STANDARD CHARTERED BANK HONG KONG TRUSTEE LTD v. AU-YANG LAM LAI MING AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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RULING

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1. The point in question has been extensively argued but for the fact that it is of an interlocutory character and therefore it is desirable to dispose of it at once, I should like to have taken time to reduce my judgment into writing if only for my views to be more elegantly expressed.

2. Presently we are on question (c) as listed out at page 275 of the Bundle, which reads as follows:-

3. The question resolves into two limbs: first, as is contended by Mr Lewis on behalf of the 1st defendant, the Official Receiver, that there is no right to retain but the personal representative of the deceased must prove in bankruptcy and be treated in the same way as the other creditors; on behalf of the plaintiff, as supported indeed by quite a number of the defendants in these proceedings, secondly that the Administrator of the deceased has a right to retain. It is conceded that the right of retain is limited to an amount equivalent to the possible dividend expected to be declared in the bankrupt's estate. What follows from the second limb of these aspects as urged upon me by the various parties to these proceedings, is how the right to retain is to be exercised.

4. The right to retain has been described in Snell 28th Edn. at page 344 as follows:-

"It rests on the principle that the beneficiary must be regarded as having in his hands an asset of the estate for which he must account, and that he cannot claim any part of the asset without bringing into the estate the portion already in his hands."

5. That definition as to the right to retain does not seem to have drawn any criticism from any quarters represented in these proceedings. I should preface the law, as I see it, by stating clearly my view that it would appear that a prima facie case has been shown as against Sabrina for her alleged indebtedness to the estate of her deceased mother.

6. It is common ground that Sabrina is herself one of the beneficiaries, and the question is, and has throughout been, whether the Administrator has any right of retention and if so, how that right to retain ought to be permitted to be exercised.

7. In Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, being the 16th Edn. of Williams and the 4th Edn. of Mortimer on Probate, at page 593, we find a statement given thus:-

"The principle of Cherry v. Boultbee, has been stated as follows: 'Where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed to participate unless and until he has fulfilled his duty to contribute.'".

8. From there I turn to Snell's, 28th Edn. at page 245:-

"No release in bankruptcy

 

If a legatee becomes bankrupt after his right to the legacy has accrued, the executor may still retain a debt out of the legacy, unless he has proved for the debt in the legatee's bankruptcy; for the trustee in bankruptcy is in no better position than the bankrupt. But under the rule in Cherry v. Boultbee, where the legatee is already bankrupt at the date, of the testator's death, the executor may not retain his debt; he can only prove and receive a dividend on the debt pari passu with the other creditors, for at no time were there cross obligations to pay in full." (Emphasis added).

9. The passage thus, on the face of it, suggests that the executor of an estate of a testator, in which the legatee concerned became a bankrupt before the death of the testator, must prove and has no right to retain; he must prove and thereafter rank pari passu with the other creditors.

10. Williams, Mortimer and Sunnucks offers the same rationale, but in these terms:

"There is this important qualification to the rule, a qualification established in the actual case of Cherry v. Boultbee, that the right, whether it is described as retainer or set-off, does not arise unless there has been a period during which the legacy or fund was payable, by the person who was entitled to receive, and to the person who was liable to pay, the debt". (1)

11. Then Williams, Mortimer and Sunnucks provides us with this passage:-

"Thus, if the beneficiary is an undischarged bankrupt at the time of the death or when the legacy or fund becomes payable, and he owes the testator's estate or the trust fund at debt, the whole debt cannot be set off against the legacy or share in the fund. The reason is that the beneficiary can only claim his share as agent for his assignee in bankruptcy, whilst the latter is not liable to pay the whole debt."

12. Williams, Mortimer and Sunnucks seems to lend support to the proposition that although the whole of the debt cannot be retained, part of it may be.

13. But I will now go back to Williams, Mortimer and Sunnucks, page 594:-

"If the debt had been proved, however, the amount of the dividends payable on the debt could be set off against the claim of the assignee in bankruptcy." (Emphasis added).

14. Williams' Law relating to Wills, 6th Edn. Vol. 1 of The Law of Wills, at page 211, has this to say:-

"Where the legatee becomes bankrupt after the death of the testator, the trustee in bankruptcy is in no better position than that of the legatee. The executor can exercise the right, i.e. the right to retain in full, unless he has proved in bankruptcy. Where the legatee becomes bankrupt before the death of the testator, the right cannot be exercised except to the extent of dividends declared or ascertained before the legacy is payable, or, where a composition deed is executed in the lifetime of the testator, except for the amount of the composition in respect of the debt." (Emphasis added).

15. Therefore, it would seem that some of the passages that I have referred to do support the submission advanced on behalf of the 1st defendant by Mr Lewis, that the Administrator, the plaintiff in this case, cannot, but prove in bankruptcy and rank pari passu with the rest of the creditors, and that the plaintiff has no right to retain.

16. But it would appear from the last two passages that if the debt has been previously proved so as to make it possible for the amount of dividend payable in bankruptcy to be finalised and ascertained by the time the Administrator comes to claim his right to retain, such a right may be exercised. This interpretation of the passages that I have last read could well support the proposition that the Administrator, the plaintiff, has a right to retain without proving the debt in question in bankruptcy. But in any case, whether or not such a right to retain may be exercised with the Court's approval would depend on the circumstances in each particular case.

17. First of all, I should go to Cherry & Boultbee⁽²⁾. The case is concerned with a legatee having been declared bankrupt before the death of the testatrix in whose estate he was one of the beneficiaries. The Master of the Rolls, Lord Langdale, rejected the claim of the personal representatives to retain. Then at page 325 of the report, by way of obiter, he had this to say:-

"It does not appear that the debt has ever been proved, and at the hearing nothing was said as to the right of proof. Subject to anything which the parties may be inclined to address to me on that point, I think that the executors have a right to prove, and to deduct the dividends payable on the proof from the amount of the sum which they are liable to pay."

18. The learned Master of the Rolls invited argument on the point of law as to whether the executors had a right then to prove and thereafter to deduct. If the executors had a right to prove, obviously they must have a right to detain in order to exercise the ultimate right to deduct.

19. When the case came on to appeal, the Lord Chancellor referred to what was suggested by the Master of the Rolls in these terms:-

"The Master of the Rolls proposed to the executors to make provision for deducting the amount of such dividend from the amount of the legacy."⁽³⁾ (Emphasis added).

20. On the face of it, the observations, though obiter in both of the judgment of the learned Master of the Rolls and the Lord Chancellor, were made on the basis that the executors had a right to prove and to deduct. And as I have said, if executors have presently a right to prove and ultimately to deduct, that must imply that executors would have an instant right to detain. But these obiter observations do not go hand-on-glove with some of the passages in the standard textbooks and the others that I have made reference to.

21. In my view, one does not have to go very far for a practical solution, not perhaps the academic answer to the question posed for my consideration. The real answer lies in the judgment of the learned Vice-Chancellor Hall in Hodgson v. For⁽⁴⁾. The judgment is brief, and in deference to the observations and the comments made by the learned Vice-Chancellor, I think it would be best for me to have the whole Judgment cited in extenso.

"I consider that this case is governed by Cherry and Boultbee. As regards the retainer of anything in respect of the dividend under the bankruptcy, what appears from two reports of Cherry and Boultbee does not satisfy me that it would be proper for the court in every case of a bankrupt legatee, to direct, in making its order, that some sum should be deducted by the executors of the creditor on account of a dividend. It may well be that in Cherry and Boultbee, where the bankruptcy had occured a year and a quarter before the death of the testatrix, the creditors claiming the amount of the assets, the cost of the bankruptcy, and the amount of the dividend had been ascertained, so that the amount to be deducted or allowed could also be ascertained or was known. But in the absence of any such materials, I am not able to make any working order as to the deduction of any sum whatever in respect of a dividend upon this debt.

22. That is, I find, a wise and practical guideline to follow. In fact at the inception, I raised the same query with Miss Yuen on a common sense approach. Unless the amount of dividend has been or can readily be ascertained, there would be no practical solution in sight, if this court were to allow the administrator plaintiff to retain a likely percentage by way of dividend payable in bankruptcy. It is common ground that no dividend has yet been ascertained or declared in the instant case. Issues are involved and the parties cannot said to be wholly co-operative. Both the plaintiff and the 1st defendant, official administrator, have my utmost sympathy in the discharge of their respective functions and duties. Without the dividend in the bankruptcy of Sabrina duly ascertained, any permitted retention of what could possibly be the dividend to be declared in the bankruptcy of her estate would provide no sensible solution.

23. In the same direction, a case concerning winding-up, In re Peruvian Railway Construction Company Ltd.⁽⁵⁾, offers similar advice. The company in question was being would-up. In the winding-up, there were surplus assets distributable among his creditors, the fully paid shareholders of the company. The amount of dividend from a deceased bankrupt debtor's estate had been ascertained or was ascertainable without more ado. It was decided that the liquidator was not entitled to retain the testator's share in surplus assets against more than the proper dividend on the ascertained debt. Perhaps, in order to understand it more fully, I should refer to the headnote for the summarised facts.

"A company incorporated under the Company's Act and whose Articles of Association did not give it any lien on its fully-paid shares for the debt of the holder thereof went into voluntary winding-up in 1914. Fully-paid up shares in the company form part of the estate of A. who died in 1908 insolvent. A judgment for administration in an action by a creditor of the testator was made in 1908 and the Master by certificate found the company to be a creditor for $2,633, in which A. had become a debtor to, the company. In the winding-up there were surplus assets distributable among the fully-paid shareholders of the company. The liquidator conceded that there were no set-off within the, language of the status of set-off and that the case was not one of mutual dealings so as to raise any question of set-off under Section 38 of the Bankruptcy Act 1883. But he contented that the case was within the broad principle - enunicated in the Cherry and Boultbee (1839) 4 My. & Cr. 442 and given effect to in Re, Akerman [1891] 3 Ch. 212 and a series of subsequent cases that with a person entitled to participate in the fund was also bound to make a contribution in aid of that fund, he could not be allowed to participate unless and until he had fulfilled his duty to contribute and that the executors of A were bound to pay the liquidators the full amount of $2,633 as a term of receiving a share in the company's assets."

It was held affirming the decision of Sargant J. "that the liquidator was not entitled to retain the testator's share in surplus assets against more than the proper dividend on the ascertained debt". It can be seen that the right of retention was exercised in respect to dividend on the ascertained debt. There appeared to be no or little difficulty in the dividend percentage as the estate had been administered for five years.

24. I have held that there is prima facie evidence that Sabrina is a debtor to the estate of her deceased mother of which the plaintiff now serves as the administrator. Whether or not the submission of the Official Receiver, the 1st defendant, is sound in principle, in the circumstances of these proceedings with dividend not readily ascertainable in the bankrupt estate of Sabrina, the plaintiff as administrator of the estate of the deceased should not be permitted to exercise the right to retain, if any.

25. In my view, therefore, the question posed for my consideration in para.(c) at p. 275 of the Bundle ought to be answered in the negative, i.e. the administrator should not continue to withhold the 1st interim distribution from the Official Receiver as trustee in bankruptcy of Sabrina and the question is so answered.

26. The Official Receiver has informed the court that interest has accrued on the sum retained by the plaintiff in the purported exercise of his right to retain. In view of my decision on para. (c), it must follow that such accrued interest must also not continue to be withheld by the adminstrator/plaintiff and must likewise be paid over by the administrator/plaintiff to the Official Receiver, the 1st defendant.