TANG YING LOI v. TANG YING IP alias TANG YING YIP AND OTHERS

HCA 2487/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2487 OF 2009

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J U D G M E N T

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INTRODUCTION

1. This is the trial of the plaintiff’s action against the 1^st and 3^rd defendants for relief arising out of the 1^st defendant’s alleged breaches of duties as administrator of the estate (“the Estate”) of Tang Pui King alias Tang Yum (or Yam) Wan alias Tang King Cheung, deceased (“the Deceased”).

2. There are three defendants in this action. Wong, Hui & Co used to act for all three defendants.  However, at the commencement of the trial on 3 November 2014, Mr Benjamin Yu SC (acting for the 1^st to 3^rd defendants) produced a psychiatric report prepared by Dr Chan Chung Mau dated 30 October 2014 which indicated that the 2^nd defendant was suffering from significant cognitive impairment compatible with the diagnosis of senile dementia/Alzheimer’s disease.  Dr Chan further expressed the view that the 2^nd defendant was mentally unfit to give instructions or attend court to give evidence or be cross‑examined.

3. In view of the apparent mental incapacity of the 2^nd defendant and the fact that both Mr Benjamin Chain (acting for the plaintiff) and Mr Yu agreed that the trial could proceed in the absence of the 2^nd defendant and were ready to proceed on that basis, I decided to adjourn the plaintiff’s action against the 2^nd defendant and proceed to hear the plaintiff’s action against the 1^st and 3^rd defendants only.  I also made an order that Wong, Hui & Co be discharged from acting for the 2^nd defendant.

4. As can be seen from the amended statement of claim, the plaintiff has advanced two major complaints in this action, namely:

(1) An unauthorised withdrawal of the sum of HK$11,480,000 by the 1^st defendant from a bank account of the Estate on 2 April 2003 (“the Loan”) which the 1^st defendant utilised for the purpose of paying part of the purchase price of a property known as all that piece or parcel of ground registered in the Yuen Long New Territories Land Registry as Yuen Long Town Lot No 319 together with the messuages erections and buildings thereon known as Nos 129‑131, Castle Peak Road (sometimes referred to as the “Main Road” in the papers before me), Yuen Long, New Territories, Hong Kong (“the Property”).

(2) A shortfall (“the Shortfall”) in the amount of HK$3,650,694 in the cash and bank balances of the Estate.

5. At the trial, the parties’ focus was mainly on the complaint regarding the Loan, in particular on what (if any) relief ought to be granted by the court against the 1^st defendant in respect of the Loan.

6. In so far as the Shortfall is concerned, there is no dispute that the 1^st defendant repaid the sum of HK$3,650,694 to the Estate’s bank account at Hang Seng Bank on 17 December 2012, albeit without interest.  I shall deal with the question of what (if any) relief should be granted against the 1^st defendant in relation to this complaint at the end of this judgment.

BACKGROUND FACTS

7. Save in relation to the true nature or characterisation of the Loan which I shall consider later in this judgment, the relevant background facts are largely not in dispute.

(i)  The parties

8. The Deceased died intestate in Hong Kong on 4 July 1978.

9. The 2^nd defendant (Yeung Fook Mui) is the lawful tin‑fong widow of the Deceased.

10. The Deceased had five sons and a daughter, namely:

(1) the plaintiff, the eldest son;

(2) Tang Ying Lam (“Ying Lam”), the second son;

(3) Tang Ying Ip (or Yip), the third son and the 1^st defendant in this action;

(4) Tang Ying Hei (“Ying Hei”), the fourth son;

(5) Tang Ying Sau, deceased (“Ying Sau”), the fifth son, who passed away in or about 1995; and

(6) Tang Yuen Ha, the daughter.

11. The plaintiff and Ying Lam were born of the Deceased and his kit‑fat wife.  The 1^st defendant, Ying Hei and Ying Sau were born of the Deceased and the 2^nd defendant.

12. Letters of Administration of the Estate were granted to the 1^st and 2^nd defendants on 21 February 1983.

13. The plaintiff is one of the beneficiaries of, and entitled to share in, the Estate of the Deceased.

14. The 3^rd defendant is a company incorporated in Hong Kong.  The 1^st defendant is the owner of 9,999 out of the 10,000 issued shares in the 3^rd defendant. The remaining one share in the 3^rd defendant is held by the 1^st defendant’s wife.  It does not appear to be in dispute that the one share is held by the 1^st defendant’s wife as nominee for the 1^st defendant.  Also, the 1^st defendant and his wife are the only directors of the 3^rd defendant, and the 1^st defendant is the company secretary of the 3^rd defendant. These were also the position at all material times.  Accordingly, it can safely be concluded that the 1^st defendant was at all material times and is in control of all the affairs of the 3^rd defendant, which could be regarded as his corporate vehicle.

15. Although the 1^st and 2^nd defendants are co‑administrators of the Estate, at all material times the administration of the Estate was undertaken mainly by the 1^st defendant.  The 2^nd defendant would basically leave it to the 1^st defendant to administer the Estate and would not interfere with his distribution and use of funds belonging to the Estate.

16. The Estate was a sizable one, consisting primarily of numerous lots of land in the New Territories.  As an indication of the size of the Estate, it is mentioned in the 1^st defendant’s witness statement dated 9 January 2013 that between 1985 and 2012, each of the five sons of the Deceased had received over HK$86 million by way of cash distributions from the Estate.

17. From time to time, the Estate would receive compensation monies from the Government upon resumption of lands in the New Territories vested in the Estate, and distribution of the compensation monies would be made by the 1^st defendant to the beneficiaries of the Estate, including the plaintiff.

(ii)  Compensation moneys received in March 2003

18. As stated in two fee notes No 41382 dated 20 March 2003 and No 41391 dated 28 March 2003 rendered by Wong, Hui & Co to the 1^st and 2^nd defendants, Wong, Hui & Co on behalf of the 1^st and 2^nd defendants wrote to the Lands Department on 28 December 2002 to confirm their acceptance of the offers of compensation for the sums of HK$8,728,733.70 and HK$737,261.25 respectively arising from the resumption of various lots of land in the New Territories vested in the Estate.

19. It would appear, therefore, that the 1^st defendant was aware, no later than 28 December 2002, that substantial sums by way compensation for resumption of lands would soon be received by the Estate.  That this was so was accepted by the 1^st defendant in his cross examination by Mr Chain.

20. As a matter of fact, the two sums of HK$8,728,733.70 and HK$737,261.25 were paid into a bank account in the name of the 1^st and 2^nd defendants as administrators of the Estate at HSBC, No 034‑738146‑001 (“the Estate’s HSBC Current Account”), on 19 March 2003 and 28 March 2003 respectively.

21. On 31 March 2003, the sum of HK$9,420,000 was withdrawn from the Estate’s HSBC Current Account and paid into another bank account in the name of the 1^st and 2^nd defendants as administrators of the Estate at HSBC, No 034‑320366‑001 (“the Estate’s HSBC Premier Current Account”).  It is not in dispute that the sum of HK$9,420,000 withdrawn from the Estate’s HSBC Current Account was funded by the aforesaid compensation monies received from the Government.

(iii)  The purchase of the Property

22. On 12 March 2003, the 1^st defendant entered into a written memorandum of agreement for the purchase of the Property at the price of HK$27,300,000, of which HK$2,000,000 by way of initial deposit and part payment and HK$730,000 by way of further deposit had been paid to the vendor on 5 and 7 March 2003 respectively.

23. On 2 April 2003, the sum of HK$11,480,000 was withdrawn from the Estate’s HSBC Premier Current Account and paid into the 1^st defendant’s personal bank account, No 221‑293723‑888, at Hang Seng Bank (“D1’s Hang Seng Account”).

24. On 7 April 2003, the 1^st defendant completed the purchase of the Property, paid the balance of the purchase price in the sum of HK$24,570,000 to the vendor and obtained an assignment of the Property.  It is not in dispute that the payment of HK$24,570,000 was partly funded by the HK$11,480,000 which the 1^st defendant obtained from the Estate.  As stated in paragraph 12 of the 1^st defendant’s first witness statement dated 9 January 2013, “the sum of HK$11.48 million was a bridging loan to myself, withdrawn from the account of the Estate on 2^nd April 2003 to facilitate completion of the purchase of [the Property].”

25. Also on 7 April 2003, the 1^st defendant executed a declaration of trust stating that the Property was in fact purchased by him as trustee on behalf of the 3^rd defendant and the consideration money for the acquisition of the Property was wholly provided by the 3^rd defendant, and declaring that he held and stood possessed of the Property and the rents and profits and the proceeds of sale thereof in trust for the 3^rd defendant.

26. On 8 November 2004, the 1^st defendant executed a vesting deed whereby the 1^st defendant (as trustee) assigned the Property to the 3^rd defendant (as beneficiary).

27. It appears, from a schedule of rental record in respect of the ground floor and cockloft of the Property, that those parts of the Property have been let to a tenant or tenants since no later than 16 April 2003.

28. The 3^rd defendant is currently still the registered owner of the Property.

(iv)  The purchase of No 140

29. On 26 January 2006, the 3^rd defendant entered into a written memorandum of agreement for the purchase of a property known as all that piece or parcel of ground registered in the Land Registry as Lot No 3720 in Demarcation District No 129 together with the messuages erections and buildings thereon known as No 140 Castle Peak Road, Yuen Long, New Territories, Hong Kong (“No 140”) at the price of HK$52,500,000, of which HK$5,250,000 was paid by way of deposit and part payment to the vendor.

30. By a facility letter dated 28 February 2006 from HSBC to the 3^rd defendant, HSBC agreed to grant a straight line loan of HK$15,000,000 and an overdraft facility of HK$15,000,000 to the 3^rd defendant.

31. On 8 March 2006, the 3^rd defendant executed an “all monies” mortgage of the Property in favour of HSBC.

32. By a facility letter dated 9 March 2006 from Hang Seng Bank Limited to Wong, Hui & Co (acting for the 3^rd defendant), Hang Seng Bank Limited agreed to grant an instalment loan of HK$15,000,000 and an overdraft facility of HK$10,000,000 to the 3^rd defendant.

33. On 15 March 2006, the 3^rd defendant completed the purchase of No 140, paid the balance of the purchase price in the sum of HK$47,250,000 to the vendor and obtained an assignment of that property.  As mentioned in paragraph 3 of the 1^st defendant’s second supplemental statement, part of the purchase price, to the extent of HK$15 million, was funded by the aforesaid straight line loan obtained from HSBC and such loan was secured by a mortgage over the Property in favour of HSBC.

34. Also on 15 March 2006, the 3^rd defendant executed an “all monies” mortgage of No 140 in favour of Hang Seng Bank Limited. 

35. The 3^rd defendant is currently still the registered owner of No 140.

(v)  The 2002 Action

36. On 28 June 2002, Ying Lam commenced an action by way of originating summons in HCMP 2517/2002 (“the 2002 Action”) against the 1^st and 2^nd defendants for (inter alia) an up‑to‑date account concerning their administration of the Estate.

37. On 4 October 2002, Deputy High Court Judge Woolley ordered the 1^st and 2^nd defendants to furnish to Ying Lam, within six weeks, all the up‑to‑date particulars and accounts concerning their administration of the Estate showing with full particularity (inter alia) all amounts paid out by the 1^st and 2^nd defendants as administrators of the Estate.

38. Apparently, Ying Lam was not satisfied with the accounts subsequently rendered by the 1^st and 2^nd defendants pursuant to the aforesaid order of Deputy High Court Judge Woolley and issued a summons on 24 May 2003 for further particulars and copies of various documents.

39. In the second affirmation of the 1^st defendant filed on 8 October 2003, the 1^st defendant stated that “[o]ther than the distributions to myself like Ying Lam as a beneficiary, I have not obtained any payment from the Estate or used any funds belonging to the Estate for my own personal purpose or for any purpose other than distributions to beneficiaries and payments to meet the obligations and expenses of the Estate” (paragraph 12).  He further stated that “… I can say once and for all that I have never obtained any benefit or advantage from the Estate other than as a beneficiary like all my other brothers” (paragraph 15) and “I am positive that I have not mixed any funds belonging to the Estate with my own” (paragraph 16).

40. Pausing here, it seems clear that these statements are inconsistent with the fact that the 1^st defendant did use the sum of HK$11,480,000 belonging to the Estate to facilitate his purchase of the Property in April 2003.  The 1^st defendant has given a convoluted explanation for the apparent inconsistencies in paragraphs 27 to 30 of his second supplemental witness statement dated 10 October 2014, which he amplified in his oral evidence.  I am unable to accept that explanation but, as will be seen below, I do not consider that this matter would have any effect on the outcome of this action or the relief that should be granted.

41. Ying Lam’s summons came before Mr Justice Yam on 10 October 2003, who made an order directing the 1^st and 2^nd defendants to inform the other three beneficiaries of the Estate (ie the plaintiff, Ying Hei and the executors named in the last will of Ying Sau) of the existence and status of 2002 Action, including a recital that the court was considering the appointment of a trust corporation for the administration of the Estate in lieu of the existing administrators (ie the 1^st and 2^nd defendants).

42. In his fourth affirmation filed on 30 October 2003, the 1^st defendant disclosed that there was:

“… a sum of HK$11,680,900.00, being return of a short term investment on the principal sum of HK$11,480,000.00 with interest thereon at 3% per annum in the sum of HK$200,900.00 currently held under time deposit …” (paragraph 3)

43. There was no mention of the nature of the so called “investment”, or the fact that the amount of HK$11,480,000.00 was lent to the 1^st defendant, in that affirmation.

44. At the restored hearing of Ying Lam’s summons on 14 November 2003, Mr Justice Yam made an order removing the 1^st and 2^nd defendants as administrators of the Estate and appointing HSBC Trustee (Hong Kong) Limited in their stead.  It was recited in the order that the appointment was made upon the court’s own motion.

45. Also on 14 November 2003, Mr Justice Yam made a separate order requiring the 1^st and 2^nd defendants to carry into effect Deputy High Court Judge Woolley’s aforesaid order by providing to Ying Lam and HSBC Trustee (Hong Kong) Limited various information and documents as set out in a schedule to that order.

46. On 13 October 2004, the Court of Appeal set aside Mr Justice Yam’s order for the removal of the 1^st and 2^nd defendants as administrators of the Estate and the appointment of HSBC Trustee (Hong Kong) Limited in their stead, and reinstated the 1^st and 2^nd defendants as administrators of the Estate, following an earlier interim order of the Court of Appeal to the same effect made on 14 January 2004 pending appeal.

(vi)  The 2007 Action

47. It is not in dispute that neither the 1^st defendant, nor the 2^nd defendant, ever informed the plaintiff of the Loan prior to the making of the Loan, or sought the plaintiff’s consent of the same.

48. The plaintiff first came to learn about the Loan on or about 9 November 2005 when Wong, Hui & Co on behalf of the 1^st and 2^nd defendants sent to John Ho & Tsui, the plaintiff’s former solicitors, a copy of a report prepared by PricewaterhouseCoopers (“PwC”) dated 10 October 2005 (“the Report”), which provided an account of the 1^st and 2^nd defendants’ administration of the Estate for the period from 21 February 1983 to 30 June 2004.

49. In a letter dated 10 October 2005 from PwC to the 1^st and 2^nd defendants included in the Report, it was stated that the Report was prepared upon the instructions of the 1^st and 2^nd defendants, and was for the purpose of assisting the Administrators (ie the 1^st and 2^nd defendants) to report to the beneficiaries on the state of the Estate’s accounts.

50. It was further stated in the Report, at page 23 thereof, as follows:

“During our review, [the 1^st defendant] advised that he made two withdrawals, by way of borrowings, from the Estate’s bank accounts in the amount of HK$4,680,698.70 and HK$11,480,000 in 2002 and 2003 respectively. Details of these withdrawals which appear to have been repaid with interest, are described below.

…

According to a bank statement of HSBC, HK$11.48m was withdrawn from the Estate’s bank account on 2 April 2003. [The 1^st defendant] was not able to recall where the money was transferred to. He advised that the money was borrowed by him to settle a transaction undertaken by him personally.

Based on the bank statements of HSBC for the Estate’s account and [the 1^st defendant’s] personal account, we note that two deposits in the amount of HK$11.48m and HK$200,900 were deposited from [the 1^st defendant’s] personal account to the Estate’s time deposit account on 27 October 2003. We were advised that the HK$200,900 represents interest paid by [the 1^st defendant] for the HK$11.48m borrowed by him.

[The 1^st defendant] advised that apart from the above, there is no other withdrawal of the Estate’s funds which were used for purposes other than that for the Estate.”

51. Pausing here, it may be noted that the 1^st defendant apparently told PwC that he borrowed the sum of HK$11.48 million from the Estate to settle a transaction (ie the purchase of the Property) undertaken by him “personally”, and not as trustee on behalf of the 3^rd defendant as stated in the declaration of trust mentioned above.

52. By a letter dated 15 August 2006, followed by a chaser dated 14 September 2006, from John Ho & Tsui to Wong, Hui & Co, the plaintiff demanded the 1^st defendant to provide detailed explanations of the following matters:

(1)   The power(s) or authority on which the 1^st defendant based to make the borrowing of (inter alia) HK$11.48 million belonging to the Estate to himself.

(2)   An account of the use to which the 1^st defendant had put the sum of HK$11.48 million after receiving the same from the Estate, with full documentary support.

(3)   How the interest in the amount of HK$200,900 was calculated, including the rate of interest and whether it was calculated on simple or compound interest basis.

53. By a letter in reply dated 11 October 2006 from Wong, Hui & Co to John Ho & Tsui, the 1^st and 2^nd defendants stated that the withdrawal of HK$11.48 million was:

“…. a loan lent by [the 1^st and 2^nd defendants] as administrators to [the 1^st defendant] as a bridging loan for a certain transaction. [The 1^st defendant] agreed to and did pay interest thereon at 0.3% per month. Interest earned on savings account at the material times in 2003 was practically nil. According to information obtained from the savings passbook of the Estate held by [the 1^st and 2^nd defendants], a capital fund of over $3,000,000.00 then yielded only a half yearly interest of $192.00 at the end of June 2003.”

54. It was further stated in that letter that the 1^st and 2^nd defendants saw the “loan” as a perfectly safe and sound short term investment for the Estate, and what the 1^st defendant did in essence was to let the Estate earn a far better rate of interest that the bank would otherwise earn from him.

55. By a further letter dated 13 November 2006 from John Ho & Tsui to Wong, Hui & Co, the plaintiff asked the 1^st and 2^nd defendants to provide “full details of the ‘transaction’ for which the ‘bridging loan’ was required” by the 1^st defendant together with all relevant documents relating thereto, and full answers to the questions raised in their earlier letter of 15 August 2006.

56. Apparently, no further answer was provided by the 1^st and 2^nd defendants in relation to the questions raised in John Ho & Tsui’s letter of 13 November 2006.

57. Accordingly, on 2 February 2007, the plaintiff commenced an action against the 1^st and 2^nd defendants by way of originating summons in HCMP 244/2007 (“the 2007 Action”) seeking (inter alia) an account of the Loan and requiring them to provide “full particulars of all uses such sum [ie HK$11,480,000] has been put to and amounts of interest or other income derived therefrom, together with copies of supporting documents including all relevant bank statements, deposit certificates, passbooks and other relevant vouchers or documentation”.

58. In his affirmation filed on 2 April 2007, the 1^st defendant stated, inter alia, that how he put the “bridging loan”, said to be a favour to the Estate, to use could only be relevant if reasonable grounds existed to suggest that he should somehow be liable to account to the Estate for the profit or benefit he derived from it. However, (according to the 1^st defendant) no such grounds existed.  No information was given by the 1^st defendant on the purpose of the “bridging loan”, or how the money was used by him.

59. On 24 April 2008, Mr Justice Poon ordered the 1^st defendant to provide to the plaintiff, within eight weeks, an account of the sum of HK$11,480,000 withdrawn from the bank account of the Estate, specifying with full particulars of all uses such sum had been put to and amounts of interest or other income derived therefrom, together with copies of supporting documents including all relevant bank statements, deposits certificates, passbooks and other relevant vouchers or documentation.

60. In compliance, or purported compliance, with the said order of Mr Justice Poon, the 1^st defendant filed an affirmation on 20 June 2008 stating, inter alia, as follows:

(1)   The bridging loan was made for the purpose of “maintaining a comfortable level of liquid cash position without the need for any additional bank borrowing or breaking the time deposit or realizing other investments in [the 1^st defendant’s] accounts” (paragraph 3).

(2)   The loan was for the period from 2 April 2003 to 27 October 2003 (208 days), and the 1^st defendant paid an interest in the sum of HK$200,900, which was about 3.0709% per annum (paragraph 8).

(3)   The sum of HK$11,480,000 was paid into D1’s Hang Seng Account.  After the said sum was paid into that account, there was a withdrawal of HK$24,570,000 (mistakenly typed as “$245,700,000.00”) which was used for lending to the 3^rd defendant to “enable it to pay part of the balance purchase price for completing its imminent purchase of [the Property]” (paragraph 10).

61. The plaintiff commenced the action herein on 16 December 2009.

THE 1^ST DEFENDANT’S EVIDENCE REGARDING THE LOAN AND ITS REPAYMENT

62. As earlier mentioned, the 1^st defendant was well aware of the fact, back in December 2002, that the Estate was soon to receive substantial compensation monies from the Government arising from the resumption of lands vested in the Estate.  However, when the Estate eventually received the monies in March 2003, the 1^st defendant decided not to distribute them to the beneficiaries because, according to his evidence:

(1)   he had disputes with his brothers (presumably a reference to the plaintiff and/or Ying Lam) and thus did not wish to distribute the monies to them at that time; and/or

(2)   the person who assisted him in keeping accounts in relation to the administration of the Estate, namely, Ken Yick, was, or might have been, on leave at the relevant time and thus the compensation monies received from the Government could not be distributed to the beneficiaries of the Estate at that time.

63. The 1^st defendant, in his cross examination by Mr Chain, also accepted that the reason why the compensation monies were not distributed to the beneficiaries of the Estate was so that they could be lent to him.

64. The 1^st defendant gave a number of reasons for making the Loan from monies belonging to the Estate to himself, namely:

(1)   Although he could raise HK$11,480,000 from other sources, it was “convenient” to borrow that sum of money from the Estate.

(2)   He wanted to maintain a greater degree of liquidity, and his bank accounts would look better if he did not have to borrow the sum of HK$11,480,000 from a bank or banks.

(3)   He believed that he acted in the best interest of the Estate and thought it would be beneficial to the Estate for him to take a short term loan in the amount of HK$11,480,000 from the Estate, in that at that time the funds held by the Estate on time deposits with banks earned on average interest at the rate of about 0.8% per annum only and he thought it would benefit the Estate for him to pay interest to the Estate at the rate of about 3% per annum on the amount of the Loan.

65. I am unable to accept the suggestion that the 1^st defendant took the Loan with a view to giving the Estate the benefit of enhanced interest.  There was no good reason why the compensation monies received by the Estate from the Government in March 2003 should remain on bank deposits earning low interest.  The obvious thing to do was to distribute the monies to the beneficiaries of the Estate, there being no suggestion of any expected or anticipated expenses of the Estate which had to be discharged in the foreseeable future.  It seems to me clear that the 1^st defendant did not distribute the compensation monies to the beneficiaries of the Estate because he had decided to make use of the monies to finance his acquisition of the Property.  In this connection, I reject his evidence referred to in paragraph 62(1) and (2) above.

66. I accept that the 1^st defendant might have been able to raise the sum of HK$11,480,000 from other sources to finance the acquisition of the Property, but he chose not to draw upon those other sources and decided to use the funds of the Estate because, as he said in his evidence, he thought it was “convenient” to do so, and he wished to maintain a degree of liquidity and generally a more healthy financial position.

67. The 1^st defendant said that he had not spoken to his brothers prior to taking the Loan from the Estate, but he had mentioned or talked to the 2^nd defendant about the Loan on three occasions.  The first conversation took place prior to his taking the Loan from the Estate.  According to the 1^st defendant, there was no discussion about the amount, or repayment, of the intended loan or the question of interest on the intended loan.  The second conversation took place after he had taken the Loan from the Estate.  On that occasion, he told the 2^nd defendant that the amount of the loan was roughly about HK$10 million but he did not mention the exact figure.  He also told the 2^nd defendant that he would repay the loan in about six to seven months’ time, but there was no discussion on the question of interest on the loan.  The third conversation took place after he had repaid the Loan to the Estate.  On that occasion, he told the 2^nd defendant that he had made repayment, and had paid interest on the loan at the interest rate of about 3% per annum.

68. The 1^st defendant also said that he told his brother (Ying Hei) and Dr Tang Siu Tong (one of the three executors named in the last will of Ying Sau) about the Loan within about a month after completion of the purchase of the Property, and both of them indicated that they had no objection to the Estate granting the Loan to him.  In passing, it may be noted that the 1^st defendant and Ying Hei are the other two executors named in the last will of Ying Sau.

69. It is not in dispute that on 27 October 2003, the 1^st defendant repaid the sum of HK$11,680,900 to the Estate.  The 1^st defendant gave an explanation of why he made the repayment on 27 October 2003 in paragraphs 34 and 35 of his second supplemental witness statement.  There, the 1^st defendant said that on 24 October 2003, for the purpose of the 2002 Action, arrangements were made with Anthony Ko & Co (solicitors for Ying Lam) to inspect certain documents of the Estate, including the up to date statements and passbooks of the Estate’s bank accounts, at Wong, Hui & Co’s Yuen Long office.  He bought the relevant documents to Wong, Hui & Co’s Mongkok office.  Mr Wong (of Wong, Hui & Co) read the documents and came to notice the withdrawal of the HK$11,480,000 from the Estate’s bank account and asked the 1^st defendant what it was about.  Upon being explained the circumstances of the Loan by the 1^st defendant, Mr Wong advised the 1^st defendant that it would be prudent for him to repay the Loan as soon as possible.  The 1^st defendant followed Mr Wong’s advice and repaid the Loan with interest on the following Monday (27 October 2003).

70. In his oral evidence, the 1^st defendant said that he repaid the Loan on 27 October 2003 not because he had been advised by Mr Wong to do so but because he had received legal advice from some other person that as administrator he should not use the Estate’s money to finance his acquisition of the Property.  The 1^st defendant also said that even before Mr Wong advised him to repay the Loan as soon as possible, he had already intended to make repayment in October 2003.

71. I should add that it is the 1^st defendant’s evidence, which was not challenged by Mr Chain, that he had always intended to repay the Loan to the Estate.  Mr Chain did, however, challenge the 1^st defendant’s evidence regarding the timing of the repayment.  It was put to the 1^st defendant in cross examination that he repaid the Loan together with interest on 27 October 2003 because he was aware that Mr Justice Yam was considering the appointment of a trust corporation as administrator of the Estate in lieu of the 1^st and 2^nd defendants (as recorded in Mr Justice Yam’s order dated 10 October 2003 in the 2002 Action).  This suggestion was denied by the 1^st defendant.

72. For the purpose of the present action, it does not seem to me to matter much whether the 1^st defendant made the repayment on 27 October 2003 because of some legal advice that he had received from Mr Wong or another source or because he thought that the repayment might persuade Mr Justice Yam not to appoint a trust corporation as administrator of the Estate in lieu of the 1^st and 2^nd defendants.  Had it been necessary for me to make a finding on this issue, I would have been inclined to accept the 1^st defendant’s version in his second supplemental witness statement.  By late October, the 1^st defendant must have realised that the Loan would or might soon be discovered by Ying Lam after his solicitors’ inspection of documents including the up to date statements and passbooks of the Estate’s bank accounts which was scheduled to take place on 24 October 2003 (and which eventually took place at Wong, Hui & Co’s Yuen Long office on 28 October 2003).  In those circumstances, it is hardly surprising that Mr Wong would advise the 1^st defendant to repay the Loan with interest as soon as possible and the 1^st defendant would follow Mr Wong’s advice.

73. For the sake of completeness, I should mention that the 2^nd defendant made a short witness statement dated 10 June 2013 and an affirmation on 10 June 2013.  In the 1^st defendant’s hearsay notice dated 11 July 2013, the 1^st defendant gave notice that he intended to rely on the 2^nd defendant’s witness statement as evidence in this action.  In view of her apparent mental incapacity, it is readily understandable why she was not called to give oral evidence at the trial.  However, her version of events as set out in paragraph 6 of her witness statement regarding what the 1^st defendant told her about the Loan at about the end of March 2003 is not entirely consistent with the 1^st defendant’s oral evidence given at the trial.  Taking into account also the fact that the 2^nd defendant’s evidence has not been tested by cross examination, I am not prepared to attach any weight on the 2^nd defendant’s witness statement or affirmation.

THE TRUE NATURE OF THE PAYMENT OF HK$11.48 MILLION

74. Mr Yu argues that the payment should properly be characterised as a loan.  He says that there is no allegation of theft or dishonesty against the 1^st defendant, and that a breach of the “no conflict” rule does not make the payment a “misappropriation”.  Mr Yu also says that Mr Chain put his case only on the basis that the 1^st defendant did not intend to pay interest, but it was never put to the 1^st defendant in cross examination that the payment was not a loan, and thus it is not open to the plaintiff now to suggest that it was not a loan.  Lastly, Mr Yu submits that the 2^nd defendant’s consent to the loan was obtained and in any event she has ratified it, and further the 1^st defendant’s act is binding on the Estate.

75. On the other hand, Mr Chain contends that the evidence shows that the 1^st defendant simply took or helped himself to the money, and the payment could not be a loan because there was no “transaction”.  He says that the 1^st defendant had at most “informed” the 2^nd defendant of the payment, whom he knew would just go along with the proposed use of the money, and nothing was agreed before the 1^st defendant took the money.  Mr Chain argues that the present situation is the clearest case of “misappropriation”, though not theft.

76. What seems to me to be significant is the fact that Mr Chain did not challenge the 1^st defendant’s evidence that he had always intended to repay the money.  In opening his case for the plaintiff, Mr Chain made it clear that he was not saying that the 1^st defendant intended to steal the money in the sense that he was not going to repay it to the Estate.  He maintained nevertheless that it was a case of misappropriation and an abuse of position by the 1^st defendant.

77. As a matter of principle, it is legally possible for a personal representative of the estate of a deceased person to make a contract with himself in his individual capacity or another representative capacity: see Rowley Holmes & Co v Barber [1977] 1 WLR 371. Whether the making of such contract would constitute a breach of fiduciary duties on the part of the personal representative is another matter.

78. In my view, once it is accepted that the 1^st defendant had always intended to repay the money to the Estate, it would be difficult to characterise the payment as anything other than a “loan” as a matter of law. It was plainly not a “gift”, and it is not suggested that it was a “theft” of the money.  Whether it should be described as a “misappropriation” would depend on how one defines that expression.

79. This having been said, there is no doubt that the 1^st defendant’s use of the money belonging to the Estate to finance his acquisition of the Property in the circumstances of the present case amounted to an abuse of his position as administrator of the Estate and a mis‑use of the Estate’s funds in breach of his fiduciaries duties owed to the Estate. What is important is not the label that should be given to this payment, but the legal consequences flowing from it.  This is the matter that I shall next turn to in this judgment.

THE 1^ST DEFENDANT’S LIABILITY TO ACCOUNT FOR PROFITS

80. That equity takes a strict position against a fiduciary making a profit in breach of his fiduciary duty is well established. In Snell’s Equity, 13^th Edn, paragraph 7‑054, it is stated that “[a] fiduciary is bound to account for any profit that he or she has received in breach of fiduciary duty.  The principal’s entitlement to an account of profits which have been made in breach of fiduciary duty is virtually as of right.”

81. At paragraph 7‑055, the learned editors of Snell’s Equity continue as follows:

“‘The obligation [to account] extends to the actual or net profit,’ which can include both revenue and capital profits… The profits for which the fiduciary must account must bear some reasonable relationship to the breach of fiduciary duty. The obligation is to account for profits which have been made in breach of fiduciary duty, not simply to account for profits in the abstract.

Like all equitable remedies, the account of profits is discretionary… The governing principles are that the fiduciary must account for all of the profit which he made in breach of fiduciary duty, but this accounting must not be allowed to operate so as to unjustly enrich the claimant…

A fiduciary does not automatically avoid the obligation to account entirely for a profit made in breach of fiduciary duty by arranging for the profit to be earned through a separate corporate entity.  The corporate veil will be pierced where a fiduciary has used a corporate vehicle as a device or façade to conceal the true facts, and where the company is a mere cloak, or alter ego, for the fiduciary, but not merely because the fiduciary has a substantial interest in a company.”

82. The strictness of the equitable principle regarding the liability of a fiduciary to account to the beneficiary for a profit obtained in breach of fiduciary duty was clearly stated by Lord Russell of Killowen in Regal (Hastings) Ltd v Gulliver (Note) [1967] 2 AC 134 at 144‑145 as follows:

“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or on such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profits for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefitted by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”

83. The same emphasis on the strictness of this equitable principle was made by Ma J (as he then was) in Kao Lee & Yip v Koo Hoi Yan and Others [2003] 3 HKLRD 296 at paragraphs 134 to 136. The following principles also emerge from that judgment of Ma J:

(1)   The essence of equitable relief is that it is primarily restorative and restitutionary rather than compensatory (paragraph 131).

(2)   A fiduciary is liable to account for a profit or benefit if it was obtained (i) in circumstances where there was a conflict, or possible conflict of interest and duty, or (ii) by reason of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position (quoting the statement of general principle by Mason J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 107) (paragraph 132).

(3)   In order to be able to claim an account of profits, there must be shown a causal link between the breach of fiduciary duty and the profits made (paragraphs 133 and 142).

(4)   It is irrelevant that the profit made by the fiduciary was one that the beneficiary could not have made anyway or that the profit was not made at the expense of the beneficiary.  Gains made by a defaulting fiduciary are to be disgorged irrespective of whether the beneficiary had suffered any financially measurable loss; in short, the remedy of an account of profits does not have to bear any resemblance (and often does not) to the disadvantage suffered by the beneficiary (paragraph 134).

(5)   The liability to account does not depend on the existence of fraud, absence of bona fides (the fiduciary may even have intended to act for the benefit of the beneficiary) and in the same way that it is unnecessary to demonstrate loss to the beneficiary, the fact that the beneficiary may also have profited is not relevant either (paragraph 135).

(6)   Where a fiduciary has obtained an unauthorised profit for himself, equity will insist on treating him as having obtained it for his beneficiary (paragraph 137).

(7)   The object in ordering an account of profits is to ascertain as accurately as possible the true measure of the profit or gain made by the defaulting fiduciary as a consequence of his breach of fiduciary duty (paragraph 141).

(8)   It may not be possible to adopt an approach that borders on any mathematical exactness and the court may have to work on “a reasonable approximation”.  An important guide for the court here is “flexibility” (paragraph 143).

(9)   In taking an account of profits, in most cases it will be right to make allowances for expenses, overheads and financial contribution (sometimes even a reasonable salary for the wrongdoer) so as to reflect the “cost” of the profit.  This is consistent with the overall object of the remedy of an account of profits, namely, to give to the beneficiary the true extent of the profits made by the fiduciary, not to punish him (paragraph 143(3)).

(10)  There is a need to focus on causation and remoteness when examining the link between the breach of duty and the gain.  It is in considering the terms of the order for an account of profits that the Court will ensure that the fiduciary is not punished and that his liability is “not transformed into a vehicle for the unjust enrichment of the plaintiff” (paragraph 144).

(11)  It makes no difference to the ordering of an account that the wrongdoer has transferred the benefit of the business opportunity to another vehicle or to a partnership, in which he has an interest.  In those circumstances, the fiduciary in breach will still be liable for the whole of the profits even though within the company or the partnership, he may only share in a part of the profits (paragraph 145).

84. When considering the above principles, one must of course bear in mind that some of them were stated in the context of a claim for diversion of business opportunity.  Nevertheless, subject to such modifications as may be necessary having regard to the relevant context, the above principles seem to me to be of general application when considering any claim against a fiduciary for an account of profits that he or she has obtained in breach of fiduciary duty. 

85. In the present case, it seems to me clear that the 1^st defendant acted in circumstances where there was a conflict, or possible conflict of interest and duty, and furthermore made use of an opportunity available to him only by reason of his position as administrator of the Estate, when he obtained the Loan from the Estate and used it to finance his acquisition of the Property.  His liability to account for the profit that he has made is not negated by the following matters or any combination of the following matters:

(1)   That he could have financed the acquisition of the Property from other sources (which he chose not to draw upon).  

(2)   That the interest which the Estate could have earned, had the funds remained on bank deposits, would have been less, or even much less, than what he eventually paid to the Estate for the short term loan. 

(3)   That the Property was acquired by the 1^st defendant as trustee on behalf of the 3^rd defendant (I should mention that on the evidence before the court it is not clear as to when it was that the 1^st defendant decided to assume the role of a “trustee” in the acquisition of the Property).  

(4)   That the 2^nd defendant and two other beneficiaries gave previous or subsequent consent to the Estate making the Loan to the 1^st defendant.  

(5)   That the opportunity to acquire the Property did not come to the 1^st defendant by reason of his position as administrator of the Estate.

86. Mr Yu submits that, when considering the question of an account of profits, it is in every case a question of fact as to what is the profit that has been derived from a breach of trust.  In principle, this must be correct.

87. In paragraphs 29 to 31 of his closing submissions, Mr Yu says that the 1^st defendant’s reasons for purchasing the Property (namely, that he felt he was able to shoulder the investment at the time, he considered the Property to be in a prime area, and the neighbouring properties were also managed by him) had nothing to do with the Estate or the possibility of obtaining a loan from the Estate, and it was not the case that he came by the opportunity to purchase the Property because of his position as trustee.

88. Mr Yu goes on to submit, in paragraph 34 of his closing submissions, that on the facts of the present case, it was the benefit of the Loan, not the purchase of the Property, which represented the profit made by the 1^st defendant as a result of his breach of fiduciary duty as administrator of the Estate.  I am unable to accept this submission.  Granted that the opportunity to acquire the Property did not come to the 1^st defendant by reason of his position as administrator of the Estate and was not the result of any breach of fiduciary duty on his part, it remains the fact that the 1^st defendant made use of funds belonging to the Estate, in clear breach of fiduciary duty owed by him to the Estate, to finance the acquisition of the Property (whether in his own name or on behalf of his corporate vehicle, ie the 3^rd defendant). There was a direct causal link between the profit obtained by the 1^st or 3^rd defendants, namely, the Property and benefits derived from holding the Property, and the breach of fiduciary duty, namely, the mis‑use of funds belonging to the Estate, which was an opportunity available to the 1^st defendant only because of his position as administrator of the Estate.

89. In Scott v Scott and Others (1963) 109 CLR 649, a trustee of a deceased estate in breach of trust applied trust moneys together with his own in the purchase of a property in which he lived till his death.  Shortly prior to his death he repaid to the estate the amount of trust moneys used by him in its purchase.  After its purchase the property had increased substantially in value.  One of the issues which arose for decision was whether the estate was entitled to share in the increase in value of the property in the same proportion to the total increase as the amount of trust moneys employed in the purchase bore to the total purchase price.  The High Court of Australia (McTiernan, Taylor and Owen JJ) held that the estate was so entitled.  The following observations of the High Court of Australia at 658‑663 are relevant to the present case:

“But if all that the remainderman were entitled to was repayment to the estate of the amount misapplied then the effect of the remedy that would have been available against W. H. Scott in his lifetime would have been merely to confirm the misapplication of that sum and to condone the breach of trust. This would mean, in effect, that the trustee was, in 1942, at liberty to use trust moneys in conjunction with moneys of his own in purchasing the property subject only to a liability to account for the trust moneys so used and to keep for himself the whole of the profit made upon any resale of the property. The proposition has only to be stated not only to realize its injustice but also to show that it is completely inconsistent with the proposition that has been consistently stated on so many occasions over the last two centuries … (658)

There is, of course, abundant authority for the proposition that if trust moneys have been exclusively used in the purchase of property the beneficiary may elect to take the property itself. There is also authority for the proposition that if trust funds from two different estates are exclusively used by a common trustee in the purchase of land in his name which has increased in value each estate will be held entitled to a proportionate part of the increase: The Lord Provost etc. of Edinburgh v Lord Advocate. In such a case it would be unthinkable that each estate should be entitled merely to a charge for the amount misapplied with, perhaps, some allowance for interest, and the trustee left with a residual profit. Why, then, should a trustee who has mixed moneys of his own with trust moneys for the purpose of purchasing lands which have greatly increased in value be held entitled, upon repayment of the trust moneys misapplied, to retain the whole of any profit which has resulted, at least in part, from the misuse of the trust money?... (660)

No doubt it is true to say that in this case the estate was entitled to assert a lien upon the property purchased with the mixed fund to secure the amount misapplied. But it is erroneous to say that in the circumstances of this case this was the full measure of the relief to which the estate was entitled… In its final analysis the appellant’s argument on this branch of the case seems to rest upon the assertion that it cannot be said that there was any liability to account for any part of the profit which accrued to the trustee or, ultimately, to his estate, unless it can be established that the estate of the testatrix became entitled to a beneficial interest in the property which W. H. Scott purchased. This, it was said, could not upon the authorities be established. Upon this latter proposition we will make some observations presently. But for the moment we are content to assume that this could not be established for the basic contention finds no support in the innumerable and varied cased in which trustees have been held liable to account for profits arising from the misapplication of trust moneys… (661‑662)

Clearly enough the estate was entitled as against W. H. Scott to seek an order for sale to enforce its lien and upon any such sale the profit would have been realised… he could not be allowed to escape his liability to account merely by repayment of the amount of trust moneys misapplied.  Accordingly, we take the view that repayment of the sum of £1,014 in 1959 did not operate to defeat the beneficiaries’ right to a sale; this, we think, could have been defeated only by an accounting for profits as on a notional sale. (662‑663)”

90. In all, I consider that the profit that the 1^st defendant is liable to account to the Estate should not be limited to the “benefit of the loan” as contended by Mr Yu, but should extend to a proportionate share of the increase in value of the Property acquired with the assistance of the Loan and the benefits derived from holding the Property.

91. I would direct an inquiry of the profit that the 1^st defendant is liable to account to the Estate.  On the facts of the present case, such profit should be ascertained by reference to:

(1)   The increase in the value of the Property, ie the difference between the open market value of the Property as at the date of the inquiry and the purchase price (HK$25,700,000)[1].

(2)   The rentals and other income (if any) derived from holding the Property between the date of acquisition (7 April 2003) and the date of the inquiry.

92. Credit should, however, be given to the 1^st defendant for:

(1)   stamp duty (HK$1,023,750) and solicitors’ costs and disbursement (HK$89,300) incurred in the acquisition of the Property;

(2)   the amount of HK$209,000, being interest paid to the Estate on 27 October 2003;

(3)   all government rents and rates if paid by the 1^st or the 3^rd defendants in respect of the Property between the date of acquisition and the date of the inquiry; and

(4)   all proper costs of repair and maintenance of the Property incurred by the 1^st or 3^rd defendants during the period from the date of acquisition to the date of the inquiry.

93. The could be legitimate arguments as to whether interest on some of the amounts referred to in paragraphs 91 and 92 above should be provided for, and if so what would be the appropriate period(s) for which such interest should run, the appropriate interest rate(s) that should be applied, and whether interest should be calculated on simple or compound basis.  All such questions are to be dealt with in the inquiry.

94. The total acquisition costs of the Property, including stamp duty and solicitors’ costs and disbursement, came to HK$28,413,050.  Accordingly, the proportionate share of the profit that the 1^st defendant should account to the Estate should be 11,480,000/28,413,050 x 100% (= 40.40%).

TRACING, CONSTRUCTIVE TRUST AND EQUITABLE LIEN

95. At the trial, there was much debate on whether the Estate is entitled to “trace” the sum of HK$11,480,000 which the 1^st defendant had used to pay part of the purchase price of the Property into a proportionate share of the Property.

96. To answer this question, it is, in my view, important to understand the true legal nature or meaning of “tracing”.  In Foskett v McKeown [2001] 1 AC 102 at 109D, Lord Browne‑Wilkinson said that “it is a process whereby assets are identified”.  In the same case, Lord Millet stated at 128C as follows:

“Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset.”

97. It will be appreciated from the above statements of principle that for a claimant to be able to trace his original asset into the traceable proceeds thereof or substituted asset, he must first show his ownership of, or a proprietary interest in, the original asset.

98. In the present case, the credit balance of HK$11,480,000 in the Estate’s HSBC Premier Current Account prior to its withdrawal and payment into D1’s Hang Seng Account on 2 April 2003 no doubt represented an asset (ie a chose in action) owned by the Estate. However, as earlier mentioned, I consider the transaction represented by the withdrawal and payment to be a “loan” by the Estate to the 1^st defendant. It follows from that characterisation of the transaction that the property in the money passed to the 1^st defendant: see Ciro Citterio Menswear plc v Thakrar and Others [2002] 1 WLR 2217, paragraph 33 per Deputy High Court Judge Anthony Mann QC.  The consequence is, in my view, that there is no asset of the Estate which can be traced into the Property.

99. There are, however, two other possible routes by which the Estate may be able to claim an interest in the Property.  First, as can be seen from the judgment of the High Court of Australia in Scott v Scott and Others mentioned above, where a trustee has misapplied trust moneys and mixed them with his own to purchase a property which has increased in value, the beneficiary may be granted an equitable lien upon the property to secure his claim against the trustee for an account of profits.  I see no reason why, on the facts of this case, the Estate should not be entitled to an equitable lien upon the Property to secure the claim against the 1^st defendant for an account of profits.  However, Mr Chain did not, either in his opening or closing submissions, seek any such remedy.  I shall not therefore consider the question of equitable lien any further in this judgment.

100. Second, as a matter of principle, the court may impose a constructive trust on the property which the trustee has acquired through the misapplication of trust moneys or on the benefit improperly obtained by a trustee in breach of fiduciary duty.  See:

(1)   Kao Lee & Yip v Koo Hoi Yan and Others [2003] 3 HKLRD 296, paragraph 137, per Ma J:

“Conceptually, where a fiduciary has obtained an unauthorised profit for himself, equity will insist on treating him as having obtained it for his beneficiary”.

(2)   Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, paragraph 83, per Ribeiro PJ:

“The foregoing discussion involves loss caused to the trust estate. The breach may of course result in no loss to the trust estate but in the fiduciary making a profit. The present case has not been conducted on that basis and it suffices to note that equity will not allow such a fiduciary to retain such profit but will require him to account for it, imposing a constructive trust.”

(3)   FHR European Ventures LLP and Others v Cedar Capital Partners LLC [2014] 3 WLR 535, paragraph 7 per Lord Neuberger of Abbotsbury PSC (delivering the judgment of the Supreme Court):

“… at least in some cases where an agent acquires a benefit which came to his notice as a result of his fiduciary position, the equitable rule (‘the rule’) is that he is to be treated as having acquired the benefit on behalf of the principal, so that it is beneficially owned by the principal. In such cases, the principal has a proprietary remedy in addition to his personal remedy against the agent, and the principal can elect between the two remedies.”

It may be noted that the specific question which the Supreme Court had to decide was whether the rule applied where the benefit was a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal.  It was held that the rule applied to that situation.  Importantly for the present purpose, this judgment shows that a constructive trust may be imposed even though the benefit (i) does not flow from an asset which was (a) beneficially owned by the principal, or (b) intended for the principal, or (ii) was not derived from an activity of the agent which, if he chose to undertake it, he was under an equitable duty to undertake for the principal.

(4)   Lewin on Trusts, 18^th Edn, paragraph 41‑108, in the context of a discussion where tracing is not or may not be permissible because trust money has gone into an overdraft bank account:

“But if tracing is not permissible, in a case where the purchase is made by a trustee, the profit rule prima facie should apply because the trustee has been enabled to make the acquisition by his use of trust money. Therefore the beneficiaries can claim that the asset acquired is held on a constructive trust for them.”

101. These having been said, there is, on the facts of the present case, a difficulty in granting in favour of the Estate a constructive trust on a proportionate share of the Property.  It will be recalled that the 1^st defendant in fact repaid the Loan (with interest) to the Estate on 27 October 2003.  It will obviously not be fair to the 1^st and/or 3^rd defendants to impose a constructive trust unless the Estate reimburses the 1^st defendant for a proportionate part of the purchase price (ie HK$11,480,000).  There is, however, no evidence that the Estate has the means to pay the sum of HK$11,480,000 to the 1^st defendant, and the plaintiff has not offered to pay that sum on behalf of the Estate.  There are other beneficiaries of the Estate who are not before the court, and they may not be willing or able to contribute their appropriate shares to enable the Estate to make payment to the 1^st defendant.  Also, they may have legitimate reasons to think that the remedy of an account of profits against the 1^st defendant would be sufficient in so far as the Estate is concerned.

102. Further, it seems to me clear the Estate cannot have both a constructive trust on a proportionate share of the Property and an account of profits in so far as such profits relate to the increase in value of the Property.

103. In all the circumstances, I do not consider that I ought to find that the Estate is entitled to a constructive trust on a proportionate share of the Property.

NO 140

104. The plaintiff does not claim that the Estate is entitled to any proprietary interest in No 140, but claims that the Estate is entitled, as against the 1^st defendant, to an account of the profits obtained from the use of the Property as security for the straight line loan of HK$15,000,000 and the overdraft facility of HK$15,000,000 granted by HSBC to the 3^rd defendant, including but not limited to a proportionate share in the profits and income derived from the 3^rd defendant’s acquisition of No 140 which was partially financed by the straight line loan of HK$15,000,000.

105. Even if one proceeds on the basis that the 1^st defendant acted in breach of fiduciary duty by using the Property as security for the banking facilities granted by HSBC and is, in principle, liable to account to the Estate for any profit which he has obtained from the use of such banking facilities, the following considerations seem to me to be significant:

(1)   The 1^st defendant did not, as a matter of fact, use funds belonging to the Estate to finance the acquisition of No 140 by the 3^rd defendant.  No part of the purchase price for No 140 can be said to represent money belonging to the Estate.

(2)   While the 1^st defendant has had the benefit of the availability of banking facilities granted by HSBC to the 3^rd defendant upon the security of the Property, the profits and income which the 3^rd defendant has derived from holding No 140 seems to me to be too “remote” and should not be treated as causally “linked” to the relevant breach of fiduciary duty: see Kao Lee & Yip v Koo Hoi Yan and Others [2003] 3 HKLRD 296, paragraphs 133 and 144.

(3)   The 1^st defendant has given evidence, which I accept, that at the time of the purchase of No 140, he was fully capable of financing the 3^rd defendant’s purchase of that property from other sources.  In particular, he had other real properties which were free from mortgage which he could have offered as security to HSBC for the banking facilities.  There is no suggestion that the interest rate which might be charged by HSBC would be higher had the 1^st defendant used those other properties instead of the Property as security for the banking facilities.

(4)   No evidence has been adduced regarding the use of the overdraft facilities granted by HSBC to the 3^rd defendant.

(5)   The 3^rd defendant remains primarily liable to HSBC for repayment of the banking facilities.  There is no suggestion that the 3^rd defendant is not able, or does not intend, to repay the banking facilities, or that any cause has arisen for HSBC to sell or foreclose the Property to discharge the 3^rd defendant’s liability in respect of the banking facilities.  There is also no suggestion that the Estate has suffered any loss as a result of the mortgage of the Property. In any event, the plaintiff is not making any claim for equable compensation, but is seeking an account of profits on behalf of the Estate against the 1^st defendant.

106. I accept that the 1^st defendant may in fact have obtained some profit or benefit from being able to use the Property as security for the banking facilities to the total extent of HK$30,000,000 granted by HSBC to the 3^rd defendant.  The plaintiff’s difficultly, as I see it, is that he has failed to adduce any evidence of such profit, nor has he put forward any reasonable basis for the quantification of such profit.  It does not seem to me right for the court to direct a general inquiry on the profit which the 1^st defendant may possibly have obtained where the plaintiff has failed to lay a sufficient foundation for the inquiry.  I therefore decline to make the order sought by the plaintiff against the 1^st defendant for an account to the Estate of the profits and income which the 1^st defendant may have obtained from mortgaging the Property to HSBC as security for banking facilities to the total extent of HK$30,000,000 granted by HSBC to the 3^rd defendant.

THE SHORTFALL

107. There is no dispute that there was a shortfall in the sum of HK$3,650,694 in the cash and bank balances of the Estate.

108. At page 24 of the Report, the following was stated:

“… we have attempted to perform a reconciliation of cash and bank balances for the Relevant Period [21 February 1983 to 30 June 2004] based on the Statement of Receipts and Payments and the known cash balances.

The reconciliation indicates there is a short‑fall of HK$3,650,694.

If bank interest income was recorded and reflected in the Statement of Receipts and Payments, the short‑fall would be even greater.

The Administrators are unable to provide specific reasons for the short‑fall but advised that it could be related to rental income recorded in the Statement of Receipts and Payments but not received. As further explained in later section of this report, rental income is recorded in the Statement of Receipts and Payments based on the ‘expected’ rental income up to 30 June 2004 according to lease agreements and rental booklets. However, there is no cash book maintained to keep track of actual rentals received. As such, the Administrators are unable to quantify the rentals not received, if any, over the years.

Due to the limited information available to us, we are not in a position to comment whether the estimated short‑fall in cash and bank balances are due to the reasons given by the Administrators or other reasons.”

109. A similar explanation regarding the Shortfall was given by the 1^st defendant in his evidence at the trial. In paragraph 10 of his first witness statement, the 1^st defendant stated that he had no doubt that the Shortfall represented mainly cumulative bad debts arising from rent receivables but unpaid for the period from 1983‑2004 covering different plots of land of the Estate.  In his oral evidence, the 1^st defendant added that some tenants paid rents by direct deposit into the Estate’s bank accounts.  However, if any tenant failed or neglected to make payment in any month or for any period, this might gone unnoticed by the 1^st defendant. This is not surprising, having regard to the fact, as mentioned in the Report, that there was no cash book maintained to keep track of actual rentals received.

110. In his opening submissions for the 1^st and 3^rd defendants, Mr Yu stated that the 1^st and 2^nd defendants acknowledged that they were unable to produce a proper account for the Shortfall, and explained that it had resulted from the accumulation of bad debts arising from rent receivables but unpaid from 1983 to 2004 in respect of lands owned by the Estate.

111. As administrator of the Estate, the 1^st defendant was under a duty to keep proper accounts of the income received and expenses incurred by the Estate.  Had proper accounts been kept, the 1^st defendant ought to be in a position to keep track of any non‑payment or under‑payment of rents by tenants and, if necessary, take action to seek to recover the outstanding rents.

112. In these circumstances, it seems to me clear that the 1^st defendant failed to discharge his duty to keep proper accounts and is liable to pay compensation for any loss suffered by the Estate arising out of the Shortfall.  Indeed, the 1^st defendant paid back the sum of HK$3,650,694, being the full amount of the Shortfall, to the Estate’s Hang Seng Bank account on 17 December 2012.  This is, I believe, an implicit recognition by the 1^st defendant of his liability to pay compensation to the Estate.

113. The outstanding issue is whether the 1^st defendant ought to pay interest on the amount of the Shortfall to the Estate.  In paragraph 16 of the Re‑Amended Defence, the 1^st and 2^nd defendants admit that “they are liable to compensate the Estate and/or the Beneficiaries to the extent of such part or parts of the Shortfall as they may be unable to account for with interest at such rate as the Estate may earn on bank deposits from time to time”.  Mr Chain argues that the 1^st defendant ought to pay compound interest on the amount of the Shortfall to the Estate.

114. I consider that, by way of compensation to the Estate, the 1^st defendant ought to pay interest, and I reserve the question of the interest rate, the interest period and whether interest ought to be calculated on simple or compound basis to be dealt with at the same time as the inquiry mentioned in paragraphs 91 to 93 above.

CONCLUSION

115. I find in favour of the plaintiff to the extent mentioned in the preceding paragraphs, and shall:

(1)   Direct an inquiry on the profits which the 1^st defendant is liable to account to the Estate derived from the 1^st and/or 3^rd defendants’ acquisition and holding of the Property, and order payment of the amount found due upon the inquiry.  

(2)   Order the 1^st defendant to compensate the Estate by paying interest on the Shortfall, the amount of which shall be determined at the same time as the inquiry mentioned above.

116. I shall leave it to the parties to agree on the exact form of the order to give effect to this judgment, with liberty to the parties to apply in the event of disagreement.  I also give liberty to the plaintiff to apply for further directions regarding the conduct of the inquiry mentioned above.

117. I make an order nisi that the plaintiff shall have the cost of this action to be taxed if not agreed.

118. Lastly, it remains for me to thank counsel for their helpful assistance rendered to the court.