CHEUK LAI MAU v. CHEUK LAI SHEUNG

HCMP 2177/2018

[2020] HKCFI 2813

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2177 OF 2018

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DECISION ON COSTS

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A.  INTRODUCTION

1.  This case concerns the estate of the late Mr Cheuk Wan Kwong, who passed away on 24 June 2015 aged 94 (the “Estate”). P is one of the four beneficiaries of the Estate.  D is similarly a beneficiary of the Estate and its sole executrix.

2.  The Estate comprised, inter alia, 4 landed properties in Cheung Chau, namely Lot 227, Lot 804, a ½ share in Lot 1359 and a ½ share in Lot 1360 (the “Cheung Chau Properties”).  More specifically:

(1)  There were two houses built across Lots 804, 1359 and 1360, but which were demolished in June 2019.  Since then, the Lots have been left vacant without generating income.

(2)  Lot 227 was rented to Wellcome Supermarket at a rate of HK$84,000 per month until 15 December 2017 and HK$130,000 from 16 December 2017 until May 2019.

3.  D made the following interim distributions of the Estate in respect of rental income from the Cheung Chau Properties:

(1)  In late 2015, P received from D a sum of HK$90,000 (representing 6 months of rental income).

(2)  From January 2016 to December 2017, P received from D a monthly sum of HK$15,000;

(3)  From January 2018 to March 2018, P received from D a monthly sum of HK$25,000.

4.  D made no distributions from the Estate between March 2018 and November 2018.

5.  Between March 2018 and October 2018, P sent various letters to D demanding that D provide an account of the Estate with all documentary proof, and putting on record the fact that D ceased making interim distributions since April 2018.  D sent various responses between April 2018 and December 2018, in which she provided a copy of the account of the Estate and an explanation for the cessation of interim distributions, which P considered to be deficient.

6.  By an Originating Summons dated 12 December 2018 (the “OS”), P sought an order that D render a true and proper account of the Estate with all supporting documents, and pay a monthly sum of HK$25,000 to P as interim distribution of the Estate as from November 2018.

7.  On 9 January 2020, with consent of the parties, the Court granted leave to discontinue the proceedings, save as to the question of costs.  Both parties have since filed evidence and written submissions on this remaining issue, which falls to be decided by me on paper.

B.  APPLICABLE PRINCIPLES

8.  The relevant principles governing the award of costs in administration proceedings are well-established.  As summarised in Chiu Pak Wo v Chiu Yim Kam [2019] HKCFI 2517, HCMP1967/2018 (unrep, 16 Oct 2019) at §5–12:

(1)  The starting point is Order 62 rule 3(2) of the Rules of the High Court (“RHC”), which sets out the general rule that costs shall follow the event.

(2)  As an exception to the general rule in trust and probate matters, where administration proceedings are properly instituted (whether by the executor or a beneficiary) for benefit of the fund or the deceased’s estate, the Court may in an appropriate case make an order that costs incurred by all necessary parties be taxed as between solicitor and client and borne by the fund or estate: Re Buckton [1907] 2 Ch 406 at 414-415 (Kekewich J).

(3)  However, there must be distinguished from the above a class of cases where the application to the Court is made by a beneficiary and is in substance an adverse claim made in hostile litigation.  In such a case, the usual approach to costs in hostile litigation should be applied: Re Buckton, 415.

(4)  As far as costs of the executor are concerned, the relevant provision of the RHC is Order 62 rule 6(2), which provides that:

“Where a person is or has been a party to any proceedings in the capacity of trustee, personal representative or mortgagee, he shall, unless the Court otherwise orders, be entitled to the costs of those proceedings, in so far as they are not recovered from or paid by any other person, out of the fund held by the trustee or personal representative or the mortgaged property, as the case may be; and the Court may otherwise order only on the ground that the trustee, personal representative or mortgagee has acted unreasonably or, in the case of a trustee or personal representative, has in substance acted for his own benefit rather than for the benefit of the fund”

(5)  This gives effect to the general rule that a trustee is entitled to an indemnity out of the trust fund for all costs and expenses properly incurred by him in connection with the performance of his duties and exercise of his powers and discretions as a trustee: Lewin on Trusts (20^th ed) §48-004.

(6)  “Properly incurred” means costs which have both honestly and reasonably incurred.  Any doubts are to be resolved in favour of the trustee: Lewin §48-006.

(7)  That said, the right of indemnity can be lost or curtailed by such inequitable conduct on the part of the trustee as amounts to a violation or culpable neglect of his duty as trustee.  The word “misconduct” should be widely construed and may include caprice and obstinacy, or neglect, negligence or carelessness, or even conduct which is unreasonable in the circumstances.  While the mere fact that the trustee has made a mistake is not enough, it is equally clear that dishonesty is not requisite: Lewin §48-006.

9.  The parties agreed that the present proceedings involved an adverse claim in hostile proceedings (a “category 3” case in the Re Buckton taxonomy).  As such, it is necessary to ascertain whether P or D was the substantially successful party in these proceedings.  In so doing, the Court is guided by the principles set out by Au Yeung J in Famous Marvel Co Ltd v Conversant Group Ltd HCA2153/2009 (unrep, 29 Oct 2012):

(1)  The Court is to decide if the party seeking costs has substantially obtained the relief sought in the litigation.

(2)  At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion.  In between, the positions will, in differing degrees, be less clear.  How far the Court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties.

(3)  A broad brush can be taken by referring to all matters already laid before the Court, eg pleadings, correspondence, witness statements, transcripts of evidence and the terms of the settlement order.

(4)  The objective is to “do justice between the parties without incurring unnecessary Court time and consequently additional costs”.

C.  THE PARTIES’ RESPECTIVE CASES

10.  In gist, P’s position is that D should personally pay P his costs of and occasioned by the OS, and personally bear her own costs.  P submits that:

(1)  The OS was only necessary because D failed to discharge her duty as executrix properly.  D failed to provide proper accounts with supporting documentation and was dilatory in responding to P’s requests.  P asked for the relief sought in the OS since March 2018, but D simply strung P along and refused to accede to his requests.

(2)  It was only after the commencement of the present action that D started to respond and comply with P’s requests.  Since then, D has largely complied with the request sought by P.  As a result, P should be regarded as the successful party of the action and should be entitled to his costs of the OS.

(3)  In light of D’s failings in keeping and rendering full and proper accounts and unreasonable responses to P’s requests for the accounts, D should be required to bear costs personally.

11.  D, on the other hand, contends that she should be allowed to recoup her costs of and occasioned by the OS from the Estate, and that neither the Estate nor D should be liable for P’s costs.  She submits that:

(1)  D diligently discharged her duties as executor.  In particular, she provided the accounts of the Estate prior to the commencement of the proceedings, and at all times dealt with P in a cooperative and proper manner.  Furthermore, her decision to withhold monthly distributions of the Estate was well-justified.

(2)  P did not substantially obtain the relief sought in the OS.  D had already provided accounts for the Estate and all supporting documents, so it is unlikely that the Court could take the matter further even if the action proceeded to a substantive hearing.  The parties did not reach any agreement in respect of the amount of monthly distributions, rather, it remains the position that D will only make distributions when the Estate has sufficient funds to do so.

(3)  In the premises, D did not act unreasonably and should not be held personally liable for costs.

D.  DISCUSSION

12.  At the outset, I agree with Mr Man (for P) that in assessing whether D acted improperly in her capacity as executor for purposes of this costs application, the Court must focus on her conduct which forms the subject of P’s complaints in these proceedings - namely her alleged failure to provide proper accounts and decision to cease making interim distributions in April 2018.  The fact that D may have acted wholly properly in other aspects of her administration of the Estate, matters on which D has filed extensive evidence, cannot assist her if she is guilty of misconduct relied upon by P.

D1.    The Accounts

13.  Having considered the correspondence between the parties, I consider that P’s complaints in relation to the Accounts are made out.  The following matters are pertinent.

14.  The Accounts and Supporting Documents: P’s solicitors first made their request for an account of the Estate with supporting documents by letter dated 19 March 2018.  By letters dated 4 April and 3 May, D’s solicitors stated that they had asked D to provide the details requested and would provide the same in due course, but they failed to do so despite chaser letters from P’s solicitors dated 26 April, 18 May and 6 June.

15.  By letter dated 27 June 2018, D’s solicitors provided a purported account of the Estate (the “Account”).  However, D’s solicitors did not provide any supporting documents, and instead stated that “a complete file is available for inspection at our office at any time during office hours” but this would “have to be made under the supervision of one of our staff” and “the hourly fee of HK$1,200 would be payable by the party making the inspection”.  

16.  Subsequently, P’s solicitors asked D’s solicitors to provide documentary proof in relation to certain items in the expense budget by letters dated 4 July and 26 October.  However, they received no response, until P’s solicitors wrote on 10 December asking if they had instructions to accept service on behalf of D.  Even then, however, all that D’s solicitors stated in their reply letter dated 10 December 2018 was to repeat the offer for P to inspect the supporting documents at their office upon prior appointment.

17.  I agree with Mr Man that the Account was deficient in several material respects.  An executrix has a duty to keep clear and accurate accounts and be ready to render such accounts when called upon to do so: Re Estate of Lee Da Kor [2010] 1 HKLRD 415, §17.  Furthermore, as explained by Chow J in Chow Chak Kiu v Chow Man Chit HCMP797/2016 (unrep, 17 Jan 2017), to render a proper account an executrix must:

(1)  Show the opening balance (including capital assets) and closing balance;

(2)  Give details of movement of assets, incomes and expenditure of the estate;

(3)  Give details of the whereabouts of all properties (including cash) of the estate which the personal representative is duty bound to administer; and

(4)  Support the account with documentary evidence.

18.  The Account prepared by D does not show the capital assets of the Estate, most importantly the Cheung Chau Properties and their value.  Nor does it state a closing balance (although a figure of HK$531,831.38 was stated in the body of D’s solicitors’ letter dated 27 June 2018).

19.  More significantly, however, D failed to provide any supporting documents in respect of the Account at all.  In my judgment, this defect could not be cured by D’s solicitors’ offer for P to inspect the supporting documents at its offices at a cost of HK$1,200 per hour.  As Rhind J clearly stated in Charles Yu Chiu Kwan v Edna Yu Chan Shek Yin HCMP965/1980 (unrep, 22 Apr 1982):

“In my view the very most the personal representatives can ask the beneficiary to pay is the cost of supplying a copy of the clear and accurate account which the personal representatives are supposed to have kept. In fact, the practice as I understand it, is that every beneficiary usually gets a copy of the estate accounts free, the cost being borne by the estate.

20.  With respect, I am unable to accept the responses advanced by Ms Kung on behalf of D, namely that:

(1)  P’s real complaint was not D’s failure to account but the status of the distribution of the Estate;

(2)  A legatee is not entitled to a copy of the accounts at the expense of the estate, but is entitled to inspect the accounts kept by the personal representative (principles which are said to be supported by Ottley v Gilby (1845) 8 Beav 602, 604 and §425.898 of Halsbury’s Laws of Hong Kong (2020); and

(3)  D was cooperative in dealing with P’s requests, providing P with documents outside the scope of her obligation as an executrix, including bank statements and tax returns.

21.  Firstly, on the basis of the evidence before me I do not think it possible to ascribe any motive for P’s request for the accounts.  In any event, the fact remains that D as executrix of the Estate was obliged to render accounts and failed to do so.  The reasons underlying P’s decision to enforce this duty are not in point.

22.  Secondly, properly analysed, the principles of law relied on by Ms Kung do not justify the course of action taken by D’s solicitors.  P did not demand a copy of the supporting documents at the estate’s expense; rather, it indicated as early as its letter dated 4 July 2018 his willingness to pay reasonable photocopying charges for copies of those documents. Meanwhile, the fact that a legatee is entitled to inspect the accounts of the Estate kept by the personal representative has no bearing on the separate question of whether he is entitled to a copy of those accounts upon payment of reasonable expenses, and in my mind it is clear that such a right exists: see, for example, Charles Yu Chiu Kwan, above.

23.  Thirdly, what D conveniently omits when she asserts that she acted in a “cooperative manner” is that these documents were only provided after P commenced the present proceedings by its OS dated 12 December 2018.  In fact, the first time that D provided any of the supporting documents requested was under cover of its letter dated 20 February 2019.  This sequence of events only reinforces P’s case that D would not have even begun to respond to his requests but for the present proceedings.

24.  I am therefore of the view that the OS was necessitated by D’s failure in its duty to render a clear and proper account, and that it was ultimately substantially successful in obtaining the relief sought.

25.  The Valuation Report: A similar situation occurred in respect of P’s attempts to obtain valuation reports in respect of the Cheung Chau Properties.  By its letter dated 3 May 2018, D’s solicitors stated that the valuer had been unable to access the premises owing to Wellcome’s renovation works, but had tentatively arranged a site visit on 9 May, and “will forward the valuation report to you when available”.  However, in its subsequent letters dated 27 June and 10 December, D’s solicitors claimed that the valuation report “is commissioned by our client to assist in the decision-making process”, such that “it is not for public dissemination and hence will not be given to your client, who has no role to play in the decision making process under law”.

26.  It was only after P brought the present proceedings that D’s solicitors stated, by letter dated 24 December 2018, that there was in fact no extant valuation of the Cheung Chau Properties as Jones Lang LaSalle (“JLL”)had advised D to delay the valuation process until the market had recovered.  Finally, after further correspondence between the parties, D provided a copy of JLL’s report dated 22 February 2019 under cover of its letter dated 26 February 2019.

27.  From the above, it is clear that D’s stance in relation to the valuation report changed dramatically after the commencement of the present proceedings: its initial opposition to disclosure of the report (even if it existed) was replaced with a plea that the report was simply unavailable.  It is further clear that D’s initial stance, being contrary to the principles stated in the authorities above, was unreasonable.

28.  In the premises, I also reject D’s assertion in her affirmation that even if the valuation report was available back in April 2018, it would not have been in the interest of the estate to disclose the contents of the report in view of the anticipated sale of Lot 227.  There is nothing in the correspondence which suggests that this was the reason for D’s refusal to disclose the report.  In any event, D disclosed the valuation report to P on 26 February 2019 even though the tender process for Lot 227 was only completed on 15 March 2019.

29.  I therefore agree with Mr Man that P was left with no alternative but to commence the present proceedings to compel D to provide the valuation report, and should be considered the substantially successful party having procured D’s change in stance.

D2.    The Interim Distributions

30.  On the other hand, I do not consider it possible to ascertain the likely outcome of the proceedings in respect of D’s alleged failure to make interim distributions on the basis of the evidence produced before the Court.  I shall explain why.

31.  On one hand, Ms Kung suggests that it was reasonable for D to cease making interim distributions from April 2018 as it had a cash reserve of HK$531,831.38 as at 31 May 2018 but estimated expenses of HK$1,004,000 (being general professional fees, expenses of complying with building orders in respect of the Cheung Chau Properties and expenses in connection with the sale of those properties).

32.  Ms Kung further submits that D was under no obligation to make interim distributions to beneficiaries; rather, she had a duty as a cautious trustee to make sure there were sufficient funds for distribution: Li Kin Yan v Li Lim Chi Dorothy HCMP3425/2015 (unrep, 17 Feb 2017).

33.  Mr Man, on the other hand, suggested that the cessation of distributions in April 2018 was unreasonable having regard to the previous practice of regular payments.  Furthermore, even if one accepted the expense budget of HK$1,000,400 at its face value, the cash reserve of HK$531,831.38 plus the rental income from July to October 2018 (HK$130,000 x 4 = HK$520,000) should have been enough for D to resume monthly distributions from November 2018.

34.  Mr Man also relied on the well-established principle that an executrix usually has one year from the death of the testator to get in the deceased’s estates, and that the onus is on her to justify any delay in realizing the property of the estate in excess of this period: Williams, Mortimer & Sunnucks: Executors, Administrators and Probate (21^st ed) §64-01–64.04.  On the facts of the present case, however, D had failed to distribute the Estate more than 3 years after the passing of the deceased.

35.  In my judgment, I have little option but to take the expense budget at face value, there being no evidence before me which casts doubt on the propriety of the figures listed therein.  On this basis, there was prima facie justification for D’s decision to pause monthly distributions until October 2018 (and I do not understand Mr Man as suggesting otherwise).

36.  I do not think the executor’s year principle affects the analysis above.  It does not impose an absolute obligation on an executrix to realise the estate within one year; instead, all it requires is for D to show some valid reason for any delay.  An executrix will not be liable for any loss if she postpones the conversion of the estate in the honest and reasonable exercise of her discretion: Williams, Mortimer & Sunnucks §52-24.

37.  In the present case, D only realised Lot 227 in May 2019, nearly 4 years after the death of the deceased.  Nonetheless, I am prepared to accept that this was a reasonable period of time on the facts:

(1)  D’s unchallenged evidence is that early on, she sought and received advice from a senior surveyor that she should wait until after the expiry of the lease over Lot 227 (in December 2017) before disposing of it, as she would likely be able to renegotiate a higher rent thereby increasing the value of the property.

(2)  As a result of this advice, the beneficiaries of the Estate agreed in a meeting on 24 November 2015 to postpone the disposal of the assets of the estate.

(3)  The lease over Lot 227 was renegotiated in December 2017, and D duly approached JLL for a valuation report in respect of Lot 227 in April 2018.  Subsequently, however, D was apparently advised by JLL to delay preparation of the written valuation report due to a downturn in the property market at the time.  The valuation report was thus only completed in February 2019, and Lot 227 was duly sold by tender in March 2019.

38.  Against all this, however, it will be observed that D stopped making monthly distributions right after P’s request for a full and proper account of the Estate in March 2018.  Furthermore, on the same day that P’s solicitors wrote to D’s solicitors asking if they had instructions to accept service, D decided to make an interim distribution of HK$100,000 per beneficiary in view of the Estate’s cash balance of HK$1,181,831.18 as of 30 November 2018.  These cast doubt on D’s purported justification for withholding monthly distributions, and could suggest that D acted not because of any shortfall in the Estate but because of her personal animosity towards P.

39.  Furthermore, while D did not make any unqualified commitment to pay monthly distributions notwithstanding the commencement of proceedings (stating only that monthly interim distribution to all the beneficiaries can resume “so long as the Estate has sufficient fund [sic] after taking into account the refurbishment costs of the Cheung Chau Properties”), this was arguably a change in stance from her earlier position in D’s solicitors letter dated 27 June 2018 that “[D] does not have any obligation to make monthly distributions to the beneficiaries, report to or seek consent from the beneficiaries for each and every decision she makes)”.

40.  Taking all the above into account, I do not think it possible to identify a substantially successful party or reach a definitive view as to which side would have prevailed had the proceedings been fought to a conclusion.

E.  CONCLUSION

41.  As a result, I am of the view that P was the substantially successful party in relation to the accounts of the Estate, whereas neither party can be considered substantially successful in relation to interim distributions.  P should have his costs of the former issue whereas no order should be made in respect of the latter.

42.  Apportioning the parties’ costs between the two issues on a broad-brush basis, I consider that D should pay 60% of P’s costs of and occasioned by the OS.

43.  Since I am of the view that D’s conduct in respect of the Account falls within the broad definition of “misconduct” set out above, I order that D shall not be entitled to an indemnity from the Estate in respect of those costs, namely the 60% of P’s costs which she is ordered to pay and 60% of her own costs.