ALBERT BUX v. THE COMMISSIONER OF ESTATE DUTY

HCED 1/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ESTATE DUTY APPEAL NO. 1 OF 2005

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J U D G M E N T

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I.  Introduction

1.  In valuing an estate for the purposes of estate duty, Estate Duty Ordinance (Cap.111) (EDO) s. 13(1) provides that:

"an allowance shall be made ... for debts and incumbrances ... and any debt or incumbrance for which an allowance is made shall be deducted from the value [of] the property liable thereto."

2.  The deceased's estate has been valued at $3,579,100.00 (the valuation).  That amount excludes the deceased's matrimonial home (the home) which is exempt from duty by reason of EDO s. 10A.  At the time of death, the home was subject to a mortgage in favour of the Financial Secretary Incorporated (FSI) and the outstanding debt so secured was $2,597,333.00 (the balance).

3.  The appellant contends that allowance should be made for the balance in the calculation of estate duty.  The appellant submits that this should be done by deducting the balance from the valuation and charging estate duty on the resultant difference.  The appellant contends that this is what the words "shall be deducted from the value [of] the property liable thereto" in EDO s. 13(1) mean.  More specifically, the expression "property liable thereto" (the appellant says) refers to the whole of the deceased's property which is liable to estate duty.

4.  The Commissioner disagrees with the appellant's construction of EDO s. 13(1).  The Commissioner says that the balance is not a relevant debt because it concerns property which is not chargeable to estate duty.  The Commissioner reads "property liable thereto" as referring only to the specific property subject to a debt or incumbrance.  Since the home is exempted from estate duty, deducting the balance from the value of the home, cannot affect the amount of estate duty payable.  There is thus no material way under EDO s. 13(1) (the Commissioner suggests) in which "allowance" can be made for the balance.

5.  The short question is whether the appellant or the Commissioner is right.

II.  Discussion

6.  In my view, the appellant is right.

7.  EDO s. 13(1) refers to "debts" and "incumbrances".  Although related, the 2 legal concepts are not normally treated as synonymous.

8.  A debt may be secured or unsecured. 

9.  A simple or unsecured debt arises where when one person owes a liquidated or unliquidated sum to another.  The person to whom the sum is due (the creditor) has a personal right of action against the person from whom the sum is due (the debtor) for the sum (the debt).  As a purely personal right of action, an unsecured debt does not attach to any particular property. It cannot be said that any specific property is "liable" for an unsecured debt.

10.  A secured debt also confers a personal right on a creditor against a debtor.  But it does more than just that.

11.  In addition, a secured debt confers an "in rem" right on a creditor.  That means that the creditor may enforce the debt against the specific property against which the debt is secured. The creditor's interest (which may be legal or equitable) in such property is often referred to as an "incumbrance" on the property. 

12.  It is thus usually only in the context of a secured debt that one can speak of property being "liable" for a debt.

13.  If "property liable thereto" only referred to "the specific property liable for a particular debt" (as the Commissioner contends), allowance could not be made for unsecured debts under EDO s. 13(1).  This is because, as just explained, ordinarily, no specific property can be said to be "liable" for an unsecured debt.

14.  The Commissioner's construction of s. 13(1) would then run counter to EDO s. 13(4).  The latter section states:

"No allowance shall be made for debts due from the deceased, other than debts contracted in Hong Kong to persons ordinarily resident therein, unless charged on property situate within Hong Kong."

15.  The effect of EDO s. 13(4) is that allowance can be made under s. 13(1) for unsecured debts, provided that they have been incurred in Hong Kong in favour of persons ordinarily resident here.  If a debt has been incurred outside Hong Kong or the creditor is not a Hong Kong ordinary resident, then allowance will only be possible if the debt is one which is secured against Hong Kong property.

16.  The Commissioner's reading of “property liable thereto” would deny allowance for a simple unsecured debt, even if that debt has been incurred in Hong Kong and was payable to a Hong Kong ordinary resident.

17.  It seems to me that the only reading of “property liable thereto” which makes sense of EDO s. 13 as a whole is that proposed by the appellant.

18.  Let me now apply that reading here.

19.  This case concerns a mortgage, which is a type of secured debt.  But (as pointed out above) a secured debt may be regarded as comprising 2 rights.

20.  There is a personal right, here a right vested in FSI to sue for monies advanced to the deceased in his lifetime by way of loan.  There is additionally a proprietary right, also vested in FSI, to recover unpaid monies against the home.  FSI’s mortgage is both a personal debt and an incumbrance on property.

21.  The personal right is the same as that which arises on any unsecured or simple debt.  That personal right is here one that has been incurred in Hong Kong in favour of a person (FSI) ordinarily resident in Hong Kong.  It follows that allowance can be made for it under EDO ss. 13(1) and (4).  The fact that incidentally FSI can also enforce its personal right against the home (which happens to be property exempt from estate duty) cannot affect the foregoing analysis.

22.  Mr. Johnny Chan (appearing for the Commissioner) draws my attention to EDO s. 8.  That section relates to property which a deceased has disposed of during his lifetime in favour of a relative or company.  In certain circumstances, property so disposed may be chargeable to estate duty.  But, in assessing duty, allowance may be given for any debt or incumbrance created by the deceased on the property so disposed.

23.  EDO s. 8(7) provides:

"Where the amount to be allowed as a deduction under this section is allowed as a deduction from the value of the property liable to a debt or incumbrance created by the deceased, it shall not exceed the amount, if any, which would be allowed under section 13(1) if sections 7 and 45 had not been passed."

24.  Mr. Chan submits that, in the context of EDO s. 8(7), it is apparent that allowance may only be given for "debts" or "incumbrances" secured against the property which has been disposed.  Mr. Chan infers from this that "property liable thereto" in EDO s. 13(1) must be read with a similar restriction.

25.  I am not persuaded by Mr. Chan’s argument.  Let us assume that Mr. Chan's reading of EDO s. 8(7) is right.  For the purposes of these proceedings, it is unnecessary for me to decide the point conclusively.

26.  Even then, EDO s. 8 deals with the limited situation where property disposed of by the deceased and no longer belonging to him at the time of death, is nonetheless subject to estate duty. When valuing such property for the purposes of duty, it is hard to see why debts which are unconnected with the disposed property, should be allowed against it.

27.  Even if Mr. Chan is right in relation to EDO s. 8(7), it does not follow in logic that EDO s. 13(1) is similarly confined as far as the scope of allowable "debts" is concerned.  EDO s. 13(1) deals with a different and more general situation.

28.  Mr. Chan has also referred to Re Barnes [1938] 2 KB 684 (CA).  He suggests that, if EDO s. 13(1) permits an allowance to be made here for the balance, it should only be deductible against that part of the deceased's estate which was solely owned by him (as opposed to jointly owned by the deceased and his wife).

29.  Re Barnes concerned Finance Act 1894 s. 7(1).  That section is similar (but not identical) in terms to EDO s. 13(1).  The question in Re Barnes was whether an allowable debt could be deducted against inter vivos gifts for which the deceased's estate was liable to pay duty.

30.  The Court of Appeal upheld Lawrence J's first instance decision that an allowance could not be made against property which, having been gifted away in the lifetime of the deceased, no longer belonged to him at the time of his death.

31.  I do not think Re Barnes helps Mr. Chan.  At the precise moment of his death, the deceased's joint interest in any assets remained vested in (and belonged to) him.  It was only in the instant immediately following his death that his wife became solely entitled to those assets by survivorship.  There is thus no analogy between the joint assets here and the inter vivos gifts in Re Barnes.

32.  Finally, Mr. Chan notes that EDO s. 10A is unique to Hong Kong.  He suggests that a reading of EDO s. 13(1) along the lines advanced by the appellant would mean a “double benefit” was being conferred upon a deceased without explicit statutory authority.  I do not find this submission compelling.  For the reasons given above, it seems to me that the Legislature plainly intended to grant allowance for “debts” which (like that owed here by the deceased to FSI) satisfy the criterion in EDO s. 13(4).

IV.  Conclusion 

33.  The appeal against the Commissioner's assessment of estate duty succeeds.  Allowance may be made under EDO s. 13(1) for the balance when assessing the duty payable on the deceased's estate.