HILLHEAD LTD v. SEAN ERIC MCLEAN HOTUNG AND OTHERS

HCMP 5250/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5250 OF 2002

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D E C I S I O N

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Introduction

1. This is a Beddoe application taken out by the trustee, the Plaintiff in these proceedings. The substantive directions sought have been agreed by the parties, which included consolidating three actions, namely, HCMP No. 2820 of 2002 and HCMP No. 4511 of 2002 with HCA No. 571 of 2003 ("the Consolidated Action") and the Plaintiff, as trustee, will take a neutral stance in the Consolidated Action. As between the Trustee and the 2nd Defendant, it has been further agreed as follows:

"Without prejudice to the Plaintiff's right to claim all the other costs incurred incidental to the assertions made by the 2nd Defendant, the 2nd Defendant will pay all the Plaintiff's costs of and incidental to the present proceedings, HCMP No. 5250 of 2002, to be taxed on a trustee basis if not agreed, such payment by the 2nd Defendant of the Plaintiff's costs shall be without prejudice to the right of the 2nd Defendant to seek to recover such costs from the other defendants in the consolidated action. The Plaintiff and the 2nd Defendant note that the 1st 4th and 5th Defendants object to the right of the 2nd Defendant to seek to recover such costs from the other defendants in the consolidated action."

The only outstanding issue is as regards the costs of the 1st 4th, 5th and 7th Defendants of and incidental to the present proceedings.

The constitution of the trusts

2. The Plaintiff is the trustee of two trusts of shares in Hotung Enterprises Limited ("HEL") and Hotung Investment (China) Limited ("HICL"). These two trusts will be referred to as the "HEL Share Trust" and the "HICL Share Trust" respectively. The HEL Share Trust was constituted by the 2nd Defendant, who is the father of all the other Defendants, transferring 10,002 shares in HEL to the Trustee on 17 September 1979 and the Trustee executed a trust deed ("the Hillhead-HEL Trust Instrument") in favour of the 3rd ("Mara"), 4th ("Sheridan") and 5th ("Gabrielle") Defendants, who are the daughters of the 2nd Defendant (collectively called "the Daughters"). As to the HICL Share Trust, HICL allotted 3 of its own shares to the Trustee on 28 September 1979, who then executed a trust deed ("the Hillhead-HICL Trust Instrument") in favour of the Daughters. It is not clear on the evidence who paid for the 3 HICL shares allotted to the Trustee, but the two trusts were apparently set up at the instigation of the 2nd Defendant.

3. At more or less the same time, the 2nd Defendant set up two similar trusts, also involving 10,002 shares in HEL and 3 shares in HICL in favour of the 1st ("Sean"), 7th ("Anthony") and 8th ("Michael") Defendants (collectively referred to as "the Sons"). The 2nd Defendant's cousin, Madam Ho Yuen Ki ("Madam Ho") is the trustee of those trusts.

4. By two Deeds of Appointment and Assignment dated 22 April 2002 executed by two of the Daughters, Sheridan and Gabrielle respectively, they appointed Sean as the trustee of their beneficial interest in the HEL Share Trust and the HICL Share Trust. By a Deed of Renunciation of Beneficial Interest dated 25 June 2002, Mara renounced all her beneficial interest in the HEL Share Trust and the HICL Share Trust in favour of Sheridan. By a Deed of Appointment and Assignment of July 2002, Sheridan appointed Sean to be the trustee of the interest renounced in her favour by Mara.

5. Initially, the Plaintiff had some doubts as to the authenticity and the effect of the abovementioned deeds. In a letter dated 11 November 2002, solicitors for the 2nd Defendant stated that the 2nd Defendant had ascertained from his daughters, Mara and Sheridan that "they have never given any authorisation or power of attorney for [Sean] to act for them". However, given the confirmation of the due execution of these deeds by the Daughters, it is now accepted that deeds are valid and effective in achieving their apparent purposes.

The recent legal proceedings

6. In HCMP No. 2031/2002 ("the 1st Action"), Sean and Anthony sought an order to compel Madam Ho to execute four powers of attorney to appoint them to exercise all her powers as the registered holder of the shares in HEL and HICL which she held on trust for them. The application was dismissed at first instance by Chung J on 26 June 2002, which dismissal was upheld by the Court of Appeal on 7 November 2002. Sean and Anthony have filed a notice of intended application for leave to appeal to the Court of Final Appeal on 27 November 2002.

7. In HCMP No. 2820/2002 ("the 2nd Action), Sean effectively sought the same directions against the Plaintiff in favour of Sheridan and Gabrielle as those sought against Madam Ho in the 1st Action. By consent, the 2nd Action has been stayed pending the outcome of the appeal to the Court of Final Appeal in the 1st Action.

8. In HCMP No. 4511/2002 ("the 3rd Action"), Sean sought an order to compel the Plaintiff to requisition the directors of HEL, pursuant to section 113 of the Companies Ordinance, Cap 32, to convene an extraordinary general meeting for the purpose of passing various resolutions. This action was adjourned by Kwan J on 15 January 2003 to be heard after the determination of the present Beddoe Application.

9. In about mid August 2002, the 2nd Defendant approached the company secretary of the Plaintiff and made certain assertions regarding the terms of the trusts ("the Assertions"). The Plaintiff's solicitor, Ms Wanda Tong promptly contacted Mr Herbert Tsoi acting for the 2nd Defendant on 21 August 2002. Mr Tsoi confirmed that he would be sending a statutory declaration from the 2nd Defendant setting out the Assertions. Such statutory declaration has never been received. Neither was any explanation given.

10. As a result of further correspondence, the 2nd Defendant's solicitors gave details of the Assertions to the Plaintiff's solicitors in their letter of 5 December 2002. The letter alleged that prior to the settling of the trusts, the 2nd Defendant expressly told Mr Ronald Ho, a former director of the Plaintiff and Madam Ho that:

"1. He would like to settle the property for his children. However, since the children were very young at that time, he would like to reserve a power to revoke the trust if any of the children did not live up to his expectation. The power that he reserved to himself would expire upon his death and thereafter the trustees could distribute the shares to the beneficiaries;

2. The trustees were also given the full discretion, during the lifetime of our client, to deal with any income that may be derived from the shares by distributing the same amongst our client, his wife and his other children (or any or them), or in their entire discretion, to accumulate the same;

3. The trustees were not to be concerned with and were to be relieved of all duties regarding the management or running of the two companies, i.e. Hotung Enterprises Limited and Hotung Investment (China) Limited;

4. Although our client came from a good family, his father had told him to build up his life with his own efforts and our client managed to do that before he inherited the fortune of his family. Our client also wished his children to learn to work hard and earn their own living rather than counting on their father."

11. As the Assertions were not supported by documentary evidence, Ms Tong requested for the 2nd Defendant's statutory declaration from his solicitors on 6 December 2002. On 9 December 2002, the 2nd Defendant's solicitors produced a statutory declaration by Madam Ho supporting the 2nd Defendant's Assertions. That declaration contained double hearsay. Ms Tong attempted to make enquiries with the two directors who executed the Trust Deeds to whom the 2nd Defendant allegedly gave the Assertions. However, she was unable to get in touch with them as they had all resigned from the Plaintiff. She wrote to the 2nd Defendant's solicitors, but there was no response.

12. On 13 February 2003, the 2nd Defendant issued a writ in HCA 571/2003 ("the Consolidated Action") claiming, inter alia, declaratory relief and an order of rectification of the Hillhead-HEL and Hillhead-HICL Trust Instruments pursuant to the Assertions.

The issue raised in the present proceedings

13. The Plaintiff as trustee has no personal interest in the subject matters of the trusts and is willing to discharge its duty as trustee according to whatever are the terms of the trusts. But as a result of the Assertions by the 2nd Defendant, doubts have arisen as to whether the Hillhead-HICL and Hillhead-HEL Trust Instruments accurately and fully recorded the terms of the trusts, whether the trusts are truly bare trusts, and whether there are other beneficiaries (other than Gabrielle and Sheridan). In order that it may properly administer the trust, the fundamental issue which the Plaintiff must resolve is whether the shares of HICL and HEL were held on the oral terms allegedly communicated by the 2nd Defendant to the Plaintiff through Mr Ronald Ho or on the terms of the written trust instruments. Thus, the substantive question raised in the present proceedings concerns the Assertions. In my opinion, it is proper and appropriate that the Plaintiff took out the Beddoe application. This has now been resolved by the 2nd Defendant starting the Consolidated Action and the parties agreeing to the directions to be sought. The outstanding issue is the costs of the Beddoe application.

Costs of the Beddoe application

14. Mr Man submits that the Plaintiff as trustee has done nothing wrong. Directions are sought and made as to how the trustee should deal with the Assertions. I find that it is proper for the Plaintiff to take out the present proceedings. There is no reason why the trustee should personally bear its own costs or the costs of any of the Defendants. The options are whether those costs should be borne by any, and if so which, of the Defendants or be paid out of the trust asset pursuant to Order 62 rule 6(2) of the Rules of the High Court. As between the Plaintiff and the 2nd Defendant, there is an agreement that the 2nd Defendant will pay all the Plaintiff's costs without prejudice to the right of the 2nd Defendant to seek to recover such costs from the other Defendants in the consolidated action.

15. As for the 1st, 4th and 5th Defendants, Mr Coleman's submission is that the costs should either be borne by the Plaintiff absolutely or subject to its ability to recover those costs as part of the costs payable by the 2nd Defendant. The 7th Defendant who is unrepresented asked that the costs be paid by the 2nd Defendant. Mr Wong, on behalf of the 2nd Defendant submits that the outcome of the consolidation is highly relevant as to who should bear the costs of the Beddoe application and hence the issue could not be decided at this stage.

16. The first three actions were taken out by the Daughters and Sons requiring the trustees to do certain things. The 2nd Defendant's attention has been drawn to those proceedings. On his assertion, he was the settlor of these trusts. He stood by and did nothing. Mr Wong explained that the 2nd Defendant was not a party to any of those proceedings and was not given a copy of the affirmations filed in those proceedings. Be that as it may, the Assertions were known to him as they were allegedly his assertions. If the Assertions are true, by the mere reading of the summonses filed in the various actions, the 2nd Defendant, either by himself or with the assistance of his solicitors, must have realised that the children have no right to compel the Plaintiff and Madam Ho to do what they demanded them to do because the trusts are not bare trusts. He must also be aware that the Assertions form the central issue in those proceedings.

17. The 2nd Defendant approached the company secretary of the Plaintiff. As a result a series of correspondence ensued for four months between the Plaintiff's and his solicitors. He ignored the Plaintiff's solicitors' request for evidence in support of the Assertions. The Plaintiff could only act on its own declaration of trust which mentioned nothing about the Assertions. Despite repeated requests by the Plaintiff's solicitors for a statutory declaration from the 2nd Defendant in support of the Assertions, and the intimation that unless one is received, the Plaintiff would act in accordance with the trusts in accordance with the declaration of trust by the trustee, the 2nd Defendant did not respond. The original directors to whom the Assertions were related are not available. The 2nd Defendant was the only other source of information. Hence, I am not persuaded by Mr Wong's argument that it was for the trustee to rectify the trust instruments and not the settlor. Deadlines imposed by the Plaintiff for making a statutory declaration were long past. In the circumstances, it is only appropriate for the Plaintiff to bring the Beddoe proceedings.

18. Having failed to comply with the agreed timetable for making the statutory declaration, the 2nd Defendant eventually took out proceedings in HCA No. 571/2003. The writ was generally endorsed and the Statement of Claim was only filed on the very last day. No explanation has been offered as to the timing of the writ or the failure to provide the statutory declaration. Against this background and timing, it is clear that the incurring of the costs of these proceedings have been caused and necessitated by the 2nd Defendant. As between the Plaintiff and the 2nd Defendant, there can hardly be any reason that the 2nd Defendant should not bear the costs of the Plaintiff. That has been rightly agreed between the two parties.

19. The same could be said in respect of the costs incurred by the other Defendants. They were brought into these proceedings by the Plaintiff who in turn was forced to bring the Beddoe proceedings by the inaction of the 2nd Defendant. I do not find Mr Wong's submission that I should delay my decision on costs until the outcome of the Consolidation Action is known. Here, costs are incurred because of the inaction of the 2nd Defendant. These costs could have been easily saved. There is a total lack of explanation from the 2nd Defendant for not making the statutory declaration or for not seeking rectification. The court has a duty to ensure that no costs are unnecessarily incurred. This is a case where in awarding costs, consideration on causation greatly outweighs those on merits. Hence, there is no need to defer my decision until the outcome of the event. It is undesirable as it is unnecessary to revisit the question of costs of these proceedings until the conclusion of the Consolidated Action. Accordingly, I order that the 2nd Defendant shall pay the costs of the 1st, 4th, 5th and 7th Defendants directly, to be taxed if not agreed.