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

CACV 36/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 36 OF 2015

(ON APPEAL FROM HCA NO. 2487 OF 2009)

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J U D G M E N T

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Hon Cheung JA :

I. The facts

1.1  The plaintiff is one of the five beneficiaries of the estate of Tang Pui King alias Tang Yum (or Yam) Wan alias Tang King Cheung, deceased (‘the Deceased’).  The 1^st and 2^nd defendants are the administrators of the estate.  Letters of administration of the estate were granted to the 1^st and 2^nd defendants on 21 February 1983.  The 1^st defendant is the son of the Deceased and the 2^nd defendant who is the tin fong wife of the Deceased.  In view of the mental incapacity of the 2^nd defendant, the action was proceeded in her absence. 

1.2  The beneficiaries of the estate consisted of the five sons of the Deceased, one of whom had passed away.  The estate is a sizeable one consisting primarily of numerous plots of land in the New Territories.  Between 1985 and 2012 each of the five sons of the Deceased had received over $86 million by way of cash distributions from the estate. 

1.3  On 12 March 2003 the 1^st defendant entered into a written memorandum of an agreement for the purchase of a property known as Nos. 129-131 Castle Peak Road, Yuen Long, New Territories, Hong Kong. The price was $27,300,000.  The 1^st defendant used the 3^rd defendant as the vehicle for the purchase.  The 1^st defendant paid the initial deposit and part payment of $2 million on 5 March 2003 and a further deposit of $730,000 on 7 March 2003.

1.4  On 7 April 2003 the 1^st defendant completed the purchase of the property, paid the balance of the purchase price of $24,570,000 to the vendor and obtained an assignment of the property.  This money was partly funded by $11,480,000 belonging to the estate.  From time to time, the estate received compensation from the Government for the resumption of land belonging to the estate.  On 2 April 2003, a few days before the completion of the purchase, a sum of $11.48 million was withdrawn from the estate’s HSBC Premier current account and paid into the 1^st defendant’s personal bank account.  The $11.48 million was made up of the following sums :

1) $950,000 which was in the estate’s HSBC Premier savings account before 17 March 2003;

2) $1,110,000 which was allowed to be overdrawn from the estate’s HSBC Premier current account by reason of a sum of $1,115,523.78 being placed on fixed deposit latest since 28 February 2003;

3) $8,668,520.70 being compensation money of $8,728,733.70 paid by the Government to the estate’s HSBC current account on 19 March 2003 less solicitors’ fee of $60,213;

4) $729,591.25 being compensation money of $737,261.25 paid by the Government to the estate’s HSBC current account on 28 March 2003 less solicitors’ fee of $7,670;

5) $18,291.85 which was in the estate’s HSBC current account since August 2002; and

6) $3,596.20 being unauthorized overdraft on the estate’s HSBC current account.

1.5  The four sums in 3), 4), 5) and 6) totalling HK$9,420,000 were transferred from the estate’s HSBC current account to the estate’s HSBC Premier current account on 31 March 2003.  These sums together with the sums in 1) and 2) totalling HK$11.48 million were then transferred to the 1^st defendant’s personal HASE Prestige current account on 2 April 2003.

1.6  On 7 April 2003 the 1^st defendant executed a declaration of trust which stated that the property was, in fact, purchased by him as trustee on behalf of the 3^rd defendant and the consideration for the acquisition of the property was wholly provided by the 3^rd defendant. The 1^st defendant declared that he held and stood possessed of the property, the rents and profits and the proceeds of sale thereof in trust for the 3^rd defendant.  On 8 November 2004 the 1^st defendant executed a vesting deed whereby he as trustee assigned the property to the 3^rd defendant as beneficiary.  On 27 October 2003 the 1^st defendant repaid $11.48 million to the estate together with $200,900 representing interest thereof. 

II.  The present action

2.1  The plaintiff only became aware of the 1^st defendant’s use of the estate money in November 2005 after reading a report by PricewaterhouseCoopers, details of which I will address later in the judgment.  The plaintiff then commenced the present action in December 2009 for relief arising out of the 1^st defendant’s breach of fiduciary duty for the misuse of the estate money in the purchase of the property.  Chow J found for the plaintiff.  He found that the sum of $11.48 million was in the nature of a loan from the estate to the 1^st defendant. Nonetheless, the loan was obtained in breach of the fiduciary duty of the 1^st defendant. The Judge held that the 1^st defendant is liable to account to the estate for 40.40% of the profits derived from the 1^st and 3^rd defendants’ acquisition and holding of the property.  For the purpose of the enquiry, the Judge held that the profits shall be ascertained by reference to the increase in the value of the property, namely the difference between the open market value of the property as at the date of enquiry and $28,413,050 being the aggregate of the purchase price, stamp duty and the solicitors’ costs and disbursement for the acquisition of the property.  The proportionate share is 11,480,000/28, 413,050 x 100% = 40.40%. 

2.2  The plaintiff also discovered that there was a shortfall in the sum of $3,650,694 in the cash and bank balances of the estate. The 1^st defendant had since repaid this shortfall.  The Judge ordered the 1^st defendant to compensate the estate by paying interest on that sum. 

2.3  As there are five beneficiaries to the estate, the Judge ordered the 1^st defendant to pay the plaintiff one fifth of the amount of the profits found upon the enquiry including one fifth of the interest. 

2.4  The 1^st and 3^rd defendants now appeal against the decision. 

III.  The defendants’ case

3.1  Mr Benjamin Yu SC (together with Mr Y C Mok) for the defendants emphasised the requirement of causal connection between the breach of fiduciary duty by the 1^st defendant and the loss suffered by the plaintiff as a result of the misuse of the estate money.  While accepting that the 1^st defendant had been in breach of his fiduciary duty, Mr Yu argued that there was no causal connection between the breach and any loss by the estate.  He submitted that this is a two transaction case.  The first transaction occurred on 12 March 2003 when the 1^st defendant signed an agreement for the purchase of the property.  The second transaction occurred on 2 April 2003 when the 1^st defendant withdrew $11,480,000 from the estate’s bank account.  Mr Yu argued that by the time of the second transaction, the defendants had already acquired a beneficial interest in the property in that since the agreement for the purchase was specifically enforceable, the 1^st defendant would have immediately acquired an equitable interest in the property: Megarry and Wade, The Law of Real Property 8^th Ed para 15―052. 

3.2  Under the sale and purchase agreement the 1^st defendant had already paid 10% as deposit of $2.73 million.  Mr Yu argued that the subsequent use of the estate money did not, in any way, augment the beneficial interest already acquired by the 1^st defendant under the sale and purchase agreement.  Hence, there was no causal connection between the misuse of the estate money by the breach of the 1^st defendant’s fiduciary duty and the loss caused to the estate upon which the plaintiff now based his claim.  

3.3  Further, Mr Yu argued that the Judge had found that the $11,480,000 was a loan from the estate to the 1^st defendant and as such the property in the loan had passed to the 1^st defendant, the plaintiff was not entitled to an account of profits.  

3.4  Mr Yu further argued that the 1^st defendant had, in any event, repaid the loan within seven months.  At the time of repayment of the loan, the value of the property had not really appreciated if one takes into account the cost of the purchase.  He argued that an account for the profits derived from the acquisition and holding of the property up to the date of the enquiry is most unfair and is in the nature of an unfair enrichment to the estate at the expense of the 1^st defendant. 

3.5  Mr Yu further argued that the 1^st defendant, in any event, had his own money to pay for the balance of the purchase price without resorting to the use of the estate money. 

3.6  In respect of the shortfall, Mr Yu argued that this cannot amount to a breach of fiduciary duty on the part of the 1^st defendant.  At most it amounts to a breach of duty of care, see: Bristol and West Building Society v. Mothew [1998] Ch 1 at 16 C-D and Kao Lee & Yip v. Koo Hoi Yan & Others [2003] 3 HKLRD 296 at paragraph 45.  Although Mr Yu had argued that there was again no causal link and therefore the 1^st defendant should not be held liable to account for the shortfall, at the end of the submission he seemed to accept that the 1^st defendant should at most only be ordered to pay simple interest on the shortfall. 

3.7  Finally, Mr Yu argued that the percentage to be accounted for by the 1^st defendant should, in any event, not be 40.40% but should be reduced to 34% because of capital expenditure incurred by the 1^st defendant in respect of the property.  

IV.  $11.48 million

1)  Causal connection between breach and loss

4.1  The requirement of a causal connection between the breach of fiduciary duty and the loss to the trust estate for which compensation is recoverable is well established by Hong Kong cases.  In Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 Ribeiro PJ stated that :

‘ 76. It is of course true that in every case, there must be shown to be “some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz the fact that the loss would not have occurred but for the breach …”. However, the authorities show that the rules on causation are of varying strictness depending on the type of duty and breach in question.’

4.2  The same argument will apply not merely to the loss to the trust estate but in the fiduciary making a profit, as Riberio PJ further observed :

‘ 83. 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. Since the jurisdiction is not punitive, the fiduciary will not be made to account for more than he actually received as a result of his breach.’ (emphasis added)

4.3  Tripole Trading Ltd & Others v Prosperfield Ventures Ltd & Another (2006) 9 HKCFAR 1 is an example of how the requirement of causal connection operates.   Two directors had in breach of their fiduciary duty, to their personal benefit, entered into two agreements which in effect transferred the entire assets of the plaintiff’s companies (including shares in a listed subsidiary known as SCIC) to two companies (CPL and Tripole) for illusory considerations.  Subsequently SCIC was restructured by the mainland authorities and CPL was allotted substantial shares in the restructured company SFC.  The plaintiff claimed against the two directors in damages and for an account for profits based on the misappropriation of the SCIC shares and against CPL for the imposition of a constructive trust on the SFC shares.  On the facts as found (including the concession that the transfer agreements were not carried into effect and accordingly CPL had never obtained any shares thereunder), the Court of Final Appeal, whilst upholding the finding of breach by the directors and that the two agreements were void, held that no loss of any kind was occasioned by the breach and no gain was made under the agreements as CPL did not derive title from any impugned transfer by one of the plaintiff’s companies.  

4.4  Authorities outside Hong Kong also show the same causal connection requirement. 

4.5  Mason J observed in the High Court of Australia in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at page 110 :

‘ (1) What is the breach of fiduciary duty?, and

(2) What is the profit or benefit which the fiduciary has made in consequence of that breach?’ (emphasis added)

4.6  In my view the words ‘in consequence of’ embrace the concept of causation.  This formulation was adopted by the subsequent High Court of Australia’s judgment in Warman International Limited and Another  v Dwyer and Others (1995) 128 ALR 201 at page 214.

4.7  Fyffes Group Ltd and others v Templeman and others [2000] 2 Lloyd’s Rep 643 is another example where the ‘but for test’ is not satisfied.  In that case an employee of the claimants received bribes from a shipping agency to transport the goods of the claimants.  Toulson J at page 672 held that :

‘ I would conclude that there are cogent grounds, in principle and in practical justice, for following the approach of Gibbs, J. and holding that the briber of an agent may be required to account to the principal for benefits obtained from the corruption of the agent.  In Attorney General for Hong Kong v. Reid Lord Templeman described bribery (p. 330) as “an evil practice which threatens the foundations of any civilised society”.  The law should not assist a party to retain the profits of such a vice.

 However, there is in my view a compelling reason why it would not be right to direct an account of profits in this case.  I have already found that it is highly probable that Fyffes [i.e. the claimants] would have entered into a service agreement with Seatrade [i.e. the shipping company] if Mr. Templeman [i.e. the employee] had not been dishonest. Insofar as the terms agreed were more favourable to Seatrade than would have been agreed to by an honest and prudent negotiator on Fyffes’ behalf, Fyffes are entitled to damages, which I have assessed.  Insofar as Seatrade made an “ordinary” profit element, it was not caused by the bribery of Mr. Templeman, but was profit for the provision of services for which there would have been a contract in any event.  I do not see the equity of ordering Seatrade to account to Fyffes for that profit.  It is important to remember the warning of the High Court of Australia in Warman at par. 33 of the judgment that “the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff”.’

4.8  Mr Benjamin Chain, counsel for the plaintiff, accepted the requirement of causation although he preferred to use the phrase ‘causal link’ rather than ‘causation’ as this may involve an examination of issues such as probability and remoteness of the loss.

4.9  A different approach seemed to have occurred in Murad and another  v Al-Saraj and another [2005] WTLR 1573.  Arden LJ at paragraphs 58 and 59 referred to the principle that in awarding equitable compensation, the Court does not apply the common law principles of causation which are premised on reasonable foreseeability and remoteness.  The authority she relied on for this principle is the case of Target Holdings Ltd v Redferns [1996] 1 AC 421, 436 where Lord Browne-Wilkinson held :

‘ [But] the basic equitable principle applicable to breach of trust is that the beneficiary is entitled to be compensated for any loss that he would not have suffered but for the breach.’  (emphasis added)

4.10  In my view Lord Browne-Wilkinson’s statement clearly established the ‘but for’ causation principle.  Insofar as Arden LJ suggested that the ‘but for’ causation principle is not relevant to an account of profits, then this is not an approach that this Court will follow.

4.11  Arden LJ’s approach was criticised in academic work such as Graham Virgo, The Principles of Equity & Trusts, P. 601-611and Rebecca Lee, Causation and Account of Profits for Breach of Fiduciary Duty, 2006, Singapore Journal of Legal Studies 488.  See also Rebecca Lee, Establishing Factual and Legal Causation in a Fiduciary’s Liability to Account for Profits (2006) 36 Hong Kong Law Journal 443 which contained a review of the authorities in this area.  It is not necessary for me to refer to them as I have already said that the approach in Murad is inconsistent with the Hong Kong authorities.

2)  Mixed funds : tracing

4.12  The Judge refused to award the plaintiff with a proprietary interest in the property by way of tracing.  The plaintiff is no longer pursuing tracing.  However, it is still relevant to discuss the seminal case of Foskett v McKeown and others (HL) [2001] 1 AC 102 which the defendants had relied upon, not in the context of tracing but in the context of the views expressed by the majority judges in the Court of Appeal ([1998] (C.A.) 1 Ch 265).  The facts of the case are summarised in the headnote of the report of the Court of Appeal judgment.  A number of purchasers entrusted money to M. and an associate for a property development scheme in Portugal on terms that within two years the developed plots would be conveyed to the purchasers or their money repaid with interest.  The scheme was never carried out.  M., in breach of trust, used some of the purchasers’ money to pay two annual premiums for 1989 and 1990 on a whole life insurance policy effected in 1986.  There was a dispute as to the extent to which he used trust moneys to pay the premium for 1988.  In 1989 M. divested himself of any beneficial interest in the policy, appointing it to be held principally for the benefit of his three children, the third to fifth defendants.  In 1991 M. committed suicide, whereupon the insurers paid to the trustees of the policy, the first and second defendants, £1 million as the death benefit due under it.  The purchasers brought an action claiming the proceeds of the policy.  The first instance judge held that they could recover 53.46 percent of the proceeds as representing the extent to which their money had contributed to the investment value of the policy at the date of M.’s death. 

4.13  The majority of the Court of Appeal reversed the first instance decision on the plaintiffs’ proprietary claim.  Sir  Richard Scott VC and Hobhouse LJ held that on M.’s death, the investment value of the policy ceased to be relevant and could not form the proper basis on which to apportion the parties’ respective equitable interests in the death benefit and that the purchasers as trust beneficiaries were only entitled to reimbursement of such of their trust funds as had been misapplied on the premiums, and could trace their money into the proceeds to that extent.

4.14  The House of Lords reversed the majority decision of the Court of Appeal.  Lord Millett in page 131 stated this basic rule on tracing: where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money.  It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.

4.15  He further stated (on the same page) that there is a mixed substitution (with the results already described) whenever the claimant’s property has contributed in part only towards the acquisition of the new asset.  It is not necessary for the claimant to show in addition that his property has contributed to any increase in the value of the new asset.  This is because this branch of the law is concerned with vindicating rights of property and not with reversing unjust enrichment.

4.16  In that case the beneficiaries’ claim to a proportionate share in the assets was by way of tracing.  Lord Millett observed at page 127 :

‘ The process of ascertaining what happened to the plaintiffs’ money involves both tracing and following.  These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership.  The processes of following and tracing are, however, distinct.  Following is the process of following the same asset as it moves from hand to hand.  Tracing is the process of identifying a new asset as the substitute for the old.  Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner.  In practice his choice is often dictated by the circumstances.’

4.17  Lord Millett, however, emphasised at page 128 that tracing is neither a claim nor a remedy.  It is merely the process by which a claimant demonstrates what has happened to his property, identifies his 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. 

4.18  Lord Millett’s view was agreed by Lord Browne-Wilkinson and Lord Hoffmann. 

4.19  In support of his argument that there was no causal connection between the breach by the 1^st defendant in using the estate money and the profit he derived from it by the acquisition and holding of the property, Mr Yu relied on the judgment of Sir Richard Scott VC in the Court of Appeal at 279 :

‘ In these circumstances, while I can see no inequity, and therefore no difficulty, in a claim by the purchasers to the restitutionary remedy of a charge upon the proceeds of the policy to recover their money with interest, I can see great difficulty in their claim to a proportionate share in the proceeds.  The case is not one in which any benefit accrued to Mr. Murphy [i.e. M] from his misuse of their money.  The benefit from the use of the purchasers' money accrued to the beneficiaries who were innocent of any part in the breach of trust. The benefit to them consisted of the keeping on foot of the policy of which they were already the beneficial owners.  Why should the use by Mr. Murphy of the purchasers’ money in paying premiums to keep the policy on foot have the effect of divesting the beneficiaries of a pro rata part of their beneficial ownership?

 One answer that might be suggested is that the purchasers can claim under a resulting trust or a constructive trust in their favour brought into being by that use of their money.  Let me test that answer by considering the case of a house purchased under an arrangement that required the price to be paid by equal annual instalments over a five-year period.  Let it be supposed that the house is purchased by A and conveyed into his name, with the purchase price left outstanding under the arrangement to which I have referred.  Prima facie the vendor would retain an equitable lien on the property for the outstanding purchase price.  The payment of each annual instalment would, pro tanto, discharge the lien.  If B’s money, instead of A’s, were used to pay, say, the third, fourth and fifth of the annual instalments, B might, depending on the circumstances in which that were done, become entitled by subrogation to the vendor's lien for the purpose of recovery of his money: cf. Boscawen v. Bajwa [1996] I W.L.R. 328.  But there would not, in my opinion, be any question of a resulting trust or a constructive trust.  The complete legal and beneficial interest in the property would, subject to the vendor’s lien, have been vested in A before the use of B’s money to pay the later instalments.  B would acquire an equitable interest in the property itself, as opposed to the benefit of the vendor’s lien to recover his money, only if some agreement to that effect between himself and A could be established, or, if the money were trust money, via a constructive trust imposed in order to prevent A from benefiting from his breach of trust…….’ (emphasis added)

4.20  Sir Richard Scott at page 282 further stated that :

‘ Second, it is well established that if a trustee uses trust money to obtain some benefit for himself he is accountable to the beneficiaries for that benefit…… What was the benefit acquired by Mr Murphy out of his use of the purchasers’ money to pay the 1988 premium that equity would regard as held upon trust for the purchasers?  As I have already observed, equity will use the means of a constructive trust in order, inter alia, to hold a trustee accountable to his beneficiaries for a benefit that the trustee has obtained by a wrongful use of trust money. In a case, however, in which it is unclear that any benefit has been obtained, it is not easy to see why a constructive trust should be imposed. If a trustee used trust money to improve or maintain his house, the beneficiaries would, in my view, be entitled to a charge on the house to recover their money.  But unless it appeared that the improvements had increased the value of the house there would be no basis for a claim to a pro rata share in the house and no reason for the imposition of a constructive trust.  There would, in such a case, be no benefit acquired by the use of the trust money for which the trustee would be accountable.  Similar reasoning applies, in my opinion, in the present case.  If the purchasers’ money was used to pay the 1988 premium, they became entitled to a charge over the policy to recover their money.  They did not, in my opinion, become entitled to a pro rata share in the policy either via a constructive trust route or via a resulting trust route.’  (emphasis added)

4.21  Hobhouse LJ at page 291 E-F apparently took a similar view. 

4.22  Lord Steyn who was one of the dissenting judges in the House of Lords agreed with the view of Sir Richard Scott VC and Hobhouse LJ.   

4.23  Lord Hope of Craighead who also dissented in the House of Lords, held at page 122 E-G :

‘ …The effect of the payment of the four remaining premiums up to the date of the life assured’s suicide was to reduce the amount which the insured had to provide to meet this liability out by reinsurance or of its own funds.  But they had no effect on the right of the trustees to the payment of the sum assured under the terms of the policy, as they did not increase the amount payable on the death.’

4.24  Mr Yu argued that while the majority of the House of Lords had held that tracing was available in a situation where mixed funds were used, Sir Richard Scott’s view that a complete legal and beneficial interest in the property, subject to the vendor’s lien, has been vested in M. before the use of the purchasers’ money to pay the later instalments was not challenged by the majority decision in the House of Lords.  This would effectively preclude the plaintiff from showing the necessary causal connection.

4.25  I disagree.  In my view, while Lord Millett’s analysis on mixed funds was in the context of tracing, his view at page 137 debunks the artificial distinction now drawn on the use of mixed funds at different times which is said to have precluded the beneficiary from asserting an interest in the property by way of an account for profit.

‘ In my opinion there is no reason to differentiate between the first premium or premiums and later premiums.  Such a distinction is not based on any principle.  Why should the policy belong to the party who paid the first premium, without which there would have been no policy, rather than to the party who paid the last premium, without which it would normally have lapsed?  Moreover, any such distinction would lead to the most capricious results.  If only four annual premiums are paid, why should it matter whether A paid the first two premiums and B the second two, or B paid the first two and A the second two, or they each paid half of each of the four premiums?  Why should the children obtain the whole of the sum assured if Mr Murphy used his own money before he began to use the plaintiffs’ money, and only a return of the premiums if Mr Murphy happened to use the plaintiffs’ money first?  Why should the proceeds of the policy be attributed to the first premium when the policy itself is expressed to be in consideration of all the premiums?  There is no analogy with the case where trust money is used to maintain or improve property of a third party.  The nearest analogy is with an instalment purchase.’  

4.26  In my view the same argument applies to this case as well.  In the first place this is not an instalment purchase like the example used by Sir Richard Scott.  The estate money was used in order to complete the transaction.  Although the 1^st defendant had acquired a beneficial interest in the property upon entering a contract for sale because he could then specifically enforce the agreement, he would still need the $11.48 million in order to complete his title (through the 3^rd defendant) to the property and the 1^st defendant chose to use the estate money to do so.  This is not a case where the 1^st defendant used the money innocently, not knowing that it was in the nature of trust money.  He knew that it was compensations payable to the beneficiaries of the estate but he chose not to distribute the money to them and had instead used it for his own purpose.  While he might have money of his own, again he chose not to use his own money to complete the transaction and deliberately made use of the estate money.  This is a clear conflict of interest situation.  The Judge had found that the misappropriation was based on an opportunity available to the 1^st defendant only because of his position as administrator of the estate?  Why should it make any difference if the estate money was not used for the 10% deposit and only as part of the balance of the purchase price?  Why should there be a different result if the whole or part of the 10% deposit came from the estate? This really demonstrates that the argument advocated by the defendants will lead to the most capricious results.  It was by the use of the estate money which enabled the 1^st defendant to acquire the property.  In my view it is splitting hairs to say that the 1^st defendant’s interest in the property was not augmented by the use of the estate money. 

3)  Account for profit for misuse of the estate money

4.27  Once a fiduciary obtained a profit or benefit when there was a conflict between his fiduciary duty and his personal interest and the casual connection was satisfied, he must account for such profit as night follows day.  This is well-established by authorities.  As Lord Russell of Killowen in Regal (Hastings) Ltd v Gulliver (Note) [1967] 2 AC 134 at 144-145 stated :

‘ 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.’

4.28  Snell’s Equity,33^rd Ed., para 7―054 at 214 states 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, citing Warman International Limited.  See also Kao Lee & Yip at paragraphs 134 to 136. 

4.29  In Scott v Scott and others (1963) 109 C.L.R. 649 (which was relied upon by the Judge) where a trustee purchases a property not ‘specifically severable’ with a mixed fund of trust moneys misapplied and his own moneys, he is nevertheless liable to account for profit made on a resale of such property.  In that case, 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. 

4.30  The High Court of Australia at page 658 stated that :

‘ ...The trust funds were improperly applied in the purchase, it was the duty of the trustee to remedy the breach of trust and, unless the repayment of the sum of £1,014 in 1959 constituted a remedying of the breach, he had failed to do so before his death.  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 and which was reformulated comparatively recently in Regal (Hastings) Ltd. v. Gulliver …’ (emphasis added)

4.31  And at page 663 :

‘ …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.’

4.32  Mr Yu submitted that Scott is a tracing case.  But in the passage that I just cited, the High Court of Australia had clearly stated that the remedy of an account for profit was available to the beneficiaries in that case which involved the use of mixed funds.  This is so even after the repayment of the misapplied fund.  The same approach should be adopted in the present case.

4.33  Gwembe Valley Development Co Ltd v Koshy [2004] 1 BCLC 131 is another example that the fiduciary must account for the profits for breach of fiduciary duty.  Mummery LJ stated that :

‘ [137] The point is not, ….., whether the loan transactions are void or voidable, or whether they were rescinded or not, or whether property in the sums repaid passed out of the beneficial ownership of [the beneficiary] and became the property of [the fiduciary’s company], or even whether [the fiduciary’s company] received the sums as trust property.  The point is that [the fiduciary] was not, as a fiduciary vis-à-vis [the beneficiary], entitled to retain for his personal benefit any of the unauthorised profits dishonestly made from transactions between him and the [the beneficiary].  If he received those profits directly in the form of payments to him or indirectly by, for example, the consequent increase in the value of his shareholding in [the fiduciary’s company], he cannot be heard to say, as against the beneficiary company, that he was entitled to retain any of the profits for himself.’

4.34  In Murad Arden LJ at paragraph 46 stated that :

‘ [46] ….For wrongs in the context of such a [fiduciary] relationship, an order for an account of profits is a conventional remedy.’

4.35  To conclude, the misuse of the estate money by the 1^st defendant after he had made use of his own money to pay for the deposits of the property does not preclude him from being held liable to account for the profits.

4)  $11.48 million as a loan?

4.36  As to the true nature of the $11.48 million, the Judge characterised it as a loan.  He held that :

‘ 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.’

4.37  But the Judge went on to state that what is important is not the label that should be given to this payment but the legal consequences flowing from it (paragraph 79).  Then at paragraph 88 the Judge stated that :

‘ 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.’

4.38  Mr Chain challenged the Judge’s finding that the $11.48 million was a loan.  In my view, the Judge was wrong to characterise the $11.48 million as a loan although his decision to order an account is correct.  The Judge relied on Ciro Citterio Menswear plc v Thakrar & Ors [2002] 1 WLR 2217, paragraph 33.  In that case Deputy High Court Judge Anthony Mann QC also characterised the withdrawal of money by directors from the company’s account as a loan.  However, this characterisation is based on the specific facts of that case.  In that case one of the directors purchased a house in his own name partly with money lent to him by the company.  The Deputy Judge held at paragraph 27 that there was evidence to support the view that the money was advanced by way of a director’s loan :

‘ The evidence, thin though it was, tended to show that what happened on this occasion was part of a historical pattern, and there was no suggestion that previous instances of the same sort of thing had been dealt with formally by the board.  At the end of the year the balances were sorted out with the assistance of the auditors. That suggests, and I find, that Thakrar directors were informally authorised to give effect to these sort of arrangements, so that Rasik and Nilesh (in this case) had sufficient authority to give rise to this particular loan.  The sort of casual disposal of company finances that went on in this case is not to be encouraged, but that does not mean that the relevant consensual element was lacking.  I find it to have been present; and I therefore find that what technically happened in this case was a loan, or a transaction in the nature of a loan, to Nilesh by the company.’

4.39  In this case, it is not necessary for the plaintiff to show that dishonesty was involved.  Based on the Judge’s finding that there was a misuse of the funds belonging to the estate which was based on an opportunity available to the 1^st defendant only because of his position as administrator of the estate, the taking of the money could not be by way of a loan, rather it was a strict misapplication of the estate money, or, put it in another way, an administrator helping himself to the estate money in an impermissible way. 

4.40  In this case, the 1^st defendant, apart from informing the 2^nd defendant and the executor of one of the deceased beneficiaries of his intention to use the money, the 1^st defendant had not obtained the agreement of the other beneficiaries including that of the plaintiff to use the estate money in this way. 

4.41  The 1^st defendant agreed in his evidence that he would need to tell his brothers (i.e. the other beneficiaries) that he had borrowed the money.  But apart from the persons that I have mentioned, he had not informed his brothers at the time of his ‘borrowing’.  Further, the evidence showed that when he borrowed the money he had already planned to purchase the property in question.  These answers were elicited by Mr   Chain during the cross-examination of the 1^st defendant.  Mr Yu submitted that Mr Chain merely put to the 1^st defendant in cross-examination that he did not intend to pay the interest for the $11.48 million at the time of repayment of the loan.  In my view, Mr Chain had done more than that.  

4.42  The 1^st defendant said he had intended to repay the $11.48 million.  The fact that the 1^st defendant said he intended to repay the money cannot disguise the fact that the taking was a misapplication of the estate money in an impermissible way.

5)  Money of the 1^st defendant

4.43  Mr Yu also submitted that the 1^st defendant had money of his own to pay for the property and the ‘but for test’ is not satisfied in this case.  This point can be dealt with shortly.  The stark fact is that the 1^st defendant had chosen not to use his own $11.48 million to complete the transaction but had put himself in a position of conflict by using the estate money.  I do not see how the 1^st defendant’s own available resources can help him in this regard. 

6)  Repayment of $11.48 million

4.44  The 1^st defendant repaid the money after seven months.  Two issues arise from this : first, whether an account for profit is still available to the plaintiff and second, whether this has a bearing on the accounting period.  In other words, whether the accounting period should stop at the time of the repayment of the money.  I have already addressed the first issue when I decided that the repayment will not defeat the order for an account of profit.  To determine the second issue it is necessary to examine the circumstances in which the 1^st defendant disclosed the taking of the $11.48 million.  This has been summarised by the Judge in paragraphs 36 to 61 of the judgment :

‘ (v) The 2002 Action

36. On 28 June 2002, Ying Lam [one of the beneficiaries] 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 1st 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.’

4.45  The summary speaks volumes about the way the 1^st defendant sought to hide his misapplication of the estate money.  It clearly reveals a deliberate concealment of this taking and the nature of the taking until the very last moment when the 1^st defendant was compelled by a Court order to do so.

4.46  In my view, if it is seriously suggested that the accounting period should stop at the time of repayment, then it behoves upon the 1^st defendant to disclose his taking to the beneficiaries at that time so that they could properly consider what their remedy should be.  This was not the case.  In the circumstances, the second issue must, likewise, be decided against the 1^st defendant. This is not a punitive order.  Quite simply, the 1^st defendant is under an obligation to account for profits, which he has not discharged due to his concealment.

7)  Capital expenditure?

4.47  Mr Yu argued that there were other capital expenses on the property incurred by the 1^st defendant which should reduce the percentage of the proportionate share of the profit.  However, it is not possible even at this stage to discern from the figures provided by the 1^st defendant whether the sums were in the nature of capital expenses or recurrent expenses.  The burden must be on the 1^st defendant to identify from the evidence what capital expenses were incurred and their effect on the value of the property.

4.48  I am not inclined to disturb the percentage decided by the Judge.  In any event, for the purpose of the enquiry, the Judge has ordered credit is to be given to the 1^st defendant in respect of the cost of repair and maintenance of the property.

V.  Shortfall

5.1  There is no dispute that there was a shortfall of $3,650,694 in the cash and bank balances of the estate. 

5.2  The Judge held that as an administrator of the estate the 1^st defendant was under a duty to keep proper accounts of the income received and expense 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 underpayment of rents by tenants and, if necessary, take action to seek to recover the outstanding sums.  The Judge held that the repayment by the 1^st defendant of the shortfall is an implicit recognition of his liability to pay compensation to the estate. 

5.3  Mr Yu submitted that the 1^st defendant is not a highly educated person.  He received education only to the form  six level.  He carried out the administration work without any remuneration.  In fact, he had to employ someone to look after the estate and paid salaries to that person out of his own pocket.  There are over 2,000 plots of land involved and the 1^st defendant had been carrying out this arduous task for over 30 years.

5.4  I agree with Mr Yu that at most the shortfall represents a breach of duty of care and not breach of fiduciary duty on the part of the 1^st defendant.  However, it does not mean that compensation should not be made by the 1^st defendant for his breach of duty of care.  The interest arising from this shortfall is the compensation that the 1^st defendant has to be responsible.  Although Mr Yu wished this Court to decide that it is by way of simple interest, my view is that the basis of the interest, the rates and the period should be decided at the time of the enquiry as the Judge had ordered.

VI.  Conclusion

6  Accordingly the appeal is dismissed.

VII.  Costs

7  It will be a costs nisi that the plaintiff is to have the costs of the appeal.

Hon Kwan JA :

8  I agree with the judgment of Cheung JA.

Hon Barma JA :

9  I agree with the judgment of Cheung JA.