HSBC TRUSTEE (HONG HONG) LTD. v. WILHELMINA WU and Others

1997, No.MP1861

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H E A D N O T E

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Variation of Trusts Ordinance Cap.253 - application by Trustee - when appropriate

Residuary Estate settled on charitable trusts for Hong Kong charities - income of one quarter share for "such charitable institutions or such other charitable objects as my Trustees may in their discretion select as especially caring for the aged sick or needy old people in Hong Kong" - income of another quarter share for "such Buddhist organizations as my Trustees may in their discretion select for the support and maintenance of homes for the aged in Hong Kong"

Will providing for automatic divesting of trust assets to and appointment of Emergency Trustee on, inter alia, Hong Kong ceasing to be part of the British Commonwealth - Emergency Trustee a foreign trustee resident in Canada

Whether approval to be given to arrangement involving deletion of provision for the automatic appointment of Emergency Trustee pursuant to section 3(1)(b) of the Ordinance - whether benefit to unascertained beneficiaries

Whether approval has effect of defeating Testatrix's intention - whether a conclusive consideration - whether borne out by the facts

Jurisdiction - whether section 3(1)(b) of the Ordinance is applicable where beneficiaries are represented by Attorney General

1997, No.MP1861

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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The Application

1. This is an application by the Trustee of the Will of Wu Chan Alice Martha 吳陳英, also known as Alice Martha Chan-Wu 吳陳英, also known as Alice Martha Chan Wu, also known as Chan Kam Ying alias Chan Kam Ang alias Alice Martha Chan alias Chan Ying 吳陳英("the Testatrix"), for a variation of the trusts created by her Will dated 13 August 1974 and two Codicils dated 13 March 1975 and 27 October 1976 (collectively "the Will").

2. Approval is sought pursuant to s.3(1)(b) of the Variation of Trusts Ordinance, Cap.253 ("the Ordinance") on behalf of all persons unknown or unascertained who may hereafter become beneficially interested under the trusts created by paragraphs (i) and (iv) of Clause 8(c) of the Will to vary the same by deleting sub-clause (c) of Clause 11 of the Will.

3. The present application was brought on for hearing with some urgency. An originating summons was issued on 12 June 1997 in the expedited form pursuant to leave granted by Master Woolley for the matter to be heard today.

4. Unusually the application under s.3(1)(b) of the Ordinance has been made by the Trustee. In normal circumstances, it would be a beneficiary rather than the trustee who would be making the application. Nevertheless where there are special circumstances and the trustee is satisfied that the arrangement is beneficial to the beneficiaries and would have a good prospect of being approved by the Court, it is proper for the trustee to initiate the application : see Re Druce's Settlement Trusts [1962] 1 WLR 363 at 370-371.

The Will Trusts

5. By Clause 5(c) of her Will, the Testatrix settled certain property upon trust for her daughter for life and subject thereto, in the events that have happened, for The Procurator in Hong Kong of the English Assistancy of The Jesuit Order. They are respectively the 1^st and 2^nd Defendants to this application. Then by Clause 8(c) of her Will, she declared the trusts of her Residuary Estate. The Trustees were directed to hold the capital thereof in perpetuity but to divide the net income thereof annually into four equal parts. The 3^rd and 4^th Defendants are the beneficiaries named in Clause 8(c)(ii) together entitled to one equal fourth part and the 5^th Defendant is the beneficiary named under Clause 8(c)(iii) entitled to a further equal fourth part. Clause 8(c)(i) and (iv) are in the following terms :

"(i) as to one such part to apply the same for such charitable institutions or such other charitable objects as my Trustees may in their discretion select as especially caring for the aged sick or needy old people in Hong Kong and to pay the same in such proportions as my Trustees may think proper.

(iv) as to one such part to pay the same to or among such Buddhist organisations as my Trustees may in their discretion select for the support and maintenance of homes for the aged in Hong Kong."

The potential beneficiaries under those paragraphs are thus unascertained but they are confined to charitable institutions or charitable objects.

6. The Attorney General is the 6^th Defendant. It is accepted that he is a necessary party. As stated in Halsbury's Laws of England, 4^th Ed.(1993 Reissue) Vol.5(2) at para.404 -

"[t]he Crown as parens patriae is the constitutional protector of all property subject to charitable trusts, such trusts being essentially matters of public concern. The Attorney General, who represents the Crown for all forensic purposes, is accordingly the proper person to take proceedings on behalf of and to protect charities."

7. Clause 11 of the Will provides as follows :

"11. AT any time during or after my Trustees shall have completed the administration of my Estate the happening of any of the following events or circumstances (hereinafter called 'an emergency situation') shall forthwith terminate the tenure of my Trustees as executor and trustee hereof so that my Trustees shall thereupon cease to be the executor and trustee under these presents and to act as such trustee and shall be thereby divested of title to the capital and income of my Residuary Estate or my Immovable Estate that is to say :

(a) The declaration or existence of a state of war in consequence whereof the citizens or nationals or residents of the Colony of Hong Kong are declared to be or deemed to be enemies of any foreign Government,

(b) The invasion of the Colony of Hong Kong by military forces,

(c) If Hong Kong shall cease to be part of the British Commonwealth of Nations,

(d) The enactment of any law or any action by or on the part of any governmental authority agency or officer of or in the Colony of Hong Kong the main purpose or effect of which is :

(i) The acquisition expropriation or confiscation of any of the assets comprising my Residuary Estate or my Immovable Estate; or

(ii) To compel my Trustees to sell or otherwise dispose of the assets comprising my Residuary Estate or my Immovable Estate; or

(iii) To restrict in any way the use investment or distribution of my Residuary Estate or my Immovable Estate; or

(iv) The restriction suspension or abrogation in whole or in part of this Will or any contract in relation to the trusts hereby created or to my Residuary Estate or my Immovable Estate.

in which event the Hongkong & Shanghai Bank (Trustee) Limited of No.9 Gracechurch Street aforesaid (hereinafter called 'the Emergency Trustee') shall (without the necessity of any act on the part of my Trustees) be substituted as the Executor or trustee of this Will and in such event the Emergency Trustee shall forthwith become vested with title to the assets of my Residuary Estate or my Immovable Estate as if it had been the original Executor and Trustee hereunder and the forum for the administration of this Will shall forthwith be deemed to be the place of residence of the Emergency Trustee and the Courts of the said place of residence shall have exclusive jurisdiction over all matters appertaining to this Will and the trusts hereby declared and of any and all matters relating thereto."

Her first Codicil to the Will varied Clause 11 by naming the Montreal Trust Company as the Emergency Trustee in place of Hongkong & Shanghai Bank (Trustee) Limited of No.9 Gracechurch Street.

8. The funds that are now vested in the Trustee comprise the settled legacy in which the 1^st and 2^nd Defendants are interested and the Residuary Estate in which the 3^rd, 4^th, 5^th Defendants and the Attorney General on behalf of the unascertained charitable beneficiaries are interested (collectively "the Trust"). It is to be noted that as the 1^st and 2^nd Defendants who consent to this application are together absolutely entitled to the settled legacy. They may, if they so wish, put an end to the trusts at any time : see Saunders v. Vautier (1841) 10 L.J.Ch.354. Thus it is open to them, for example, to terminate the existing provisions affecting the settled legacy and resettle the same omitting clause 11(c). So far as the Residuary Estate is concerned, the ascertained beneficiaries, namely the 3rd, 4th and 5th Defendants consent to the proposed variation. The Attorney General representing the unascertained beneficiaries interested under paras.(i) and (iv) of Clause 8(c) also supports the proposed variation. It is on behalf of those beneficiaries that the Court's approval is sought pursuant to s.3(1)(b) of the Ordinance. In this regard, the Court has to consider whether the proposed variation is for their benefit.

Benefit

9. The current size of the Residuary Estate is of the order of HK$240 million. If Clause 11(c) of the Will were to take effect, which it would if the present application were not made and the relief sought not acceded to, the effect would be that as from 1 July 1997, the Trust would have a foreign trustee. The effect of that would be the Trust would, for the purposes of Canadian tax laws, be regarded as resident in Canada.

10. The fiscal effect of the Trust migrating to Canada through the appointment of a sole trustee resident in Canada and from where the trust will be managed may be summarised as follows :

1. If the Trust is not a registered charity or non-profitable organisation for the purposes of Income Tax Act, Canada, it will be subject to Canadian income tax like any other Canadian resident and the maximum rate of duty could be as high as 52.94% depending on the level of the taxable income.

2. If the Trust is a registered charity or non-profitable organisation, no tax is payable on its taxable income. However, if it distributes income to a non-resident charity, the charity would be subject to payment of income tax at the rate of 25% of such income and such tax would be withheld by the Trust unless the tax rate is reduced by an applicable tax treaty At present there is no relevant tax treaty between Canada and Hong Kong in that regard.

3. Capital gains on actual dispositions of trust assets is treated as income of the Trust for computing the amount of income tax.

4. Apart from actual disposition, the Income Tax Act Canada provides for a deemed disposition of trust assets at intervals of every 21 years from the date of creation of the Trust. The capital gain is measured based on the difference between the fair market value proceeds and the cost amount of each particular asset. The Trust would be subject to tax on any capital gains realised on the deemed disposition of any of its assets.

11. The fiscal disadvantages flowing from the export of the Trust to Canada are serious and substantial. Quite apart from these fiscal considerations, the export of the Trust give rise to other problems in so far as it concerns the Residuary Estate. These are administrative difficulties because under the Will the unascertained objects or beneficiaries under paras. (i) and (iv) of Clause 8(c) of the Will are all Hong Kong charities. The Emergency Trustee named in the First Codicil has no office in Hong Kong and there is no reason to believe that it has any familiarity with local conditions. Moreover, if it were to assume the trusteeship of the Trust, the trust law of Canada rather than of Hong Kong would then be applicable.

12. From the evidence filed, it is apparent that the present Trustee, HSBC Trustee (Hong Kong) Limited goes through a careful selection process in order to discharge its obligations and exercise the discretion conferred on it by Clause 8(c) of the Will. The process includes the identification of eligible charities which provided elderly services such as hostels, homes, care and attention homes for the aged, sick or poor and they are obtained from organisations such as the Social Welfare Services Department of Hong Kong, the Community Chest of Hong Kong and Hong Kong Council of Social Services and from the records of the Trustee. A list of discretionary beneficiaries is then compiled. Then there is the selection process which involves inquiries of charities identified, of their management, background and the precise elderly services they provide to the poor and needy old people. Potential charities when identified are invited to submit applications to the Trustee for consideration of donations. The applications and proposals are then reviewed. Preference is given to capital projects involving buildings and purchase of equipment for the benefit of the large number of old people. Finally, the Trustee also monitors the use of donations granted.

13. If the Trust were to be moved to Canada, I have no doubt whatsoever that the beneficiaries on whose behalf the Court's approval is sought (who incidentally have no connection whatsoever with Canada) would be seriously disadvantaged in two respects. First, from the fiscal angle it is little short of disastrous : income available for distribution is likely to be significantly reduced and the impact of capital gains tax would also reduce the capital value of the Residuary Estate. Second, the administrative difficulties likely to arise cannot be to the benefit of the potential beneficiaries.

14. The principles that govern the exercise of a discretion under s.3(1)(b) of the Ordinance may be found in Re Seale's Marriage Settlement [1961] 1 Ch 575 at 579; Re Sainsbury's Settlement [1967] 1 WLR 476 at 480 and Re Weston's Settlement [1969] 1 Ch 223 at 244-248. I do not propose to go into these authorities as I am satisfied that the proposal is inarguably beneficial to and in the interest of the unascertained beneficiaries on whose behalf the court's approval is sought.

15. The only consideration that had caused some concern was whether by approving the proposed arrangement the Testatrix's intentions would be defeated. One would effectively be rewriting part of the Will. It is relevant to bear in mind that the Will was made in 1974. Although it predated the Sino-British Agreement by a decade, the Testatrix did not die until December 1991. Prima facie, by not taking any steps to further revise Clause 11(c) of her Will, the Testatrix can be said to have manifested an intention that Clause 11(c) should stand. However, in the course of the application, it transpired that a Receiving Order was made in respect of the Testatrix in February 1987. In support of that application, there is an affidavit filed by the 1st Defendant who is the Testatrix's only daughter and who had lived with her for many years in Hong Kong. From that affidavit, it is clear that the Testatrix suffered ill health as from 1981. She underwent a series of operations and her mental condition really began deteriorating as from 1982. There is a report by her doctor, a Dr Baldwin, dated 14 October 1986 which was filed in support of the receivership application. In that report, Dr Baldwin opined that the Testatrix commenced suffering from senile dementia from about the fall of 1985.

16. Having regard to these facts, it is clear that the Testatrix was not capable of altering her Will certainly from about the mid-80s. Of course, the Sino-British Agreement and the return of Hong Kong to China did not come about until 19 December 1984. In fact, given her ill health as from 1981/82, the fact that she did not take any steps to alter the provisions of her Will is hardly surprising and in those circumstances cannot be taken as manifesting any intention not to alter her Will.

17. The Testatrix's intention has to be gathered from the Will as a whole and when one reads the Will, it is clear that she intended to benefit Hong Kong charities. The purport of Clause 11 which designated events as automatically triggering the appointment of the Emergency Trustee showed an intention to preserve and protect trust assets so that they may continue to be enjoyed by the beneficiaries the Testatrix wished to benefit. That provision was intended to cater for the situation where the assets were in danger by remaining in Hong Kong or when the trusts themselves or the powers vested in Trustees were somehow to be curtailed.

18. Miss Eu Q.C. who appears for the Plaintiff submitted that Clause 11(c) really has nothing to do with Hong Kong being and remaining a British colony. There is much force in that submission. In any event, even if the proposed arrangement had the effect of defeating the Testatrix's intention, that consideration, though a serious one, is by no means conclusive. In In Re Remnant's Settlement Trust [1970] 1 Ch 560 at 567C, Pennycuick J. approved an arrangement which had the effect of defeating forfeiture clauses contained in a will. It would follow from that decision that the mere fact that the testator's intentions may be said to be defeated by any proposed arrangement is not in itself sufficient to reject the application. If, on balance, the advantages accruing to the beneficiaries are so overwhelming, it would be proper and appropriate for the Court to exercise its jurisdiction under s.3 of the Ordinance to vary the Trust.

19. I am satisfied that it is the case here and I would therefore grant the relief sought.

Jurisdiction

20. I should mention at this point that a question as to the Court's jurisdiction arose in the course of submissions. The Attorney General who supports the arrangement proposed by the Plaintiff submitted that the present application is not within the Ordinance because the Attorney General is the only person who can represent charitable beneficiaries under Clause 8(c)(i) and (iv) and it is for the Attorney General and not the Court to give any requisite consent. As I understand it, the submission is that s.3(1)(b) is not apposite since in view of the Attorney General's "interest", there are no unascertained beneficiaries on whose behalf the Court could consent. Reliance was placed on the decision of the Court of Appeal in Ip Cheung Kwok v. Sin Hua Bank Trustee Ltd and Others [1990] 2 HKLR 499 at p.516 where Clough JA referred to Tudor on Charities, 7^thEdn at p.337 and approved the dictum of Sir John Romilly M.R. in Ware v. Cumberledge (1855) 20 Beav 503 at 511, viz. 

"In case the gift is for charity generally, no one can represent it but the Attorney General, and he must be here to represent such general charities."

Reference was also made to In re J.W. Laing Trusts [1984] 1 Ch 143 which was an application under s.13 of the Charities Act 1960 and alternatively under the inherent jurisdiction of the Court in respect of charities to discharge the trustees from the obligation imposed on them by the settlement to distribute capital within 10 years of the settlor's death. In that case the Court exercised its inherent jurisdiction and approved a scheme enabling the trustee to be so discharged.

21. It was submitted that the application should not have been made under the Variation of Trusts Ordinance; rather the Court's inherent jurisdiction should be invoked. But nothing in either of the two cases relied on persuades me that the Ordinance is inappropriate in circumstances such as the present. They are not authority for the proposition that such an application is outside the scope of the Ordinance. Whilst I accept that the Attorney General is the proper person to represent charities, he does not thereby become the person(s) interested under paras.(i) and (iv) of Clause 8(c). In any application under the Ordinance which does not involve charities but unascertained beneficiaries, a representative is normally appointed to represent their interests and that representative would put forth his views regarding any proposed application to vary the trusts. In my judgment, the Attorney General is not in a different position. He is here to represent the interest of unascertained charities or charitable objects and of course his views would carry weight. However, I do not accept that the fact that he represents those beneficiaries has the effect of displacing their interest or rendering his consent a pre-requisite to any court approval under the Ordinance or indeed of rendering s.3 of the Ordinance inapplicable. The court's approval under s.3 of the Ordinance is not contingent on the Attorney General's consent although it must be rare for the court to approve an arrangement that is opposed by the Attorney General.

22. Be that as it may, even if I were wrong and that the only appropriate mode is an application which invokes the inherent jurisdiction of this Court, I would, for the reasons set out above, exercise my discretion under that inherent jurisdiction and approve the arrangement proposed.

23. For those reasons, I grant the relief sought and I will hear counsel as to the appropriate form of order.