CHAN NGOK TIM, THE PROVING ADMINISTRATOR OF THE ESTATE OF THE DECEASED v. THE COMMISSIONER OF ESTATE DUTY

HCMP 1178/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1178 OF 2004

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J U D G M E N T

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I.   INTRODUCTION

1.  Ms. Tang Ying Kuen died on Sunday 26 November 1995 in hospital.  She had been admitted there on 15 November 1995.

2.  Three days before she died, Ms. Tang entered into an Agreement and Supplemental Agreement to purchase a property in Dongguan in the Mainland for $10,016,864.  She paid a deposit of $10,000 at the same time.  According to the Supplemental Agreement, the balance of the purchase price was due upon the signing of that agreement.

3.  The vendors of the Dongguan property were Dongguan City Sheung Ping Real Property Development Company (Sheung Ping) (a Mainland corporation) and Hogary Estate Limited (Hogary) (a Hong Kong company).  Mr. Chan (Ms. Tang’s husband and prospective administrator) was (and remains) a director and majority shareholder of Hogary.

4.  On the same day Ms. Tang also sold 2 Hong Kong properties owned by her to Hip Hing (Holdings) Investment Ltd. for a total consideration of $10 million.  Hip Hing is a company controlled by Mr. Chan’s family.

5.  Two days before she died, a sum of $9,800,000 was transferred from Ms. Tang’s current account to a fixed deposit account.  The source of the funds in the current account appear to have been the proceeds from the sale of Ms. Tang’s property to Hip Hing.  The fixed deposit was to mature within 7 days at a rate of 6% per annum.

6.  On the day before she died Ms. Tang wrote a cheque in favour of Messrs. S. K. Wong & Lee, solicitors, for the sum of $9,810,400 purportedly in payment of the balance of the price due on the Dongguan property.

7.  On the day after Ms. Tang died, the sum of $9,800,000 plus $3,423.29 of accrued interest was transferred (ahead of maturity) from Ms. Tang’s fixed deposit to her current account.  Prior to that transfer, Ms. Tang’s current account held $7,095.  Following the transfer of the fixed deposit, $9,810,400 was debited from the current account in payment of the cheque made out to Messrs. S. K. Wong & Lee.

8.  The question is whether the $9,810,400 formed part of Ms. Tang’s estate at the time of her death.  The Commissioner says yes, while Mr. Chan says no.

9.  If Mr. Chan is right, the principal value of Ms. Tang’s estate would be less than $6,000,000.  At the time of Ms. Tang’s death, no estate duty was payable on a deceased’s estate having a principal value of under $6,000,000.  The consequence would then be that Ms. Tang’s estate would have no liability to estate duty.  Not being in Hong Kong, the Dongguan property would not be assessable to estate duty.

II.  BACKGROUND

10.  Estate Duty Ordinance (Cap.111) (EDO) s.13(1) provides that in determining the value of an estate, allowance shall be made for debts and incumbrances.  But the section goes on:-

“an allowance shall not be made:-
(i)	for debts incurred by the deceased and incumbrances created by a disposition made by the deceased, unless such debts or incumbrances were incurred or created bona fide for full consideration for money or money’s worth wholly for the deceased’s own use and benefit and take effect out of his interest;...
and any debt or incumbrance for which an allowance is made shall be deducted from the value of the property liable thereto.”

11.  EDO s.13(4) further provides that:-

“No allowance shall be made for debts due from the deceased, other than debts contracted in Hong Kong to persons ordinarily resident therein, unless charged on property situate within Hong Kong.”

12.  Mr. Chan contends that the cheque created a liability which must be allowed for under EDO s.13(1) in the assessment of Ms. Tang’s estate to duty.  Alternatively, the Agreement and Supplemental Agreement gave rise to a debt for which allowance should be made in the calculation of estate duty.

13.  The Commissioner argues that EDO s.13(4) applies because the Dongguan property is situate offshore.  Alternatively, the Commissioner says that the Agreement and Supplemental Agreement do not give rise to a bona fide debt within the terms of EDO s.13(1).

III. DISCUSSION

14.  In my view, there is only one question in this case.  That is whether the Agreement and Supplemental Agreement give rise to a bona fide debt within the terms of EDO s.13(1).

15.  The cheque was made out to the solicitors as agents of the vendors of the Dongguan property. If the underlying transaction (namely, the sale of the Dongguan property) was not a bona fide transaction then it could not be valid consideration for the cheque. 

16.  In that case, there would be no valid consideration for the cheque and the chose represented by the cheque would not be enforceable against Ms. Tang’s estate. There would be no debt for which allowance is to be made in the calculation of estate duty.

17.  Conversely, if the underlying transaction were bona fide, there would be valid consideration for the cheque.  The dishonour of the cheque (as a result (say) of Ms. Tang’s bank losing its mandate to pay out) would have given rise to a cause of action vested in the payees (or their principals) against Ms. Tang’s estate for payment. There would be an enforceable debt which must be taken into account in the assessment of estate duty.

18.  As for EDO s.13(4), if the underlying transaction is bona fide, the Agreement and Supplemental Agreement would mean that Ms. Tang was liable to Sheung Ping and Hogary jointly and severally.  As far as Hogary is concerned, there would be a debt due from the deceased to a person (Hogary) ordinarily resident (being a Hong Kong company) in Hong Kong. 

19.  The debt would have been contracted in Hong Kong where Ms. Tang indisputably was to be found in her last days.  The lex situs of the debt would be Hong Kong as the place where the debtor (Ms. Tang) was present at the time when the Agreement and Supplemental Agreement were executed. 

20.  If so, the exclusion in EDO s.13(4) relied on by the Commissioner would not be applicable.

21.  Thus, however one looks at the facts, the crucial question is the bona fides of the sale of the Dongguan property to Ms. Tang. 

22.  On this last question, Mr. Gary Soo (appearing for Mr. Chan) accepts, I think rightly, that Mr. Chan has at least an evidential burden to discharge: Is the Court reasonably satisfied on the evidence that the sale to Ms. Tang was “a bona fide commercial transaction in which there is no element of gift to or bounty in favour of the creditor” (see In re Whitfield’sEstate [1976] 1 Ch 264 (CA))?

23.  There was a flurry of sale and purchase activity just before Ms. Tang’s death.  That activity naturally gives rise to an inference that she was concerned about minimising estate duty. 

24.  But Mr. Soo has drawn my attention to Attorney-General v.Duke of Richmond and Gordon [1909] AC 466.  There the majority of the House of Lords pointed out that there was nothing wrong about being motivated in one’s conduct by a desire to reduce estate duty.  Such motive by itself does not mean that a party has acted in a manner which is less than genuine. 

25.  It is more pertinent to see whether Ms. Tang received full consideration in money or money’s worth in return for her incurring a debt of some $9,800,000.

26.  Here I regret that I am not satisfied on the evidence that there has been a genuine commercial transaction or exchange.  I do not think that Mr. Chan has discharged the evidential burden of establishing that the Dongguan property apparently sold to Ms. Tang under the Agreement and Supplemental Agreement was worth some $9.8 million.

27.  My primary reason for coming to this conclusion is the absence of valuation reports by an independent body confirming that the Dongguan property was worth some $9.8 million immediately before Ms. Tang’s death.

28.  Mr. Soo points to some mortgage documents dated 2003 for some idea of valuation.  But that can hardly be probative of anything in 1995.

29.  Mr. Soo further submits that the fact that Hogary and Sheung Ping entered into the Agreement and Supplemental Agreement implies that they must have been satisfied that a proper bargain had been struck.  But I do not find this persuasive.  For instance, there has been no disclosure of company resolutions or board minutes of either Hogary or Sheung Ping approving the sale. 

30.  This non-production is especially worrisome in the case of Hogary, because Mr. Chan was a majority shareholder of that company at the time.  Did he vote in favour of any resolution to sell the property to his wife?  If he did, the sale consideration may not have been a proper amount reached after arm’s length bargaining.  There is no evidence that either company obtained any independent valuation before agreeing a price for the Dongguan property.

31.  My second reason is that it is unclear what interest (if any) Sheung Ping and Hogary held in the Dongguan property (a floor in a building).  No expert opinion from (say) a Mainland lawyer has been produced to explain the situation.  No title deeds have been exhibited to any affidavit (despite repeated requests by the Commissioner) to clarify which of Sheung Ping and Hogary owned what interest in what part (if any) of the Dongguan property.  All there is on Sheung Ping’s and Hogary’s titles to sell may be found in the recitals to the Agreement and Supplemental Agreement.  Such mere recitals cannot amount to any strong evidence of the vendors’ ownership prior to sale.

32.  Mr. Soo points me to a cooperation agreement between Sheung Ping and Hogary for the development of the building in which the Dongguan property is located.  But I am unable, in the absence of expert opinion from a Mainland lawyer, to infer from such agreement that any specific party had any particular interest in the Dongguan property.

33.  My concern as to title is not an idle matter.  Among other things, it bears directly on the application of EDO s.13(4).

34.  If Hogary has no interest in the land capable of being conveyed to Ms. Tang, there would be no real justification for making Hogary a party to the Agreement and Supplemental Agreement in the first place.  Was Hogary’s joinder (one would then ask rhetorically) simply done to forestall the application of EDO s.13(4) through interposing, artificially and for no good reason, a creditor who was ordinarily resident in Hong Kong?

35.  For what it is worth, I mention as a third reason that I am puzzled and troubled by the discrepancy between the $9,810,400 paid by cheque and the balance of $10,006,864 remaining due on the Dongguan property according to the face of the Agreement.  If this were a genuine transaction, how did $9,810,400 suddenly become the outstanding amount payable for the Dongguan property?  The unexplained discrepancy is admittedly small.  But if this truly were a commercial arm’s length transaction, one would not have expected any difference.

36.  There has been ample opportunity for Mr. Chan to lodge such material as he deemed appropriate to discharge the evidential burden on him.  Unfortunately, such evidence that has actually been filed is not enough in my view to discharge the burden and make out a case for an allowance to estate duty.

IV. CONCLUSION

37.  Mr. Chan’s appeal against the Commissioner’s assessment is dismissed.  I shall now hear the parties on costs.