KONG COLIN CHUNG PING AND ANOTHER v. KONG WING ON AND OTHERS

HCMP 2045/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2045 OF 2012

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RULING ON COSTS

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1.  On 24 February 2015, judgment on the remaining substantive issues of the plaintiffs’ originating summons dated 20 May 2013 (“the 2015 Judgment”) was handed down.  The parties were directed to submit written submissions on the issue of costs within 14 days thereafter.  As an oral hearing proved unnecessary, my ruling on costs is set out below.

2.  The background facts that gave rise to the originating summons are set out in §§2‑18 of the 2015 Judgment to which reference should be made.  Also pertinent to this ruling are the matters stated in §§46‑59 that the court took into account in refusing to exercise its discretion to relieve the 1^st defendant from personal liability pursuant to section 60 of the Trustee Ordinance.

3.  That these proceedings fall within the third class of cases discussed by Kekewich J in In re Buckton [1907] 2 Ch 406 is beyond question.  It was hostile litigation and initially had been commenced because the plaintiff beneficiaries were unable to obtain accounts of the estate from the 1^st defendant who was the sole executor until he was replaced by an order of this court. 

4.  The originating summons (as amended) sought seven heads of relief.  It is pertinent to note that the plaintiffs have succeeded on all the heads of relief.

5.  Prior to the hearing on 2 to 3 February 2015 (“the 2015 hearing”), the plaintiffs had already obtained relief that concerned:

(i) the removal and replacement of the executor;

(ii) the validity or otherwise of the tenancy agreements relating to the premises; and

(iii) the provision by the 1^st defendant of a true and perfect inventory and account of the estate under section 56 of the Probate and Administration Ordinance.

6.  At the 2015 hearing, the plaintiffs sought the remaining two heads of relief, namely, whether the 1^st defendant had acted in breach of trust in his dealings with the assets of the estate and, if so, to pay the sum found due on the taking of the account together with interest to be held as part of the residuary estate.

7.  By a judgment dated 10 March 2014 the tenancy agreements (described in §§4‑7 of the background facts of the 2015 Judgment) were held to be void and unenforceable.  The 1^st defendant had relied upon those tenancy agreements as justifying the use and occupation by the 3^rd defendant (a company wholly owned by the 1^st defendant after the death of the deceased) upon the payment of a nominal rent.  The deceased owned 50% of the premises.

8.  Not surprisingly, the main issue for determination at the 2015 hearing was whether by using and occupying trust property for his personal benefit to the exclusion of the estate, the 1^st defendant (who was the former sole executor of the estate of the deceased) had acted in breach of trust and was thus accountable for market rent or alternatively must compensate the estate for its share of the market rent. 

9.  As an additional argument in support of their contention that the 1^st defendant had acted in breach of trust, the plaintiffs prayed in aid a separate (albeit minor and subsidiary) matter, i.e. “the vacancies issue”.  That issue concerned various lengthy periods during which various floors of a building jointly owned by the 1^st defendant and the deceased had been left vacant with no tenant in occupation. 

10.  The vacancies issue was little more than another aspect of the 1^st defendant’s dealings with the estate that the plaintiffs submitted was in dereliction of a trustee’s duty of care. Although on the evidence I did not find for the plaintiffs on the vacancies issue, in the scheme of things in this litigation, it was a very minor matter. In my view, it did not cause a significant increase in the length or cost of the proceedings. 

11.  I consider that the vacancies issue was not raised unreasonably when one takes into account the history of this litigation and how the 1^st defendant through his initial reluctance to provide information concerning the estate despite numerous requests caused these proceedings to be instigated.  The disclosure of matters such as the tenancy agreements some 9½ years after the deceased’s death understandably engendered deep mistrust on the part of the plaintiffs and caused them to scrutinise and question the 1^st defendant’s dealings with the estate and to view them with a degree of suspicion.

12.  Although the plaintiffs did not succeed on the vacancies issue, there is no doubt that they are the successful parties in this litigation, having obtained relief under each of the heads of the originating summons.  In those circumstances, it would be wholly inappropriate to deprive the plaintiffs of part of their costs.

13.  As regards the third issue, the relevant extract from the transcript reads:

“COURT: … is the question now, today, I’m putting to you, do you require from this court an order that [the plaintiffs and Madam Tam] pay you now those sums of money?

MS WU: Correct, your Ladyship.  I’m not going to say anything.  Yes, this is the position and this is the order sought from the court, yes.”

14.  Be that as it may, it is difficult to see in what capacity Ms Wu’s client was seeking an order for payment when he was no longer in the saddle as executor and Madam Tam was not a party.  It should never have been raised.  In short, the approach the 1^st defendant espoused was designed “to add to the aggro” between the parties and nothing else when the current executor (the 2^nd defendant) was not himself seeking such an order.

Ruling

15.  In conclusion, I have no hesitation in ordering that the costs of the plaintiffs and of the 2^nd defendant be borne by the 1^st defendant on a party and party basis.

16.  There is one remaining issue.  It arises out of the fact that it is the plaintiff beneficiaries who have commenced this action rather than the 2^nd defendant, the replacement executor. In those circumstances, the plaintiffs seek an order that the difference between party and party costs and full indemnity be paid to them out of the assets of the estate (“the indemnity provision”).

17.  Mr Lynn made reference to the decision in Re X (Trust) [2012] JRC 171, a case where the beneficiaries of a discretionary trust in Jersey obtained an order for payment out of the trust fund of present and prospective costs of bringing a breach of trust action against trustees: see footnote 644 at §27‑188 of Lewin on Trusts, 19^th edition.

18.  As stated in the main text of Lewin, the general rule relating to beneficiaries’ costs is that they are not in a privileged position as to costs in pursuing a breach of trust action and normally would not be permitted to do so at the expense of the trust fund.

19.  Admittedly, the facts of the present case are unusual.  Apart from the plaintiffs, the only other beneficiaries of the estate are Madam Tam (the deceased’s longtime companion) and the 1^st defendant. In Madam Tam’s case, her interest is limited to a 20% interest in the Windsor Park property and during her lifetime a monthly sum corresponding to the rental of a gross office area of 2,000 ft² of any portion of the Prince Edward Building but capped at $40,000 per month.  In the 1^st defendant’s case, it is an annual sum of $100,000 (which could be adjusted for inflation) from such rental income.

20.  Upon Madam Tam’s death, her estate would be entitled to 20% of the Windsor Park property and, subject to the other conditions (relating to marriage and the duration of marriage of each of the plaintiffs) being satisfied, the balance would go to the plaintiffs in the stated percentages.

21.  Apart from their vested but defeasible interests in the Windsor Park property, the plaintiffs are also the residuary beneficiaries of the deceased’s estate upon the death of both Madam Tam and the 1^st defendant.

22.  The plaintiffs are not discretionary beneficiaries.  They are not here seeking any pre‑emptive order as to costs. The application was put on the basis that if the replacement executor rather than the plaintiffs had pursued the claim against the 1^st defendant, then the replacement executor would expect to obtain an order for (1) costs incurred by him to be paid by the 1^st defendant; and (2) costs insofar as not recovered from the 1^st defendant to be paid out of the estate on an indemnity basis.  In other words, it was said that the plaintiffs were bringing the claim against the 1^st defendant for the benefit of the estate as a whole.

23.  However, the practical reality on the facts is that the plaintiffs are the only beneficiaries who stand to benefit because the interests of the remaining two beneficiaries would not be at adversely affected, whether or not the proceedings were instigated.

24.  That said, I accept that on the facts the plaintiffs are the residuary beneficiaries and to grant them the indemnity provision would merely award them now sums that they would in any event expect to obtain in due course.  My only hesitation arises from the fact that there is no updated financial information concerning the estate before the court.  That leaves the court in the unenviable position of being asked to make an order without being apprised of the current financial condition of the estate and that is hardly satisfactory.

25.  In my view, the better course would be to order that the indemnity provision should become absolute upon the expiration of 21 days from the date of this ruling if there is no application by the 2^nd defendant to show cause why the indemnity provision should not be made absolute.  If such an application were to be made by the 2^nd defendant, then the matter would fall to be determined upon the disposal of that application.