TSANG WING KWAI v. TSANG WING FAI

HCMP 3186/2016

[2018] HKCFI 1060

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3186 OF 2016

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J U D G M E N T

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A. Introduction

1.  By Originating Summons dated 16 November 2016, the plaintiff applies for the following orders against the defendant: –

(1)  the defendant do within 14 days provide the plaintiff with a true and perfect inventory and account of the estate of Chan Chung Han (“Deceased” and “Estate” respectively) as verified by affidavit;

(2)  there be an inspection of all supporting documents in relation to the said account of the Estate within 14 days thereafter; and

(3)  the defendant be removed as the executor of the Estate and the plaintiff and/or other suitable persons as the Court thinks fit and proper be appointed in his place.

B.  Background

2.  The plaintiff is the younger brother of the defendant, and they are sons of the Deceased who passed away on 20 August 2012. 

3.  The defendant and his family have emigrated to the United States.

4.  By her last will dated 16 June 1997, the Deceased appointed the defendant as the sole executor and trustee of the Estate.

5.  Pursuant to clause 6 of the will, the Deceased gave one share in a company called United Keswick Limited (“UKL”) to the defendant’s two sons (her grandsons). 

6.  The residuary Estate was divided into five shares as follows: the defendant (2 shares), the plaintiff (1 share), the Deceased’s daughter (1 share), and the defendant’s two sons (the remaining one share in equal share as tenants-in-common): clause 7(c).

7.  On 5 December 2013, the defendant obtained grant of letters of administration over the Estate.

8.  The Estate consists of, inter alia, the following assets: –

(1)  49,999 shares in UKL which holds four properties in Hong Kong, including Shop B on G/F, and Flat B on M/F, King Tak House (referred to as “Property 2” in the plaintiff’s affirmation);

(2)  5,000 shares in Open Treasure Industries Limited (“Open Treasure”) which holds two properties in Hong Kong, including Flat 908 of Kent Mansion in Tin Hau (“Flat 908”) where the plaintiff and his family reside;

(3)  Flat 907 of Kent Mansion (“Flat 907”), which is opposite to Flat 908, is the family residence where the Deceased resided during her lifetime (and after her demise, occupied by the defendant upon his return to Hong Kong to administer the Estate) and also used as the office of UKL;

(4)  Car-parking Space No 34 of Kent Mansion; and

(5)  Four bank accounts maintained at the Hang Seng Bank and HSBC.

9.  On 8 January 2014, the plaintiff commenced HCMP 1912/2013 (“2013 Action”) against the Estate claiming that: (1) the allotment of 9,998 shares in Open Treasure was without his consent and invalid; (2) as a result, the Deceased at all times held only 1 share in Open Treasure, and on trust for the plaintiff; and (3) the plaintiff was the sole beneficial owner of Open Treasure.

10.  On 28 March 2014, in response to the plaintiff’s complaint of the defendant’s occupation of Flat 907 after the Deceased’s demise, the defendant through his solicitors explained by letter that he does not have a permanent address in Hong Kong and needs a residence as and when he returns to Hong Kong to deal with matters relating to the Estate, and he refused to pay rent for his occasional and temporary use of Flat 907 as the plaintiff demanded. 

11.  On 13 June 2014, the plaintiff started another action (“2014 Action”) against the Estate under HCMP 1440/2014 for: (1) inventory and account; and (2) disposal of all the real and personal properties of the Estate (other than retention out of the Estate as the provisions against the contingent liability which may be incurred under the 2013 Action) and distribution of the residuary Estate.  The defendant did not contest the request for an inventory and account of the Estate which he provided to the plaintiff on 18 February 2015.  Master J Wong dismissed the rest of the 2014 Action.

12.  Trial of the 2013 Action took place before Anthony Chan J who dismissed the plaintiff’s claim on 20 August 2015.  The Court of Appeal allowed the plaintiff’s appeal on 29 April 2016 and ordered a re-trial, which has not yet taken place.

13.  On 18 October 2016, the plaintiff demanded another inventory and account of the Estate from the defendant within 10 days, and again complained about the defendant’s occupation of Flat 907.

14.  On 1 November 2016, the defendant’s solicitors sent a holding letter to the plaintiff.

15.  On 15 November 2016, the defendant’s solicitors informed the plaintiff that the defendant was in the course of preparing an updated inventory and account of the Estate, and would be in a position to furnish the same to the plaintiff on or before 13 December 2016.

16.  In the same letter, the defendant’s solicitors also explained that the defendant had been residing in Flat 907 when he returned to Hong Kong from the United States in order to save hotel expenses which would otherwise be incurred and paid out of the Estate as part of the executorship expenses.

17.  Despite the defendant’s above reply, on the following day, 16 November 2016, the plaintiff issued the present Originating Summons, contending that “ample time had already been given to [the defendant]”. 

C.  Relevant Legal Principles

18.  The duty of an executor to keep and render proper accounts is of paramount importance.  Generally speaking, it is the duty of a personal representative, after a grant has been made to him, to collect and get in the real and personal estate of the deceased, and to administer it according to law.  He must act with due diligence in the discharge of his duties: Williams, Mortimer and Sunnucks on Executors Administrators and Probate (20^th edn, 2013, paragraph 48-18).

19.  In Cheng Tang Kam Yung v Tang Kam Cheung, HCMP 147/2008 (Judgment dated 26/08/2013), DHCJ Leung said, at paragraph 52:

“……. 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; 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).”

20.  In Re Estate of Lee Da Kor [2010] 1 HKLRD 415, at paragraph 17, Poon J (as he then was) said:

“It is the duty of an executor to keep clear and accurate accounts, and to be always ready to render such accounts when called upon to do so …… In order to provide a true and perfect account, the executor must provide details of the whereabouts of all properties (including cash) which he is bound to administer …”

21.  In Chow Chak Kiu v Chow Man Chi, HCMP 797/2016 (Decision dated 17/01/2017), Chow J said, at paragraph 40, that to render a proper account of the estate of a deceased person, the personal representative is required to: –

(1)  show the opening balance (including capital assets) and closing balance;

(2)  give details of movement of assets, incomes, and expenditure of the estate;

(3)  give details of the whereabouts of all properties (including cash) of the estate which the personal representative is duty bound to administer; and

(4)  support the account with documentary evidence.

22.  A personal representative owes duties to preserve the assets of the estate, to deal properly with them, and to apply them in the due course of administration for the beneficiaries: Williams, Mortimer and Sunnucks (supra, paragraph 57-04).  He may become personally liable to make good the loss caused to the estate if he violates or neglects his duties in respect of the estate.  This misconduct is called devastavit (that means, a wasting of the assets), which has been explained, at paragraph 57-02:

“… a mismanagement of the estate and effects of the deceased, in squandering and misapplying the assets contrary to the duty imposed on them, for which executors or administrators must answer out of their own pockets, as far as they had, or might have had, assets of the deceased.”
(emphasis added)

23.  For most part a personal representative is in the same position as a trustee, who owes fiduciary duties to the beneficiaries in respect of the estate.  A personal representative cannot personally profit through a breach of these duties, nor can he place himself in a position whereby his interest conflicts with the interests of the estate.

24.  A personal representative may be liable for devastavit in respect of losses occasioned by his improperly neglecting to realise the estate.  For example, he is liable for consequential loss when he, without any apparent reason or necessity, omitted to sell property when it ought to have been sold: Williams, Mortimer and Sunnucks (ibid, paragraph 57-11).

25.  Although section 71 of the Probate and Administration Ordinance, Cap 10 (“the PAO”) provides that a personal representative is not bound to distribute the estate before the so-called “executor’s year”, yet if there is delay of more than the executor year, the onus would be on him to show some valid reason for that delay: Williams, Mortimer and Sunnucks (ibid, paragraphs 48-18; 57-22; 69-02).

26.  In addition, a personal representative will not be permitted to put himself in a position of conflict in dealing with the estate.  Kong Colin Chung Ping v Kong Joanie Chun Mun, HCMP 2045/2012 (Judgment dated 24/02/2015) is a case analogous to the present. The plaintiff in that case complained that the defendant executor acted in breach of his fiduciary duty and/or duty of care by occupying property forming part of the estate for the purpose of his own business paying only nominal rather than market rent.  At paragraphs 19 and 20, DHCJ Le Pichon held that the personal representative must not enter into any engagement in which he has or can have a personal interest that may conflict with the interests of the estate, and he is not allowed to profit from a trust through the use of trust property in the absence of any express provision authorizing it.  

27.  Turning to the basis for the removal of a personal representative, it is well-established that the Court’s discretion under section 33(3) of the PAO is wide.  The exercise of the discretion is not necessarily premised on a finding of misconduct on the part of the personal representative.  The statutory criteria provided for an exercise of the discretion to suspend/remove are: –

“…... the due and proper administration of the estate and the interests of the persons beneficially entitled thereto so require [for a suspension or removal]”

28.  In Cheng Tang Kam Yung (supra), DHCJ Leung said, at paragraph 62:

“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.”

(emphasis added)

29.  Similar observations were made by Poon J (as he then was) in Chan Sau Heung v Kwan Siu Fai, HCMP 2620/2012 (Judgment dated 17/04/2013). After tracing the history of a similar provision in England, section 50 of the Administration of Justice Act 1985, the learned Judge said at paragraph 15:

“15. It is not necessary to establish wrongdoing or fault by the personal representative in order to obtain his removal under section 50 of the 1985 Act. The court may order a removal if, for example, the breakdown of relations between the personal representatives (such as clash of personalities, or the lack of confidence in the personal representative by the beneficiaries) leads to the administration coming to a standstill, or makes it difficult or impossible for the administration to be completed by an existing personal representative: see generally Williams, Mortimer and Sunnucks, Executors, Administrators and Probate, 20^th Edition.”

(emphasis added)

30.  The passage in Williams, Mortimer and Sunnucks (paragraph 62-15) referred to by Poon J in Chan Sau Heungis as follows:

“… if the administration has come to a standstill because relations between the personal representatives have been broken down, or relations between the representatives and the beneficiaries have broken down, the court will ordinarily remove the personal representatives and appoint new ones to enable the administration to be completed. It is not necessary to establish wrongdoing or fault by the personal representative to obtain his removal. If, for whatever reason, (such as clash of personalities, or the lack of confidence in the personal representative by the beneficiaries, even if unjustified) it has become impossible or difficult for the administration to be completed by an existing personal representative, then an order for his removal will usually be made.”

(emphasis added)

31.  In Re Steel, Angus v Emmott [2010] EWHC 154 (Ch), the English Court reaffirmed that the Court’s power to replace a personal representative is in no way limited to cases of misconduct.  The Court stressed that the main guide must be the “welfare of the beneficiaries” [see: paragraphs 107 and 108 of the Judgment of Deputy Judge Snowden QC].

32.  In Re Steel (ibid), the Deputy Judge ordered that all the current executors be replaced with a suitably qualified professional.  The Deputy Judge took into account the animosity and litigation between the parties which hampered the expeditious administration of the estate.  He said at paragraphs 113 and 114:

“113. That said, I accept Mr. Allston’s submission that, even without misconduct, a situation has been reached in which there is such a degree of animosity and distrust between the executors that the due administration of Mr Steel’s estate is unlikely to be achieved expeditiously in the interests of the beneficiaries unless some change is made.

114.  The very fact that since Mr. Steel died in 2007, his executors have been engaged in hostile litigation with each other twice in as many years is telling.  It is also a matter of considerable concern that we are now over six and a half years since Mr. Steel’s conviction was quashed and over two years since he died, and yet the claim for the substantial compensation to which his estate is undoubtedly entitled has still to be filed.  The point is also rightly made that Mr. Steel’s mother is elderly and that she ought to benefit from the share of compensation which her son wished her to have without further delay.”

(emphasis added)

D.   Conversion of Flat 907 to the Defendant’s Own Use

33.  Flat 907 is a flat of 1,400 square feet with estimated monthly rental at HK$45,000 (including rental for the car park).  Since the grant of Probate to the defendant in late 2013, the defendant occupied Flat 907 for his own use.  As at the date of this hearing, there has been a loss of income for around 50 months.  Taking HK$45,000 as the monthly rental, there is a loss of income of some HK$2.25 million. 

34.  The explanation by the defendant at paragraph 12 of his affirmation that he needed somewhere to stay on his temporary return to Hong Kong is untenable.  I agree there is simply no reasonable explanation why he needed to stay at Flat 907 with 3 bedrooms and 2 dining rooms.  If he were only to return on temporary basis, any reasonable hotel accommodation would not have costed HK$2 million or anywhere near such a sum.  He would most probably not need to own a car either. 

35.  It should also be noted that the defendant’s explanation in paragraph 19 of his affirmation that Flat 907 had never previously been rented out and therefore reasonable for it to be used by a family member (namely, himself), betrays a complete misconception of his duty as executor, which is to convert Flat 907 to money with a view to making distribution.  As DHCJ Le Pichon remarked at paragraph 27 in Kong Colin Chung Ping (supra), whatever was the previous situation, once he became the executor, his fiduciary role and duties altered and he would not be allowed to make decisions or act in relation to Flat 907 that would adversely affect the interests of other beneficiaries of the Estate.  

E.  Wasting of Asset - Property 2

36.  Property 2 is a shop on the Ground and Mezzanine Floor of a building in King Kwong Street, Happy Valley. It used to generate HK$90,000 monthly rental, but it has not been let out since July 2013.  As at the date of this hearing, there has been a loss of income for around 55 months.  Taking HK$90,000 as the monthly rental, there is a loss of income of some HK$4.95 million.  I agree that the failure to rent out Property 2 cries out for explanation by the defendant. 

F.   Deficiencies in the Accounts rendered by the Defendant

F.1  Questionable Dealings concerning UKL

37.  UKL’s accounts show audit fees to have been incurred for the years 2013 to 2016, but the accounts produced were only unaudited management accounts.

38.  UKL’s credit facilities with Hang Seng Bank have increased significantly from HK$500,000 to HK$5 million (compare also the Schedule of Liabilities attached to the Probate and facility letters in 2014 and 2016).  Under the facilities, the sum allegedly owed by UKL to Hang Seng Bank is said to be about HK$3.9 million.  In light of the accounts as revealed, there is simply no good reason or explanation why the loan amount should have been increased so significantly.  It also raises the concern whether the loans were properly incurred for the Estate.

F.2  No Bank Statements of the Deceased’s Bank Accounts

39.  The Deceased’s 4 bank accounts were stated to be closed after her death.  The amounts involved totalled about HK$460,000.  No bank statement has been disclosed to show how the funds were expended or dealt with. 

F.3  Absence of Documents

40.  As pointed out by the plaintiff at paragraph 9(b) and (c) of his 2^nd affirmation, various other documents are wanting.

41.  In the circumstances, and having regard in particular to Chow Chak Kiu(supra),it is clearly appropriate that an order be made for the rendering of a true and proper Account, and for inspection of the supporting documents. 

G.   Replacement of Executor

42.  I refer to the principles set out in paragraphs 27 to 32 above regarding the removal/replacement of personal representatives. 

43.  The defendant has not only put himself in a position of conflict, but worse still has failed to recognise such conflict.  By maintaining some spurious reasons to justify his stay in Flat 907 for free (to the exclusion/detriment of the other beneficiaries), he is clearly acting in a way that is against rather than in favour of “the welfare of the beneficiaries”: Re Steel (supra), paragraph 107.  This alone would lead to the conclusion that the defendant should be removed as the executor of the Estate.

44.  Further, it is also important to emphasise that the duty of an administrator to render a full and proper account when called upon to do so is a fundamental and important duty. The failure to do so may be a good reason to justify the removal of an administrator: Re Estate of Lee Da Kor (supra), paragraph 37; Cheng Tang Kam Yung (supra), paragraph 63.

45.  I agree that for the cumulative reasons set out above, the Estate should best be administered by some independent professional.  This will relieve the defendant of his responsibility and enable the administration to move forward, especially, in light of the defendant’s professed desire to return to the United States.  To this end, I agree with the plaintiff’s proposal that a direction may be made by this Court that the parties do within 14 days provide nominations of professional accountant as the executor (together with their curriculum vitae and normal level of charges) for the Court’s consideration.

H.   Conclusion

46.  For the reasons set above, I order as follows: –

(1)  The defendant do within 14 days provide the plaintiff with a true and perfect inventory and account of the Estate (“the Account”) as verified on affirmation.

(2)  The defendant do within 14 days thereafter allow the plaintiff and/or his legal representatives to inspect all supporting documents in relation to the Account and allow the plaintiff to take copies thereof.

(3)  The defendant shall be removed as the executor of the Estate of the Deceased.

(4)  The parties may within 14 days and in writing submit their respective nominations of professional accountant, if any, for appointment as the executor of the Estate of the Deceased (together with their curriculum vitae and normal level of charges) for the Court’s consideration.

(5)  Sub-paragraph (3) above shall take effect upon the actual appointment of the new executor of the Estate by the Court, which shall be made on paper.

47.  Further, I order that the defendant shall personally pay the plaintiff the costs of and occasioned by these proceedings, which shall be taxed, if not agreed.

48.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

49.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.