CLEMENCIA MANANSALA GALLAGHER v. MARK EDWARD KIRKHAM

HCMP 83/2011 AND HCMP 315 /2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NOS. 83 AND 315 OF 2011

(ON AN INTENDED APPEAL FROM HCMP NO. 1850 OF 2009)

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BETWEEN

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REASONS FOR DECISION

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Hon Le Pichon JA:

1.  There were two applications before me. The first was a summons by the second defendant for an extension of time within which to appeal an order of Yam J made on 9 July 2010. The second was an application by the second defendant for leave to appeal the costs order made by Yam J on 10 December 2010 in the event that the time summons were refused. At the conclusion of the hearing both applications were refused. My reasons appear below.

Background

2.  The plaintiff is the widow of Gerard John Gallagher (“the deceased”) who died on 29 September 2008.  They had been married for a little over 14 years.  There are no children of the marriage.  The deceased was a senior solicitor employed by the Hong Kong Government who had just retired when he died.  He had been resident in Hong Kong since 1985.

3.  The first defendant (“Mr Kirkham”) together with Mr Michael Harris and Ms Nora Monica Gallagher (“Ms Gallagher”) were named as executors and trustees of the deceased’s will dated 17 March 2008.  Ms Gallagher has renounced her right to prove as executor while Mr Harris has reserved his right to do so.

4.  AzureTrustees Ltd (“the second defendant”) is the trustee of the Minotaur Trust which the deceased created by a Declaration of Trust dated 22 March 2007 (“the trust instrument”) with a nominal sum of US$10.  It was described as “an insurance trust” in the fee agreement of 8 February 2007 between the second defendant and the deceased, it being envisaged that one or more insurance policies would be added to the trust fund.

5.  Both the trust instrument and the will emanated from the second defendant.  The second defendant’s managing director, Debbie Annells (“Ms Annells”) was personally involved in the preparation of the trust instrument while her colleague Graham Moore was involved in the preparation of the will.

6.  The deceased made no direct provision for his widow in his will.  Her interest (if any) is indirect, as beneficiary under the trust instrument.  The deceased’s residuary estate (estimated to have a value of about HK$10 million) was bequeathed to the second defendant to hold upon the trusts of the trust instrument.

7.  It was in those circumstances that on 21 September 2009 the widow commenced proceedings for provision to be made for her pursuant to the Inheritance (Provision for Family and Dependants) Ordinance, Cap. 481 (“the Ordinance”).  In those proceedings Mr Kirkham who was the executor adopted a neutral position.

8.  The second defendant opposed the application.  While ostensibly espousing a ‘neutral’ position, it was anything but that.  In fact in late July 2009, it drew attention to provisions in the trust instrument relating to ‘hostile beneficiaries’ and accused the widow of having been driven by apparent hostility to the deceased.  Then shortly after the commencement of the proceedings threatened to have them struck out.  The second defendant was said to be motivated out of its obligation to the deceased who allegedly did not like the widow’s relatives and was concerned that she might be a target for friends and relatives if perceived to be wealthy.

9.  The deceased was “the Donor” under the terms of the trust instrument.  At issue was the nature of the widow’s entitlement under the trust instrument.  Its resolution would have a bearing on the question whether an order under the Ordinance would be necessary.

10.  The dispute between the parties centred on Article III of the trust instrument which was headed “Dispositive Provisions After The Donor’s Lifetime”.  Clauses 3.0 and 3.10 read:

“ 3.0 Persons Entitled to Capital and Income.

After the Donor’s lifetime, the Trustee shall distribute the Trust Fund at such time or times indicated below (“Distribution Date”):

The Trust Fund shall be resettled by the Trustee into an irrevocable discretionary trust for the surviving Primary Beneficiary, or failing her for the surviving Secondary Beneficiary, or failing her the Contingent Secondary Beneficiary.

3.10 Persons Eligible after the Distribution Date: Primary Beneficiaries. At the Distribution Date the Trustees shall calculate the shares of the Trust Fund and any undistributed income as indicated below.

The Trustee may allocate the share to the trust fund resettled as per Clause 3.0 above for the benefit of the person named below (“Primary Beneficiary”) as follows:

Primary Beneficiary	Fraction
Clemencia Manansala Gallagher	100% ”

The second defendant’s stance before the judge was that the widow was entitled to a life interest only and it has not been consistent as to whether capital could be applied for her.  As appears from §22 below, it has since changed its stance somewhat.

11.  Ms Gallagher, the deceased’s sister, was named the “Secondary Beneficiary” and John Hand of Chanel College was named the “Secondary Contingent Beneficiary”.  Both have renounced and disclaimed all interest in the trust and in the residuary estate.  Indeed, the deceased’s brother Martin Gallagher who is not mentioned in the trust instrument has also executed a similar deed of renunciation and disclaimer.  That has come about because of the second defendant’s intimation to the widow’s solicitors that it proposed to resettle the trust into a new irrevocable discretionary trust which would include Martin Gallagher as a potential beneficiary although he was not named in the trust instrument.  Sometime prior to November 2009 the deceased’s family in Ireland advised the executor’s solicitors by letter that it was the wish of the Gallagher family and Fr John Hand that the deceased’s estate should pass to the widow in its entirety.

12.  The International Red Cross was named the Final Contingent Beneficiary entitled to capital at the final distribution date.  As defined in the trust instrument, the final distribution date is 80 years from the date of the trust instrument (i.e. 22 March 2087).

13.  Under the fee agreement mentioned earlier, the annual trust fee whilst the trust is unfunded is US$500.  There is a table of annual fees relative to the value of insurance policy assets only but there is a right to review the annual trustee fee basis 2 years after the implementation of the trust.  Insurance policy assets of US$1 m to US$2 m attract an annual fee of US$2,750 (or HK$22,000).  Since the assets of the residuary estate are not insurance policy assets, it is not entirely clear what the charges would be.

14.  The judge correctly observed that poor draftsmanship provided considerable scope for advancing different interpretations of the trust instrument.  In fact, the trust instrument bristles with difficulties of construction.   In construing the Article III, the judge considered the trust instrument as a whole and adopted a purposive approach.  He concluded that the widow was entitled to the whole estate.

The time summons

15.  It is common ground that time for appealing the judgment of 9 July 2010 expired on 6 September 2010.  On 21 September 2010, the plaintiff’s solicitors drew the second defendant’s attention to that fact.  Confirmation by the second defendant’s former solicitors that that was indeed correct apparently took a further two weeks.

16.  Upon receipt of that confirmation on 5 October 2010 the second defendant instructed its former solicitors to obtain advice from senior counsel on the merits of the substantive appeal.  However senior counsel approached were unable to assist due to other commitments and only the advice of junior counsel was available.

17.  The second defendant then decided not to seek an extension of time and to focus on the costs hearing fixed for 17 November 2010.

18.  The time summons was taken out on 19 January 2011, some 9 weeks after the costs hearing and approximately 6 weeks after the judgment on costs (in which the second defendant was heavily criticized) was handed down on 10 December 2010.

19.  It will be seen from this brief chronology that the delay involved is 4½ months which, on any view, is substantial.  In my view, the reasons given for the delay do not constitute good reasons that could or would justify the delay.  In short, the delay was wholly inexcusable.

20.  I now turn to the merits.  Given the view I have taken of the delay, in the balancing exercise that has to be undertaken, ‘much more merit is required’ to overcome delay that was both inexcusable and substantial.

21.  The court was invited to revisit the judge’s interpretation because it was said to be ‘contrary to the intent of the deceased’.  Pausing there, it is to be noted that there was nothing in writing from the deceased as to his wishes and no contemporaneous written record or file note of the deceased’s wishes or intention to corroborate the assertions of Ms Annells and Mr Kirkham.

22.  The second defendant has advanced in its draft grounds of appeal what is said to be the true interpretation of the trust instrument.  Suffice it to note that, before the judge, the second defendant had advanced several different versions of the trusts created, not to mention other versions that had been put forward in the pre-proceedings correspondence.  Nor has the second defendant been consistent as to who the beneficiaries are who stand to benefit under the trust and the nature of their respective interests.  What is in the draft grounds would appear to be yet another version under which the widow is not even entitled to a life interest in the sense that the income could be withheld and, instead, accumulated.  All that hardly inspires confidence and would suggest that the second defendant itself is uncertain and unclear as to the true meaning and effect of the trust instrument.  Inevitably, that must undermine its case.

23.  Be that as it may, one should not lose sight of the nature of the proceedings: it was ‘an application’ made pursuant to the Ordinance for provision to be made for the widow out of the deceased’s estate.  Having regard to the value of the residuary estate, the widow’s own assets (including those devolving by survivorship) and needs, in particular the need to purchase a primary residence and to have sufficient capital that will generated adequate income for her living expenses, it is unthinkable that her application would not succeed, irrespective of the true interpretation of the trust instrument.  Nor do I consider it an answer (much less an adequate answer) that the widow will be adequately provided for under the trust (assuming for present purposes that one of the versions put forward by the second defendant were held to be the true interpretation) when the decision whether any capital is to be applied for the widow’s benefit rests solely with the second defendant who is a total stranger (and hostile at that) to the widow.

24.  There are further factors that militate against any extension of time.  First, there would be prejudice to the widow, the would-be respondent to any appeal.  She should not be burdened with further litigation when all actual and potential natural beneficiaries wish the estate to go to her and, in any event, her claim for provision under the Ordinance is unanswerable.  Second, there is the fact that, seemingly, the second defendant, has initiated the present applications without first obtaining any Beddoe order when, following the costs judgment below, it should have appreciated the advisability, if not need, for such an order. Third, one of the considerations that the second defendant prayed in aid was the “wider interest to be served” by having the appeal heard.  Apparently, the trust instrument is widely used as a standard precedent for Citigroup Private Banking and clarification by the Court of Appeal was considered desirable.  Yet, the second defendant made no offer to fund the appeal for all parties.  One might well ask why the widow should have to act altruistically and face the prospect of the estate being squandered on costs for the benefit of third parties including those who stand to reap financial rewards through such trust instruments.

25.  In the circumstances, this was a very clear case for a refusal.

The summons for leave to appeal on costs

26.  The judge ordered costs against the second defendant, such costs to be paid personally and on an indemnity basis.  His reasons are set out in the costs judgment to which reference should be made.

27.  For the reasons set out in §§4-18 of the costs judgment, judge came to the firm conclusion that the second defendant had defended the proceedings unreasonably and for its own benefit.  In those circumstances, he considered it appropriate to order indemnity costs.

28.  Mr Westbrook SC who appeared for the second defendant submitted that the judge erred in principle and that the evidence before him was not sufficiently compelling and/or cogent such that he could have properly drawn the inference that the second defendant was motivated by self-interest.  Mr Westbrook’s complaint was that the inference should not have been drawn in the absence of any cross-examination of, inter alia, Ms Annells.

29.  Insofar as it was suggested that an order for indemnity costs may not be made in the absence of viva voce evidence from the party made to pay such costs, I disagree.

30.  The judge was well placed to consider and decide whether the second defendant had acted reasonably both before and after the proceedings.  In the present case, the judge took a dim view of the conduct of the second defendant for reasons fully articulated in the costs judgment.  On the basis of those matters, I cannot see any prospect of the judge’s conclusion being impugned.  As Mr Westbrook acknowledged, the question of costs is one for the judge’s discretion and there is limited scope for interference with the exercise of that discretion by this court.

31.  In any event, I am troubled by the fact that it was considered appropriate to apply for leave to appeal on costs or indeed for the second defendant to take further steps without first obtaining a Beddoe order.  If one should have been obtained in advance of defending the proceedings, there is all the more reason for one to have been obtained before proceeding with any application necessary for the prosecution of any proposed appeal.