HO YUEN KI WINNIE v. ANTHONY ERIC RYAN HOTUNG AND OTHERS

HCMP 641/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 641 OF 2009

-----------------------

-----------------------

--------------------------------------

REASONS FOR DECISION

--------------------------------------

Introduction

1.  By my Decision handed down on 18 June 2010 (“the Decision”),

(1) The 1^st defendant’s summons filed herein on 1 June 2009 to stay the originating summons (as amended) was disallowed.

(2) The part of the originating summons applying for permission for the plaintiff (“the Trustee”) to retire from the trusts in question is adjourned pending the determination of the contempt proceedings commenced by the 1^st defendant against her.

(3) It was held that upon a proper construction of the respective declarations of trust, the shares in Hotung Enterprises Limited (HEL) and Hotung Investment (China) Limited (HICL) held by the Trustee on behalf of the 1^st to 3^rd defendants are held in severalty for the respective beneficiaries, each of whom is entitled to the proportion of shares set out in the schedules to the declarations of trust. Accordingly, each of the beneficiaries has a right to call for transfer of his aliquot share, without the concurrence of all the other beneficiaries.

(4) The 2^nd defendant’s application by summons filed herein on 9 July 2009 for an order directing transfer to him of 3333 shares in HEL and 1 share in HICL held on trust for him was allowed (“the Transfer Order”).

(5) A costs order nisi was made whereby the costs of the plaintiff and the 1^st and 2^nd defendants of the originating summons, the 1^st defendant’s summons dated 1 June 2009 and the 2^nd defendant’s summons dated 9 July 2009 be paid out of the trust estates (“the Costs Order Nisi”).

2.  By summons filed on 23 June 2010 (“the Trustee’s Summons”) made returnable on 28 June 2010, the Trustee sought further consideration of paragraphs 5 to 8 of the originating summons and, in particular, the following relief:

(1) The trusts in question be carried into execution by the Court (paragraph 1); and

(2) Alternatively, unless otherwise directed in writing by the 1^st to 3^rd defendants, the Trustee be at liberty to decide whether to attend and how to vote at the Extraordinary General Meeting (EGM) of HEL scheduled to be held on 5 July 2010, as if she were the absolute legal and beneficial owner of all 10,002 shares registered in her name to the intent that she should not be under any duty of a trustee in relation thereto (paragraph 2).

3.  The Trustee’s application is prompted by a letter dated 3 June 2010 from Briscoe & Wong Limited, enclosing a Notice of EGM dated 2 June 2010 (“EGM Notice”) given by HICL as director of HEL together with proxy forms. The EGM Notice was signed by the 2^nd defendant as authorised representative for and on behalf of HICL.  The EGM is to be held on 5 July 2010 for members to consider two resolutions. The first (which is by way of special resolution) is for HEL to be wound up voluntarily on the basis that it cannot, by reason of its liabilities, continue its business.  The second is for the appointment of Mr Stephen Briscoe & Mr Wong Teck Meng to be appointed as Joint & Several Liquidators of HEL. 

4.  By summons filed on 25 June 2010 (“D1’s Summons”), the 1^st defendant applied for:

(1) Under paragraph 2, a stay of the Transfer Order until the determination of the committal proceedings against the Trustee;

(2) Under paragraph 3, a variation of the Costs Order Nisi and for an order that the Trustee pays the 1^st defendant the costs of his summons dated 1 June 2009 and of the originating summons (as amended);

(3) Under paragraph 4, a stay of paragraph 1 of the Trustee’s Summons until the determination of the committal proceedings against the Trustee; and

(4) Under paragraph 5, an order that the Trustee shall attend personally at the EGM of HEL in her capacity as a trustee and to vote against the special resolution and ordinary resolution in accordance with the directions of the 1^st to 3^rd defendants.

5.  At the hearing, I made the following orders:

(1) No order is made on paragraph 1 of the Trustee’s Summons and paragraph 4 of D1’s Summons.

(2) On paragraph 2 of the Trustee’s Summons and paragraph 5 of D1’s Summons, the Trustee is directed to: (a) attend the EGM of HEL in person or by proxy; (b) to vote on the proposed resolutions in accordance with the respective directions of the 1^st defendant and 2^nd defendant as indicated at the hearing in respect of the shares held for their benefit; and (c) to abstain from voting in respect of the shares held for the 3^rd defendant.

(3) Paragraphs 2 and 3 of D1’s Summons are dismissed.

(4) The costs of the Trustee and the 1^st and 2^nd defendants on the Trustee’s Summons and D1’s Summons are to be paid out of the trust estate; in the case of the Trustee on trustee basis and in the case of the 1^st and 2^nd defendants on common fund basis.

6.  My reasons for the orders appear below.

Application for the trusts to be carried into execution by the Court

7.  In paragraph 5 of the originating summons (as amended), the Trustee has sought an order that the two trusts in question may be carried into execution by the Court.

8.  In the Decision handed down on 18 June 2010, there was no adjudication on this part of the originating summons.  I was of the view that this as well as paragraph 6 of the originating summons (seeking consequential directions, accounts and inquiries) would be ancillary to an order permitting the Trustee to retire from the trusts.  As the retirement application was held over pending the determination of the contempt proceedings commenced by the 1^st defendant against the Trustee, there was no separate consideration, hence adjudication, on the application for the trusts to be carried into execution by the Court.  In short, this part of the originating summons was at large.

9.  The 1^st defendant submitted that the Trustee’s Summons, in particular, paragraph 1 thereof, is an abuse of process.  It was said that the application was effectively an appeal against the order to adjourn the retirement application.  However, given there was no adjudication on paragraph 5 of the originating summons, the Trustee may for good reasons restore the application.  I do not accept that the Trustee’s Summons amounted to an abuse of process or was procedurally irregular and ought to be refused on this basis.     

10.  I accept, as pointed out by Mr Yin, there are differences between an administrative order whereby the administration of the trusts are to be under the direct supervision of the Court and an order permitting the Trustee to retire from the trusts.  Under an administration order, the Trustee remains in trusteeship and continues to hold the legal title of the trust properties, but she will cease to exercise any discretion or decision-making power associated with her office as a trustee. 

11.  The modern practice of the court is not to make an administration order unless it is necessary.  An administration order will not be made where the difficulties can be resolved by the procedure under Order 85 of Rules of the High Court, Cap.4A.  In Underhill and Hayton, Law of Trusts and Trustees, 17^th Ed. (2006), p.1043 at para.88.4, it is said that “cases necessitating general administration can seldom arise; except: (1) where the trustees cannot pull together, or (2) the circumstances of the estate give rise to ever-recurring difficulties requiring the frequent direction of the court, or (3) where a prima facie doubt is thrown on the bona fides or the discretion of one or more of the trustees.” 

12.  In the present case, the Trustee’s main reason for an administration order is that she was not prepared to exercise the discretion associated with her office as trustee, especially in relation to the EGM of HEL.  Underlying her reluctance is her desire to be freed from the onerous position of trusteeship, having regard to the history of controversies and litigations brought by the beneficiaries.  As is evident from these proceedings, the Trustee is unwilling to continue with her office, but her retirement application is currently being held in abeyance pending the outcome of the contempt proceedings brought by the 1^st defendant against her.  It is also plain that she does not enjoy good relationship with the beneficiaries, especially the 1^st defendant.  Mr Yin is justified in saying that any decision on the management of the trusts that the Trustee may make in exercise of her discretion is likely to be challenged by the 1^st defendant. 

13.  In respect of the EGM of HEL, the Trustee had sought instructions from the beneficiaries.    After receiving the EGM Notice on 5 June 2010, the Trustee’s solicitors had by separate letters dated 9 June 2010 to the 1^st to 3^rd defendants, asked them whether they were unanimously agreed to the resolutions proposed in the EGM Notice.  It should be noted that this letter predated the Decision of 18 June 2010, which held that the shares in HEL were held on trust for the 1^st to 3^rd defendants in severalty.

14.  By letter dated 17 June 2010, the 1^st defendant’ solicitors complained it was unreasonable and impossible for the 1^st defendant to consider and any informed decision on the proposed resolutions as he has not been able to obtain the financial accounts of HEL.  The Trustee was asked to make enquiries from HEL regarding the position of HEL and how did it propose the beneficiaries to vote and the reasons for the same.  The 2^nd defendant by his letter also dated 17 June 2010, invited the Trustee to cast his vote either to approve or to reject or to abstain from the subject matter of the EGM.  There was no response from the 3^rd defendant. 

15.  The position was therefore far from satisfactory by the time the Trustee’s Summons was issued on 23 June 2010.  It is understandable why the Trustee felt necessary to seek directions from the court.  It is also not difficult to understand the Trustee’s reluctance to exercise any discretion or power associated with her office as trustee and her wish to have the trusts carried into execution by the court.  However, there had been further developments since then.

16.  By letter dated 25 June 2010 from his solicitors, the 3^rd defendant indicated his position had been and remained to be neutral, and that if the 1^st and 2^nd defendants could agree on an appropriate course of action to deal with HEL, he was “prepared to assist facilitate the same, should his assistance be required.”   By letter from his solicitors of the same date, the 1^st defendant instructed the Trustee to object to the EGM on the basis that the EGM Notice was defective, and also to object to the proposed resolutions.  Then by his written submissions dated 28 June 2010, the 2^nd defendant indicated that the Trustee should vote in favour of the liquidation of HEL.

17.  As matter stood at the hearing, the 1^st and 2^nd defendants had made clear how they would want the Trustee to vote on the subject matter of the EGM.  Directions from the court as to how the Trustee should act at the EGM of the HEL would be sufficient to address the immediate difficulties faced by the Trustee and which gave rise to the application.  On the materials before the court, I do not consider it necessary to make an administration order.  As paragraph 5 of the originating summons (as amended) has yet to be adjudicated upon, the appropriate order is to make no order on paragraph 1 of the Trustee’s Summons.  It also follows that there is no need to deal with paragraph 4 of D1’s Summons seeking a stay of paragraph 1 of the Trustee’s Summons.

Directions relating to the EGM of HEL

18.  As mentioned above, the directions of the 1^st and 2^nd defendants on how the Trustee should act in relation to the EGM of HEL had become clear at the hearing.  So far as the 1^st defendant’s instruction to object to the validity of the EGM Notice was concerned, that stemmed from the 1^st defendant’s mistaken view that HICL had no authority to convene the meeting and to give the notice for it.  In any event, it was a matter capable of being waived by members attending the meeting.  While paragraph 5 of D1’s Summons sought a direction that the Trustee shall attend the EGM in person, this was not insisted upon at the hearing.  But it was noted by the parties that under the Articles of Association of HEL, the Trustee could only appoint a member of the company to be her proxy.

19.  As the 1^st and 2^nd defendants had given their directions on how to act on the EGM and on how to vote on the proposed resolutions, the Trustee should attend the EGM either in person or by a properly authorised proxy and should, in respect of the portions of shares held on trust for them, vote in accordance with their directions.

20.  In respect of the portion of shares held on trust for the 3^rd defendant, as the 3^rd defendant had indicated his wish to take no position, the Trustee should abstain from voting on the proposed resolutions.       

21.  Accordingly, on paragraph 2 of the Trustee’s Summons and paragraph 5 of D1’s Summons, the Trustee was directed: (a) to attend the EGM of HEL in person or by proxy; (b) to vote on the proposed resolutions in accordance with the respective directions of the 1^st defendant and 2^nd defendant as indicated at the hearing in respect of the shares held for their benefit; and (c) to abstain from voting in respect of the shares held on trust for the 3^rd defendant.     

1^st defendant’s application to stay the Transfer Order

22.  Paragraph 2 of D1’s Summons sought to stay the entire Transfer Order pending the determination of the committal proceedings against the Trustee.  At the hearing, however, it was indicated that the stay was limited to the one share in HICL.  The reason for the 1^st defendant’s stay application is that the transfer of the one share held on trust for the 2^nd defendant would reduce the Trustee’s shareholding in HICL to below 2.5%, which is the minimum voting rights required for an application to inspect records of a company: section 152FA(2) Companies Ordinance, Cap.32.  It was said that for the purpose of the pending contempt proceedings, if the Trustee is no longer the legal owners of three shares (out of 96 shares) in HICL, she could not be compelled to bring a section 152FA application and the Court may effectively be unable to take steps to compel her compliance with the order made in CACV178 of 2006.    

23.  The 2^nd defenda8nt, in whose favour the Transfer Order was made, opposed the stay application.  It was said that the 1^st defendant should not be allowed to re-litigate a point that had been argued and decided by the 18 June 2010 Decision.  At the hearing of the 2^nd defendant’s summons seeking a transfer to him of the shares held on trust for him, the 1^st defendant neither consented nor objected to the application. 

24.  In my view, the argument underlying the 1^st defendant’s stay application must be part and partial of the consideration whether there are special circumstances or good reasons not to allow the 2^nd defendant to exercise his right to call for transfer of his aliquot share without the concurrence of all the beneficiaries.  This was a matter canvassed at the hearing of the 2^nd defendant’s summons.  The 1^st defendant could have opposed the 2^nd defendant’s application, but he had chosen not to.  The 1^st defendant’s application to stay the Transfer Order on the basis that the transfer would adversely affect his pending committal proceedings against the Trustee is procedurally improper. 

25.  That aside, in approaching the stay application, it must be remembered that both the 1^st and 2^nd defendants are beneficiaries. The stay application was therefore a contest between beneficiaries, each of who is entitled to have one share in HICL transferred to him.  The 1^st defendant was in effect saying that transfer of one share to another beneficiary should be held up because the transfer would affect the rights of the other two shares held on trust for him and the third beneficiary.  The authorities have established that even if a transfer would diminish the value of the other shares, it does not constitute special circumstances not to allow a beneficiary to have his share transferred to him: In re Weiner, decd. [1956] 1 WLR 579 and In re Sandeman’s Will Trusts [1937] 1 All ER 368.  In the same vein, the fact that a transfer would affect the rights of the other shares does not amount to special circumstances and good reason to the contrary. 

26.  For these reasons, paragraph 2 of D1’s Summons should be dismissed.

Variation of the Costs Order Nisi

27.  The 1^st defendant’s application to vary the Costs Order Nisi was based on two main reasons. The first is that he had been successful on his summons filed on 1 June 2009 and also in resisting the Trustee’s application to retire from the trusts.  The second is that these proceedings were brought by the Trustee for her personal benefit.  The 1^st defendant also said that as HEL and HICL do not appear to be financially sound, he might not be able to recover his costs from the trust estate, resulting in unfairness to him.  The 1^st defendant sought to have his costs of the 1 June 2009 summons and of the originating summons paid by the Trustee personally.      

28.  Under the summons filed on 1 June 2009, the 1^st defendant applied for a stay of the originating summons until the Trustee complies with the order dated 10 July 2007 made in CACV178 of 2006.  That was on the basis that the Trustee should not be heard for as long as she is in contempt of court.  The 1^st defendant did not succeed in obtaining a stay in terms of his summons as the question of whether the Trustee is guilty of contempt is a matter yet to be determined: see paragraph 22 of the Decision dated 18 June 2010.  It was only in the course of submissions at the hearing of the originating summons that the 1^st defendant advanced the alternative proposition of an adjournment to await the determination of the contempt proceedings.  In the end, the Trustee’s application to retire from the trusts was held over pending the determination of the contempt proceedings.  This is not the same as staying or dismissing the reliefs sought by the Trustee in the originating summons (as amended).  It follows that it cannot be said the 1^st defendant had succeeded on his summons and/or in resisting the originating summons.        

29.  Apart from the application to retire from the trusts, the originating summons (as amended) also sought determination on the construction of the two declarations of trusts.  The questions put forward for determination in the originating summons are the same as those to be considered under the 2^nd defendant’s application for transfer of the trust shares to him.  The construction aspect of the originating summons carries importance for all the beneficiaries and is of direct relevance to the management of the trusts.  It is also relevant to note that the bulk of legal submissions on the construction issues were from counsel appearing for the Trustee.  At least on the construction aspect of the originating summons, the Trustee cannot be said to be acting for her personal benefit. There is no proper basis to order the Trustee to personally bear the costs of the 1^st defendant.  The fact that there might not be sufficient trust assets to meet the costs order is not a ground for making the Trustee liable for the costs of the 1^st defendant. 

30.  As to the costs of the Trustee, Order 62 rule 6(2) of Rules of the High Court provides:

“Where a person is or has been a party to any proceedings in the capacity of trustee, personal representative or mortgagee, he shall, unless the Court otherwise orders, be entitled to the costs of those proceedings, in so far as they are not recovered from or paid by any other person, out of the fund held by the trustee or personal representative or the mortgaged property, as the case may be; and the Court may otherwise order only on the ground that the trustee, personal representative or mortgagee has acted unreasonably or, in the case of a trustee or personal representative, has in substance acted for his own benefit rather than for the benefit of the fund.”

31.  I do not consider there are grounds for the court to order the costs of the Trustee not to come out of the trust estate. 

32.  In summary, there is no proper basis for the 1^st defendant’s application to vary the Costs Order Nisi.  Paragraph 3 of D1’s Summons ought to be dismissed.                    

Costs of the Trustee’s summons and D1’s Summons

33.  On the costs of the Trustee’s Summons and D1’s Summons, the Trustee was content for the costs to be paid by the trust estate, while noting at the same time that the court may order part of the costs to be paid by the 1^st defendant personally as he had been unsuccessful on parts of his summons.  The 1^st defendant, on the other hand, said that as the Trustee did not succeed in obtaining an administration order, which took up most of the hearing time, her costs should be disallowed.  At the same time, the 2^nd defendant complained his share of the trust asset should be made to bear the costs of applications he considered to be not necessary.

34.  As noted above, as matters stood on 23 June 2010, it was not unreasonable for the Trustee to apply for directions from the court.  It was only at the hearing that the beneficiaries’ position became clear, as a result of which there were little arguments on paragraph 2 of the Trustee’s Summons.  So far as the costs for the application for directions under paragraph 2 of the Trustee’s Summons were concerned, they were properly incurred for the administration of the trust estate.  As for the application for an administration order, I accept Mr Yin’s submission that it was made with a view to avoiding incurring further costs and time on future disputes arising from the EGM and other aspects of management of the trusts. 

35.  As to D1’s Summons, the applications under paragraphs 2 and 3 do not concern the administration of the trusts and were made primarily for the personal benefit of the 1^st defendant.  If the principle of costs follow event were to be strictly adhered to, the 1^st defendant would have to be liable for the costs of the applications.  However, the parties are likely to incur more time and costs if the costs of the summons were to be apportioned. 

36.  As far as the 2^nd defendant is concerned, the Trustee’s application and the hearing are also beneficial to him in that they afforded him the opportunity of clarifying his direction to the Trustee regarding the EGM.   

37.  In light of the above considerations and taking a broad brush approach, the costs of the parties on the Trustee’s Summons and D1’s Summons were ordered to be paid out of the trust estates; in the case of the Trustee, on trustee basis and in the case of the 1^st and 2^nd defendants on common fund basis.