KONG COLIN CHUNG PING (also known as COLIN CHUNG PING KONG) AND ANOTHER v. KONG WING ON defending by his guardian ad litem MOY NUI CHING AND OTHERS

HCMP 2045/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2045 OF 2012

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TAKING OF ACCOUNT

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Introduction and background

1.  This is an administration action.

2.  Since about 1950, two brothers operated in partnership a pharmaceutical and related business in the trade name of On Hong Ning Drug Company (安康寧大藥房) at 2 properties.

(a) Basement, Ground Floor Shop, and the 1^st Floor, Hong Kiu Mansion No. 313 Nathan Road Kowloon (the “Jordan Property”) and  

(b) Basement, Ground Floor, 1^st Floor, 2^nd Floor, 14^th Floor and the Floor above thereof (also known as the Roof) No.792 Nathan Road Kowloon (the “Prince Edward Property”).

3.  The brothers were tenants in common of the 2 properties. No rent and payment was therefore made by their business for the occupation thereof.

4.  On 9 June 2003, the elder brother (the deceased in the present action) died testate.  Briefly, by his will, he left his estate to 4 persons.

(a) his younger brother, the 1^st defendant,

(b) one Madam Tam (his long-term partner), and

(c) (d) his grandchildren, the plaintiffs

5.  The deceased also appointed the 1^st defendant to be the sole executor.  On 6 March 2006, probate was granted to the 1^st defendant to administer the estate of the deceased.

6.  However, on 21 September 2012, the plaintiffs issued the present proceedings. They complained, among others, that the 1^st defendant failed to render proper accounts, failed to properly administer the estate, put himself in a conflict of interest situation and was in breach of his fiduciary.  He should be removed and replaced.

7.  On 13 November 2013, parties appeared before Deputy Judge Le Pichon. After hearing from parties, the learned Judge ordered, inter alia, that the younger brother:

(a) be removed as an executor under section 33 Probate and Administration Ordinance (Cap. 10) (“PAO”) and substituted by a professional accountant, Mr. Li Ka Shing (who later being joined and become the 2^nd defendant herein), and

(b) pursuant to section 56 PAO, to make an affirmation exhibiting a true and perfect inventory and account of the estate.

8.  Thereafter, parties further came before the Judge on a number of occasions for directions and conduct of the proceedings.

9.  On 10 March 2014, regarding the dispute as to whether the 1^st defendant was entitled to conduct the business in the 2 properties by 2 tenancy agreements requiring the payment of nominal rent, the Judge held that they were void and unenforceable.

10.  On 24 February 2015, the Judge further held that, among others, the 1^st defendant failed in the “nominal/market rent issue” before her.  The plaintiffs succeeded in establishing that the 1^st defendant (as executor of the estate) was in breach of trust by using the 2 properties to his personal benefit.  The 2^nd defendant was also able to establish that the 1^st defendant allowed himself as the other co‑owner to use the 2 properties rent‑free.  All defences raised by the 1^st defendant were rejected by the Judge.  She ordered that:

“1. An account be taken from the 1^st Defendant for 50% of the market rental of the premises being:

(a) Basement, Ground Floor Shop, and the 1st Floor, Hong Kiu Mansion No. 313 Nathan Road Kowloon; and

(b) Basement, Ground Floor, 1st Floor, 2nd Floor, 14th Floor and the Floor above thereof (also known as the Roof) No.792 Nathan Road Kowloon;

2. Simple interest at the rate of 1% per annum above the best lending rate of HSBC prevailing from time to time be paid on the amount found due on the taking of the account from 9 June to the date of judgment and thereafter at judgment rate until payment;

3. The sum found due on the taking of account together with the interest ordered be paid by the 1^st Defendant to the 2^nd Defendant to be held as part of the residuary estate; and

4. …”

11.  Parties thereafter went before different masters to seek directions on the taking of account.  They also appeared before me for 2 PTRs.

12.  Finally, they came before me for 3 days in January this year.  Thereafter, closing written submissions were prepared and lodged in the following 2 months.  Here are my decisions on the taking of account exercise.

Nature of the present taking of account exercise

13.  Counsel for the parties made a number of submissions on the nature of exercise before this court.  It is important to decide on it because it will affect the way how the present taking of account is to be dealt with and indeed, provides answers to the issues in dispute among the parties.

14.  Mr. Lynn, counsel for the plaintiffs, spent quite some effort in his written opening submissions to explain the role and approach of the court in the taking of account exercise.  I accept them in their entirety, as a matter principle.  Among others, he said that the meaning and procedure of ‘taking of an account’ in equity was best summarized by Peter Millet writing extra judicially in ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214 at 225-226,

“…the primary remedy of the beneficiary is to have the account taken, to surcharge and falsify the account, and required a trustee to restore to the trust estate any deficiency that may appear when the account is taken. The liability is strict… If the beneficiary is dissatisfied with the way in which the trustee has carried that out his trust - if, for example, he considers that the trustee has negligently failed to obtain all that he should have done for the benefit of the trust estate, then he may surcharge the account. He does this by requiring that the account be taken on the footing of wilful default… The trustee is made to account, not only for what he has in fact received, but also for what he might in due diligence have received… Where the beneficiary complaints that the trustee has misapplied the trust money, he falsifies the account, that is to say, he asked for the reimbursement to be disallowed…”

15.  Counsel for the 1^st and 3^rd defendants, Ms. Wu reminded me what were the arguments of the parties and how the Judge decided that the 1^st defendant had acted in breach of the trust and his fiduciary duties under the nominal/market rent issue.  The present exercise was ordered on the basis of and was subject to the Judge’s ruling.

16.  Mr. Siu informed that the relevant principle on assessment of mesne profit should be applied herein.  The relevant principle it set out in Fordtime Idustrial Ltd v Yip Shing Lam LDPE 757/2012 (unreported, 8 April 2016) at p.29 – 32:

“(1) The basic premise underlying the calculation of mesne profits, as with any other claim in trespass, is that a trespasser shall not make use of another person’s land without properly compensating that landowner for that use.

(2) Mesne profits may be calculated on a restitutionary basis, seeking to identify the extent to which the former tenant has been unjustly enriched by his occupation.

(3) In making that assessment of what the tenant would pay, it is essential to identify and consider what benefits it receives, because the object of the exercise is to identify the benefit to the tenant of the wrong it is committing.

(4) The landlord cannot have both restitutionary damages and damages quantify did by reference to his actual notice without there being recovery.”

17.  Upon thought, I set out my views in the followings.

(a) The present taking of account exercise is premised on the order of the Judge.  It sets out the scope and boundary.  No one can go beyond it.

(b) The order itself spells out the job of the master clearly, i.e. “to take account … 50% of the market rental of the 2 premises…”.  With this, one may observe that the taking of account as ordered is somewhat different from the ordinary one.  It usually asks the master to take account of “the profit made by the executor/administrator or loss incurred by the estate”.

(c) In going through the judgment of the Court of Appeal (CACV 69/2015, dated 11 November 2015) in upholding the Judge’s order, I note that the 1^st defendant had argued, among others, that the Judge made the wrong order.  However, the Hon Kwan JA disagreed and said that:

“57. We see no basis to interfere with the judge’s conclusion that to do broad justice between the parties [emphasis added], the 1^st defendant should be ordered to account for and pay the estate 50% of the market rental …”

18.  To conclude, the present taking of account exercise is not an ordinary one, as suggested by Mr. Lynn.  There is no need to decide how much the 1^st defendant was benefited from his breach of fiduciary duty (something like a tracing exercise) or how much the 1^st defendant caused the estate to suffer as a result of his breach of fiduciary duty (something that he should have earned for the estate).  Instead, what I need to do is something akin to the suggestion made by Mr. Siu.  It is so because the Judge decided to adopt a broad justice approach requiring the 1^st defendant to compensate the estate as such.

Issues

19.  As said, there are 2 properties involved in the present taking of account exercise.

20.  On Prince Edward Property, the valuation experts agreed that the rent of it from 9 June 2003 to 9 June 2017 was $23,092,800.

21.  However, as the Jordan Property, there has been no agreement.  The plaintiffs’ expert (Mr. Cheung) proposed $63,627,600 when that of the 1^st and 3^rd defendants (Mr. Chan), $52,776,000.

22.  The parties were asked to agree on issues thereof but could not do so.  All 3 counsel tried in their openings to identify the differences among them.  It suffices for me to set out the followings for the present purpose.  In the taking of account for the Jordan Property from 9 June 2003 to the date(s) when vacant possession of the same was delivered to the 2^nd defendant:

(a) Should the yard be included (the “yard issue”)?

(b) Should the basement, ground floor and first floor be considered as one single unit (or basement/ground floor as one shop and then, first floor as an office separately) (the “single unit issue”)?

(c) Should a deduction be applied to adjust the rent on repair condition, and if so, “-5%” or “-10%” (the “repair adjustment issue”)?  In determining it, the court will also decide on:

(i) Is it within the present taking of account exercise for the plaintiffs to seek determination that the 1^st defendant was in breach of the duty to maintain the Jordan Property and/or to allow the illegal structures thereon?

(ii) Subject to (i), did the 1^st defendant breach such duties?

Witnesses

23.  There were altogether five factual witness attending before this court.

(a) The plaintiffs called no factual witness.

(b) The 1^st and 3^rd defendants called four witnesses.

(i) Mr. Kong Chung Ip (the eldest son of the 1^st defendant)

(ii) Mr. Partcol Wu (sole proprietor of a company called “Skyton”, contractor to repair the subject properties)

(iii) Mr. Lau Shing (staff working at the Jordan Property at the material times)

(iv) Mr. Lam Chong Sang (staff working at the Prince Edward Property at the material times) 

(c) The 2^nd defendant himself gave evidence.

24.  Upon consideration, on balance, I accept all the evidence of the 5 factual witnesses, so far as they are relevant for the purpose of the present taking of account.

(a) The plaintiffs have not adduced any evidence to contradict them.

(b) Notwithstanding the cross‑examinations, their evidence remained unshaken.

25.  For the present purpose, I state the following findings (if they become relevant for the present taking of account).

(a) The unauthorized works at the Jordan Property were there from around 1974.  Building order(s) was/were served.  They were taken care in 2014 by Skyton.

(b) The basement of the Jordan Property suffered from water seepage problem from time to time since around 1993 or 1994.  Sometimes, water could be trapped there for over 2‑feet deep, resulting in the lowest level of storage racks submerged in water.

(c) The basement and ground floor of the Jordan Property was leased out for 3 years from 15 June 2015 at a monthly rent of $500,000.

The yard issue

26.  There is no argument that the yard is not part of the Jordan Property.  The yard is a common area belonging to the incorporated owners (“IO”) of the building.

27.  There is also no argument that the business occupied the yard at the material times.  No action has been taken by the IO.  At the same time, no action has been taken to claim adverse possession regarding the yard.

28.  Should be yard be included for the purpose in the present exercise?  The plaintiffs said “yes” and all defendants said “no”.

29.  Mr. Lynn asked me to adopt the suggestion made by the plaintiffs’ expert, Mr. Cheung.  He adopted the “existing use” approach, i.e. the value of the yard was taken into account because the 3^rd defendant did enjoy the use of the yard.  Legal title to the yard was said to be irrelevant.  Even it did matter, the 3^rd defendant had a good case of adverse possession.

30.  Ms. Wu disagreed. She preferred the expert of her clients, Mr. Chan.  He said that the 3^rd defendant had no legal title to the yard and as such, no value should be attributed to these 221 sq. feet.

31.  Mr. Siu also asked me to exclude the yard in the exercise.  He submitted that the yard was simply outside the scope of the Judge’s order.  The yard was never part of the Jordan Property.

32.  Upon consideration, I take the view that the yard is not to be included for the purpose of the present exercise.

(a) Legal title to the yard does matter in the present exercise. Neither the estate nor the 1^st defendant has title to the yard.

(b) The yard is not part of the Jordan Property and does not form part of the estate.

(c) As discussed, the Judge has not adopted the usual way of asking 1^st defendant to account for profit/compensate the estate for loss. She aimed at doing broad justice.  By counting the yard within the present exercise will in fact assess the profit that the 1^st defendant has earned.  It is outside the scope of the Judges’ order.

The single unit issue

33.  There is no argument that the 1^st defendant used the whole of the Jordan Property for the business at the material times.  The ground floor was the shop, the basement was the warehouse and the first floor, the office.

34.  There is also no argument that there was a lawful staircase linked between the ground floor and the basement, but not the ground floor and the first floor.  From the building plan, the 1^st floor was to be used for office only.

35.  Should the Jordan Property be counted as 1 single unit (and hence enjoy higher rent) or 2 units (and hence enjoy a lower rent)?

36.  Mr. Lynn asked me to adopt the calculation put by Mr Cheung.  Again, the “existing approach” should be preferred to.

37.  Ms. Wu disagreed.  Five reasons were given.  As a matter of principle, each floor could be leased out separately.  The staircase connecting the ground floor and the first floor was an unauthorized structure built on a common area of the building.  Such staircase was demolished.  The use of the first floor was “office” in the government document.  The rating and valuation department also assessed the Jordan Property separately.

38.  Mr. Siu under this topic supported the case of the plaintiffs.  He said that valuation should be done by “restitutionary approach” (as compared to “compensatory approach” in the said case of Fordtime Industrial Ltd v Yip Shing Lam.

39.  Upon consideration, I agree that all 3 floors should not be valued as a single unit in the exercise herein.  Instead, the basement/ground floor will be assessed as one shop on the one hand, and then the first floor on its own as an office, on the other.

(a) Such method coincides with the building plans of the Jordan Property.

(b) It has been something done by the Rating and Valuation Department.

(c) It is in line with the broad justice approach directed by the Judge, otherwise this court will be assessing the profit earned by the 1^st defendant when he took the advantage of other beneficiaries in the estate.

The repair adjustment issue

40.  Both experts agreed that certain deductions should be made in valuation to reflect the conditions (unauthorized structures and maintenance/water seepages) within the Jordan Property.  In the joint report, Mr. Cheung said that 5% was good enough when Mr. Chan took the view that 10% deduction should be made.

41.  Mr. Lynn took 2 position.  As a matter of law, he said that no deduction should be made because the unauthorized structures and maintenance/water seepages were caused by the 1^st defendant’s (further) breach of duty to maintain and repair the Jordan Property.  One could not take advantage of his own breach.  There was no reason why this court could make such finding within the taking of account exercise.  Alternatively, the fall‑back position rested on the suggestion made by his expert of 5% deduction.

42.  Ms. Wu disagreed.  Legally, it was not open to allege that the 1^st defendant was in breach of his duty to maintain and repair.  It was never the case when parties argued their cases before the Judge.  The taking of account was subject to the Judge’s ruling. Alternatively, there was no failure on the part of the 1^st defendant.  As to the deduction to be made, Ms. Wu said that the appropriate reduction should be “-7.3%” as revised by her expert after examinations.

43.  Mr. Siu agreed with Ms. Wu that the allegation against the 1^st defendant for (further) failure to maintain and repair went beyond the order of the Judge and the scope of the taking of account exercise.  He further added that master did not have the jurisdiction to determine any breach of trust.  Regarding percentage of deduction, he said that the question had become largely academic because both experts (after examinations) opined that an adjustment of around “-7%” should be adopted.

44.  Upon thought, I take the view that, as a matter of law, it was outside the scope of the present exercise to decide whether the 1^st defendant has or has not breached his duty to maintain and repair the Jordan Property.  The Judge in her order does not ask the master to do so at all.  It cannot be incidental to the order.

45.  In the event that I had to go further, as a matter of fact, on balance, with the evidence from the witnesses of the 1^st and 3^rd defendants and my findings of fact as above, the plaintiffs have not come up with proof that the 1^st defendant failed on such duty.

46.  In line with the broad justice approach directed by the Judge, I agree that no adjustment is needed. It is because, for the present exercise, the Jordan Property should be presumed to be reasonably repaired and at tenantable condition at the material times.

47.  If I was wrong in the above, i.e. I should have held that (as a matter of law) it was within the present exercise to decide if the 1^st defendant failed to maintain/repair the Jordan Property and (as a matter of facts) he did fail so on balance, with the state of expert evidence before me after cross‑examinations by counsel, I agree to adopt the suggestion of broad brush “-7%” made by Mr. Siu in the circumstances, rather than going through the details as suggested by both Mr. Lynn and Ms. Wu in their written closing submissions.

Answers to the issues

48.  To conclude, my answers to the issues having been identified are:

(a) The yard should not be included.

(b) The basement/ground floor as one shop and then, first floor as an office separately.

(c) No adjustment is needed for the repair condition.

(i) No.

(ii) No (if applicable).

Direction to parties

49.  In light of the above rulings, I will further direct the parties (and the experts), without prejudice to any of their rights in the matter, to agree on the rental of the Jordan Property from 9 June 2003 to the date(s) when the 1^st defendant delivered vacant possession of the same to the 2^nd defendant.  Parties do within 28 days submit a draft order for the court’s approval.

Costs

50.  Costs follow event. There appears to be no reason to depart from it.  Although I do not have the benefit of parties’ full submissions on costs, the Ruling on Costs of the Judge dated 28 May 2015 herein and the decision of the Court of Appeal in dismissing the appeal against the Judge’s costs order (paragraphs 58 to 65 of CACV 69/2015 dated 11 November 2015) do shed some light in the matter.

51.  In the present taking of account exercise, parties won and lost some of the issues before me.  Sometimes, I relied on counsel’s submission to make the decision.  Sometimes, I had my own reason(s).  The factual evidence adduced by parties appear to be not relevant for the exercise. With all these in mind, I will make an order nisi (which is to be made absolute within 28 days from the date hereof) that:

(a) The 1^st defendant shall pay the plaintiffs and the 2^nd defendant costs of assessment, including all costs reserved and certificate of counsel for hearings before me at the assessment as well as the 2 PTRs, on party and party basis, to be taxed if not agreed.

(b) The difference between party and party basis and full indemnity be paid to the plaintiffs out of the estate.

52.  I have nothing further to add apart from expressing my gratitude to all 3 learned counsel and the 2 experts appearing before me for their assistance.