equitable intervention There might be cases, though, where the courts do not feel able to infer the existence of a trust but where the spouse (or co-habitee) who owned and controlled the company has assured the other that they have or will have an interest in the family home.
On the face of it, the person giving the assurance has no legal or equitable interest in the property. It would seem to follow that there is no basis on which the recipient of the assurance can claim an interest in the family home.
How might equity intervene to protect the expectations of the recipient of the assurance in these circumstances? In 2008, in Luo Xing Juan v Hui Shui See, the Hong Kong Court of Final Appeal considered this question.
The facts in Luo Xing Juan v Hui Shui See
Luo Xing Juan ('L') and Hui Shui See ('H') co-habited in a property owned by Glory Rise Ltd ('Glory Rise'). Glory Rise had acquired the property as an investment. The company had two shareholders when incorporated but subsequently H became the sole shareholder and director.
H asked L to marry him and she agreed. H assured L that he would give her a 35% interest in the property when he was in a position to do so. In the meantime, he transferred a 35% shareholding in Glory Rise to L.
H died before he was in a position to give effect to his promise to make L a co-owner of the property. H's estate sought to revoke L's licence to occupy the property. L responded with claims to an interest in the property based on the common intention constructive trust and proprietary estoppel.
The corporate veil rules out the use of the common intention constructive trust and proprietary estoppel
L's claims failed because there was no reason to pierce the corporate veil: H had given an assurance about property owned not by him but by a third party, Glory Rise. Unlike Prest, it could not plausibly be suggested that the company held the property as trustee for H.
Promissory estoppel as the solution L successfully resisted the company's attempt to evict her by relying on promissory estoppel. H's assurance was re-interpreted so that it related to the exercise of his powers as controlling shareholder of Glory Rise.
In effect, H had assured L that he would not allow his powers as controlling shareholder to be used to evict her until she had received the 35% beneficial interest in the property that she had been promised.
The Court of Final Appeal ordered that Glory Rise should be wound up on the just and equitable ground. The property was to be sold and L was to vacate it once a buyer had been found. L would then receive 35% of the net sale proceeds.
This solution has the clear merit of both respecting the corporate veil and of giving practical (and just) effect to H's assurance and L's detrimental reliance on it.
Promissory estoppel: no proprietary effect
Ribeiro PJ, in the main judgment in Luo Xing Juan, emphasised that promissory estoppel was a mere equity; it was not proprietary. It conditioned H's exercise of the voting power connected with his controlling stake in Glory Rise and, indirectly, deferred Glory Rise's ability to evict L.
The blurring of the distinction between proprietary and promissory estoppel
It is not surprising that promissory estoppel should be invoked so as to defer a licensor's right to evict a licensee. Maharaj v Chand had already shown the way on this; promissory estoppel was used to prevent the man who was the legal owner of the family home from evicting his wife.
On the other hand, it is very noticeable that, in considering the relief to be granted, the Court of Final Appeal was guided by the classic English proprietary estoppel authorities (Crabb v Arun District Council; Pascoe v Turner; Gillett v Holt; Campbell v Griffin and Jennings v Rice). The Court of Final Appeal clearly intended that L's relief should be designed with the exercise of the proprietary estoppel remedial discretion in mind.
Promissory estoppel was used, in effect, to protect L's expectation of a 35% interest in Glory Rise's property. This is surprising because it seems to contradict the proposition in Coombe v Coombe that promissory estoppel cannot be used as a cause of action.
The interplay between promissory estoppel and winding up on the just and equitable ground
The order was that Glory Rise should be wound up on the just and equitable ground. The substratum of Glory Rise was as 'the intended vehicle for holding the Property as the matrimonial and family home of the deceased, Miss Luo and [Miss Luo's daughter]' (Ribeiro PJ at [74]). This substratum disappeared with H's death.
This prompts the reflection that where, like L, the plaintiff is a shareholder in the company then a winding up petition (or, perhaps, unfair prejudice proceedings) are an option. Further, they represent an option which is available independently of any estoppel claim.
Limited to cases where the recipient of the assurance is a shareholder?
The Luo Xing Juan promissory estoppel approach is available even in cases where the recipient of the assurance is not a shareholder in the company that holds the property. Thus, in Hong Kong Hua Qiao Co Ltd v Cham Ka Tai (later upheld by the Hong Kong Court of Appeal), the Luo Xing Juan approach was adopted in a case with similar facts.
L and C began to co-habit in a property owned by a company in which L was effectively the sole shareholder. Each was already married when the relationship began.
L assured C that she would be able to live in the property for the rest of her life. L and C co-habited for five years before L died intestate. His wife and son sought to evict C from the property.
C was not a shareholder in the company that owned the family home, although the assurance concerned both the family home and shares in the company that owned it. Winding up would have been of no use to the recipient in this case.
Deputy Judge Saunders, relying on Luo Xing Juan, decided that L's promises that C could live in the property for the rest of her life were 'enforceable by way of promissory estoppel' ([115]).
On relief, Deputy Judge Saunders, relying on Luo Xing Juan, said that C was entitled to an order transferring the legal title of the property to her ([118]). Again, this seems to have been a proprietary estoppel case in all but name.
Limited to family home cases? Luo Xing Juan and Hong Kong Hua Qiao each concerned the use of promissory estoppel to establish a claim to the family home.
In Hong Kong Hua Qiao, Deputy Judge Saunders drew attention to the fact that both cases involved couples living together as man and wife ([93]) without explaining the significance of this fact. In Chan Sung Lai v Chan Sung Lim Paul, Deputy Judge Saunders (at [128]) expressed his uncertainty as to whether the doctrine could apply as between father and son.
Clearly, the distinction drawn in Thorner v Major between this context and the commercial context is likely to be relevant if there is any dispute as to the meaning of any words or conduct said to constitute an assurance.
Luo Xing Juan and Hong Kong Hia Qiao, however, were not concerned with questions of interpretation. If context was relevant it was for some other reason.
Deputy Judge Saunders may have intended to indicate that this approach to promissory estoppel was more likely to be used in the family home or 'domestic' context.
It may be that the Luo Xing Juan promissory estoppel will turn out to be confined to cases with the very specific features of these cases; it may be limited to cases where a couple are living together as man and wife (whether or not they are married) in a property owned by a company controlled by one of them (who gives the relevant assurance).
Limited to company owned by a single shareholder?
In both Luo Xing Juan and Hong Kong Hia Qiao, the company that owned the family home was solely owned by the maker of the relevant assurance. In Luo Xing Juan, H bought out his sister's 20% minority stake around the same time as he transferred the 35% shareholding to L.
This raises the question as to whether the doctrine can only operate where the maker of the assurance is the sole shareholder. There are arguments in principle in favour of either possible answer to this question.
On the one hand, the relevant assurance is an assurance as to the exercise of voting control. There is no need for a shareholder to own all of the shares in a company to have the power to dictate the outcome of the board decision on any question.
On the other hand, if there are minority shareholders, other than the recipient of the assurance, then the effect of the use of the doctrine on their interests would need to be taken into consideration. They may view the property as an investment and in some market conditions might prefer the company to retain ownership.
This may seem a purely theoretical question but in Luo Xing Juan, H's sister retained a 20% stake in the company for a few months after the transfer of the 35% shareholding to L. Had H died during those few months then this question would have had practical importance.
Limited to cases where the recipient of the assurance is in occupation of the relevant property at the time of the proceedings?
In Luo Xing Juan and Hong Kong Hia Qiao, the company that owned the family home sought to evict the recipient of the assurance who was in occupation of the property. Promissory estoppel is invoked, in the first place, as a defence against this attempted eviction.
Is this an essential element of the Luo Xing Juan doctrine? The company's right to possession is not taken away but is conditioned by the estoppel. This accords with a traditional understanding of promissory estoppel and, as noted earlier, suggests a continuity with Maharaj v Chand.
Limiting the Luo Xing Juan approach to cases like this would be consistent with the idea, just discussed, that its use might be limited to family home cases.
A more general relaxation of the distinction between promissory and proprietary estoppel?
The approach in Luo Xing Juan challenges what had seemed to be a well-established distinction between proprietary and promissory estoppel in ways that I have indicated.
I have considered the possibility that the Luo Xing Juan approach is only intended to take effect in certain circumstances. I have considered what those circumstances might be.
It is possible, however, that the Court of Final Appeal intended to establish a more general proposition; it may be that the judgment intended to minimise or even abolish altogether the distinction between proprietary and promissory estoppel. This would explain why proprietary estoppel principles and authorities were applied so readily.
On the other hand, there is no express indication in any of the judgments to indicate that this was the intention; one would have expected that an intention to restructure the law in this way would be clearly flagged up and that some justification would be offered for it.
In paragraph [54] of his judgment, Ribeiro PJ raises the question of the relationship between promissory and proprietary estoppel;
'The doctrine of estoppel continues to represent a developing area of the law and aspects of the applicable principles are subject to debate. Thus, there is discussion as to the extent to which promissory estoppel and proprietary estoppel overlap, with a body of opinion inclining towards the view that there is no real difference between them. In the present context, proprietary estoppel is inapplicable because the deceased, not being the owner of the Property, was not in a position to confer on Miss Luo a proprietary interest in it. However, as Maharaj v Chand establishes, this does not prevent recourse to promissory estoppel. The doctrines therefore differ at least to that extent. However, it is at the same time clear that many of the constituent elements of the two forms of estoppel are shared and where that is so, authorities on proprietary estoppel provide guidance in cases involving promissory estoppel.'
This passage leaves the question in the balance: there is substantial overlap but some (unspecified) difference. There is no suggestion here of an intention to effect radical change in the law.
Conclusion When a limited company holds the title to the family home, assurances concerning ownership of the home given by a director or shareholder cannot directly limit the rights of the company nor give rise to a common intention constructive trust or proprietary estoppel claim.
Luo Xing Juan created the possibility that such an assurance could condition the exercise of that shareholder's voting rights so that they could not be exercised in a way that is inconsistent with the assurance that has been given. This limitation is presented as a form of promissory estoppel.
The Court of Final Appeal went further when it decided that the effect of the estoppel was, in effect, to require the company to make good on the assurance given by the controlling shareholder.
It is not clear whether this promissory estoppel has general application or applies only in limited circumstances. If the latter, the circumstances in which the estoppel applies are not clearly defined.