XCHRX LEE TAK YEE AND ANOTHER v. LEE TAK YAN

1998, No. A10000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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Background

1. This matter is a family dispute. The first plaintiff is the father of the second plaintiff. The first plaintiff and the defendant are brothers. The dispute concerns some shares in a family company; HY & HT Lee Brothers & Company Limited. The father of the first plaintiff and the defendant died on 6 February 1979. Their mother died on 15 May 1991. The defendant is an executor of both estates. The plaintiffs have commenced proceedings against the defendant claiming payment of nearly $13 million being dividends paid on shares in the family company since the death of the mother. The plaintiffs have also issued summonses seeking interlocutory injunctions and summary judgment. The defendant has issued summonses seeking leave to amend his defence. These are now before me.

The Plaintiffs' Case

2. The first plaintiff's primary case is that he is the beneficial owner of 2750 shares in the family company. There is a dispute about this, and Mr Barlow concedes that this dispute is a triable issue. The case of the second plaintiff, and the alternative case of the first plaintiff, is that the shares were bequeathed to them.

3. Miss Li makes the point that the first plaintiff's primary and alternative cases are inconsistent. They are, but most alternative cases are inconsistent with primary cases. If the first plaintiff is able to establish his alternative case, and is entitled to judgment on that case, there is no necessity to send the case to trial on the primary case.

4. The plaintiffs plead that they are entitled to the dividends on the shares, but the defendant has directed that these dividends be paid to MW Lee & Sons Enterprises Limited (MW Lee), and the defendant should not have done this. This act, the plaintiffs plead, is a breach of trust for which the defendant is liable to account.

5. The plaintiffs claim payment of the amount of the dividends to them, an injunction restraining the defendant from dealing with the shares or other assets and other relief.

The Defendant's Case

6. The defendant accepts that the plaintiffs will be entitled to receive the shares and the dividends when the administration of the estate of the mother is complete. In his defence, the defendant says that, subject to the grant of probate, the plaintiffs are beneficially entitled to the dividends. The defendant wishes to amend his defence by, amongst other things, deleting this unqualified statement that the first plaintiff is entitled to the dividends. Strangely, the same statement regarding the second plaintiff is not to be amended. The defendant also wishes to plead that there is a dispute with the Estate Duty Office, and, if this is resolved in favour of that Office, the shares would be liable for a share of estate duty. In the circumstances, the defendant says, the executors have no obligation to make any distribution of the assets, including the shares. In the premises, the defendant pleads, the first plaintiff's entitlement to any income accruing is not absolute.

7. Mr Barlow says that the defendant is not allowed to amend his defence to withdraw an admission without explaining how that admission came to be made, which the defendant has not attempted to do. I do not think that there is, in reality, any withdrawal of an admission here. The defendant's present defence in relation to the first plaintiff is that shares were part of the estate of the father and the first plaintiff will be entitled to the dividends, but only when the estate is wound up. The amended defence maintains that same case, but wishes to allege that the Estate Duty Office does not accept this view. This dispute with the Estate Duty Office, the defendant pleads, is another reason why the dividends cannot be paid to the first plaintiff now.

8. The defendant says that his only duty is to preserve the assets, which he has done. The defendant admits he has directed the payment of the dividends mentioned to MW Lee as "a temporary repository of funds until grant of probate is obtained when distribution of the mother's estate can be effected.". The defendant goes on to plead that the "dividends were placed on fixed deposits upon receipt and credited respectively to the current accounts of the company with 'Lee Cheong Yee' and 'Ng Chun Wa'.".

The Claim to the Dividends

9. I do not really understand the basis on which the plaintiffs claim a right to immediate payment of the amounts of the dividends. The statement of claim seems to assert this right because the dividends are "money had and received by the defendant" to the plaintiffs' use, but this is not a viable claim in the circumstances. The defendant was fully entitled to receive the dividends, and to retain them. Indeed, he had a duty to collect the dividends, and to keep them until distribution. At this time, the defendant is, on the alternative basis of the first plaintiff's claim, the owner of the shares and the dividends flowing from them. The plaintiffs have only an inchoate right to receive them eventually, and a right to enforce the proper administration of the estate. I do not read in the statement of claim any clear assertion that the plaintiffs are entitled to an immediate right to receive the dividends by way of distribution from the estate. The plaintiffs accept that a grant of probate has not been made, so there can be no distribution. The plaintiff's main complaint seems to be that the defendant is in breach of trust, but this cannot give them a right to immediate payment of the dividends that they do not have otherwise.

10. Mr Barlow accepts that the plaintiffs cannot seek orders for delivery of the shares because the defendant has not been granted probate. Until probate is granted, the defendant cannot distribute the shares. Until he does that, he is the owner of the shares, and, if he is the owner of the shares, he is also owner of the fruits from the shares. I do not see how the right to the shares and the dividends can be separated.

11. The plaintiffs also assert a claim for damages for conversion and a duty to account. The plaintiffs also say that the defendant has wasted the assets of the estate. I do not think these claims are established at this stage. There is no evidence that the plaintiffs have any immediate right to the dividends that would found an action for conversion, and no evidence that any damages have been suffered. A duty to account does not arise, as I see it. The plaintiffs know where the dividends are situated. There is no evidence that the assets have been wasted. My view is that the plaintiffs have established at this stage only that they have a right to ensure that the estate is properly administered.

12. Accordingly, the plaintiffs application for a summary order that the amount of the dividends be paid to them fails. The defendant is given unconditional leave to defend on this aspect.

The Injunction

13. Before claiming summary judgment, the plaintiffs issued a summons claiming an interlocutory injunction. The claims for a final injunction and the interlocutory one proceed on the same basis.

14. As I have said, it was the defendant's right and duty to receive the dividends. Having done so, he was obliged to treat those dividends as "trust" property. He is not a trustee, but clearly he has fiduciary duties similar to those of a trustee in dealing with property received by him as executor. What he did with the dividends is to pay them to MW Lee. Although the accounts of MW Lee recite that the money was paid to it as "non-trade advances which are interest free and have no fixed repayment dates.", the defendant's solicitors, in a letter dated 23 October 1998, asserted that the payment of the money to MW Lee "was never intended to be a loan", but that MW Lee was only to be used "as a temporary repository of funds". The money, it is said, was on fixed deposit, and it was the defendant's intention that the "third party pay out the money with interest to the beneficiaries when he can properly do so." None of this, other than the assertion that MW Lee was used as a temporary repository, is in evidence.

15. The accounts also reveal that the defendant borrowed money from MW Lee. The balance outstanding as at 31 March 1997 was $21,062,258.

16. MW Lee shares are held, as to 56%, by the defendant and his children. The first plaintiff is a director, but the defendant is the managing director and has day to day control of the company's management and affairs. The first plaintiff holds 29% of the shares. The ownership of the other 15% is in dispute, but clearly the defendant and his immediate family are in control of MW Lee.

17. Although Miss Li disputes that the defendant is a trustee, she accepts that he is a fiduciary, and that the plaintiffs have a right to compel him to administer the estate properly. I take it as beyond challenge that a fiduciary has a duty imposed on him by equity to perform his duties so that his personal interest does not conflict with the interests of the ultimate beneficiaries. Miss Li argues that, by receiving the dividends, which, it is said, were liable to forfeiture, the defendant ensured that the dividends were more secure. But that is not really the point. Of course the defendant was entitled to receive the dividends, but the question is: Was it consistent with his duty as a fiduciary, having received those dividends, to pay them over to a company in which he and his immediate family had a majority controlling interest, to which he owed a large sum of money, without ensuring that the money was adequately secured and without ensuring that the money was not mixed with the company's other money and without spelling out the terms on which the money was paid over? Apparently, the defendant did not make it clear to MW Lee that the money was to be treated in any special way. The company received it as an advance, without any obligation to pay interest, without any specific obligation to repay it on a fixed date, and without any other strings attached. I believe the question posed answers itself. It was, in my judgment, an unusual thing for a fiduciary to do, and it screams out for an adequate explanation. The defendant makes no attempt whatsoever to explain why he did this odd thing. The natural step for a fiduciary to do in this situation is to hold the money in a trust account with a reputable bank earning a fixed rate of interest. Not having done this, one must ask oneself why he did not do it, and instead paid it to a company that he and his immediate family controlled and to which he owed a much larger sum of money. He does not give an answer. This absence of an answer for a failure to do the natural and obvious thing invites the conclusion that he did it because it suited his own best interests. It certainly did not suit the interest of the estate or the ultimate beneficiaries.

18. It is for the defendant to establish that he has an arguable defence. This should have taken the form of explaining why he paid the money to MW Lee instead of taking the natural and obvious step of paying the money into a bank trust account in the name of the estate. It should have been obvious to the defendant that paying the money into a company in the circumstances I have mentioned was bound to excite suspicion. The defendant has made no attempt whatsoever to explain why he did this.

19. On this basis, it seems to me that the plaintiffs are entitled to an injunction restraining the defendant from continuing to allow MW Lee to hold the dividends on behalf of the estate. I leave it to the parties to agree a minute, failing which, I will hear further submissions on the form of the injunction.

The Interlocutory Injunction

20. In the light of my decision to grant the injunction summarily, there is no need to make any order here, other than in respect of costs.

Leave to amend Defence

21. There seems to me to be no reason why the defendant should not be allowed to amend his defence, and this is granted.

The Costs

22. The question of costs has not been argued. Without the benefit of that argument, I am inclined to think that the defendant should pay the costs of the summary judgment application, that there should be no order as to the costs of the application for the interlocutory injunction, and that the defendant should pay the costs of his application to amend and the costs occasioned by the amendment. I make an order nisi accordingly.