LAU KOON YING MATTHEW, as the executor of the estate of LAU YIU WING, deceased (“the Deceased”) v. LAU TARK WING AND ANOTHER

CACV 508, 509 & 510/2020
(Heard together)

[2021] HKCA 1349

CACV 508/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 508 OF 2020

(ON APPEAL FROM HCAP NO 23 OF 2013)

____________

____________

____________

CACV 509/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 509 OF 2020

(ON APPEAL FROM HCA NO 2305 OF 2012)

____________

____________

CACV 510/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 510 OF 2020

(ON APPEAL FROM HCA NO 2306 OF 2012)

____________

____________

(Heard together)

___________________

J U D G M E N T

___________________

Cheung JA:

1.  I agree with the judgment of G Lam JA. Accordingly there will be judgment in terms of the orders he proposes to make.

Au JA:

2.  I agree with the judgment of G Lam JA.

G Lam JA:

Introduction

3.  These appeals raise the issue of whether compound interest should be awarded to the plaintiff on the sums found due upon the taking of accounts ordered by the court in three related actions. Master J Wong, after taking the accounts, awarded compound interest but, on appeal, B Chu J substituted an order for simple interest.  The plaintiff now appeals to this court, contending that compound interest should be awarded.

Background

4.  Lau Hin Chi (“Grandfather”) was born in 1913 as an indigenous villager of a village called Shun Fung Wai (順風圍) in Tuen Mun, New Territories, Hong Kong.  He and his wife Madam Tam Mei Ho (“Grandmother”) had two sons, namely, Lau Yiu Wing (“Father”) and Lau Tark Wing (“Tark Wing”) (in addition to a son who died in infancy and five daughters).  The appellant, who was the plaintiff below in the three actions (“plaintiff”), is the son of the Father and thus a nephew of Tark Wing.

5.  There is no dispute that in 1966, the Grandfather inherited various properties in the New Territories including Lots No 2785, 3763 and 3825 in DD No 124 (which will be referred to as “Lot 2785”, “Lot 3763” and “Lot 3825” respectively).  In 1980, the Grandfather transferred a 1/4^th undivided share in Lot 2785 and Lot 3825 to each of the Father, Tark Wing and the Grandmother by way of gift.  They became, therefore, together with the Grandfather, tenants in common each holding a 1/4^th undivided share in the two properties.  On 21 September 1992, these two lots were sold to a third party for a total consideration of $4,338,468. The plaintiff complained that the Father had never received his ¼ share of the sale proceeds in the amount of $1,084,617 (“Sale Proceeds”).

6.  Lot 3763 was subsequently sub‑divided into several sections including Lot 3763C, Lot 3763D, Lot 3763E and Lot 3763RP.  By 13 September 1994, the Father had become the sole owner of Lot 3763C; the plaintiff had become the sole owner of Lot 3763D; Tark Wing had become the sole owner of Lot 3763E; and the Father and Tark Wing had become equal owners as tenants in common of Lot 3763RP.  A 3‑storey house was constructed on each of Lot 3763C, Lot 3763D, Lot 3763E, and a 2‑storey house was constructed on Lot 3763RP, in around 1997. The Grandfather passed away in July 1997.

7.  The houses on Lot 3763C, Lot 3763D and Lot 3763RP were let to tenants, and Tark Wing, through his companies, namely, Wing Hing Resources Ltd (“Wing Hing”) and Caba Resources Ltd (“Caba”), had been collecting the rents.  The Father passed away in November 2007, and the plaintiff became the sole executor of his estate.  The plaintiff started asking Tark Wing for vacant possession of Lot 3763C and Lot 3763D in late 2010 and obtained vacant possession in December 2011.  The plaintiff complained that Tark Wing had failed to account to him or the Father for the rental proceeds of Lot 3763C and Lot 3763D and half of the rental proceeds of Lot 3763RP (collectively, “Rental Proceeds”).

8.  In 2012 and 2013, the plaintiff brought three actions to pursue, inter alia, these complaints:

(1)   In HCAP 23/2013, the plaintiff, in his capacity as executor of the Father’s estate, claimed against Tark Wing and the Grandmother for, inter alia, an account of the Sale Proceeds (i.e. the Father’s ¼ share of the proceeds of the sale of Lot 2785 and Lot 3825 in 1992).

(2)   In HCA 2305/2012, the plaintiff, in his capacity as executor of the Father’s estate, claimed against Tark Wing and Wing Hing for an account of the rental proceeds received in respect of Lot 3763C and the Father’s half share of Lot 3763RP from 1997 onwards.

(3)   In HCA 2306/2012, the plaintiff, in his personal capacity, claimed against Tark Wing, Caba and Wing Hing for an account of the rental proceeds received in respect of Lot 3763D from 1997 onwards.

9.  These three actions were tried together before Chow J in 2017.  The Grandmother had died in 2016 and her estate was represented in the trial by Tark Wing as executor.  One of the defences raised by Tark Wing was that there was an oral arrangement within the family whereby it was agreed that a village house would be built on each of Lot 3763C, Lot 3763D, Lot 3763E and another lot (Lot 884); the construction costs would come from the Grandfather and the Grandmother as well as the resumption compensation for another lot in the Father’s name and contributions from the Father and Tark Wing; the rental income generated from Lot 3763C would be used to maintain the Grandfather and the Grandmother during their lifetime; the ground floor of Lot 3763D would be reserved for the Father’s or his family members’ occupation when they returned to Hong Kong while the rental income generated from the upper two floors would be used to maintain the Grandfather and the Grandmother during their lifetime and pay the expenses of ancestral worship and maintenance of the general area of Lot 3763.  This defence eventually failed because Chow J, whilst believing that there was some general discussion within the family on how the construction of the houses was to be funded, did not accept that the parties had actually reached any definite and binding arrangement as alleged by Tark Wing.[1]

10.  In relation to the claim for an account of the Sale Proceeds, Tark Wing’s defence was that, as part of the same oral arrangement, the Father had agreed that the proceeds be applied towards the construction costs of the village houses on Lot 3763, and that whilst the Sale Proceeds were initially received by Tark Wing, he had since paid them over to the Grandmother who applied them towards the construction of the houses.  In his judgment, Chow J did not accept that this was done with the consent or approval of the Father, concluding:[2]

“ Tark Wing’s payment of the same to the Grandmother, in the absence of proof of consent or approval by the Father, constituted a breach of his fiduciary duty owed to the Father.”

11.  In respect of the Rental Proceeds, Chow J said:

“ 77. It is not in dispute that Tark Wing and/or his companies (Caba and Wing Hing) collected the Rental Proceeds generated from Lot 3763C, Lot 3763D and Lot 3763RP since around 1997. … The defence put forward by Tark Wing, Caba and Wing Hing is based on the Arrangement … In view of my earlier conclusion regarding the Arrangement, this defence cannot stand.

78. It is clear, in my view, that Tark Wing, Caba and Wing Hing should be regarded as holding the Rental Proceeds as ‘trustees’ for the Father and Matthew, and ought properly to account to the Father and Matthew for the Rental Proceeds, which they have failed to do.”

12.  In the result, Chow J directed that:[3]

“ (1) an account be taken of the Father’s share of the proceeds of sale of Lot 2785 and 3825 received by Tark Wing and the Grandmother;

(2) an account be taken of the Rental Proceeds received by Tark Wing, Caba and/or Wing Hing; and

(3) the questions of (i) the appropriate period and rate of interest, and (ii) what (if any) credit should be given for the construction costs of the houses on Lot 3763C, Lot 3763D, Lot 3763RP and Lot 884, be dealt with in the taking of the accounts.”

The Accounts

13.  On 8 January 2018, the plaintiff commenced the accounting procedure by filing an affirmation, made by his solicitor, asking for the relevant accounts.  In that affirmation, the plaintiff stated that the defendants should be required to pay compound interest on the sums found due at the rate of prime +1% per annum with yearly rests. 

14.  On 16 January 2018, directions were given by the Master J Wong (“Master”) for the account.  Among other things, the defendants were ordered to file an account of the Sale Proceeds and the Rental Proceeds together with all vouchers receipt documents and statements, identifying the whereabouts of the proceeds at all material times since receipt, the income and profits made therefrom, the properties or assets acquired therefrom and the interests accumulated and received.

15.  The defendants provided the accounts through an affirmation of Tark Wing dated 21 March 2018.  In that affirmation:

(1)   Tark Wing stated that he passed the Sale Proceeds (i.e. $1,084,617) to the Grandmother who then used them for the construction of the houses.  He did not know where the money was deposited or kept as it was over two decades ago and the Father had never inquired about the sum during his lifetime, but he was prepared to account for that sum.

(2)   As to the Rental Proceeds, Tark Wing produced a schedule summarising the rental income received in respect of Lots 3763C, 3763D and 3763RP between 1997 and 2018.  Out of such income, he claimed deductions of certain specific expenses, 10% for general wear and tear, and 16.5% for tax payable by Caba and Wing Hing.

(3)   Tark Wing also claimed credit for the construction cost of the houses, of which the Father’s and the plaintiff’s shares together amounted to about $3.85 million. 

16.  The account was taken before the Master pursuant to Order 43 of the Rules of the High Court (Cap 4A).  By his decision dated 29 April 2019,[4] the Master held that in relation to the Sale Proceeds, Tark Wing and the Grandmother’s estate had to repay the sum of $1,084,617 in full to the plaintiff as executor of the Father’s estate.[5]  As to the Rental Proceeds, the Master rejected the deductions proposed by Tark Wing as being vague, unreliable and not supported by documents, and adopted the plaintiff’s calculations.  He also refused any deduction on account of the construction costs of the houses on the ground that Tark Wing had failed to discharge as burden to show that credit should be given.  As regards interest, the Master held that the defendants had to pay the amounts due with compound interest at the rate of prime +1% per annum with yearly rests. 

17.  The Master mentioned the following four matters in particular when ordering compound interest:[6]

“ (a) Tark Wing from time to time still maintain defences having rejected by the trial judge.

(b) In my view, Tark Wing has not provided truthful/accurate account.

(c) There is no reason why Matthew should not be granted compound interest because it is a right of the beneficiary in case where the accounting party is unable/unwilling to account.

(d) The case of Ting Yuk[7]does not assist Tark Wing and his companies.  In the authority, within an assessment of damages (not taking of account), the plaintiffs asked for compound interest.  In the end, the learned master refused to do so because she did not see fit to so order in the particular circumstances of the case.”

18.  The actual judgment sums, calculated on the basis of compound interest up to 29 April 2019, are as follows:

(1)   $7,252,785.41 in HCAP 23/2013, representing the Sale Proceeds of $1,084,617 and compound interest thereon from 21 September 1992;

(2)   $6,956,135.86 in HCA 2305/2012, representing the net rental proceeds received in respect of Lot 3763C and half of the net rental proceeds received in respect of Lot 3763RP from 1 January 1997 together with compound interest from the time of receipt; and

(3)   $3,893,950.20 in HCA 2306/2012, representing the net rental proceeds received in respect of Lot 3763D from 1 January 1997 together with compound interest from the time of receipt.

19.  Pursuant to RHC Order 44 rule 12 and Order 58 rule 1(1), the defendants appealed against the Master’s decision in each of the actions to a judge in chambers[8] in respect of (i) the award of compound interest, (ii) the commencement date for the accrual of interest, and (iii) the refusal of any deduction for construction costs.  By her judgment dated 21 August 2020 (“Judgment”),[9] B Chu J (“the judge”) allowed the appeals in relation to compound interest holding that simple interest should be awarded instead, but dismissed the appeals in relation to the other two matters.

20.  The plaintiff now appeals to this court from the Judgment in relation to the issue of compound interest.  We are told by the defendants’ counsel that the difference in the aggregate judgment sums depending on whether interest is compounded exceeds $10 million.

The judge’s decision on interest

21.  The judge noted that the plaintiff’s case before the Master was that compound interest should be awarded because of the defendants’ wilful default in rendering proper accounts.[10]  She further noted that what the plaintiff had done was to seek to “falsify” the account in the sense of asking for the purported disbursements to be disallowed, rather than to “surcharge” the account by having it taken on the basis of wilful default so that certain additional property should be included on the ground that it should have been obtained for the benefit of the plaintiff had the defendants performed their duty.[11]

22.  The judge then considered the four reasons mentioned by the Master.  She concluded that reason (a) was not made out because Tark Wing did not maintain defences that had been rejected by Chow J, and that it was anyhow not a valid reason for awarding compound interest.[12]  As to reason (b), the judge considered that the lack of supporting documents relating to the sale of Lot 2785 and Lot 3825 and the construction of the houses was unsurprising given the lapse of time, and noted that the Master did not make any finding of deception on the part of Tark Wing.  She considered that the provision of inaccurate accounts was not a valid reason for ordering compound interest.[13] The judge noted that reason (d) was not really a reason and was not relied upon by the plaintiff.[14]

23.  As for reason (c), the judge noted the plaintiff’s argument that there was ample basis to conclude that Tark Wing had used the Sale Proceeds for his own purpose and that he and his two companies had used the Rental Proceeds for their own purposes.[15]  The judge however considered that the Master had apparently misunderstood the law in thinking compound interest was warranted on the facts.  In the end she concluded that it was plainly wrong to order compound interest.  The gist of the judge’s reasoning appears in the Judgment as follows:

“ 93. In the present case, the parties were all family members and the fiduciary relationship arose out of a familial and not commercial context. Tark Wing had said that the present dispute between him and P only arose after Father had passed away. It was also Tark Wing’s evidence that all along Ds had managed and dealt with the rental properties. There was no sufficient evidence that Tark Wing or Grandmother had received any compensation for their efforts. There was no evidential foundation for any assumption that there was any actual gain/profits or assumed gain/profits made by Tark Wing and/or Grandmother. Tark Wing was a professional accountant, and there was no sufficient evidence that he was involved in any commercial trade or transaction. The evidence seemed to indicate that Grandmother was a housewife and in any event, there was no evidence to show she had been involved in any commercial trade or transaction. There was also no evidence that Tark Wing and/or Grandmother had carried on any business as property developers, apart from building the houses on the family lots. There was also no evidence as to the nature of the business of the Companies, whether they were involved in any commercial trade or activities or investments, apart from rendering service to Tark Wing in collecting the rental income from and managing the houses on Lot 3763 and on DD 884.

94. Further, there was no sufficient evidence that whether Tark Wing, or Grandmother, or the Companies had put themselves in a position that would attract a presumption that compound interest had been made on the Sale Proceeds or the net of the Rental Proceeds.

95. There was no finding by the Master that Ds had utilised the Sale Proceeds or the net Rental Proceeds for a commercial advantage and/or earned any profits as a result thereof.

96. Mr Lam further pointed out that the Master had adopted the rate of prime plus 1% and had referred to Waddington Limited v Chan Chun Hoo Thomas & Ors, CACV 10/2014, unrep 20.05.16 in which this rate was generally accepted as reflecting the theoretical costs to the plaintiff of borrowing the withheld sums commercially. In that case, the lower judge ordered the pre‑judgment interest on the judgment sum to be 2.5% per annum and declined to award compound interest with monthly rests. On the cross‑appeal by the plaintiff/respondent, the rate was changed to prime plus 1% per annum but compound interest was refused. It can be seen in the Court of Appeal judgment, the lower judge ordered simple interest because he did so because he felt that the case was not one in which the appellant had misappropriated company funds and used them for his own purposes but was on a less serious level. The Court of Appeal agreed with the appellant’s senior counsel’s submission that the normal rule was for award of simple interest and that there must be features justifying a departure from it before an award of compound interest could properly be made, and that the situation in that case, of conflict of interest, was not as serious as a case of misappropriation.

97. Having considered the authorities, the evidence and all the circumstances of this case, I am of the view that Master’s Reason (c) for ordering the Compound Interests was flawed and there seemed to be a misunderstanding on the law on his part, and I have come to the conclusion that his exercise of discretion in ordering the Compound Interest was plainly wrong. There are merits in Ground 1 and I am prepared to allow the appeal on this ground.” (footnotes omitted)

The Appeals

24.  On behalf of the defendants Mr Lam SC accepts that on the appeal from the Master’s order made upon the taking of an account pursuant to Order 44 rule 12 and Order 58 rule 1, the judge could only disturb the Master’s findings of fact and exercise of discretion on the grounds applicable to a similar appeal to this court.  Likewise, if the judge was entitled to exercise her own discretion, there is no dispute that any challenge to her exercise of discretion is subject to the well‑established limits applicable to an appeal of this kind, where the function of this court is initially one of review only: SPH v SA (2014) 17 HKCFAR 364, §65; Hadmor Productions Ltd & others v Hamilton & another [1983] 1 AC 191, 220.

25.  The plaintiff’s argument on this appeal may be summarised as follows.  The judge erred in law in considering that compound interest would only be awarded if the defaulting fiduciary had used the misappropriated money in a trade or business, and her focus on the search for evidence or a finding by the Master that the defendants had utilised the money for trade or earning profits is inconsistent with the proper legal approach.  The judge ought to have presumed that the defendants had made a profit from the money in the absence of cogent evidence from them on how the money had been used.  On Tark Wing’s evidence that the Sale Proceeds were used by the Grandmother for constructing houses, Tark Wing had made a gain since a house was built on his land (Lot 3763E) and on Lot 3763RP which he owned in half.  The court should further assume that the entirety of the Sale Proceeds were used for the construction of Tark Wing’s houses.  There was also evidence that the principal business activity of Wing Hing was “Property Investment and Sub‑letting of Properties”.  The Master found that the Rental Proceeds were used by Tark Wing and his companies for their own purposes.  The fact that the fiduciary relationship arose out of a family context and that neither Tark Wing nor the Grandmother had received compensation for their efforts in dealing with the rental properties are irrelevant considerations taken into account by the judge.

26.  In response, the defendants submit that to justify an award of any interest (whether simple or compound) in lieu of account of profits, it is necessary for there to be evidence to enable the court to infer or presume that the fiduciary has made profits out of the trust money, and that to justify an award of compound interest, something more is required, such as the profits earned being used as working capital for earning further profits.  The basis relied upon before the Master was wilful default in rendering proper accounts.  The Master was wrong to order compound interest simply based on the defendants’ failure to account properly.  The judge was entitled to consider the matter afresh.  She understood the law correctly and was right not to order compound interest simply on the basis that the defendants had used the money “for their own purposes”.  There was insufficient evidence basis to presume that the defendants made any profits out of the money.  The arrangement for the rent to be collected by the companies was set up for tax efficiency.  The judge was right to conclude that there was no evidence of the companies being involved in any trade or commercial activities other than the collection of rent.  On the totality of the evidence, to award compound interest would entail a real risk of imposing a punishment on the defendants.  The judge was plainly right not to do so.

The principles on compound interest

27.  The principle on which the courts award compound interest where money has been withheld or misapplied by a fiduciary was stated by Lord Hatherley in Burdick v Garrick (1869-70) LR 5 Ch App 233 at 241 (approved by Lord Millett NPJ in China Everbright‑IHD Pacific Ltd v Ch’ng Poh (2002) 5 HKCFAR 630 at §108) as follows:

“ … the Court does not proceed against an accounting party by way of punishing him for making use of the Plaintiff’s money by directing rests, or payment of compound interest, but proceeds upon this principle, either that he has made, or has put himself into such a position as that he is to be presumed to have made, 5 per cent., or compound interest, as the case may be. If the Court finds … that the money received has been invested in an ordinary trade, the whole course of decision has tended to this, that the Court presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in those cases the Court directs rests to be made. …”

28.  In Wallersteiner v Moir (No 2) [1975] QB 373, Lord Denning MR said at p 388C:

“ … in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position – who has misapplied the money and made use of it himself for his own benefit. The court:

‘ presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in those cases the court directs rests to be made,’ i.e., compound interest: see Burdick v Garrick, 5 Ch. App. 233, 242, per Lord Hatherley L.C.

The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust: and, if he does, he is liable to account for that profit or interest in lieu thereof.”

29.  Buckley LJ said at p 397:

“ It is well established in equity that a trustee who in breach of trust misapplies trust funds will be liable not only to replace the misapplied principal fund but to do so with interest from the date of the misapplication. This is on the notional ground that the money so applied was in fact the trustee’s own money and that he has retained the misapplied trust money in his own hands and used it for his own purposes. Where a trustee has retained trust money in his own hands, he will be accountable for the profit which he has made or which he is assumed to have made from the use of the money. In Attorney‑General v Alford, 4 De GM & G 843, 851 Lord Cranworth LC said:

‘ What the court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it.’

This is an application of the doctrine that the court will not allow a trustee to make any profit from his trust. The defaulting trustee is normally charged with simple interest only, but if it is established that he has used the money in trade he may be charged compound interest … The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes: Burdick v Garrick.” 

30.  Similarly, Scarman LJ said at p 406:

“ The question whether the interest to be awarded should be simple or compound depends upon evidence as to what the accounting party has or is presumed to have done with the money. As Lord Hatherley L.C. said in Burdick v Garrick 5 Ch. App. 233, 241:

‘ the court does not proceed against an accounting party by way of punishing him for making use of the plaintiff’s money by directing rests, or payment of compound interest, but proceeds upon this principle, either that he has made, or has put himself into such a position as that he is to be presumed to have made, 5 per cent., or compound interest, as the case may be.’

Dr Wallersteiner was at all material times engaged in the business of finance.  Through a complex structure of companies he conducted financial operations with a view to profit.  The quarter million pounds assistance which he obtained from the two companies in order to finance the acquisition of the shares meant that he was in a position to employ the money or its capital equivalent in those operations.  Though the truth is unlikely ever to be fully known, shrouded as it is by the elaborate corporate structure within which Dr Wallersteiner chose to operate, one may safely presume that the use of the money (or the capital it enabled him to acquire) was worth to him the equivalent of compound interest at commercial rates with yearly rests, if not more.”

31.  It may be noted at this point that the cases do not show that compound interest ought to be awarded once it is found that the fiduciary has made a gain.  Rather they suggest that the courts are concerned also to gauge the nature and extent of the gain, actual or presumed, from the relevant circumstances.  This is hardly surprising, since equity does not act to penalise the fiduciary, but to strip him of profits from the trust.  The award of interest reflects the measure of restitution equity exacts.  As Lord Woolf said in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at p 730H:[16]

“ Equity, in the case of both simple and compound interest, will look at the benefit which the payee has derived. If it is equitable so to do, the payee will be ordered to pay simple or compound interest depending upon the benefit which has resulted from the payment.”

32.  Thus in Burdick v Garrick, Lord Hatherley referred to “that amount of profit which persons ordinarily do make in trade” as profit that justified directing rests, but, on the facts, refused to order compound interest because the trustee was a solicitor and “[a] solicitor’s profit arises from the time and the labour which he bestows upon cases in which he is engaged.  There is nothing like compound interest obtained upon the money employed by a solicitor”.[17] Sir G M Giffard LJ likewise said: “there being neither proof nor presumption that compound interest was made, in my opinion compound interest ought not to be charged”.[18]  In Wallersteiner v Moir (No 2),Buckley LJ referred to the fact that “profits earned in trade would be likely to be used as working capital for earning further profits” as justification for charging compound interest; in other words, the interest was taken to have been used to make a profit (O’Sullivan v Management Agency and Music Ltd [1985] QB 428, 473H per Waller LJ).  In the same case Scarman LJ referred to the use of the misappropriated money being “worth to [the fiduciary] the equivalent of compound interest at commercial rates with yearly rests, if not more”, an approach applied by the Court of   Appeal in China Everbright-IHD Pacific Ltd v Ch’ng Poh (CACV 513/2001, 19 February 2002) at §90; see also O’Sullivan v Management Agency and Music Ltd, p 461H per Dunn LJ.  In Guardian Ocean Cargoes Ltd & others v Banco do Brasil SA (No 3) [1992] 2 Lloyd’s Rep 193 at 199, Hirst J considered compound interest justified since the defendant bank there engaged in investment business and “must be presumed to have used the money for normal banking purposes as part of its working capital, and thus to have been in a position to earn compound interest”.  In Westdeutsche, at p 724A, Lord Woolf said: “If it is not a situation where the defendant would have earned compound interest then as in Burdick v. Garrick there would be no profit of compound interest so it will not be awarded.  Simple interest will be awarded instead.”  In Chow Fu Hsien v K Vision International Investment (HK) Ltd (HCA 2884/2004, 20 July 2010) at §60, Recorder Benjamin Yu SC considered that compound interest may be charged “where that fairly represents what the trustee may reasonably be treated as having received”.[19]  In General Communications Ltd v Development Finance Corporation of New Zealand Limited [1990] 3 NZLR 406 at 436, Hardie Boys J, giving the judgment of the New Zealand Court of Appeal, referred to the test as being whether the trustee “may properly be presumed to have earned compound interest himself”.  In Equiticorp Industries Group Ltd (in statutory management) v R (No 51) [1996] 3 NZLR 690 at 701, Smellie J considered it necessary that “it can either be proved, or safely assumed, that profit equal to or greater than compound interest has been made”.  In Belgrave Finance Ltd (in receivership and liquidation) v Schofield & others [2014] NZHC 2223 at §§52‑53, Fogarty J required evidence, before ordering compound interest, that the fiduciary had earned profits in excess of the simple interest otherwise to be awarded. 

33.  The approach that has emerged in these cases is in my view not inconsistent with the dictum of Lord Browne‑Wilkinson in Westdeutsche at p 702D that:

“ These authorities establish that in the absence of fraud equity only awards compound (as opposed to simple) interest against a defendant who is a trustee or otherwise in a fiduciary position by way of recouping from such a defendant an improper profit made by him. It is unnecessary to decide whether in such a case compound interest can only be paid where the defendant has used trust moneys in his own trade or (as I tend to think) extends to all cases where a fiduciary has improperly profited from his trust.”

34.  That dictum was relied upon by Duffy J in Eden Refuge Trust v Hohepa [2011] 3 NZLR 273 in holding that compound interest is not confined to cases in which the trustee has applied trust funds in his own trade but extends to cases where he has improperly profited from his breach of trust.  I agree that the jurisdiction to award compound interest is not limited to the situation where the money taken has been used in a trade or business.  I do not however consider that either Lord Browne‑Wilkinson or Duffy J can be taken to have held that the fact that the trustee has made a gain or derived a benefit, irrespective of its nature or size, will necessarily warrant an order for compound interest.  The power to direct rests is discretionary; the basis for its exercise is restitutionary, not penal; and, as the cases show, it is exercised having regard to the profits made or fairly presumed to have been made by the fiduciary.

35.  With these principles in mind, I turn to the present case.  It seems to me that the Sale Proceeds and the Rental Proceeds should be dealt with separately since the circumstances and the evidence are different.

Sale Proceeds

36.  The Master recorded that Tark Wing’s explanation was that the Sale Proceeds had been passed to the Grandmother and he had no record of the monies except that he knew they were used by her for the construction of the houses.[20] The Master, however, said that the argument was no longer available to Tark Wing,[21] and that Tark Wing had not provided a truthful/accurate account.[22]  In this respect the judge considered[23] that the Master was mistaken because Tark Wing’s case as to what happened to the Sale Proceeds had not in fact been rejected by Chow J, who only rejected the contention that it took place with the consent and approval of the Father.  We agree with the judge’s view.  Indeed, before us the plaintiff is content to proceed on the basis that the Sale Proceeds were indeed passed by Tark Wing to the Grandmother and used by her in the construction of the four houses on the various sections of Lot 3763.  Because of the Master’s error in rejecting the evidence, the judge was entitled to exercise her discretion afresh on the basis of Tark Wing’s explanation which she evidently accepted. 

37.  The plaintiff submits that in exercising her own discretion, the judge misdirected herself in law in thinking that compound interest could only be awarded if the fiduciary had used the money in question in a trade or business.  I agree that if established, this would be a misdirection, for it seems to me, as discussed above, that where there is evidence of profits or for presuming profits, made by the fiduciary by re‑investing gains or on some other compound basis, that would be sufficient.  He does not necessarily have to have made profits from a trade or business in the usual sense, though that would be the paradigm situation for awarding compound interest. 

38.  I am not, however, persuaded that the judge did err in this regard.  She did not confine her attention to the existence of a trade or business.  She referred to the lack of evidential foundation for assuming that there was any actual gain or profit made by Tark Wing or the Grandmother, and the lack of evidence that the defendants “had put themselves in a position that would attract a presumption that compound interest had been made”.[24] There was in my view no error in the approach the judge adopted.

39.  It is not in dispute that there were four houses built, one on each of the relevant sections.  The one on Lot 3763C belonged to the Father; the one on Lot 3763D belonged to the plaintiff; the one on Lot 3763E belonged to Tark Wing; and the one on Lot 3763RP belonged to the Father and Tark Wing in equal shares.  Their construction costs together apparently amounted to approximately $4.5 million.[25]  On the basis of Tark Wing’s account, there is no information as to how much of the Sale Proceeds had gone into the construction of each of the houses respectively.  The plaintiff submits that in these circumstances the court should assume that the entirety of the Sale Proceeds had been used for the construction of Tark Wing’s houses.

40.  In support of this submission the plaintiff relies on the following passage in Lord Goff’s speech in Westdeutsche at p 693B:

“ In cases of misconduct which benefits the executor, however, the court may fairly infer that he used the money in speculation, and may, on the principle ‘In odium spoliatoris omnia praesumuntur,’ assume that he made a higher rate, if that was a reasonable conclusion.”

This passage is actually a paraphrase of what Lord Cranworth said in Attorney‑General v Alford (1855) 4 De G M & G 843 at 852 in justifying in certain cases an assumption that the executor did make the higher rate of 5% instead of the usual 4%.

41.  Reliance is also placed on a sentence in the judgment of Lord Denning MR in Wallersteiner v Moir (No 2) at p 388G: “it should be presumed that the wrongdoer made the most beneficial use of [the taken money]”, and on the following passage in Lord Millett NPJ’s judgment in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at §174:

“ I agree with Ribeiro PJ and for the reasons given by him that there was more evidence before the court than the courts below have given credit for, and that further accounts and enquiries are unlikely to be fruitful. After this time the number and cost of shares which the defendant ought have acquired and falsely said that he had acquired is little more than informed guesswork and the quality of the answer is unlikely to be improved by further inquiry. Where the absence of evidence is the consequence of the fiduciary’s own breach of duty the court is not without resource, for it can have resort to three principles. First, it may be able to take the fiduciary at his own word and use his falsehoods to establish the facts as if they were true even though they are known to be untrue. Secondly the court is entitled to make every assumption against the party whose conduct has deprived it of necessary evidence. And thirdly the court is entitled to be robust and do rough and ready justice without having to justify the amount of its award with any degree of precision.” (emphasis added)

42.  With respect, I am not prepared to make the assumption advocated by the plaintiff.  It does not appear that this submission was made below.  The Grandmother was the one who applied the money.  She was born in 1919 and therefore already 78 in 1997, and appeared to be a housewife not versed in business.  The Father had apparently never asked for an account of the Sale Proceeds during his lifetime.  When the action in HCAP 23/2013 was brought by the plaintiff in 2013 against the Grandmother, she was 94 and had had to act by a guardian ad litem since 2014.  By the time of the trial, she had died and Tark Wing as executor represented her estate.  The judge found it understandable and not surprising that few supporting documents could be located after the long lapse of time.[26] There is no basis to think that there was any deliberate failure to preserve or produce the information.  Further, in a situation where the Grandmother was in all likelihood holding mixed funds from which she made payment for building the houses, it seems to me arbitrary and unrealistic in fact, and far from a reasonable conclusion, to assume that the Grandmother somehow used her elder son’s money to build solely her younger son’s houses. 

43.  In his reply for the plaintiff, Mr Fung SC mentioned the possibility of assuming that 50% of the Sale Proceeds were applied in constructing Tark Wing’s houses.  This does not appear to be a correct rateable proportion since only one and a half out of the four houses belonged to Tark Wing.  Further, as this was never advanced before but only raised in reply, we do not think it would be fair to accept this contention.

44.  In any event, the judge was well aware of Tark Wing’s case and the consequent possibility that the Sale Proceeds had at least in part gone into the construction costs of his one and a half houses.[27]  That would mean he obtained a benefit out of the money, but the judge also noted that neither Tark Wing nor the Grandmother was a property developer (unlike the defendant in Chow Fu Hsien v K Vision International Investment (HK) Ltd) and that there was no evidence or finding by the Master that they had used the Sale Proceeds for a commercial advantage.  The judge concluded that there was no sufficient basis to hold or presume that “compound interest had been made on the Sale Proceeds” by either Tark Wing or the Grandmother, and decided to award simple interest only.[28]

45.  In my view, the judge’s exercise of discretion cannot be faulted.  As discussed above, the mere fact that a benefit has been obtained by the fiduciary does not necessarily mean that compound interest should be awarded.  The nature and extent of the gain are also of significance.  The judge was, on the evidence, entitled to consider that neither Tark Wing nor the Grandmother had derived such benefit from the Sale Proceeds as would warrant an award of compound interest.  The plaintiff relies heavily on Lord Millett NPJ’s remark in Libertarian that the court is entitled to make “every assumption” against the party whose conduct has deprived it of necessary evidence.  But, as is common ground, any such presumption must still have some evidential basis.  Here, there was nothing that compelled the court to presume that Tark Wing or the Grandmother had made a gain exceeding the simple interest that the judge was prepared to award.  The judge’s decision cannot be said to be plainly wrong.

46.  The plaintiff also submits that the judge took into account two irrelevant considerations.  As to the first, namely, that the fiduciary relationship arose out of a family context, I would agree that how the fiduciary relationship arose is not directly relevant to the question of compound interest, but it seems to me that in the passage concerned[29] the judge was looking at the broader picture of the overall setting which is relevant to whether Tark Wing and the Grandmother can be presumed to have engaged in activities of a commercial character using the money belonging to the Father or the plaintiff. As to the second consideration, namely, that neither Tark Wing nor the Grandmother had received compensation for their efforts, read in context it appears to have been mentioned by the judge with reference to the rental properties, rather than as a matter relevant to the Sale Proceeds.  In any event, I see no reason in principle why, even in the absence of a specific claim by the fiduciary for an equitable allowance, the court cannot in an appropriate case take into account the efforts expended by the fiduciary in assessing whether he has derived an illegitimate profit that is worth to him compound interest on the money used, thus justifying an award of compound interest.  The weight that should be placed on such a consideration is of course a matter for the judge.

47.  For these reasons, I see no ground for interfering with the judge’s exercise of discretion in ordering simple interest, as opposed to compound interest, on the Sale Proceeds.  Even if the exercise of discretion is re‑opened, I would have come to the same conclusion myself.

Rental Proceeds

48.  The Rental Proceeds stand on a different footing.  It is common ground that they were collected by Wing Hing and Caba.  (There is some evidence that the plaintiff actually granted a lease of Lot 3763D to Wing Hing in 1997 but its terms are unclear.[30]  It is also not clear whether it was simply a device to enable Wing Hing to collect rent on behalf of the plaintiff.  Since the parties have proceeded in these proceedings on the basis that Wing Hing had collected rents belonging to the plaintiff and the Father, that lease may be ignored.)  The defendants’ affirmation placed before the Master claimed various deductions from the income, as mentioned above, but did not account for the balance.  Upon the account being falsified and the claimed disbursements and credits disallowed, those sums also became unaccounted for.  Tark Wing’s evidence given at trial that the net rental income from Lots 3763C & D was given to the Grandmother[31] was not repeated in his affirmation filed for the accounts.  Instead, the defendants asserted that Wing Hing and Caba were assessed with tax for the rental income, and must be taken to have accepted that the Rental Proceeds were received by the two companies themselves rather than as mere agents or nominees.  In the circumstances the proper inference is that the money was retained by the companies and applied for their purposes.  This was the Master’s finding, which was not challenged before the judge.[32]

49.  The judge however said there was no evidence as to the nature of the business of the companies and whether they were involved in any commercial trade or activities or investments.[33]  With this observation I must respectfully disagree, for there is in evidence a profits tax return of Wing Hing for the year 2012/13 which stated that its principal business activity was “property investment and sub‑letting of properties” and that it had assessable profits in the sum of $209,199 excluding profits from sale of capital assets in the sum of $25,741 for that year.  While no tax return of Caba has been disclosed, the evidence is that it also paid profits tax at 16.5%.  As Mr Fung SC has pointed out on behalf of the plaintiff, profits tax is charged on a person carrying on a trade, profession or business in Hong Kong in respect of profits arising in or derived from such trade, profession or business (see section 14 of the Inland Revenue Ordinance (Cap 112)).

50.  It is remarkable that despite being ordered to give an account of the Rental Proceeds with all supporting documents, the defendants had failed to disclose any other financial documents or information showing how the money was applied by Wing Hing and Caba and what profits they made.  Not even the audited financial statements of the companies had been disclosed even though tax was claimed as a disbursement.  Mr Lam SC refers to the plaintiff’s own evidence that he had been informed by Tark Wing that the arrangement whereby rent was collected by Wing Hing and Caba was set up for tax efficiency and that Wing Hing had incurred losses for some years. That was said by the plaintiff in the context of demonstrating that the defendants had not disclosed enough information for claiming deduction of any tax.  It is not evidence that the Rental Proceeds had not been used as working capital in the business of the two companies to generate income.

51.  It is also submitted that the only basis for seeking compound interest before the Master was the defendants’ wilful default in rendering proper accounts, and that it is unfair for the plaintiff to invite the court to make assumptions or draw inferences about the defendants’ profits when they had not been asked for any further account or inquiry or cross‑examined in that regard.  There is no merit in this contention.  In the affirmation of the plaintiff’s solicitor filed several months prior to the hearing before the Master, it was already alleged that the defendants had failed to render proper accounts, and that as a consequence the court should presume that the funds were used by the defendants to earn profits, and if such profits were not identifiable, the fiduciaries should be ordered to pay compound interest on the sums taken.[34] There were also requests in correspondence by the plaintiff for financial documents but the only document disclosed by the defendants was the tax return of Wing Hing for the year 2012/13.  Ultimately, it is for the defendants as fiduciaries to take positive steps to account, and not simply wait for being orally examined in court.

52.  In my view, this being a case where the money had been collected by the companies both of which carried on trading or business for profit (in the case of Wing Hing, the business of property investment and sub‑letting) and presumptively retained and applied as working capital therefor in the absence of disclosure from the defendants showing the contrary, it falls squarely within the principle explained in Burdick v Garrick and Wallersteiner v Moir (No 2) so that an award of compound interest is justified.  The Master’s award cannot be said to be plainly wrong. 

53.  Nevertheless, in his reason (c), the Master did not refer to either of those cases or any presumption that the money had been applied as working capital in the business thus justifying compound interest, but simply said that compound interest was a “right” of the beneficiary where the accounting party is “unable/unwilling to account”, which does not seem to me to be an accurate statement of the principle.  For this reason, the judge was entitled to think that she was not bound by the Master’s decision.  The judge’s own exercise of discretion, however, based as it was on an incomplete view of the evidence, is vitiated, and it is therefore open to this court itself to decide the basis on which interest is to be charged.  For the reasons given above, I would order compound interest with yearly rests.  There is no reason to think that the order would be punitive when the defendants have not disclosed the most basic of the companies’ financial information.

54.  In my opinion, therefore, the plaintiff’s appeals in relation to the Rental Proceeds should succeed.  As there was no appeal or argument before us concerning the rate of interest, it is unnecessary to express any view as to whether a rate representing an achievable return on investment rather than a borrowing rate should be used.[35] The outcome is simply that the Master’s orders in HCA 2305 and 2306 of 2012 are reinstated.  There is no suggestion that the orders should make any distinction between Tark Wing and the two companies. 

Disposition

55.  I would therefore make the following orders:

(1)   In CACV 508/2020, the appeal be dismissed.

(2)   In CACV 509 and 510 of 2020, the appeals be allowed.  The orders made by the judge in HCA 2305 and 2306 of 2012 as regards interest be set aside and the corresponding orders made by the Master be reinstated.

56.  I propose to deal with costs here and below on the basis of written submissions, to be lodged by the plaintiff within 14 days hereof, followed by the defendants within 7 days thereafter and a reply by the plaintiff within a further 7 days thereafter.