CHENG TANG KAM YUNG v. TANG KAM CHEUNG AND ANOTHER

HCMP 147/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 147 OF 2008

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J U D G M E N T

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1.  On 15 July 1998, Tang Chung Sau passed away intestate (“the Deceased”). On 1 December 2004, letters of administration were granted to the 1^st defendant and the 2^nd defendant. Administration of the estate of the Deceased is yet to be completed as at today.

2.  In January 2008, the plaintiff commenced these originating proceedings pursuant to O.85 of the Rules of the High Court (“RHC”) against the 1^st and the 2^nd defendants in their capacity as the joint administrators.  The plaintiff asks for the furnishing of account of the estate; further or alternatively, administration of the estate.  The court gave the order in respect of the former and adjourned the latter sine dine.

3.  The 2^nd defendant passed away in October 2011.  By the order of the court, the 1^st defendant now also represents the estate of the 2^nd defendant in these proceedings.

4.  On 21 November 2012, the plaintiff took out the present summons for the replacement of the defendants as the administrators of the estate.  The application was adjourned to be argued in open court.  Hence this hearing.

BACKGROUND

5.  The Deceased left behind substantial estate.  According to the provisional schedule of properties filed with the Estate Duty Office in 2003, the major components of the estate were:

(1) cash and bank deposits in the sum of about HK$630,000;

(2) debt owed to the Deceased in the sum of about HK$3,200,000;

(3) 23 lots of land in the New Territories estimated to be worth about HK$80,000,000; and

(4) right to compensation in unknown amount from the Government for the resumption of land.

6.  The Deceased was survived by his widow (the 2^nd defendant), his son (the 1^st defendant) and his daughter (the plaintiff).  At one stage, there was dispute as to the entitlement of another surviving child of the Deceased (Tang Ieng Kit) and hence the contentious probate action HCAP No 3/2000.  The dispute was eventually settled.  The 1^st and the 2^nd defendants managed to obtain the grant of administration in December 2004.

7.  At the time of the grant, the 2^nd defendant was already 80 years old.  She was said to be uneducated and in poor health.  The estate of the Deceased was in reality and is under the administration of the 1^st defendant.

8.  More than a year after the grant, in March 2006, the plaintiff through solicitors sought an account of the estate from the 1^st defendant.  In his reply, the 1^st defendant confirmed that the estate had received land resumption compensation with interest in the total sum of about HK$8,700,000.  However he explained that the sum only sufficed to meet the expenses of the estate, including the litigation costs and expenses in HCAP 3/2000 mentioned above.  It was said that substantial sum would still have to be defrayed for the balance of legal costs payable.

9.  HCAP 3/2000 was commenced by the plaintiff and the defendants herein, all named as the plaintiffs.  Tang Ieng Kit and his mother were named as the defendants.  The action was eventually settled in November 2003.  The settlement entailed the payment of agreed costs of Tang Ieng Kit in the sum of HK$190,000 and agreed sum of HK$400,000 to his mother.  The 1^st and the 2^nd defendants finally came to obtain the grant of administration.

10.  In his reply in March 2006, the 1^st defendant also explained that a sum in excess of HK$2,130,000 had been spent on the medical treatment of the 2^nd defendant and the engagement of 2 private nurses for the 2^nd defendant (since September 2003).  The expenses were apparently continuing.  He also referred to the outstanding estate duty with interest payable in excess of HK$18,000,000 with interest continuing to accrue at the daily rate of HK$2,584.

11.  The 1^st defendant claimed that he managed to meet the expenses only by way of personal loan from friend.  He also claimed to have already engaged an accountant to prepare a full and proper report for the plaintiff’s perusal; and he would provide the same once available.

12.  In June 2006, the plaintiff requested again but was given the impression that the 1^st defendant had yet to engage an accountant to prepare the accounts of the estate, contrary to his representation made 3 months before.  The 1^st defendant added that he was prepared to sell the properties in the estate to raise funds but that would have to depend on the property market situation.

13.  Eventually in January 2008, the plaintiff commenced these originating proceedings.  As mentioned, he seeks an order that the defendants as the administrators should furnish proper account of the estate of the Deceased and, if necessary, administration of the estate or alternatively an order for payment into court of any sum held by the defendants in the capacity of the administrators.

14.  In November 2008, the master ordered the defendants to furnish true and proper accounts of the estate of the Deceased for the period from 15 July 1998 up to 31 March 2008.  The master adjourned the rest of the plaintiff’s application sine dine with liberty to restore.

15.  The defendants subsequently made available the accounts.  The master ordered those to be verified by affidavit.  This the defendants did in early March 2009.

16.  Another 3½ years elapsed.  The plaintiff took out the present summons in November 2012 whereby she applies for the appointment of her or alternatively a professional accountant in place of both defendants as the administrators.  Alternatively the plaintiff seeks to be appointed in place of the 2^nd defendant so as to act jointly with the 1^st defendant to complete the administration of the estate.

17.  As mentioned, due to the passing of the 2^nd defendant, the 1^st defendant was appointed as the representative of her estate; and the proceedings herein carried on.

18.  For the purpose of the determination of the summons, the court directed the 1^st defendant to put forward a proposal on the administration and to set out the problems that stand in the way as well as whether change of personal representative of the estate would be necessary.  This the 1^st defendant did in March 2013.

19.  When this hearing commenced, Mr Tse for the plaintiff indicated that his client no longer seeks to be appointed as administrator whether singularly or jointly with the 1^st defendant.  He now only seeks to appoint a professional accountant as administrator in place of the defendants.  The plaintiff took out a summons on the day before the hearing for leave to rely on a further affirmation attaching a proposal for the appointment of 2 members of the professional accountant, namely, Ernst & Young, to be the joint administrators for the court’s consideration.

THE PRINCIPLES

20.  Section 33(3) of the Probate and Administration Ordinance, Cap 10 provides that:

“The court may, if satisfied that the due and proper administration of the estate and the interests of the persons beneficially entitled thereto so require, suspend or remove an executor or administrator (other than the Official Administrator) and provide for the succession of another person in place of such executor or administrator and for the vesting in that other person of any property belonging to the estate.”

21.  The statutory criteria for exercising the discretion are clearly set out, namely that it is required by the due and proper administration of the estate and the interests of the persons beneficially entitled to the estate.

22.  The court should have regard to the size of the estate, the nature of the assets that needed to be administered, the background and the education, training and experience of the remaining and substituted personal representatives and the interests of the beneficiaries: see Shih Chia Cheong v Li Liu Zhu HCMP 1891/2011 (5 November 2012) at §11 (adopting Yu Hong Ping & Ors v Kenneth Yuen [2009] 6 HKC 347 (at 349)).  The discretion in the choice of substitute administrators under section 33(3) is wide: see Re Lau Yik Yam [2010] 3 HKLRD 700 (at 703).

GROUNDS OF APPLICATION

23.  The plaintiff complains that the defendants (or actually the 1^st defendant) have been delaying in administering and distributing the estate; have failed to administer the estate properly; and to administer the estate fairly and impartially.  She also complains that the 1^st defendant has failed to keep a proper and accurate account of the estate and to put forward a valid proposal.

24.  The 1^st defendant denies the complaint.  He argues that the application by the plaintiff is premature, as the further accountant’s report was already under preparation.

THE ADMINISTRATION SO FAR

25.  Even accepting that the delay of 6 years from the death of the Deceased to the grant of the administration has been partly occasioned by the probate dispute and HCAP 3/2000, one can see that another 9 years have passed since the grant of the letters of administration.

26.  With the exception of 2008 and 2010, the estate has received substantial income, either in the form of land compensation or proceeds of sale of some of its land, every year during the period between 2005 and 2011.  The total amount exceeded HK$60,000,000.  Yet the 1^st defendant claimed that the amounts received by the estate were absorbed by the expenses of and for the estate.

Prior to the grant

27.  The 1^st defendant explained that prior to the grant of the letters of administration, he had already incurred the following expenses:

(1)   medical and nursing expenses for the 2^nd defendant amounting to HK$600,000 by late 2003;

(2)   costs and compensation payable in HCAP 3/2000 in the total sum of more than HK$1,100,000; and

(3)   costs and expenses for applying for the grant in the total sum of about HK$1,000,000.

28.  According to the 1^st defendant, due to the lack of financial resources, he had no alternative but to seek personal loan from his friends, specifically Mr Leung Chi Wah and a Mr Fok Kam Woon, to cover the above expenses.  Leung and Fok charged interest on the loans at the rate of 48% per annum.

29.  By his 2^nd affirmation, the 1^st defendant produced tables (“exhibit TKC-4”) setting out the loans so raised from time to time and the interest that accrued (and presumably still accrues) on a day by day basis over the years up to the end of March 2009.  The interest rate was 3.6% per month or 43% per annum.

30.  The first thing to note from the tables is that loan was apparently first taken out in April 1998.  That was when the Deceased was still alive.  Since then, the expenses in relation to the Deceased (eg his hospital fee) were said to be financed by such personal loans.  By the time of the grant in December 2004, the amount of loan and interest outstanding already exceeded HK$9,500,000.

After the grant

31.  On top of the expenses of the management of the estate, there was the estate duty payable.  Up to February 2006, the estate duty payable exceeded HK$18,000,000 with interest accruing.  As mentioned, the 1^st defendant also referred to the medical and nursing expenses of the 2^nd defendant which were also continuing then.

32.  The 1^st defendant pointed out that the estate consisted of an insignificant amount of cash.  He also explained that the other assets could not be readily deployed to meet the expenses.  However that, in my view, did not render the estate insolvent, as Miss Chan for the 1^st defendant suggested in court.  It was a liquidity issue.

33.  The 1^st defendant explained that no loan or mortgage could be arranged with any bank.  He therefore continued to resort to such personal loans from Leung and/or Fok.  Mr Tse questioned the explanation.

34.  Mr Tse pointed out that the income and expenditure account for the year ended 31 March 2008 produced by the 1^st defendant’s accountant somehow contained an entry of mortgage loans interest in excess of HK$2,500,000.  Mr Tse also pointed out that a lot of land (No 4540 of DD 116) was sold in 2011 when it was mortgaged to a finance company within days of the conclusion of the sale and purchase agreement.

35.  I understand Mr Tse’s query.  But even assuming that the 1^st defendant indeed did attempt but fail to arrange finance by way of mortgage, I think there is still much to be said about the personal loans that he resorted to.

36.  The interest rate was extraordinarily high.  The 1^st defendant explained that the high interest rate was imposed because the term was short (2 years).  I can understand that if it was indeed contemplated that the loans would be repaid by the end of the term.  For if they were not, the consequence would be disastrous.

37.  That was exactly what happened.  I am not convinced that the 1^st defendant actually planned such loans as a mere bridging measure pending the realisation of the properties in the estate by the end of the term.  This was also manifested by the 1^st defendant’s stance that the sale of the lands in the estate would have to take time depending on the property market.

38.  The first sum received by the estate since the grant was the land compensation in late 2005.  It was absorbed by the amount of repayment of loan and interest.  The tables mentioned above show that the subsequent land compensation, proceeds of sale and the rental income from the lands in the estate simply could not catch up with the rate at which the loans and, even more so, the interest were accumulating.

39.  The estate duty and the medical/nursing expenses for the 2^nd defendant were the 2 major items of expenses that the 1^st defendant has tried to cope with.

40.  As far as the estate duty was concerned, a couple of things should be noted.  As explained in the accounts produced by the 1^st defendant’s accountant, the outstanding estate duty attracted interest at the rate of 8% per annum. Further it is not uncommon that the repayment of estate duty may be secured by equitable charge over the properties in the estate.  This actually happened in the present case.  The decision of the 1^st defendant to resort to loans at such interest rate is objectively questionable.

41.  According to the account of the estate for the year ended 31 March 2007 produced by the 1^st defendant’s accountant, the first substantial partial payment of the estate duty (in the sum of HK$10,000,000) was made by utilising the proceeds of sale of lands received in 2006 in excess of HK$16,500,000.  In that case, question arises as to the relevance of the loans raised by then to the discharge of liability for estate duty.

42.  As far as the medical and nursing expenses for the 2^nd defendant are concerned, the cost paid by the estate for funding them was equally alarming.  Between 2003 and the passing of the 2^nd defendant in 2011, a total sum of HK$6,000,000 was allegedly spent on her medical and nursing expenses.  The 1^st defendant produced some receipts.  According to the 1^st defendant, interest on loans to cover such expenses amounted to HK$8,640,000.

43.  Such expenses for the 2^nd defendant, whether before or after the grant, were hardly debt of the estate.  But the 1^st defendant borrows assistance from section 34 of the Trustee Ordinance, Cap 29, which says:

“(1) Trustees may at any time or times pay or apply any capital money subject to a trust, for the advancement or benefit in such manner as they may, in their absolute discretion, think fit, of any person entitled to the capital of the trust property or of any share thereof, where absolutely or contingently …… and whether in possession or in remainder or reversion, and such payment or application may be made notwithstanding that the interest of such person is liable to be defeated by the exercise of a power of appointment or revocation, or to be diminished by the increase of the class to which he belongs:

Provided that-

(a) the money so paid or applied for the advancement or benefit of any person shall not exceed altogether in amount one-half of the presumptive or vested shares or interest of that person in the trust property; and

(b) if that person is or becomes absolutely and indefeasibly entitled to a share in the trust property the money so paid or applied shall be brought into account as part of such share; and

(c) no such payment or application shall be made so as to prejudice any person entitled to any prior life or other interest, whether vested or contingent, in the money paid or applied unless such person is in existence and of full age and consents in writing to such payment or application.

(2) This section applies only where the trust property consists of money or securities or of property held upon trust for sale calling in and conversion, and such money or securities, or the proceeds of such sale calling in and conversion are not by statute or in equity considered as land.

……”

44.  It was the 1^st defendant who took out the personal loan other than for and on behalf of the 2^nd defendant.  The subsequent utilisation of the fund of the estate to repay the loan was effectively discharge of the 1^st defendant’s liability to the lenders.  Whether that was the advancement or benefit to the 2^nd defendant envisaged by section 34(1) above is just debatable.

45.  In any event, the section does not absolve the administrator from the duty to act in the interest of the estate for the benefit of all the beneficiaries and to do so impartially among the beneficiaries.  There is no evidence that the plaintiff was aware (until 2006) of the 1^st defendant’s resort to loan or loan on such terms for the purpose of the 2^nd defendant with the plan to utilise the assets of the estate for repayment.

Conduct of the plaintiff

46.  The 1^st defendant criticised the plaintiff that it was she who paid no attention to the 2^nd defendant.  The plaintiff denied that.  The dispute, in my view, is irrelevant to the discharge of the 1^st defendant’s duty as the administrator.

47.  The 1^st defendant also criticised the plaintiff for hindering the proper administration of the estate.  He was referring to the registration of the originating summons herein against the lots of land in the estate in early 2008.  He complained that the plaintiff has been unreasonable in refusing to vacate the registration to facilitate sale.

48.  One of the intended sales that was allegedly blown was that of Lot 5059 in DD 51 in November 2008.  It was the 1^st defendant’s own address.  According to the provisional sale and purchase agreement, it was an intended sale subject to tenancy back to the 1^st defendant.  But the interesting thing to note is that the intended purchaser was no other but Leung, one of his lenders then mentioned above.

49.  Notwithstanding the complaint, sale of land in the estate took place in 2009 and 2011.

Land in possession of trespassers

50.  Several lots of land in the estate were and still are occupied by trespassers.  The plaintiff pointed out that as early as 2004, the 1^st defendant should have been aware of the situation.  According to the 1^st defendant, no action has been taken in relation to them since December 2006 because the estate had no cash.  In relation to one of those lots, the writ, though issued in 2012, has not been served.

51.  Mr Tse for the plaintiff raised the concern that the estate’s right to recover those lots that have been trespassed since the passing of the Deceased, if not earlier, might have already been jeopardised in terms of the limitation period (12 years) well before 2012.  The concern, in my view, is genuine.  Only now the 1^st defendant somehow suggested that the writs for recovery of those lots of land would be issued soon.

DUTY TO ACCOUNT

52.  The 1^st defendant as the administrator might have formed his view on how the estate should be administered.  Nevertheless proper account must be kept and the beneficiaries of the estate kept informed.  The account kept must be clear and accurate; and the executor or administrator must always be ready to render such account when called upon to do so: see In Re Estate of Lee Da Kor [2010] 1 HKLRD 415 (at §§16-17).

The keeping of account

53.  The letters of administration were granted in 2004.  The plaintiff made her first request for an account of the estate in 2006.  Representation by the 1^st defendant that an accountant had been engaged in March 2006 proved to be equivocal by what was suggested in his letter 3 months later.  Accounts were provided and verified on oath only after the commencement of the present proceedings in 2008.

54.  Representation was made in his 1^st affirmation in March 2009 that further account would be prepared.  Yet it was only in response to the court’s direction for proposal after the present application has been taken out did the 1^st defendant actually engage an accountant to prepare the further account.  In his proposal lodged on 5 March 2013, the 1^st defendant stated that he had recently appointed an accountant to prepare the further financial statements.  By “recently”, the 1^st defendant actually meant the day before he lodged his proposal.  The letters from that accountant revealed that.

The accounts shown

55.  In his 2^nd affirmation, the 1^st defendant gave a summary of the following expenses:

(1)   the medical and nursing expenses of the 2^nd defendant mentioned above;

(2)   the compensation and costs occasioned by HCAP 3/2000;

(3)   the costs and expenses incurred in applying for the grant;

(4)   the estate duty paid by the end of 2007;

(5)   the expenses on the administration of the estate; and

(6)   the interest on loans at 48% per annum to meet the above expenses.

56.  All of the above amounted to a total sum of about HK$42,200,000.

57.  As mentioned, the 1^st defendant also produced the tables of calculation of outstanding indebtedness on his loan from Leung/Fok.  The tables suggest that interest was charged at 3.6% per month or 43% per annum.  The tables show that after exhausting over HK$30,000,000 received from realisation of some of the lands in the estate, the 1^st defendant owed the lenders about HK$250,000 by the end of March 2009.  Interest apparently continued to accrue.

58.  It is difficult, if at all possible, to tally the items of expenses recorded in the tables with those summarised by the 1^st defendant and mentioned above. The payments of estate duty or the medical and nursing expenses of the 2^nd defendant were hardly recorded in the tables.  The tables also show no new items of expenses financed by such loans since April 2008, save that the interest on the outstanding amount by then continued to accrue.

PROFESSIONAL ACCOUNTANT

59.  Miss Chan questioned the cost and benefit of replacing her client by a professional in administering the estate.  She suggested that this will be costly exercise and the professional accountant may not be familiar with administration of estate.  In my view, the likely cost of engagement of a professional administrator could hardly compare to the extraordinary interest the 1^st defendant has paid and recouped from the estate.

60.  Miss Chan suggested that the professional administrator may well be incapable of surmounting the financial stress of the estate; and therefore may have to resort to loans in any event.  I have no reason to speculate at this stage the course that a professional administrator may propose.  Suffice it to say that the candidates proposed by the plaintiff are qualified to take up the role.

61.  The estate consists of the Deceased’s shares in and debts owed to him by a company (Happy Post Enterprises Limited).  The financial statements of that company show that the plaintiff and the 1^st defendant were directors; and they both owed to the company loan to directors.  The administrator of the estate would be under the duty to see that the debts owed by the plaintiff and the 1^st defendant would be recovered for the benefit of the estate. This puts a professional accountant in a better position than either the plaintiff or the 1^st defendant to consider this aspect of the administration.

CONCLUSION

62.  It is not difficult to detect the plaintiff’s hint of allegation of misconduct on the part of the 1^st defendant in handling the assets of the estate.  However the terms of section 33(3) are wide; and establishment of specific guilt or misconduct in administering the estate is not a pre-requisite to the exercise of the discretion.  The concern at this stage is whether it is necessary for due and proper administration of the estate in the interest of its beneficiaries.

63.  The history of how the 1^st defendant has administered the estate for the last 9 years, even on his own case, and his failure to keep and provide full and accurate accounts of the details of the estate as and when required to do so cry out for intervention.  In my judgment, the 1^st defendant (for himself and as representative of the estate of the 2^nd defendant) should be removed and replaced by a professional accountant as the administrator of the estate.

64.  The plaintiff did not put forward actual nomination of candidates for the court’s consideration of appointment in place of the 1^st defendant until the day before the hearing.  Further, it was proposal from one firm of accountants.  As the 1^st defendant is at the same time a beneficiary of the estate, I am minded in the circumstances to give him the chance to submit his nominations, if so desired, for the court’s consideration.

COSTS

65.  This is a contentious application between the plaintiff and the defendants.  Having failed, the defendants could not look to the estate for recouping their costs: see Re Estate of Lee Da Kor (above) (at §39).  Miss Chan did not argue otherwise.  For all intents and purposes, it was the 1^st defendant who has been administering the estate, including resisting the present application.  He alone should bear the plaintiff’s costs of and occasioned by the present application.

ORDER

66.  I make the following order:

(1)   The 1^st defendant (for himself and as representative of the estate of the 2^nd defendant) shall be removed as the administrator of the estate of the Deceased;

(2)   For completeness, there be leave to the plaintiff to rely on her 4^th affirmation attached to her summons dated 25 June 2013; the 1^st defendant may within 14 days and in writing submit his nominations of professional accountants, if any, for appointment as the administrator of the estate of the Deceased by the court;

(3)   Paragraph (1) above shall take effect upon the actual appointment of the new administrator by the court, which shall be made on paper; and until then, the 1^st defendant (for himself and as representative of the estate of the 2^nd defendant) shall continue to be bound by the undertaking as recorded in the order of the court dated 6 March 2013;

(4)   The 1^st defendant shall personally pay the costs of and occasioned by the plaintiff’s application (including any costs reserved), which shall be taxed, if not agreed.