HSBC INTERNATIONAL TRUSTEE LTD v. TAM MEI KAM

HCMP 716/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 716 OF 2004

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J U D G M E N T

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1.  The Deceased, Mui Yim Fong, made a will on 3December 2003 [“the Will”] and passed away on 30 December 2003.  Under the Will, the entire estate of the Deceased was bequeathed to the Applicant as trustee of Karen Trust.  Karen Trust was also set up on 3 December 2003, on the same date as the Will.  Putting aside the devolution of the estate under the Will, the only asset held by Karen Trust appears to be a nominal sum settled by the Deceased upon the setting up of the trust.  The Applicant was also appointed under the Will to be the executor and trustee in respect of the estate of the Deceased.

2.  Karen Trust, according to the trust deed, is a discretionary trust.  Under Clause 5 thereof, the Applicant was given absolute and uncontrolled discretion to deal with the trust properties.  As in the case of most discretionary trust, there is a document called the Trustee Memorandum which is said to be non-binding in nature.  In that memorandum, some suggestions by the Deceased as to how the trust properties were to be distributed or applied were set out.  The Applicant regarded this to be a confidential document and apart from a redacted version, it was not willing to disclose the contents thereof to the Respondent.  For present purposes, suffice to say that the Respondent was not the only beneficiary to the estate under the suggestions of the Deceased recorded in that document.  The Respondent had been kept in the dark as to the identities of the other suggested beneficiaries.

3.  The Respondent was the mother of the Deceased.  She was not happy with the Will.  On 25 February 2004, she commenced a probate action in HCAP 2 of 2004 seeking an order from the Probate Court to pronounce against the validity of the Will.  She also sought the grant of Letters of Administration of the estate of the Deceased in her favour.  Alternatively, she sought relief under the Inheritance (Provision for Family and Dependants) Ordinance Cap.481.

4.  The Applicant is named as the defendant to that probate action.  It is not apparent on the face of the Statement of Claim filed in that action as to the capacity in which the Applicant was named as defendant.  There are at least three different capacities that the Applicant was involved in the matter,

(a)     as the trustee and executor under the Will;

(b)    as the beneficiary under the will in the capacity as the trustee under  Karen Trust;

(c)     as the party who prepared the Will and the Trust Deed for the execution by the Deceased.

As shall be noted below, each of these different roles carries different duties and they are by no means identical.  

5.  In the probate action, it is alleged by the Respondent (as plaintiff in that action) that the Deceased lacked the necessary testamentary capacity at the material time and did not understand the consequences and effect of the Will and the Trust Deed.

6.  By the present proceedings, the Applicant sought a Beddoe order to sanction its defence against the challenge to the Will in the probate action.  It is apparent from Prayer 1 in the Originating Summons filed on 15 March 2004 that the Applicant pursued the application in the capacity as the executor and trustee of the Will.  There is nothing before me to suggest that this application was made by the Applicant in its other capacities mentioned above.  Paragraph 3 of the Originating Summons sought an order that all costs incurred by the Applicant in carrying out the acts as approved by this court be paid out of the estate of the Deceased on a trustee basis.  

7.  In other words, this is not an application in respect of the administration of Karen Trust.  Of course, if the Will were held to be invalid, a Beddoe order made in respect of the administration of Karen Trust could not enable the Applicant to resort to the estate of the Deceased to meet its legal costs.  On the other hand, a Beddoe order made in respect of the estate of the Deceased would serve that purpose.

8.  As mentioned above, these two capacities carry different duties on the part of the Applicant.  As trustee under Karen Trust, the Applicant is under a duty to act in the best interest of the beneficiaries according to the terms of that trust.  That includes a duty to act reasonably in securing the properties belonged to the trust.  To what extent that duty can be enforced in the context of a discretionary trust is a question I need not address in this judgment.  The recent decision of the Privy Council in Schmidt v Rosewood Trust [2003] 2 AC 709 gave valuable guidance in that regard.  That question would have to be considered if an application is made by the Applicant as trustee of Karen Trust for directions regarding the administration of that trust.  For reasons given, this is not the application before me.

9.  The position of executor and trustee under the Will is different.  Faced with a challenge to the validity of the Will, the principles set out in Alsop Wilkinson v Neary [1996] 1 WLR 1220 come into play.  Lightman J (as he then was) examined the position of a trustee in three different kinds of dispute.  In my judgment, insofar as the position of the Applicant in the capacity as executor and trustee under the Will is concerned, the dispute with the Respondent is a trust dispute under the classification of Lightman J, viz. a dispute as to the settlement on which the trustee hold the subject matter of the settlement.  His Lordship said the following as regard the duty of a trustee in this sort of dispute,

“I do not think that the view expressed by Kekewich J in the Ideal Bedding case that in a case of trust dispute … a trustee has a duty to defend the trust is correct or in accordance with modern authority.  In a case where the dispute is between rival claimants to a beneficial interest in the subject matter of the trust, rather the duty of the trustee is to remain neutral and (in the absence of any court direction to the contrary …) offer to submit to the court’s directions, leaving it to the rivals to fight their battles.  If this stance is adopted, in respect of the costs necessarily and properly incurred, for example in serving a defence agreeing to submit to the court’s direction and in making discovery, the trustee will be entitled to an indemnity and lien.  If the trustee does actively defend the trust and succeeds, for example in challenging a claim by the settlor to set aside for undue influence, he may be entitled to his costs out of the trust, for he has preserved the interests of the beneficiaries under the trust … But if he fails, then in particular in the case of hostile litigation, although in an exceptional case the court may consider that the trustee should have his costs … ordinarily the trustee will not be entitled to any indemnity, for he has incurred expenditure and liabilities in an unsuccessful effort to prefer one class of beneficiaries (e.g. the express beneficiaries specified in the trust instrument) over another (e.g. the trustees in bankruptcy or creditors) and so has acted unreasonably and otherwise than for the benefit of the trust estate…”

10.  On pre-emptive costs order, Lightman J identified four relevant considerations with reference to Re Biddencare Ltd [1994] 2 BCLC 160,

(a)     the strength of the party’s case;

(b)    the likely order as to costs at the trial: it must appear that the judge at the trial could properly exercise his discretion only by ordering the applicants’ costs be paid out of the trust estate, see McDonald v Horn [1995] 1 All ER 961;

(c)     the justice of the application; and

(d)    any special circumstances.

11.  In the present context, looking the matter from the perspective of the disposition of the estate of the Deceased, the rival claimants are the Respondent and Karen Trust.  If the Respondent were successful in her challenge to the Will, Karen Trust would not get anything by way of succession.  In its capacity as the executor and trustee under the Will, the Applicant is in a similar position as the trustee under the settlement in Alsop Wilkinson v Neary [1996] 1 WLR 1220.  Applying the principles laid down by Lightman J, the Applicant should remain neutral and let the rival claimants to fight their own battles.

12.  The unfairness of making a pre-emptive cost order in favour of the Applicant can be highlighted by comparing the likely consequences where the Respondent succeeds in her challenge and those where she fails.  If she succeeds, that means the court held the Will to be invalid.  However, if a pre-emptive cost order is made as per paragraph 3 of the Originating Summons, the Respondent could find the estate substantially diminished by the costs of the probate action.  Based on the information from counsel, the estimated costs could represent a sizeable portion of the estate.  On the other hand, if the Respondent fails in her challenge to the Will, the Applicant could probably get a cost order for the cost to come out of the estate and it could even be borne by the Respondent’s suggested share of the estate under the Memorandum (assuming the Applicant were to exercise its discretion in the manner suggested in the Memorandum).  What the Applicant fails to get if a pre-emptive costs order is refused is an insurance against its cost liabilities in the event that the court finds against the validity of the Will.

13.  In this connection, the following observations of Park J in Breadner v Granville-Grossman (unreported) 17 July 2000 in respect of the position of a partisan trustee are apposite,

“…I do not mean to be critical of them for being partisan.  I can entirely understand why they thought it right to be partisan.  My point, however, is that there is another side of the coin.  If the trustees decide that they are going to take a position which is adverse to [one of the beneficiaries] and are going to argue strenously for it, that may be an entirely proper and sensible thing for them to do, but they must surely accept that there might be costs consequences if they are unsuccessful.”

After referring to Alsop Wilkinson v Neary, His Lordship continued,

“It seems to me that the thrust of what Lightman J says is that, if the trustees decide not to be neutral but to take sides in a dispute between beneficiaries, they must accept that, if the side which they support loses, they will be at risk of being subjected to an order for costs.”

14.  Mr Smith SC did not dispute these principles and analysis.  However, he submitted that the position is different here because Karen Trust is a discretionary trust and there is therefore no beneficiary to resist the challenge from the Respondent. He submitted that this rendered the present case an exceptional one and the Applicant must therefore be authorized to take up the mantle to resist the challenge by the Respondent.

15.  He derived support from Para.21-102 of Lewin on Trusts 17^th Edn.  Dealing with a situation where there appear to be significant difficulties in joining beneficiaries as defendants to a trust dispute, the learned editors suggested that a trustee has three options,

(1)     not to defend and allow the claim to go by default;

(2)     make alternative arrangements to fund a defence of the claim; or

(3)     make a Beddoe application.

Regarding the first option, the learned editors commented as follows,

“The first course is entirely appropriate if the trustee is firmly advised that there is no reasonable prospect of success.  Otherwise a trustee who adopts this course is at risk of a claim from the beneficiaries.  The rationale for neutrality on the part of the trustee is not present because there is no rival with whom the claimant might fight his battle.  For the trustee to allow the claim to go by default when there is a reasonable prospect of defence but no effective defendant would be tantamount to passive support to the claimant against the beneficiaries, not mere neutrality.  It is one thing for a trustee to take proper measures for his own protection, but a trustee must not by his acts or omissions set up the right of a third party against the beneficiaries, save in cases where there is a suspicion that the trust fund has a criminal source where special considerations apply.”

16.  Relying on that passage, Mr Smith submitted that given the merits of the case as matter stands at the moment (taking into account of the evidence obtained by the Applicant so far), it would not be right to leave the probate action undefended.  I have examined the material filed by the Applicant (those material were, in accordance with usual practice and for good reasons, not shown to the Respondent) and I have no reason to doubt Mr Smith’s preliminary assessment as to the merits of the case.

17.  However, the commentary does not stop there.  The learned editors went on to consider the two other options under Paras.21-103 to 21-105.  I found the observations at Paras.21-104 to 21-105 to be particularly helpful in the present context.  The learned editors suggested that a Beddoe application would be appropriate where the claimant targets the trustee for attack and no reasonable arrangements can be agreed for the addition of beneficiaries as defendants, or there are none available who might clearly fit the role of being the true rivals to the claimant’s claim, and no alternative funding is available to the trustee apart from either the disputed trust property or his own personal resources.          

18.  The learned editors expressed the view that in such an application, the court does not merely consider whether litigation is in the interests of the express beneficiaries of the trust, but considers also the injustice to the claimant in fighting a hostile claim at his own risk as to costs.  It is also suggested that the court should explore various options as alternative to the making of a pre-emptive costs order in favour of a trustee: (a) compromise; (b) alternative dispute resolution; (c) joinder of beneficiaries as parties.

19.  Coming back to the present case, the first question to ask is whether there could be any effective defendant apart from the Applicant in the capacity as executor and trustee under the Will. In my view, the answer is yes.  The beneficiary under the Will is the Karen Trust.  Hence, the Applicant could be a defendant in its capacity as trustee under the Karen Trust instead of its capacity as executor and trustee under the Will.  From the stance taken by Mr Wong, I understand that the Respondent would be agreeable to the joining of the Applicant as trustee under the Karen Trust as a defendant to the probate action.  Hence, this is not a case where the Respondent insists on targeting her attack against the Applicant in its capacity as executor and trustee under the Will.   

20.  The matter can be tested by looking at a scenario where two different entities were appointed as executor under the Will and as trustee for the Karen Trust respectively.  If the party who challenged the Will is willing to join the trustee under the Karen Trust as a party to that action, I see no reason why this could not be done.  In principle, I fail to see why there should be a difference when the same entity took up both offices.

21.  Mr Smith submitted that such a joinder could not solve the problem because as a matter of reality, Karen Trust has no resource to defend the action.  He also drew an analogy between the present case and the situation where the beneficiaries were all infants.

22.  Whilst it is correct that Karen Trust does not have any substantial asset at the moment apart from its interest in the estate of the Deceased under the Will, I am not convinced that there is no means to secure alternative financial resource to support the defence of the probate action or that there would not be any effective defence unless the relief sought in the Originating Summons is granted.

23.  Mr Smith’s argument hinged on the discretionary nature of Karen Trust.  Until the power of appointment of beneficiaries is exercised by the Applicant, there is no beneficiary who has a vested interest in the trust and hence, no prospect of such person providing an indemnity for legal costs in defending the probate action.

24.  To start with, I am not convinced that given the situation we are facing, viz. an attack is being mounted against the Will by the Respondent, it would not be in the best interest of all the potential beneficiaries under the Karen Trust that the power of appointment is at least partially exercised to ensure that alternative funding is forthcoming.  Mr Smith submitted that this should not be done as it would not be in accordance with the wish of the Deceased.  I reject that submission.  I have no evidence as to the wish of the Deceased in that regard since the terms of the Trust Deed do not contain any restriction as to the timing and manner of the exercise of the power of appointment.  Further, there is nothing before me to suggest that Deceased had anticipated the Respondent’s challenge to the Will and the costs in defending the probate action would represent a sizeable part of her estate.

25.  In any event, since the present application is not a Beddoe application with respect to the administration of Karen Trust, I am not concerned with giving directions to the Applicant as trustee under that trust.  It is therefore unnecessary and inappropriate (since other parties should arguably be given an opportunity to be heard if such an application is properly brought before the court) for me to come to a conclusion whether the power of appointment should be exercised at this stage.  All I said is that it is a possible option.

26.  I see no reason why the Applicant could not make a proper Beddoe application with respect to the administration of Karen Trust and obtain protection by way of directions from the court as to what it should do in view of the challenge by the Respondent to the Will.  In such application, the court will explore various options open to the trustee with the benefit of hearing views from those who might have an interest under the trust.  If alternative funding for the defence of the probate action were not forthcoming through one means or another, those who have potential interest under the trust would have to accept the consequence of such lack of defence.  The trustee would then be exonerated from the neglect in defending. 

27.  As mentioned by the learned editors of Lewin on Trusts, various options other than litigation conducted by the trustee could be explored in such application including compromise and joinder of beneficiaries.  In the present context, these options can only be explored under a proper Beddoe application with respect to the administration of Karen Trust. 

28.  It is up to the Applicant to consider whether it would make such an application in the light of this judgment.  As matter presently stands, I am unable to accept the lack of effective defence argument as a justification for the departure from the principles laid down in Alsop Wilkinson v Neary.

29.  I am of the firm view that there should be a dichotomy between the three capacities of the Applicant mentioned in Paragraph 4 above.  As far as its capacity as executor and trustee under the Will is concerned, the Applicant should abide by the principle of neutrality set out in the judgment of Lightman J.  In this connection, I am reinforced by the commentary at Para.62-36 of Williams, Mortimer & Sunnucks, Executors. Administrators and Probate, 18^th Edn.,

“In general an executor has a duty to protect the estate in proceedings adverse to the estate, but where there is dispute between the persons entitled, whether contentious or non-contentious, his duty is to remain neutral.”

See also Lewin on Trusts, 17^th Edn., Para. 21-96.

30.  Given the Applicant’s professional involvement in the preparation and execution of the Will, and bearing in mind the nature of the attack by the Respondent as shown in the present pleadings, it might be that the Applicant had a separate interest in defending the Will under the third capacity mentioned in Paragraph 4 above.  But the joinder of the Applicant to the Probate Action in such capacity had not been argued before me and I say no more about it.

31.  The directions that I shall give with regard to the Applicant’s role as executor and trustee under the Will are as follows,

(a)     the Applicant should make an application in the Probate Action seeking to clarify the capacity or capacities in which the Applicant is being named as the defendant to that action;

(b)    if the trustee of Karen Trust is not yet a defendant to the Probate Action nor proposed to be joined as a defendant by the Respondent, the Applicant should apply for it under that capacity be joined;

(c)     in its capacity as trustee and executor under the Will, the Applicant should remain neutral and confine its stance to filing a defence submitting to the court’s direction and in making discovery;

(d)    all reasonable costs properly incurred pursuant to (c) be borne by the estate irrespective of the outcome of the Probate Action.

32.  I also give parties liberty to apply.

33.  It follows that apart from (d) in Paragraph 31, I am not going to make any pre-emptive costs order.  In any event, I fail to see how in the present circumstances this court can conclude at this stage that the judge at the trial must conclude on a proper exercise of his discretion that the Applicants’ costs be paid out of the trust estate. Given the Applicant’s involvement in the preparation and execution of the Will, if the Respondent succeeded in her attack, it is rather unlikely that the Applicant should get its costs out of the estate.  I do not consider justice demands that the Applicant in its capacity as trustee and executor under the Will be given an advance assurance from this court that it would not be at risk on costs if it chooses to take side in the Probate Action.  As I said earlier, if the Applicant were successful in defeating the claims of the Respondent, it would most probably get costs from the estate.  If it were unsuccessful, as far as I can see at this stage, there is no reason why the beneficiaries under the intestacy of the Deceased should be burdened with such costs.

34.  As regards the costs of this application, I think it is reasonable and proper for the Applicant to make the application.  The Respondent had taken a limited part in the hearing as directed by me and I am assisted by submissions from counsel.  In the circumstances, I think it is appropriate to make a costs order nisi that the costs of the application shall be paid out of the estate, such costs to be taxed on trustee basis on the part of the Applicant.