TO KIN WAH AND OTHERS v. TO FOOK TIM AND OTHERS

CACV 107/2008 & CACV 108/2008

CACV 107/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 107 OF 2008

(ON APPEAL FROM HCA NO. 1603 OF 2004)

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J U D G M E N T

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Hon Le Pichon JA:

Introduction

1.  These interlocutory appeals arise from two sets of proceedings instituted a number of years ago and concern the management and application of funds (“the funds”) (previously the subject of proceedings culminating in the Court of Final Appeal’s judgment in Secretary for Justice v To Kan-chi and Others [2000] 3 HKCFAR 481) which belong to an ancestral t’ong of the To clan called “Tsing Wan Kun”:

(1)  HCMP 509 of 2002 was an ex parte originating summons taken out on 5 February 2002 by To Fook Tim, To Kam Chau and To Kan Chi (collectively “the managers”), the three managers of the t’ong Tsing Wan Kun for payment out of the funds, made inter partes on 28 June 2002 when Yam J added To Kin-wah and his infant son (who objected to such payment out) as defendants.

(2)  HCA 1603 of 2004 is an action commenced on 8 July 2004 by To Kin-wah as plaintiff against the managers as defendants.  On 3 November 2008, To Cheong Lam, To Mei Lun and To Siu Lam were added as plaintiffs.

The plaintiffs in HCA 1603 and the defendants in HCMP 509 adopt the same stance as regards the management and application of the funds and so can be said to have an identity of interest in the two sets of proceedings.  They are the appellants in these appeals.

2.  As of August 2002, the funds (which consist of compensation received for land resumption) stood at over $280 million.

3.  CACV 107 is an appeal from 3 orders made in HCA 1603 by Yam J on 8 April 2008, dismissing (1) the appellants’ summons dated 23 May 2005 for leave to amend the statement of claim; (2) the appellants’ summons dated 18 November 2004 for consolidation etc with HCMP 509/2002; and (3) the appellants’ summons dated 23 May 2005 for a pre-emptive costs order.  CACV 108 is an appeal from an order made in HCMP 509/2002 also on 8 April 2008, dismissing the mirror application in HCMP 509 for consolidation with HCA 1603.

Background

4.  The managers and the appellants belong to the t’ong Tsing Wan Kun.  The members of that t’ong are the members from time to time of the To Ka YiTso (“the tso”) and the To clan.

5.  In the previous proceedings, the Court of Final Appeal declared that the t’ong Tsing Wan Kun’s proprietary rights in the temple Tsing Wan Kun’s assets are vested rights and that the t’ong Tsing Wan Kun is entitled to withdraw such assets from devotion to the purpose of due observance of the customary ceremonies of the temple, the maintenance of its temple buildings and temple properties at any time provided it does so in a manner which conforms with Chinese law and custom.  The Court of Final Appeal explained that the proviso was necessary in that a t’ong, being an institution of Chinese law and custom, cannot act effectively if it does not act in conformity with that system.  While the court did not deal with the details of the relevant requirements of Chinese law and custom, it made the observation that “unanimity in some form is generally required”.

6.  After the Court of Final Appeal’s decision, the managers (who were and remain managers of the tso) were appointed managers of the t’ong at a meeting of Tsing Wan Kun held on the 13 May 2001.  A further meeting was convened on 12 August 2001 which resolved that apart from certain land including the site of the Kun together with $50 million to be set aside for devotion to temple purposes, all other property, assets and funds “shall be applied for such purpose and in such manner as the T’ong Tsing Wan Kun may from time to time determine”.

7.  The District Officer of the Tuen Mun Home Affairs Department approved the appointment of the managers as managers of the t’ong Tsing Wan Kun as from 2 January 2002 under the provisions of section 15 of the New Territories Ordinance.

8.  As earlier noted, in February 2002, by dint of their appointment as managers and the resolution of 12 August 2001, the managers applied, ex parte, for payment out of the funds to them.  The supporting affirmation did not reveal the managers’ intention as regards “the surplus funds”, namely, the funds other than the $50 million to be set aside for temple purposes.  In April 2002, the appellants objected to the payment out on the ground that the appointment of the managers did not comply with the requirements of Chinese law and custom which required unanimity and was thus invalid.  Further there was concern as to how the managers proposed to handle the surplus funds which are subject to purpose trusts and, in any event, it was said that the managers were unsuitable to administer the trusts affecting the surplus funds.  By 15 December 2002, it became clear from an affirmation filed by on behalf of the managers that their intention was to distribute the surplus funds among the members by a method to be decided in future meetings.

9.  HCMP 509 was made inter partes in June 2002.  By mid-2004, it had not progressed further: there were no directions for the filing of pleadings so that the issues could be defined or for the underlying issues to be otherwise formulated.  The only issue on the face of the summons was still whether the funds should be paid out to the managers which was not a satisfactory state of affairs given the matters raised in the opposing affirmations.  In those circumstances, the appellants instituted HCA 1603 against the managers in July 2004.  This took place a week before the hearing of judicial review proceedings challenging the validity of the administrative decision to register the managers.

10.  HCA 1603 challenged the validity of the appointment of the managers in 2001 and the validity of a resolution of 27 June 2004 ratifying their appointment on the basis that the decisions did not comply with Chinese law and custom which required the decisions to be unanimously supported by the members or alternatively some form of unanimity and that the custom of the t’ong, clan and tso did not allow retrospective ratification of such appointment.  Further, it was said that the managers were not fit and proper persons to be managers of the t’ong.  The relief sought was for a declaration that the managers had not been validly appointed and for an injunction to restrain them from acting as managers of the t’ong.

11.  The summonses for consolidation of the proceedings were filed in late 2004.  Pending the hearing of those summonses, the summonses for leave to amend the statement of claim in HCA 1603 and for pre-emptive costs orders in both proceedings were issued.  The continuing absence of any crystallization of the issues underlying HCMP 509 despite further affirmations setting out the parties’ respective stance led to the application for an amendment in HCA 1603.  In brief, the issues in HCA 1603 (with the proposed amendments which the judge did not allow) involve the following:

(1)  whether under Chinese law and custom unanimity or, alternatively, some form of unanimity is required for

(a)  the appointment of managers; and

(b)  decisions concerning the distribution or preservation of the surplus funds;

(2)  the trusts affecting the surplus funds;

(3)  the fitness or suitability of the managers;

(4)  whether there have been breaches of trust.

12.  The hearing before the judge took place in late August 2005 by which date the judicial review application had been dismissed but was pending appeal to this court.

13.  On 29 September 2005, the judge made a pre-emptive costs order in HCMP 509 but adjourned the other summonses part heard until the conclusion of the judicial review proceedings and the completion of an independent audit by Deloittes of the funds.  In reaching his decision as to pre-emptive costs, the judge stated as follows:

“51.  … To Kin Wah has mentioned infants and those yet to be born.  I accept Mr McDonnell’s submission that under HCMP 509/2002, To Kin Wah has “shown a sufficient case for further investigation” … Consequently, in my view, To Kin Wah is the most appropriate person to represent those who are in opposition to the distribution of the balance of the fund.

52.  In any event, this point of unanimity in the decision of distributing the balance of the fund is a question of mixed law and fact.  There would be infants and children en ventre at any point of time and in future there will be other members of the T’ong.  In fact the number of members would vary from time to time and this is just a fact of life.  To Kin Wah does not have to adduce evidence therefor.  This legal issue whether unanimity among existing members are required and whether future generation should be taken care of by the court is something which the court will have to decide in this case.  As there is no pleadings in these miscellaneous proceedings, this point of law could not and actually should not be raised in an affidavit.  On the other hand, after all, point of law is not required to be pleaded in a High Court Action began by writ.”

While the judge appeared to recognise the unsatisfactory state of HCMP 509 and the clear need for the underlying issues to be formulated, it is regrettable that nothing was done to enable the issues to be crystallized and the matter to progress.  By this time, 3½ years had already elapsed since the date of the originating summons.

14.  The resumed hearing of the adjourned summonses took place on 6 March 2008, between 3 and 3½  years after they had been issued.  The judge dismissed all the outstanding summonses including the summons for leave to amend, taken out less than a year after the issuance of the writ at a time when no progress to speak of had been made in the action.

The appeals

15.  Shortly before the mid-morning adjournment on the first day, this court expressed certain tentative views as to the merits of the appeals.  In particular, the difficulty in the way of a pre-emptive costs order when one of the issues to be resolved is whether breaches of trust have occurred was highlighted.  At this stage, it would perhaps not be inappropriate for some observations to be made on the approach to the trustees’ costs generally and on pre-emptive costs orders in the context of these proceedings.

16.  HCMP 509 was taken out by the managers on the basis of entitlement, by dint of appointment and registration as managers and did not seek the court’s determination of how the surplus funds should be administered.  It had not been authorised by a prior Beddoe order.  Had there been such authorisation, undoubtedly, provision would have been made for the costs of the managers, including costs to be incurred.

17.  As I understand it, the managers have been making periodic applications in HCMP 509 to the judge for sums to be released to cover “legal and professional charges”.  Some, if not all, of such costs were prospective and all such applications have been allowed although no pre-emptive costs order as such has been made in favour of the managers.  The impression may be gained that provision will be made for costs so long as the applicants are acting in their capacity as trustees.

18.  I would emphasise here that, absent any Beddoe order authorising the proceedings, the managers who are trustees are as vulnerable as any ordinary litigant on the matter of costs. I would further observe that on any application for costs to be paid out of trust assets, the nature of the ‘unauthorised’ proceedings, the relief sought and whether they raise issues in the administration of the trust that need to be resolved are relevant considerations.  Trustees should be disabused of the notion that they are at liberty to incur and defray legal costs out of trust assets and the court should approach with circumspection legal costs incurred by trustees in commencing proceedings without obtaining prior authorisation.

19.  That said, it has become clear that the issues underlying HCMP 509 (yet to be properly formulated in those proceedings), are issues that affect the administration of the trusts of the t’ong.  Accordingly, it would appear appropriate for the costs of both sides to be provided for out of those funds.

20.  So far as the ‘hostile’ elements in HCA 1603 are concerned such as allegations of breaches of trust, pre-emptive costs order are wholly inappropriate, whether in respect of the costs of the trustees or the beneficiaries who are making the allegations.  Costs should normally be dealt with at the end of the proceedings when the court would be in a position to decide where the costs should fall.  As a general rule, a trustee who is found to have acted in breach of trust would be excluded from any entitlement to indemnity out of trust assets and a beneficiary who unsuccessfully sues trustees will normally have to pay their costs.

21.  When the hearing resumed, Mr McDonnell offered a ‘practical solution’, namely, that if this court were otherwise receptive to the appellants’ appeals, they would be willing to abandon the ‘hostile’ elements in HCA 1603 such that all the issues raised in that action would be non-hostile and would simply be formulations of the issues underlying HCMP 509.  The hearing was then adjourned to the afternoon to enable the parties to consider and to take instructions on that proposal.

22.  In the event, the parties were able to compromise their differences on the appeals.  Although the terms required fine-tuning, essentially it was agreed in principle that if this court were minded to grant leave to the appellants to amend the statement of claim so as to ‘sanitize’ it by removing all allegations that could give rise to hostile litigation, the managers would not oppose the application for leave to amend and upon the grant of such leave, the appeals would be allowed with orders

(1)  for HCMP 509 and HCA 1603 be tried together;

(2)  extending the pre-emptive costs order in favour of the appellants to HCA 1603;

(3)  granting the managers the same pre-emptive costs order for both proceedings;

(4)  under Order 15, rule 13 for representation so that any decision made would be binding on all members of the t’ong including unborn and unascertained members; and

(5)  that the costs below on the 4 summonses and of these appeals be paid out of the assets of the t’ong.

23.  The hearing was then adjourned, with liberty to apply, pending the submission of agreed draft minutes of order from the parties for the court’s approval.

24.  Agreed draft orders were submitted to this court for approval on 11 December 2008.  In essence, they encapsulate what is set out in § 22 above with additional agreed directions for the further conduct of the proceedings.  The additional directions deal with leave to amend the pleadings and a timetable for the discovery and inspection of documents, the exchange of witness statements and of expert reports on Chinese law and custom.  In the case of CACV 107, an amended Statement of Claim was annexed.

25.  The draft orders submitted are approved in terms as of the date of this judgment.

26.  Leading counsel for both parties are to be commended for their part in facilitating the settlement of these appeals and enabling the issues which arise on the administration of the trusts affecting the surplus funds to be crystallised and a timetable agreed for the further conduct of the proceedings.  In due course, the matter should be restored to the judge for setting down for trial.

Hon Barma J:

27.  I agree.