HR Holdings Ltd v Taka [2019] PGNC 245; N8004 (18 September 2019)

N8004

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

CIA No. 7 of 2019

BETWEEN:
H.R. HOLDINGS LIMITED
Appellant

AND:
DANNIE IKI TAKA
First Respondent

AND:
ALEX TONGAYU
As Former Registrar of Companies
Second Respondent

AND:
INVESTMENT PROMOTION
AUTHORITY
Third Respondent

Waigani: Thompson J

2019: 4^th & 18^th September

APPEAL - Appeal under S408 of Companies Act - unregistered transfer of land - whether land vested in Registrar under S373 of Act on company’s deregistration - breaches of statutory requirements by Registrar of Companies for transfer of land - whether procedural breaches sufficient to amount to fraud - fraud must be of registered proprietor or actual fraud.
Counsel:

Mr L. Yandaken, for Appellant
Mr K. Makeu, for the First Respondent

18^th September, 2019

1. THOMPSON J: BACKGROUND: The Appellant and its shareholder and director were shareholders in Olympic Stationery Ltd (“Olympic”), a company which was incorporated in 1972. Olympic became the registered proprietor of a property on State Lease Vol 82, Fol 50, Lot 1, S312 Gerehu (“the property”) in 1986, and held the Owners Copy of the State Lease.
2. On 6 August 1997 Olympic signed a contract of sale of the property to the Appellant, which was duly stamped in 1997.
3. In or about 2009, the Appellant underwent a corporate re-structure, involving the transfer of assets from what were said to be the subsidiary companies to the Appellant, and then winding up the subsidiary companies. A Transfer of the property from Olympic to the Appellant was signed on 3 June 2009, was duly stamped in 2009, was duly approved by the Minister on 27 October 2009, and was said to have been lodged with the Department of Lands for registration.
4. The Transfer did not become registered on the Title. The Owners Copy of Olympic’s State Lease was given to the Appellant, who continued to hold it, overlooking the fact that the Transfer had not been registered on it.
5. As Olympic had been wound down and ceased operations, it was removed from the Company Register on 13 May 2011.
6. Throughout this time, the Appellant proceeded on the basis that it was the registered proprietor of the property. The Appellant paid annual land rentals for the property, and the latest Lands Department receipt for the annual land rental for the property was issued to the Appellant in 2016.
   

Evidence

7. The Appellant said that in about August 2016, it advertised the property for sale for K300,000.00. The 1^st Respondent said that after contacting the Real Estate agent, and after confirming bank finance for K370,000.00 following an earlier attempt to buy another property, he was informed that Olympic had agreed to the sale. The Appellant’s former lawyer prepared a Contract of Sale and Transfer, which the 1^st Respondent said showed the vendor as Olympic, while the Appellant said that it showed the vendor as the Appellant. Neither party produced a copy of this contract, which was signed by the 1^st Respondent in or about August 2016.
8. It was at this time that the Appellant realized that the Transfer of title from Olympic to the Appellant had not been registered, Olympic was still shown as the registered proprietor, and Olympic had been removed from the Register, giving rise to a prima facie presumption that the property had vested in the Registrar of Companies (“ROC”).
9. The Appellant’s former lawyer prepared another contract of sale, showing the vendor as Olympic by its representative the ROC, which the 1^st Respondent signed.
10. The Appellant’s former lawyer contacted the ROC in or about 12 September 2016, provided him with the contract which had been signed by the 1^st Respondent, and requested the ROC to sign the contract and transfer on behalf of Olympic. There is no evidence of what information or other documentation was provided by the Appellant’s former lawyer to the ROC. In particular, there is no evidence that the ROC was told of the Appellant’s claim that the property had already been sold pursuant to the 1997 contract and 2009 Transfer, and that as the Transfer had not been registered, the property had been held by Olympic since 2009 on constructive trust for the Appellant.
11. On 20 September 2016, the 1^st Respondent’s lawyers wrote to the ROC, informing him that the 1^st Respondent had signed a contract with Olympic, had finance for K370,000.00, had found that the company was deregistered, and now wanted to purchase the property from the ROC. On 21 September 2016, the ROC acknowledged receipt and said that he would proceed by invoking his powers under the Act. The 1^st Respondent replied on the same day, in agreement. On 23 September 2016, the ROC wrote, making an offer to sell the property for K250,000.00, plus a sum of K120,000.00 to be paid separately. On 26 September 2016, the 1^st Respondent wrote, accepting the offer.
12. On 29 September 2016, the ROC signed a Memorandum of the Exercise of his Powers under S371-372 of Act to sell Olympic’s property to the 1^st Respondent. The ROC then prepared a contract of sale to the 1^st Respondent, which he signed on 29 September 2016 as Registrar on behalf of Olympic. The purchase price was K370,000.00, but there was a Special Condition that the property was only valued at K250,000.00, the purchaser had approved finance for K370,000.00, and the difference of K120,000.00 would be paid to the purchaser at settlement.
13. The 1^st Respondent also signed a Transfer on 30 September 2016. The Transfer did not specify the consideration, which is an offence under S42 of the Land Registration Act (“LRA”). The Transfer was stamped, but there was no evidence of Ministerial approval, and no evidence that it was lodged for registration with the Registrar of Titles (“ROT”).
14. By an email of 6 October 2016, the ROC informed the Appellant’s former lawyer that the contract signed by the 1^st Respondent with Olympic was not valid, that he had invoked his powers under S373 of the Act, and that the Appellant had “no jurisdiction” over the property.
15. By an email of 11 October 2019, the Appellant’s former lawyer informed the ROC that the Appellant was a former shareholder of Olympic, had an interest in Olympic, and was the beneficiary of the defunct company’s property. He said that on 10 October 2016 they had lodged an application to reinstate the company to the Register, and so no further action on the sale should be taken. It seems that the Appellant’s former lawyer was referring to action on the sale contract he had earlier sent to the ROC, and he may not have been aware that the ROC had already executed another contract of sale with the 1^st Respondent.
16. A Notice of Intention to Reinstate was duly lodged on 10 October 2016, a caveat was signed on 11 October 2016, and the lodgment fee was paid on 18 October 2016. The caveat was not entered on the title.
17. Although the ROC had signed the sale documents, he did not have the Certificate of Title. On 27 October 2016 he wrote to the ROT informing him that the Owners Copy of the Title was not available due to the company being defunct, and requested a replacement title be issued. On 30 November 2016 the ROT advertised his intention to issue a replacement Title for the property, in a newspaper. On 6 December 2016 the issue of the replacement title was notified in the Government Gazette. On 21 December 2016 the replacement title was registered on the Certificate of Title, and the transfer of the Title to the 1^st Respondent was registered on the same day. The Certificate of Title did not record that the title had been transmitted from Olympic to the ROC, prior to its transfer to the 1^st Respondent.
18. Settlement appears to have taken place on 22 December 2016, when various Bank Cheques were distributed. After various payments, the remaining balance of K201,406.80 was paid into the ROC’s Trust Account, pursuant to S373 (10) of the Companies Act (“the Act”).
19. There is no evidence of what happened between December 2016 and December 2018.
20. On 19 December 2018 the Appellant obtained leave of the court to proceed with an appeal under S408 of the Companies Act. On 15 January 2019 the Appellant issued these proceedings, appealing against the 2^nd Respondents decision of 29 September 2016 to sell the property to the 1^st Respondent.

Issues

21. The Grounds of the appeal are:
    • (a) Because Olympic had transferred the property to the Appellant two years prior to Olympic’s deregistration, it was not property which immediately before its deregistration was not distributed by the company, within the meaning of S373 of the Act.
      • (b) As the Transfer had been validly effected by a Contract of Sale and Transfer, the Appellant was entitled to have had the Transfer registered on the title in 2009, the Appellant had an unregistered interest, and until the Title was registered, Olympic held the property on constructive trust for the Appellant.

(c) As the property had been held on trust by Olympic since 2009, it did not vest in the ROC when Olympic was deregistered, and the ROC had no power under S373 to sell the property.
(d) Pursuant to S374, as the property was held in trust for the Appellant by Olympic at deregistration, then the ROC continued to hold the property on trust for the Appellant after deregistration.
(e) The ROC did not exercise his statutory powers in a bona fide manner, by excluding the Appellant from the sale process to the 1^st Respondent, by failing to act on the application for reinstatement of Olympic, by disregarding the Appellant’s claim to ownership, by “gifting” the property to the 1^st Respondent for no consideration, and by informing the Department of Lands that the Owners Copy of Title was not available, when he knew or ought to have known that the Owners Copy was with the Appellant, but he had not asked the Appellant to produce it, thereby causing the Registrar of Titles to wrongly issue a replacement Title.
(f) The ROC’s conduct was tantamount to fraud.

22. The Appellant seeks orders that the transfer of the property from the 2^nd Respondent to the 1^st Respondent be set aside, the 1^st Respondent’s copy of the title be delivered up to the Register of Titles for cancellation, and the Appellant’s title be registered.

The Law

23. Section 17 of the LRA provides that an instrument signed by a proprietor purporting to pass a registrable interest shall, until registered, be deemed to confer on the person intended to take under the instrument, a right to registration of the instrument.
24. Section 23 - 24 of the LRA provides that the Registrar of Titles shall register an instrument in registrable form, in the order in which they are produced to him.
25. Section 33 of the LRA provides that the registered proprietor holds the title indefeasibly, subject to the prescribed exceptions. Section 33 (1) (a) is an exception in the case of fraud, and Section 33 (1) (c) is an exception for the interest of a proprietor claiming the same land under a prior instrument of title.
26. Section 45 of the LRA provides that, notwithstanding any rule of law or equity to the contrary, a transferee of land is not affected by actual or constructive notice of a registrable claim other than those which have been notified or protected by entry in the Register, except in the case of fraud.
27. Under part V111 of the LRA, a person claiming an interest may lodge a caveat in the prescribed form, which comes into force when accepted by the Registrar, shown by making a note to that effect on the caveat. While a caveat remains in force, the Registrar of Titles shall not register another instrument.
28. Section 2 of the Frauds and Limitations Act says that, while an interest in land must be created in writing, and a declaration of trust respecting any land must be proved in writing, this does not affect the creation of a resulting, implied or constructive trust.
29. Section 373 of the Companies Act provides that property of a company which immediately before its removal from the Register had not been distributed, vests in the ROC with effect from the date of removal from the Register. If the vested property is not held in trust, the ROC may sell it by public tender or private contract, for such consideration and on such terms as he thinks proper.
30. The 1^st Respondent has been the registered proprietor of the property since 21 December 2016.
    

Application of the Law

31. Applying the law to the facts, in 2009 Olympic was the registered proprietor who executed a written contract and transfer of the property in registrable form to the Appellant, creating a registrable interest, which until registration, conferred on the Appellant a right to registration of the title, which was capable of protection by caveat. The Register of Titles was obliged to register the transfer when produced to him, and was obliged to accept the caveat in the prescribed form when lodged with him.
32. The ROT did not register the transfer of title in 2009, and did not accept the caveat in October 2016. However, there was no evidence that the 2009 transfer or the 2016 caveat and fee receipt had actually been lodged and received by the ROT, and so this could not amount to fraud.
33. In the absence of fraud, the 1^st Respondent was not affected by notice of the Appellant’s registrable claim, because the claim was not notified or protected by entry in the Register.
34. In the absence of fraud or a prior instrument of title, the 1^st Respondent’s title is indefeasible.
35. There is no pleading of fraud against the 1^st or 3^rd Respondents, or against the ROT, who was not a party.
36. The Appellant has alleged fraud against the 2^nd Respondent, and a prior instrument of title by way of a constructive trust over the property.
37. The Appellant has pleaded that the irregularities and breaches of statutory procedures by the 2^nd Respondent were so serious that they were tantamount to fraud. In support of this proposition, the Appellant has relied on the decision in Emas Estate Development Pty Ltd v John Mea (1993) PNGLR 215 and Steamships Trading Ltd v Garamut Enterprises Ltd (2002) N 1959, which said that procedural breaches and irregularities could be sufficiently serious to be tantamount to fraud within the meaning of S33 of the LRA.
38. This court is bound by the subsequent decisions of the Supreme Court in Koitachi Ltd v Walter Schnaubelt and ors (2007) SC870, Paga No. 36 Ltd v Joseph Ealeadona and ors (2018) SC 1671, and John Soto and ors v Our Real Estate Ltd (2018) SC170, which declined to follow the Emas line of authority.
39. These Supreme Court cases have held that an allegation of fraud must be pleaded with particularity, and then proven by evidence, with the standard of proof being higher than on the balance of probabilities, and increasing with the seriousness of the allegation. The fraud must be fraud by the registered proprietor or actual fraud, and not constructive fraud:

“Once the land is registered, the owner attains indefeasibility of title which cannot be invalidated by any unregistered interest, or mere irregularities ....” (see Koitachi, supra).

“Contrary to the Appellant’s contention, the fraud concerned must be actual fraud by the registered proprietor in procuring registration, not constructive fraud”. (see John Soto, supra),

40. In the Paga No. 36 Ltd and Koitachi cases (supra), the courts said that even if constructive fraud would suffice to constitute fraud within the meaning of S33 (1) (a) of the LRA, there was no evidence from which an inference of constructive fraud could be drawn. The evidence gave rise to a reasonable inference that the registered proprietor had taken advantage, but this was not actual fraud, and there was no evidence that he was complicit in any actual fraud.
41. In relation to the ROT, even if it had been pleaded, the evidence was insufficient to show fraud by the ROT, because there was no evidence that either the original Transfer in 2009 or the caveat in 2011 had actually been received by him. In relation to the replacement title, the Appellant gave no explanation for not responding to the ROT’s advertisement of intention to issue a replacement title. As no objections were received by the ROT, he correctly proceeded to issue a replacement title.
42. In relation to the ROC, there was evidence that the property was not “gifted” for no consideration, it was sold for K370,000.00, and the 1^st Respondent had paid that amount.
43. There was evidence of possible breaches and irregularities by the ROC in the process of failing to investigate the Appellant’s claim to ownership of the property, and in the process of selling the property to the 1^st Respondent. However, the evidence was not sufficient to satisfy the higher onus of proof required to establish fraud. This is primarily because there was no evidence that the ROC was aware of the Appellant’s claim that the property was held in trust. The only evidence was that the Appellant’s former lawyer had said that the Appellant’s claim was based on being a former shareholder. This was not sufficient under S373 (2) of the Act to show that the property had vested in Olympic prior to deregistration, and the ROC would not have been obliged to act on this claim.
44. There was evidence that the Notice of Intention to Reinstate was received by the ROC, after the Contract of Sale had been signed by the 1^st Respondent. The evidence was sufficient to raise an inference of lack of bona fides by the ROC, in failing to act at that time on the Appellant’s application for reinstatement. Section 378 (1) of the Act says that ROC shall, on the application of a prescribed person, restore a company that has been removed in the previous six years. The Appellant, as a shareholder and an aggrieved person, was a prescribed person, and the application was made within six years of the deregistration. The ROC breached his obligation under S378 (1) of the Act to assess the application to restore Olympic to the Register.
45. The evidence was also sufficient to raise an inference of lack of bona fides by the ROC in requesting the ROT to issue a replacement title on the untrue basis that the Owners Copy was unavailable.
46. However, there was no evidence that the 1^st Respondent was complicit in either of these matters. There was no evidence he even knew that the Appellant had made an application for Olympic’s reinstatement. There was no caveat on that title. There was no reason for him to doubt the correctness of the ROT’s advertisement for a replacement title. Accordingly, even if the evidence was sufficient to amount to fraud by the ROC, it was not sufficient to show fraud of the registered proprietor.
47. Even if it was accepted that procedural breaches and irregularities could be tantamount to fraud, the evidence was insufficient to show that these breaches and irregularities of the ROC were sufficiently serious so as to warrant setting aside the title under S33 of the LRA. They were also not breaches or irregularities by the 1^st Respondent.
48. Following the Supreme Court authorities referred to earlier, the Appellant has failed to establish, to the higher standard of proof required for fraud, that there was fraud by the registered proprietor or actual fraud.
49. The Appellant has alleged that the property was held by Olympic on constructive trust for the Appellant. The Supreme Court in PNG Institute of International Affairs Inc v Hightech Industries Ltd (2014) SC1577, said when referring to constructive trusts in relation to the same section of the Act:

“In equity, the expression is given wide or liberal meaning ...... The expression appearing in S373 (2) and (4) is used in a generic sense and intended to be read and understood in that way. .... A trust arises either under statute or are created ..... by implication of a court of equity where the title to property is in one person, and the equitable right to the beneficial enjoyment of the trust property is in another person, in which case it is called a constructive trust: Underhill’s Law of Trusts and Trustees (12^th Ed), 1970. ..... In our view, the expression is intended to be read broadly to permit all forms of trust, whether express or implied. A narrow or strict construction of the word “trust” which would only permit express trusts, is inconsistent with the intention of S373(2) and (4) and the principles of law and equity embedded in that statutory provision. We consider these definitions to be appropriate and applicable to the circumstances of Papua New Guinea.”

50. In Dumal Dibiaso Inc Land Group v Kola Kuma (2005) SC805, the Supreme Court said:

“A constructive trust is a trust raised by construction of law ........ Blacks Law Dictionary 6^th Ed. states “Where the circumstances of a transaction are such that the person who takes the legal estate in property cannot also enjoy the beneficial interest without necessarily violating some established principles of equity, the court will raise a constructive trust, and fasten it upon the conscience of the legal owner so as to convert him into a trustee for the parties who in equity are entitled to the beneficial enjoyment”.

51. The execution of a Contract of Sale and stamped Transfer was a clear expression of Olympic’s intention to transfer title to the Appellant. The failure to complete the transfer by registration meant that the title was in Olympic’s name, but the equitable right to the beneficial enjoyment of the property and the right to registration of title to the property, was in the Appellant. A constructive trust has therefore been raised and “fastened upon the conscience” of Olympic so as to convert Olympic into a trustee for the Appellant.
52. The evidence is sufficient to show that under S17 of the LRA, the Appellant was the beneficial owner and had a right to registration of the transfer of the property, which was therefore impressed with a constructive trust, so that the property was held by Olympic on trust for the Appellant immediately prior to deregistration.
53. The Appellant’s beneficial ownership of the property pursuant to the constructive trust, is not sufficient to amount to a “prior instrument of title” within the meaning of S33 (1) (c) of the LRA.
54. As the property was held by Olympic on trust for the Appellant immediately before Olympic’s removal from the Register it was not “property of a company” within the meaning of S373 of the Act, and so did not vest in the ROC on the deregistration.
55. Pursuant to S373 (3) of the Act, as the ROC did not apply to the court for the appointment of a new trustee, he continued to act as trustee of the property for the benefit of the Appellant. The ROC should not then have proceeded to sell or otherwise deal with the property, without the Appellant’s consent.
56. However, this was a matter between the Appellant and the 2^nd Respondent, there was no evidence of complicity with the 1^st Respondent, and it was not fraud by him.
57. The Appellant has established irregularities and breaches of the Companies Act and the Land Registration Act by the ROC, but those breaches do not amount to actual fraud, or fraud of the registered proprietor.
58. As the Appellant has not established either fraud of the registered proprietor or actual fraud, or an instrument under a prior instrument of title, and as the Appellant’s registrable interest was not notified or protected by entry in the Register, the 1^st Respondent’s interest as transferee is not affected, and the Appellant has not shown that it comes within any of the exceptions in S33 of the LRA.

Relief

59. Pursuant to S373 (8), a person who would have been entitled to receive the property if it had been in the hands of the company immediately before deregistration, may apply to the court within six years of the deregistration or such longer period as the Court may allow, for an order vesting the property in him. However, once the property has already been transferred to a third party and in the absence of fraud, it is no longer possible to make such an order.
60. The alternative under S373 (8) (b) and (9) is that the court may order payment by the ROC to the entitled person of an amount for that person’s interest in the property, not to include interest and damages and less the ROC’s commission and expenses.
61. The amount of the Appellant’s interest in the property is the purchase price of K370,000.00, less the Registrar’s commission of K25,000.00 and the expenses of K5962.30 and K130.90, making a balance of K338,906.80.

Findings

64. The property was held on constructive trust for the Appellant by Olympic since the contract of sale and subsequent transfer in 2009.
65. It therefore did not vest in the ROC/2^nd Respondent on deregistration of Olympic in 2011.
    66. The 2^nd Respondent continued to hold the property on constructive trust for the Appellant after deregistration of Olympic, and had no power to sell the property without the Appellant’s consent.
    67. The 2^nd Respondent breached provisions of the Companies Act and the Land Registration Act in the process of selling the property to the 1^st Respondent. These breaches may give rise to a cause of action by the Appellant against the 2^nd Respondent, but were not proven to be actual fraud.
68. There was no evidence of complicity by the 1^st Respondent in the breaches by the 2^nd Respondent. There were no irregularities or fraud pleaded or proven against the 1^st Respondent.
69. In the absence of fraud, this court is unable to set aside the 1^st Respondent’s indefeasible title under S33 of the Land Registration Act.
70. Pursuant to S373 (8) of the Companies Act, it would be in the interests of justice for this court to allow a longer period for the application for an order vesting the property in the Appellant, and to make an order for payment by the 2^nd Respondent to the Appellant of an amount for the Appellant’s interest in the property.
71. In relation to costs, there was evidence that on 25 June 2019 the current ROC proposed settlement by payment of the monies held in the ROC’s trust account, of K201,406.80. This was rejected by the Appellant on the basis that it maintained its claim to the title.
72. I therefore make the following orders:
    • (a) The Appellant’s application to set aside the 2^nd Respondent’s decision to transfer the property to the 1^st Respondent, is refused.
      
    • (b) The 2^nd Respondent is to pay the sum of K338,906.80 to the Appellant.
      
    • (c) The 2^nd Respondent is to pay the 1^st Respondent’s costs, to be agreed or taxed.
      
    • (d) The 2^nd Respondent is to pay two-thirds of the Appellant’s costs, to be agreed or taxed.
      

__________________________________________________________________
Yandeken Lawyers: Lawyers for the Appellant
Niuage Lawyers: Lawyers for the Respondent