LAM KA WAI REBECCA AND ANOTHER v. LAM JENNY, THE ADMINISTRATOR OF THE ESTATE OF LAM KAM WAI AND OTHERS

HCMP 1014/2021

[2022] HKCFI 3653

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1014 OF 2021

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BETWEEN

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DECISION

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1.  This Originating Summons dated 20 July 2021 (as amended on 19 October 2021) (“AOS”) is for (a) the removal of the existing administrators of the Estate; and (b) the appointment of a professional administrator in substitution. At the conclusion of the hearing, this Decision was reserved which I now give.

The parties

2.  The plaintiffs are Lam Ka Wai Rebecca (“Rebecca”) and her brother Lam Kai Cheung (“Kenneth”) (collectively, “the Plaintiffs”), two of six children of the late Lam Kam Wai (“the Deceased”) and born by Madam Chan who died intestate on 19 May 2012.

3.  The remaining 4 children of the Deceased are the 1^st defendant Lam Jenny (“Jenny”) one of two administrators of the Deceased’s estate, the 3^rd defendant Lam Calina Ka Ling (“Calina”), the 4^th defendant Lam Ka Kei Annie (“Annie”) and the 5^th defendant Lam Philip Kai Tak (“Philip”) and born by Madam Cheung. The 3^rd, 4^th and 5^th defendants will hereafter be referred to collectively as “the 3 siblings” who, collectively with the 1^st defendant, will be referred to as “the Defendants”.

4.  The Deceased’s 6 children each have a 1/6 share in the residuary estate of the Deceased who died intestate on 8 September 2006, leaving an estate with an estimated value of $557 million[1]. While a large part of the estate has been distributed, the undistributed assets include two substantial assets (“the Subject Assets”).

5.  The 2^nd defendant Chiu Pak Ming Norman (“Norman”) is an independent solicitor and the other administrator. The Letters of Administration were issued on 18 November 2009.

6.  The Deceased and Madam Cheung divorced in 1993. But since 1988, the Deceased has lived with Madam Chan who gave birth to the Plaintiffs thereafter.

7.  It is common ground that Norman and Jenny should be removed as administrators and the only issue that remains unresolved is who should be appointed administrator in their place.

8.  It is the Plaintiffs’ case that the current administrators have failed to collect and distribute the Subject Assets. There are fundamental differences between the Plaintiffs and the Defendants. The Plaintiffs consider that the investigation into the Subject Assets requires forensic accounting and recovery by way of legal action which would warrant the appointment of a single professional administrator.

9.  They have proposed 3 potential candidates, namely: (i) Cosimo Borrelli of Kroll; (ii) alternatively, Derek Lai and Guy Norman of Deloitte Touche Tohmatsu (“Deloitte”); and in the alternative, Mat Ng of Grant Thornton.

10.  Jenny’s position has been evolving: having initially stated that it is unnecessary to have an investigator, she now recognises a conflict of interest, and is willing to step down in favour of Annie as sole administrator.

11.  As matters now stand, Jenny no longer opposes a professional administrator to be nominated if the Plaintiffs were to bear the costs involved. The 3 siblings adopt the same position.

12.  The parties have agreed on the following list of issues:

1. Given the common ground that [Jenny and Norman] shall be removed as administrators of the estate, who shall be appointed as the new administrator(s) of the estate?

1.1. Whether there are circumstances justifying the appointment of independent professionals as administrators?

1.2. Whether there should be one independent professional or two independent professionals (one to be appointed by [Rebecca and Kenneth], whilst the other one to be appointed by [Jenny, Calina, Annie and Philip]?

1.3. Which independent professional(s) should be appointed?

2. What ancillary directions (if any) for the administration of the estate should be given, including whether the orders in paragraphs 3 to 5 of the [AOS] should be granted?

3. What should be the proper costs order?

13.  The key issue in the present case is whether there are reasonable grounds for investigation in relation to the Subject Assets.

Legal principles

14.  The court’s powers in relation to the removal and substitution of administrators stem from sections 33 (3) and 36 of the Probate and Administration Ordinance, Cap 10 (“PAO”). It is the welfare of the beneficiaries that is the overriding consideration when deciding whether the discretion should be exercised: see Re Estate of Chan Chuk Kan [2021] HKCFI 3649 at §26.

15.  As to the appointment of independent professionals as administrators, in general:

(a) they are appointed where there may be serious disputes or animosity among the competing groups of beneficiaries: Re Estate of Chen Pang Ping Eugene [2016] 2 HKLRD 813 at §38;

(b) in deciding whether or not to appoint independent professionals, the court does not delve into disputed facts: see Re Estate of Ho Hung Sun Stanley [2022] 4 HKC 321 at §32;

(c) the court must be satisfied that there are reasonable grounds for investigation: see Re Estate of Madam Chan Lam Yat Wah [2020] HKCFI 388 at §§106-107; and

(d) even where there are different beneficiaries, normally only one professional administrator would be appointed because the appointment of an independent professional would of itself address the need for each to have their representation: see Re Estate of Ho Hung Sun Stanley [2022] 4 HKC 321 at §39.

16.  It is relevant to note that when one of the big four audit firms is engaged to act as the administrator, their common practice is to put forward two persons who will act as joint administrators who will be considered as one professional administrator.

The Subject Assets

17.  At the date of his death, the Deceased was the majority shareholder of Golden Time Enterprises Ltd (“GTE”) and Rainbow Rich Industrial Limited (“Rainbow Rich”). The shareholdings are of substantial value.

(I) The GTE Sum

18.  GTE’s shares were held as to 89.9% by the Deceased, 10% by Jenny, 0.05% by Madam Chan and 0.05% by Madam To Chung Lee (an employee of GTE’s subsidiary in the Mainland (“GTC”)).

19.  After the Deceased’s death, and since 2007, its directors were Jenny, Madam Chan (replaced by Annie after Madam Chan’s death in 2012) and Madam To. It is the Plaintiffs’ understanding that it is now managed by Jenny.

20.  In January 2021, the Plaintiffs received the 1^st account of the Estate (the 2018 Estate Account dated 23 December 2020) (“2018 Estate Account”). Item VII shows GTE’s indebtedness to the Deceased as an “[a]mount due to an ex-director” in round terms of $5.2 million and as a “[s]hareholders’ loan” of $188.5 million, totalling approximately $193.7 million (“the GTE Sum”).

21.  When the administrators’ solicitors made an enquiry, Jenny initially agreed[2] that the GTE Sum was owed to the Deceased. A week later, in response to an inquiry from the Plaintiffs’ representative, Jenny suggested that the bulk of the GTE Sum was from Madam To, Madam Chan and herself. An unverified breakdown covering the period from 7 December 2006 to 19 August 2009 (“the Loan Schedule”) said to have been prepared by GTE’s auditors was attached showing Madam To as the most significant contributor.

22.  The Plaintiffs have difficulty in accepting this explanation since Madam To was only an employee of GTE’s subsidiary in China and held no more than 0.05% of GTE’s shares. Moreover, she has never made a claim to the GTE Sum.

23.  In view of those reservations, as appears from her affirmation dated 23 May 2022 (“Jenny I”), Jenny’s current position (supported and endorsed by Annie) is that the GTE Sum should be divided into 2 parts: (a) GTE Sum Part 1 comprising loans made by the Deceased for the acquisition of the GTE flat and GTE duplex; and (b) GTE Sum Part 2 comprising largely circular round-robin funds from GTC to GTE for investing in GTC’s factory in the Mainland.

24.  GTE Sum Part 2 is said to be US$23.5 million equivalent to $183.3 million. Subtracting that amount from the $193.7 million (being the sum total of 2 loans mentioned in §20 above, the GTE Sum Part 1 has a value of approximately $10.4 million.

25.  The GTE flat was sold for $19.5 million in June 2017. Instead of applying the net proceeds to discharge GTE Sum Part 1 which Jenny considered “circular”, “artificial”, “cumbersome” and “unnecessary”, her proposal was to directly distribute the sale proceeds to the beneficiaries and for that purpose a discussion was held to consider, inter alia, Norman’s advice[3] which was to the contrary.

26.  Although Jenny claims that all the beneficiaries agreed with her proposal the Plaintiffs deny giving their consent. The sale proceeds have not been distributed as the consent requested by Jenny’s former solicitors on 24 September 2020 to the Plaintiffs’ solicitors was not forthcoming.

27.  As regards GTE Sum Part 2 ($183.3 million), it is common ground that (i) GTC entered into investment agreements on 14 December 2004 and 18 August 2005 with Nanjing Chemistry Industrial Park Limited (“the Nanjing Company”) with GTC agreeing to invest US$299.8 million under each agreement in an industrial land development project in Jiangsu; and (ii) between 27 June 2005 and the 21 August 2009, GTE remitted a total of approximately US$23.5 million (HK$183.3 million) to GTC for discharging GTC’s contractual obligations under the investment agreements.

28.  It is the source of the GTE Sum Part 2 (i.e. the $183.3 million) that is controversial.

29.  In her email of 21 January 2021, Jenny provided the Loan Schedule to the Plaintiffs. It was said to have been prepared by the auditor recording loans made by Madam To, Jenny and Madam Chan to GTE[4]. After Rebecca made known her reservations (see §22 above), Jenny appeared to change her stance by saying that they were fake records produced for accounting purposes only.

30.  Jenny’s current contention is that GTE Sum Part 2 was not paid by the Deceased at all: it was made up of 2 parts, namely, (i) a sum of US$640,000 (equivalent to HK$4,992,000) that came from Rainbow Rich; and (ii) the balance of US$22,860,000 (equivalent to HK $178,308,000) that came from GTC. Her explanation[5] is that as the Deceased was a substantial shareholder of both GTE and Rainbow Rich,

“the book keeper of GTE, without understanding the concept of corporate personality, just treated these 2 sums (like other sums investment in the name of GTE into GTE China) as ‘loans from shareholders’ for accounting purposes”

31.  Jenny further explained that a foreigner or foreign corporation making an investment in China is required to have his investment verified through the process of verification of investment involving proof of remittances from outside China to the Chinese company. She then gave a description of the common practice amongst foreign investors between the 1980s and 2010s of using underground Chinese currency exchange agencies which practice has since 2018 been outlawed in China.

32.  Mr Danny Tang, counsel for the Plaintiffs, submitted the explanation given is not credible given that the 2018 Estate Account records an “amount due to an ex-director” of approximately $5.2 million, and a “shareholders’ loan” in the amount of approximately $188.5 million, totalling $193.7 million. They reflect the amount of $5.2 million owed to an ex-director and a shareholders’ loan of $188.5 million under non-current liabilities recorded in the audited accounts of GTE from 2006 to 2019. The notes to the 2018 Estate Account record the relevant “director” and “shareholder” to be the Deceased “unless … evidence in the contrary” was produced.

33.  Mr KM Chong, counsel for D1, sought to demonstrate the source of the $183.3 million[6]. The Court was referred to the schedule of assets of the Deceased’s estate filed for the grant which is said to show that at the date of his death his cash assets had a value of $15.29 million but his total cash liability was $19.8 million resulting in a deficit of $4.5 million.

34.  Although all his bank accounts would have been frozen from the date of his death, between 7 December 2006 and 19 August 2009, money was continuously being remitted into China. Jenny’s explanation is that Madam To, Madam Chan and herself caused $152.8 million as shown in the Loan Schedule to be transferred to GTE, entered into its books and then remitted to China. All that took place prior to 18 November 2009, the date of the grant.

35.  Mr KM Chong submitted that the Plaintiffs’ case justifying an investigation is that the $152 million came from the Deceased’s money but that is shown to be an impossibility for the reasons set out in the preceding paragraph. Hence there is nothing to be investigated. He further submitted that documents showing all the remittances from GTE to GTC on those dates have been exhibited.

36.  At the hearing, Jenny and Annie relied on a table[7] which was unverified, without supporting documentation and explanation of its source. Then, at the end of the hearing, Mr KM Chong requested that Jenny be allowed to submit a table (“Summary Table”) merely summarising the fund flow from GTE to GTC as shown in the internal accounting documents of GTE.

37.  A table entitled “Remittance records between GTE and GTC” was lodged on 23 November 2022. Despite assurances at the time the request for lodging this document was made that it would only summarise in tabular form the documents exhibited in the hearing bundles to show the fund flow from GTE to GTC, that was not case.

38.  The 4^th column of the Summary Table bears the heading “Amount Paid by GTC to GTE (equivalent in HKD)” suggesting that it is a summary of the fund flow from GTC to GTE. Plainly, that exceeds the avowed purpose of the Summary Table and, as will become apparent, squarely contradicts the concession made in Court during the hearing. It is conduct that merits disapproval.

39.  The round robin fund arrangement on which the Defendants rely involves transfers by GTC to GTE through underground currency exchange agencies, after which GTE would remit the received amounts back to GTC. In response to the court’s inquiry, Mr A Chong, counsel for 3 siblings, conceded that there is no documentation showing remittances from China to Hong Kong. In other words, one leg of the round robin arrangement is without documentary support. Mr KM Chong did not demur.

40.  If, as is the Defendants’ case that underground currency exchange agencies were used, it does not mean that no documentary evidence would exist. Mr Tang submitted that there should at least be 3 sets of documentary proof: (i) the receipt from the underground bank agent; (ii) the payment record showing that GTC paid the PRC receiving agent; and (iii) documents showing payment has been made by the Hong Kong paying agent to GTE. The documents within (ii) and (iii) above are company documents and there is no reason for those documents not to be produced even if those within (i) being the Deceased’s documents may have been destroyed.

41.  Mr Tang further submitted that the assertion that the statement that there is no documentation showing remittances from GTC to GTE is ambiguous: it could mean they exist but have not been produced or they do not exist at all. In either case, the matter should be investigated.

42.  Further, the Defendants’ explanations cannot explain why the $183.3 million is shown as a “shareholder’s loan” in the audited accounts. If the money had come from GTE, it should be booked as an amount due to a related company rather than as a shareholder’s loan.

43.  Nor has Jenny given any explanation for the earlier conflicting explanations despite the fact that it is her evidence that the round robin arrangement was a fact known to Madam Chan, Madam To and herself.

44.  As regards the balance of US$640,000 making up the GTE Sum Part 2, Mr KM Chong referred to a bank payment voucher showing a TT payment of US$640,000 (HK$4,992,000) to GTC described as “Investment loan from shareholder”. GTE’s accounting records[8] show 2 transfers (of US$370,000 and US$270,000) totalling US$640,000 to GTC on 29 December 2005. He submitted that on that evidence, the US$640,000 was an investment or loan from Rainbow Rich (and not the Deceased) to GTC.

45.  Mr Tang invited attention to the absence of the payment record from Rainbow Rich which, according to Mr KM Chong could easily be extracted from its records. Despite the fact that both Jenny and Annie are directors of Rainbow Rich, no such record has been produced.

46.  Further, upon the court inquiring whether the hearing bundles contained Rainbow Rich’s audited financial statements, it transpired that they do not.

47.  It is evident from the various unknown matters referred to above that an investigation is required in relation to the GTE Sum.

(2) The Rainbow Rich loan

48.  The Rainbow Rich loan is a shareholder’s loan of $48.8 million recorded in the valuation report to the administrators dated 17 November 2014 of Joseph WP Fan & Co of the shares in Rainbow Rich and GTE.

49.  On 11 June 2019, the Plaintiffs and the Defendants (as beneficiaries) and Jenny and Norman (as administrators) entered into a deed of family arrangement (“the DFA”) for the distribution of the Deceased’s shares in Rainbow Rich to the 6 beneficiaries equally.

50.  On the same day, Rebecca entered into a SPA with Calina and Annie selling all her shares in Rainbow Rich (those distributed to her under the SPA and what she had inherited from Madam Chan’s estate) at a price of $4,245,000. Kenneth entered into a similar SPA with Jenny and Philip. Thus the Plaintiffs received a total of $8.49 million for their Rainbow Rich shares.

51.  The Defendants’ case is that upon the execution of the DFA and SPAs, the Rainbow Rich loan ceased to be owing to the estate on the basis of an established practice of Rainbow Rich and of GTE that the right to recover the “shareholders’ loan” was attached to the shares while loans advanced to the companies in their personal capacity (i.e. as directors) the right would be attached to their persons. When a person ceases to be a shareholder, the right to recover the shareholder’s loan would be lost. As a result, the estate’s right to recover the Rainbow Rich rested with the Defendants.

52.  Alternatively, the Defendants contend that the price under the SPAs was reached was without taking the Rainbow Rich loan into account and is said to be evidenced by the “Pre-completion Accounts” up to the period of 31 May 2019 referred to in the SPAs[9].

53.  Another aspect of that submission is that had the Rainbow Rich loan been taken into account, the parties would have agreed a much lower price than $8.49 million for the Plaintiffs’ shares. The Defendants’ stance was that either the Rainbow Rich loan was transferred to the Defendants or extinguished in 2019.

54.  Although Mr KM Chong sought to explain his calculations regarding what is set out in the preceding paragraph, I found the whole exercise incomprehensible.

55.  On the question whether the Rainbow Rich loan passed on the sale of the shares, the Defendants initially maintained that it was a matter purely between the vendors and purchasers of the shares to be resolved in a construction summons. As the estate and Rainbow Rich are not parties to the SPAs, they would not be involved.

56.  But there is not a single reference to the Rainbow Rich loan in either the DFA or the SPAs. Rainbow Rich is not a party to the SPAs and unless it is joined as an interested party, it will not be bound by the outcome of any construction summons.

57.  The Defendants have also not adduced any evidence in support of the ‘unique’ practice put forward.

58.  In my view, the estate is clearly an interested party so far as concerns a construction summons and would be entitled to be heard. In any event, the Plaintiffs have shown an arguable case that the Rainbow Rich loan remains owing to the estate.

59.  It was said that although Annie is a shareholder of Rainbow Rich, there is no conflict as she is neither a shareholder nor director of GTE were she to be appointed sole administrator: Annie is entitled to her share of Rainbow Rich loan in any case, whether as a shareholder or as a beneficiary of the estate. But there is a real difference in the quantum of her interest in the Rainbow Rich loan: as one of 6 beneficiaries her 1/6^th share is $8.13 million but as shareholder, her interest being 1/4^th of the issued shares would be $12.2 million. Clearly, a conflict would arise.

Conclusion

60.  For the reasons set out above, I am satisfied that the Plaintiffs have shown reasonable grounds for investigation in respect of the Subject Assets.

Choice of administrator

61.  As the investigation involves forensic accounting, a professional administrator should be appointed.

62.  Mr KM Chong sought to draw a distinction between the costs of investigation and the costs of administration and that the former is very costly, submitting that the candidates offered by the Defendants would be the better choice.

63.  I have little doubt that what is required in the present case is the expertise of an accounting professional and the candidates proposed by the Plaintiffs have the requisite experience. Having regard to the proposed fees, Derek Lai and Guy Norman of Deloitte are appointed as the administrators of the Deceased’s estate in place of Jenny and Norman.

Order

64.  Having perused the draft order submitted by Mr Tang at the conclusion of the hearing pending the Court’s Decision, I make an order in terms of §§1-7 of the draft submitted.

65.  So far as costs are concerned, this will be dealt with by the Court by way of written submissions. It is directed that

(a) the Plaintiffs lodge their written submissions (not exceeding 5 pages) by Thursday, 15 December 2022;

(b) the Defendants lodge their response (not exceeding 5 pages) by Thursday, 5 January 2023; and

(c) the Plaintiffs lodge their reply (not exceeding 3 pages) by Monday, 16 January 2023.