TAM MEI KAM v. HSBC INTERNATIONAL TRUSTEE LTD AND OTHERS

CACV 200/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 200 OF 2008

(ON APPEAL FROM HCAP NO. 2 OF 2004)

____________

____________

BETWEEN

____________

_______________

JUDGMENT

_______________

Hon Tang VP (giving the judgment of the Court):

Introduction

1.  Ms Mui Yim-fong (“the deceased”) was a well-known singer and actress.  She passed away on 30 December 2003 when she was 40.  She was survived by her mother Madam Tam Mei Kam, the plaintiff in these proceedings (“the plaintiff”), as well as two elder brothers.  An elder sister had predeceased her.

2.  The deceased had suffered from cervical cancer since 2001.  By the time she consulted Dr Peter Teo Man Lung of the Hong Kong Sanatorium and Hospital in July 2003, the cancer had reached an advanced and incurable stage.  Dr Teo advised her to make a will.

3.  In September 2003, the deceased made a public announcement that she had cervical cancer and was receiving treatment.

4.  On 3 December 2003, she executed a deed establishing a discretionary trust (“the Karen Trust”).  The trustee of the discretionary trust was HSBC International Trustee Limited (“HSBC”).  It is an offshore trust established under the laws of the Cayman Islands.  The final repository of the Karen Trust is the New Horizon Buddhist Association Limited (“New Horizon”), the 3^rd defendant in the proceedings.  The Karen Trust was established with a nominal sum of $1,000.  A pilot settlement with properties to be added later by a settlor is a common practice.  Encyclopedia of Forms and Precedents, (5^th ed), Vol 40(1) at 3628.

5.  On the same day, the deceased made a will (“the will”).  The beneficiary of her residuary estate is the Karen Trust.  HSBC was appointed as her executor and trustee.  The will was witnessed by Dr Peter Teo Man Lung as well as Ms Doris Lau, a director of HSBC. 

6.  This action was commenced on 4 May 2004.  By this action, the plaintiff claimed:

(1)       for a pronouncement against the validity of the will;

(2)       a declaration that the Karen Trust was void;

(3)       a declaration that the deceased had died intestate and a grant to the plaintiff of letters of administration of the estate of the deceased.

7.  The 1^st and 2^nd defendants were HSBC as the executor and trustee named in the will and the trustee of the Karen Trust respectively.  Following directions given by Lam J in a Beddoe application, HSBC had not taken any active step in the proceedings, leaving it to New Horizon and Lau Kai Eddie (Eddie Lau) who had been joined as the 3^rd and 4^th defendants to defend the plaintiff’s claim.

8.  After an 18-day trial, where the plaintiff was represented by leading and junior counsel, A Cheung J pronounced for the force and validity of the will and ordered that probate be granted to HSBC, the executor name in the will.  He also made a declaration that the Karen Trust is and was at all material times a valid trust.  However, he made no adverse costs order against the plaintiff because  he took the view that the action:

“291. … falls within the second exception to the general rule that costs generally follow the event where opposition to a will is unsuccessful …”

9.  He ordered that the defendants’ costs be borne by and paid out of the estate of the deceased, to be taxed if not agreed, on a common fund basis.

10.  This is the plaintiff’s appeal.  She appeared in person, but had submitted various written submissions including, as her main submissions, a 32-page written submission in English dated 11 May 2010.  The 3^rd respondent is represented by Mr Albert Yau and Mr Kevin Poon, who had represented the 3^rd defendant below.  Likewise Mr Richard Leung appeared for the 4^th respondent.  They have also submitted written submissions.  The trial was conducted in English.  The judgment (104 pages) is in English.  The plaintiff’s main submissions are in English.  Hence, this judgment is also in English.

The Karen Trust

11.  The nature of a discretionary trust can be gathered from an oft-cited passage in Snell’s Equity, (31^st ed) at 20-51:

“A Discretionary Trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion would be exercised in his favour, and so, except as to any money which has already been paid to him, there is nothing which his creditors or assigns can claim, even if it is a case where a person has settled property on himself.”

12.  Discretionary trusts are often employed for estate planning purposes.  Such purposes include the reduction of estate duties and the desire that the objects of the settlor’s bounty should be protected from their profligacy.  The estate duties avoided may include estate duties otherwise payable on the death of the settlor, as well as those payable on the death of, say, a beneficiary of the estate. 

13.  Very often, wide discretions are conferred on the trustees under a discretionary trust, such that expressions such as “uncontrollable or absolute discretions” are used.  But as Lord Reid said in Re Gulbenkian [1970] AC 508 at 518:

“The trustees are to act in their fiduciary capacity. They are given an absolute discretion. So if they decide in good faith at appropriate times to give none of the income to any of the beneficiaries the court cannot pronounce their reasons to be bad. And similarly if they decide to give some or all of the income to a particular beneficiary the court would not review their decision. That was decided by this house in Gisborne v Gisborne 1877 2 AC 300. But their ‘absolute discretion’ must, I think, be subject to two conditions. It may be true that when a mere power is given to an individual he is under no duty to exercise it or even to consider whether he should exercise it. But when a power is given to a trustee as such, it appears to me that the situation must be different. A settlor or testator who entrusts a power to his trustees must be relying on them in their fiduciary capacity so that they cannot simply push aside the power and refuse to consider whether it ought in their judgment to be exercised. And they cannot give money to a person who is not within the classes of persons designated by the settler: the construction of the power is for the court.”

14.  A settlor will wish the trustees to know his wishes.  For that purpose, it is common for a discretionary trust to be accompanied by a memorandum of wishes.  On the same date as the Karen Trust, HSBC signed a trustee memorandum in which the settlor’s wishes were recorded:

“3. The Settlor’s Suggestions

3.1 During the lifetime of the Settlor, the Trustee would give due consideration to the recommendations and suggestions put forward by her in all matters concerning the Trust Fund of the Trust including the investment, management and distribution thereof.

3.2 Upon the death of the Settlor, the Trustee would consider holding and distributing the Trust Fund in the following manner:

(1) The Trustee would hold and distribute all shares of and in the following companies comprising the Trust Fund to Lau Kai Eddie (‘Eddie’) absolutely if he shall survive the Settlor by thirty days:

(a) Leisure Gain Limited, a company incorporated in Hong Kong on 28 October 1988; and

(b) Well Future Investment Limited, a company incorporated in Hong Kong on 4 October 1988

PROVIDED THAT if Eddie shall predecease the Settlor or shall not survive her by thirty days, then the Trustee would consider holding the share of the Trust Fund which would have been held for Eddie in the manner as described in paragraph 3.2(3) below.

(2) The Trustee would set aside a sum of HK$1,700,000 upon trust for the Settlor’s nieces and nephews, namely Mui Pak Ning (梅柏寧), Mui Pak Wai (梅柏慧), Poon Chun Ho (潘俊皓) and Poon Man Ho (潘文皓) (collectively, the ‘Nieces and Nephews’), and to make an annual payment of HK$100,000 each to such of the Nieces and Nephews while he or she is pursuing full time tertiary education, whether in Hong Kong or elsewhere, and before he or she reaches the age of 25,

PROVIDED THAT:

(a) the distribution payable to each of the Nieces and Nephews under this paragraph 3.2(2) shall not be more than HK$400,000 in aggregate;

(b) no payment pursuant to this paragraph 3.2(2) shall be made to the parent or guardian of the Nieces and Nephews notwithstanding that any of the Nieces and Nephews shall be under 18 at the time of payment and the Trustee would in such event pay, transfer or deliver the payment in direct disbursement of the educational expenses of the Nieces and Nephews; and

(c) upon the last one among the Nieces and Nephews to attain the age of 25, if any part of the Trust Fund set aside is not fully disposed of under this paragraph, then my Trustee would consider distributing the remaining balance of such part of the Trust Fund in accordance with paragraph 3.2(3) below.

(3)    Subject as aforesaid, to hold the balance of the Trust Fund for the Settlor’s mother, Tam Mei Kam (覃美金), while she is alive and make a monthly distribution of HK$70,000 for her use and benefit absolutely and upon the death of the Settlor’s mother, or if she shall not survive the Settlor, then upon the death of the Settlor, to distribute the entire balance of the Trust Fund then remaining to New Horizon Buddhist Association Limited, a company incorporated in Hong Kong, absolutely or if the same has ceased to exist or amalgamated with another institution, then to such other charitable organization as the Trustee shall in its absolute discretion determine.”

15.  This is what the learned judge said about the relationship between the deceased and New Horizon (“the 3^rd defendant”).

“85. It is convenient to record here that the deceased’s close association with the 3^rd defendant and her spiritual master was testified to by a director of the 3^rd defendant, whose evidence was not challenged at all. I have no reason not to accept the evidence given. There were more than sufficient reasons for naming the 3^rd defendant as the final repository. It should be noted that under the trust deed, the position of the final repository need not be taken into account when the trustee considers how to exercise its wide discretions. According to Mrs Lau’s and Mrs Ho’s evidence, both the deceased and Mrs Ho were fully aware of that.”

16.  Under the Karen Trust, the plaintiff’s name was the only name appearing in the Third Schedule under the words “‘Beneficiaries’ means and includes”.  However, “beneficiaries” was defined in clause 1(b) to mean her and:

“(ii) any person or class of persons as may be appointed from time to time by the Trustee in accordance with Clause 5(c).”

Clause 5(c) is very widely drawn.

17.  The deceased was defined as a member of “excluded class”.  So too were effectively HSBC and all those who are associated with them. 

The will

18.  On the same day (3 December 2003), the deceased made a will appointing HSBC as executor and trustee, inter alia, to hold her residuary estate:

“… upon trust for HSBC International Trustee Limited acting in its sole capacity as the trustee for the time being of the Karen Trust”.

The Facts

19.  Before dealing with the plaintiff’s specific submissions, we turn to the facts as found by the learned judge.  We can state them briefly since they have been carefully set out in the judgment of A Cheung J.  With respect, we are in full agreement with the learned judge’s findings.

20.  We deal first with the circumstances leading to the execution of the Karen Trust and the will.  As noted, the deceased first consulted Dr Teo in July 2003.  Between 23 July 2003 and 17 October 2003, she had been admitted to hospital more than 10 times, usually for blood and platelet transfusions.  Apart from those admissions, Dr Teo had visited her at her home to give her treatment on a number of occasions.  After a series of eight concerts at the Hong Kong Coliseum in November 2003, she was admitted to HK Sanatorium and Hospital from 21 to 23 November 2003 because of fever, anaemia and thrombocytopenia (reduction in blood platelets).  After discharge, she flew to Japan to shoot a television commercial.  She felt ill during her short stay in Japan and immediately upon her return to Hong Kong on 27 November 2003, she was admitted to the Hong Kong Sanatorium and Hospital, where she remained until she died on 30 December 2003 due to liver complications.

21.  The plaintiff, however, was not aware of her admission into the hospital until 28 December 2003 when her consent was necessary before further treatment could be given to the deceased who was by then unable to give consent.  Nor had the plaintiff been told:

“… of the making of the will and the setting up of the Karen Trust.” Para. 13

22.  Several witnesses gave evidence in support of the will and the Karen Trust, they were: Mrs Sheila Ho (“Mrs Ho”), Mrs Doris Lau and Dr Teo.  All of whom the learned judge found to be “honest, credible and reliable witnesses”.  para 27.  He explained:

“28. Returning to my acceptance of the factual evidence of the three crucial witnesses, my point is that I have borne in mind not only their demeanour in Court, but have also carefully considered the contents of their oral evidence and the documents made by them (including witness statements and so forth), other evidence including other witnesses’ evidence as well as the documentary evidence that has been adduced, the surrounding circumstances of the case, as well as the inherent probabilities and improbabilities of their evidence. As I say, I have no doubt that they were truthful and reliable witnesses at trial.”

23.  Mrs Ho and her late husband Mr Ho Koon-cheung – a co-founder of Golden Harvest, a movie production and distribution company, were the godparents of the deceased.  The deceased had a name in Chinese “何加男”, by reason of such relationship.  The learned judge said:

“10. … There is little doubt that the name of the trust, ‘Karen’, was based on this particular name of the deceased – ‘加男’ (which sounds like Karen in Cantonese).”

24.  Regarding their relationship, the learned judge said:

“58. … ever since the deceased became her goddaughter back in the 1980s, she had treated and taken care of the deceased as if she were one of her daughters. They had a very close relationship and for all practical purposes, they regarded (and addressed) each other as mother and daughter. …

25.  Mrs Lau was a private trust director of HSBC, a non-bank member of the HSBC group.  The learned judge said:

“40. … She was a highly experienced private trust professional, having worked in HSBC for 21 years. Her professionalism and experience in the field was plain to see when she was in the box. ”

26.  As for Dr Teo:

“11. Dr Peter Teo is a well-known and experienced oncologist. He is and was at the time the director of the Comprehensive Oncologist Centre as well as the director of the Department of Radiotherapy at Hong Kong Sanatorium & Hospital. … Dr Teo, together with a team of expert colleagues at the hospital, were in charge of treating the deceased during her final admission until her eventual demise on 30 December 2003.”

27.  Although the plaintiff had alleged undue influence against Mrs Ho, on the first day of trial, Mr Chan Chi Hung SC, who appeared for the plaintiff together with Mr Jerome Liu, abandoned the allegation. 

28.  In the section headed “Detailed account of the facts”, the learned judge recounted the evidence of Mrs Ho, who said that the deceased consulted her in early 2003 about making provisions for her mother after her death.  The deceased told her that she wanted to provide for her mother’s living expenses for the rest of her life and she expressed the concern that as her mother was not good at management of finance, she might be cheated of her money if she was to be given a lump sum.  Mrs Ho suggested the deceased should consider employing a professional to advise her and:

“38. … she introduced to her Mrs Doris Lau of HSBC, with whom Mrs Ho herself had set up a discretionary trust.”

29.  She was then told by the deceased in July or August 2003 that she wanted to retain Mrs Lau and HSBC for the intended services.

30.  Mrs Lau told the court that on 19 October 2003, she received a call from the deceased who asked her some general questions regarding estate and succession planning.  The learned judge’s detailed account of the facts dealing with “Idea of setting up a trust and making a will” up to “3 December 2003 morning: executing will and trust documents” covered paras 37 to 107 (pages 13 to 34) of the judgment.  We will not repeat them. 

31.  The evidence of Mrs Lau, as expected, was supported by file notes which she kept of her conversations and meetings with the deceased.  She said, for example, that on 19 October 2003, she received a telephone call from the deceased who had asked her some general questions regarding estate and succession planning.  After giving her some general advice over the phone, Mrs Lau advised the deceased to ask her accountant (Rachael Lo) to liaise with Mrs Lau and to prepare for her details of the deceased’s assets so that she could carry out an initial appraisal of the same before arranging a meeting with the deceased.  The deceased’s accountant (Rachael Lo) then supplied to Mrs Lau the requisite information about a week after the initial telephone conversation, on the basis of which Mrs Lau prepared a chart of the deceased’s companies and assets and arranged a meeting with the deceased at her home on 31 October 2003, which was “well documented by another file note prepared by Mrs Lau after the meeting” (Para. 43) and which corroborated the oral evidence given by Mrs Lau and by Mrs Ho about that meeting.  Mrs Lau explained to the deceased the benefits of placing her assets into a discretionary trust, and that as the asset contributor (settlor), the deceased should be excluded from being a beneficiary so as to minimise the exposure to challenge by the Estate Duty Office. 

32.  The learned judge said:

“44. … The deceased said she was particularly appreciative of the fact that in appointing a professional trustee, she could be sure that her wishes regarding disposal of her assets would be respected and the trustee would act in good faith and in the best interest of the beneficiaries.”

45.   The deceased then told Mrs Lau how she wanted her assets to be distributed via a trust arrangement, and this was meticulously recorded in the file note prepared by Mrs Lau after the meeting. …”

33.  In short, first, two properties (owned by two companies) were to be given to a “very special friend” (Eddie Lau, the 4^th defendant).  Secondly, she wanted to set aside some funds to subsidise her nephews’ and nieces’ tertiary education.

“46. Thirdly and most importantly, according to the file note:

‘ [The deceased] said that she would like to make sure that upon her death, her mother should be given a monthly allowance until her mother’s death to maintain her present life style: one chauffeur, two domestic helpers. She said it should be about HK$70,000 per month. (She said, rather sadly, that her mother would live a much longer life than she would.)

[The deceased] said very determinedly that she would not want her estate to pass outright to her mother for fear that she would be incapable of managing wealth and would end up penniless for the rest of her life.’

47. Lastly, the deceased wanted to name the 3^rd defendant the final repository of the trust.

48. According to Mrs Lau’s oral evidence in Court, which I have no difficulty in accepting in full, the deceased told her at the meeting that she had carefully thought through the provisions to be made after her death. She wanted to maintain her mother at the same level that she was then enjoying (two maids plus one chauffeur). She told Mrs Lau that her relationship with her mother was not particularly good and her mother had poor financial discipline. If she were to leave her mother a lump sum of money for her living for the rest of her life, she feared that her mother would lose all money and become penniless in no time. She said she had made calculations and $70,000 per month was the right amount.

49. The deceased also told Mrs Lau emphatically that apart from her mother and her nieces and nephews, she did not want any part of her estate to pass to any other Muis.

50.   Indeed, according to Mrs Ho and Eddie Lau, the deceased had a very bad relationship with her eldest brother.  Their evidence in this regard was not challenged in cross-examination.  Nor was it denied by the plaintiff when she gave evidence.”

34.  Mrs Lau had also advised the deceased to seek independent tax advice from an accountant.  It was agreed that Mrs Lau should approach Price Waterhouse for a quotation. 

“54. … Mrs Lau also advised the deceased of the advantage of making a will as a ‘backup’ measure pending the decision to set up a trust and the setting up of the trust itself, having ascertained from the deceased that she had not made any will at all. This would avoid the situation of partial or total intestacy because amongst other things, it would take time to inject assets into the trust. Mrs Lau left with the deceased a ‘will appointment questionnaire’ to fill in, after going through with her the information required to be supplied in the standard form.”

35.  The will appointment questionnaire was duly filled out by Mrs Ho at the request of the deceased.  Mrs Ho explained:

“59.  According to Mrs Ho, both she and the deceased treated the questionnaire as a preliminary document to provide information to HSBC both for the purposes of setting up the trust and for making a will as a backup measure.  The setting up of the trust and the making of the will were, according to Mrs Ho, “twin sisters”.  It was throughout the intention of the deceased, after learning of the device of discretionary trusts, to set up a trust to make provisions regarding her estate.  It was never her intention to make a will alone.  Mrs Ho said in Court, most convincingly, that if it had been the intention of the deceased to make a will only, she need not have approached HSBC or Mrs Lau – rather she would have approached a solicitor with ease.”

36.  On 27 November 2003, Mrs Lau and Mrs Ho obtained the deceased’s instructions to proceed to retain Price Waterhouse for the necessary advice on establishing the trust.  During that conversation, Mrs Lau “obtained the deceased’s definite instructions to proceed with setting up the trust”.  Also that the deceased wished to have the will prepared and executed as soon as possible.  The learned judge said:

“66. … It is not clear from the evidence whether that request of the deceased was in any way affected by the deterioration of the deceased’s condition while she was shooting the television commercial in Japan. In any event, the telephone conversation took place on the very day the deceased returned from Japan to Hong Kong which was followed by her immediate admission to Hong Kong Sanatorium & Hospital. …”

37.  In para. 67 of the judgment, the learned judge set out the evidence on the extent of the communications between HSBC’s Trust Department and its Probate Department which was responsible for drafting the will on the basis primarily of the questionnaire.  In paras. 68 to 70 of the judgment, the learned judge set out the details regarding the various draft wills which were prepared by the Probate Department of HSBC.  None of the drafts mentioned the setting up of a trust and the first draft provided for 50% of the residuary estate to be left to the plaintiff and 50% to the 3^rd defendant.  Also,

“68. … despite the deceased’s specific request to Mrs Lau to keep confidential the identity of the specific devisee, the name of Eddie Lau appeared prominently on the first page of the draft will. …”

38.  On 28 November 2003, three further drafts were prepared “as alternatives or variations by the Probate Department so that the client could have more options to choose from”.  Para. 68.

39.  After Mrs Lau had read the drafts, she:

“72. … realized that her colleagues in the Probate Department had misunderstood the deceased’s wishes as set out in section H of the questionnaire.”

40.  The learned judge went on to find:

“73. Although the faxing over of the draft wills and the subsequent telephone conversation were not evidenced by any file note, after due consideration I have no difficulty in accepting Mrs Lau’s and Mrs Ho’s respective accounts of the same. In particular, I accept Mrs Lau’s evidence that in her view, the colleagues in the Probate Department had misunderstood the deceased’s instructions in the questionnaire (as understood by her) and the contents of the various draft wills did not reflect the deceased’s true intentions. I will presently return to this theme when I deal with Mr Chan’s argument on knowledge and approval.”

41.  In order to address the concern of the possibility of a mismatch between the dispository provisions in the will and the trust, Mrs Lau advised on 1 December 2003 on the phone that

“77. … the ‘matching’ concern could be eliminated by naming the trust as sole beneficiary under the will so that all assets of the estate would pass to the trust to be distributed in accordance with the terms of the trust. …”

42.  The learned judge said:

“79. … Mrs Ho relayed the message to the deceased for her instructions after the telephone conversation and after the deceased expressed the view that this was the best arrangement to make, Mrs Ho called Mrs Lau on the same day to pass on the message. She instructed Mrs Lau to set up the trust first and name it as the sole beneficiary under the will. She also told Mrs Lau that the deceased had named the trust ‘The Karen Trust’. Mrs Lau told Mrs Ho that a doctor would need to be present when the documents were executed to certify the deceased’s mental capacity in view of the fact that she was then hospitalised.”

43.  Mrs Lau then gave instructions to her colleagues to prepare the trust deed (based on HSBC’s standard form) and a trustee memorandum, and to redraft the will.  The instructions were evidenced by an internal memo dated 1 December 2003 which Mrs Lau had sent to Gladys Lo and Phoenix Lam.

44.  The documents were ready on 2 December 2003.  However, the documents contained an error in that the trustee memorandum provided:

“83. … monthly sum of $70,000 to the mother was to be on top of the rental income of a property situated at Happy Court, Village Road in Happy Valley. Mrs Ho spotted the mistake and in a subsequent telephone conversation (after confirming the same with the deceased), she clarified with Mrs Lau that the deceased’s intention was only to give $70,000 per month to her mother. …”

After clarification the documents were corrected and finalised for execution on 3 December 2003.

Mental capacity

45.  As for the deceased’s mental capacity on the morning of 3 December 2003, the following is the learned judge’s account of Dr Teo’s evidence:

“86. …From his interaction with the deceased that evening (2 December 2003), Dr Teo told the Court, he formed the view that the deceased was most alert and concerned about her condition. She had no difficulties in understanding Dr Teo’s explanations, she asked questions (including leading questions) and her responses quite clearly showed that she was fully following what was going on. …

87. When Dr Teo saw the deceased again at around 8:30 am on 3 December, the deceased had already woken up and had breakfast. She could remember the colour of her urine that morning, which was independently verified by Dr Teo. Dr Teo testified in Court that most probably, he and the deceased again discussed the results of the CT scan after the deceased had time to digest what she had been told the previous evening. Although Dr Teo could not be 100% sure, he probably had discussions with the deceased in two or three ward rounds on the CT scan results which painted a very gloomy picture. Dr Teo testified that on 3 December, the deceased was her normal self, fully alert and as attentive, responsive and smart as before. Thus when Mrs Lau arrived at around 11 am that day at the hospital and he was asked to be present to witness the explanation and execution of the documents, he had no hesitation whatsoever in advising Mrs Lau that in his view, the deceased had full mental capacity and was of a “sound and clear mind” to execute the documents. And Dr Teo did not consider it necessary at all to consult a neurologist or psychiatrist on the matter.”

“87. Dr Teo testified that on 3 December, the deceased was her normal self, fully alert and as attentive, responsive and smart as before. Thus when Mrs Lau arrived at around 11 am that day at the hospital and he was asked to be present to witness the explanation and execution of the documents, he had no hesitation whatsoever in advising Mrs Lau that in his view, the deceased had full mental capacity and was of a “sound and clear mind” to execute the documents. And Dr Teo did not consider it necessary at all to consult a neurologist or psychiatrist on the matter.”

46.  That was also the impression of Mrs Lau and Mrs Ho.

“89. Mrs Lau, who quite plainly possessed an excellent memory, gave detailed evidence on what happened that morning. She first explained the contents of the trust deed to the deceased. She explained it clause by clause although not line-by-line. What is important for our purposes is that the deceased, according to all those present, followed the explanation well and gave appropriate responses. She asked pertinent questions and reacted appropriately in words, facial expressions and body languages. After the explanation, the deceased executed the trust deed and Mrs Lau signed the same as a witness. Then Mrs Lau explained the contents of the will to the deceased. Following explanation, the deceased executed the will in the presence of Dr Teo, Mrs Lau and Mrs Ho. Dr Teo and Mrs Lau then signed the will in each other’s presence as attesting witnesses. The process took about 45 minutes and throughout Dr Teo was present although he had to leave the ward on two or three occasions to answer calls. Then Dr Teo left to attend to some other business and only the three ladies remained in the ward. Mrs Lau continued to explain the trustee memorandum to the deceased. Again from the deceased’s responses as observed by Mrs Lau (and corroborated by Mrs Ho), the deceased fully followed and agreed to the contents of the trustee memorandum. The trustee memorandum was not required to be signed by the deceased, who however signed a number of related trust documents.”

47.  In paras. 90 to 105, the learned judge explained in some detail how the questions asked by the deceased, in relation to different provisions in the Karen Trust, showed that she was fully aware of the contents of the trust deed that she was about to execute.  For example:

(1)               “90.    … She asked about whether she could change her wishes after setting up the trust and her confirmation of the terms in the trustee memorandum. …”

(2)               She also noticed that the name of the 4^th defendant did not appear in the third schedule of the trust deed where the  beneficiaries are named:

“90. … She felt relieved evidently when she was told that the name of Eddie Lau would appear in the trustee memorandum.”

(3)               She could remember HSBC’s fees structure.  She also noted the wide indemnity which was provided in the trust deed and said that the trustee “好着數”.  Para. 93.

(4)               “97.    In relation to clause 33 (absence of any responsibility on the part of the trustee to inform the beneficiaries their interest in the trust), the deceased asked how the trustee was to distribute the assets in favour of the beneficiaries if they were not aware of the trust.”

(5)               She also asked what procedures had to be followed if she herself should want to change the beneficiaries later.

48.  Regarding the will, the learned judge said:

“101. … the deceased expressed her understanding that under the will everything would go to the trust. As regards the other standard and detailed terms in the will giving the executor/trustee various powers, the deceased observed that they would not really be required to be exercised as everything would be given to the trust.”

49.  On such evidence, it does not surprise that the learned judge found for the validity of the Karen Trust as well as the will. 

50.  The learned judge had also dealt in some detail with the expert medical evidence on the mental capacity of the deceased. 

51.  The evidence was that:

“86. On the late afternoon of 2 December 2003, the abdomen and pelvis CT scan results of the deceased were out. The results were not encouraging and as a matter of fact, the picture was bleak. …”

52.  On the late afternoon of 3 December 2003, Dr Teo ordered the testing of the deceased’s blood ammonia level:

“108. … According to Dr Teo, it was an exercise to gather more information on the liver function of the deceased. …”

53.  The result of the blood ammonia test and was available at around 11 am on 4 December 2003:

“109. … The ammonia level was 99, three times the upper limit of the normal range (9-33). According to the notes made by Dr Teo after his morning ward round on 4 December, the deceased was ‘drowsy’ and had ‘interrupted speech’. Together with the abnormally high level of ammonia, Dr Teo made the suspected diagnosis of hepatic pre-coma, which can mean either stage 1 or stage 2 HE.”

“110. In short, HE is a reversible functional brain disorder characterized by disturbances of consciousness and other neuro-psychiatric manifestations due to metabolic disturbances associated with liver disease. According to Dr Woo, the pathogenic mechanism is felt to be the failure of the liver to remove toxic substances from the blood circulation so that the latter accumulate and disturb the functions of the brain. Although the exact culprit is still unknown, a substantial amount of clinical and experimental evidence indicates that ammonia as one of those toxic substances probably plays a major role in the pathogenesis of HE. On the other hand, based on the expert evidence actually adduced before the Court, there is a substantial proportion of patients suffering from HE who have a normal level of ammonia in their blood. Conversely, there is also a substantial proportion of liver patients who do not develop HE despite a very high level of ammonia in their blood.

111.  Leaving that aside for the time being, it is a fair summary of the evidence that from 4 to 7 or 8 December 2003, the deceased was in a drowsy state and Dr Teo accepted in oral evidence that without a proper mental state examination (and none was done at the time), he could not be sure whether the deceased was of sufficient mental capacity to make a will or to sign other legal documents during that period of time.  He frankly accepted that the suggestion in his aide memoire that until the last 48 hours of her life, the deceased was throughout of a sound and logical mind was an over-statement.  He qualified it in Court by excluding the period from 4 to 7 or 8 December as well as the period after 24 December (when the deceased was intubated) from his statement.  Having made that concession in the box, Dr Teo remained adamant that on 3 December when the legal documents were explained to and executed by the deceased, she was of a sound and logical mind, with good mental capacity to understand and execute the documents.”

54.  After giving full consideration to the evidence (paras 143-217), the learned judge concluded:

“218. I have no difficulty in concluding that the 3^rd defendant as propounder of the will has overcome the burden on testamentary capacity. Likewise, the deceased’s mental capacity to make the trust arrangement has been duly established. (For the same reasons, I also find that the deceased knew and approved of the contents of the will and trust arrangement.)”

55.  With respect, we are in full agreement with the learned judge’s conclusions.

56.  The deceased had also executed an enduring power of attorney on 20 December 2003.  That was executed in the presence of Ms Jacklyn Ng, a solicitor from JSM, who explained the relevant documents to the deceased and attended to the execution.  The learned judge said:

“114. … the deceased appeared to her to be fully aware of what she was doing. She followed her explanation and asked questions. She understood the effect of signing an enduring power of attorney and knew what she was doing. I fully accept Ms Ng’s evidence.”

57.  Mrs Doris Lau was present on that occasion because HSBC was the donee under the enduring power of attorney.  By then, the necessary documents for injecting the deceased’s assets into the Karen Trust were ready for execution.  So she asked the deceased whether she wanted to execute them before Christmas, as Mrs Lau was taking a vacation over Christmas.  The deceased replied that she would like to execute the documents after Mrs Lau’s return from her holidays.  Obviously nobody thought the deceased would die within a matter of days.  Unfortunately,

“115. … The deceased’s liver condition continued to deteriorate. She eventually lapsed into a coma and died of acute liver failure resulting from cytomegalovirus infection on 30 December. …”

The appeal

58.  The issues identified in the plaintiff’s written submissions are:

“9. The sole key issue (which can be framed in multiple ways, leading to several sub-issues) or the crucial question for this Appeal is:

What were the true testamentary intentions/instructions of the Deceased during 19/10/2003 and 3/12/2003? OR

Whether the Will/Trust Scheme in its present form, truly incorporates all the testamentary intentions of the Deceased in the Law of Probate, which are binding and shall without exception but certainty be executed/performed by her Executor, or enforced by a Court of Law, without the risk of being frustrated at will or wish of her Executor or due to other human elements, beyond the jurisdiction of the Court?”

59.  The short answer to this so-called key issue can be found in the following passages in the judgment:

“259. I can be very brief with this issue which can be disposed of on the facts. On the facts and evidence, I wholly reject the notion that the deceased’s wishes were anything more than wishes. This matter has been directly dealt with on various occasions during Mrs Doris Lau’s evidence. She was adamant, and I fully accept her evidence, that everyone involved – HSBC, the deceased as well as Mrs Sheila Ho – knew, understood and agreed completely that the powers given to HSBC to appoint beneficiaries were wide discretionary powers. The deceased’s suggestions set out in the trustee memorandum or any wishes to be communicated by her to HSBC in future were nothing more than suggestions and wishes, which HSBC would no doubt bear in mind and seriously consider. But what is important is that HSBC did not bind itself to complying with those suggestions and wishes without independent consideration and judgment. That applies to the suggestions set out in the trustee memorandum; that also applies to whatever wishes that the deceased might have wanted to communicate to the trust manager after the setting up of the Karen Trust (which, of course, never happened).

260. That the parties fully contemplated that under normal circumstances, the trustee would, after due consideration, act in accordance with the suggestions and wishes of the settlor is one matter.  To elevate such suggestions and wishes to legally binding instructions by the settlor to the trustee so that the trustee has no discretion nor need exercise any independent judgment, but must follow those instructions from the settlor, is quite another matter.  I am certain that in the present case, the situation is just the former, not the latter.”

60.  We have already expressed our agreement with the learned judges’ conclusion that:

“… the deceased knew and approved of the contents of the will and trust arrangement.)” See para.55 above.

61.  Clause 33 of the Karen Trust provided:

“NO OBLIGATION TO INFORM BENEFICIARIES OF THIS TRUST

33.   The Trustee shall not be obliged to make known to any Beneficiary or the Final Repository that this Trust exists or any matters in relation thereto or that they are named as such or that they are now or at any time hereafter included in any of such expressions. The Trustee shall not in any way be obliged to contact any Beneficiary or the Final Repository or any of them until any of them becomes absolutely and indefeasibly entitled to any part of the Trust Fund and the Trustee shall then provide the Beneficiary so entitled with information relating to his entitlement and such other information relating to this Trust as may be reasonably required by him for the compliance of his reporting or tax obligations arising under all applicable laws. Subject to the above no Beneficiary or Final Repository shall be entitled to demand or compel the Trustee to release or disclose any information or document relating to the Trust or the exercising of the Trustee’s powers and duties hereunder. For the avoidance of doubt, it is hereby declared and confirmed that none of the Beneficiaries nor the Final Repository has any interest right or claim of whatever nature in and to the Property comprised in the Trust Fund.”

62.  The plaintiff submitted that clause 33 conferred upon HSBC “excessive or unnecessary power”.  The plaintiff also submitted that as a result it is void relying on the dictum of Millet LJ (as he then was) in Armitage v Nurse [1998] Ch 241 at 253H that:

“… If the beneficiaries have no rights enforceable against the trustees there are no trusts. …”

63.  Armitage v Nurse was concerned with the validity of an exemption clause which exempted liability for constructive or equitable fraud.  There, Millet LJ accepted the submission that there is an irreducible core of enforceable obligations owed by the trustee to the beneficiaries which is fundamental to the concept of a trust. 

64.  It is true that HSBC has a very wide discretion.  But as the judgment of the Privy Council in Schmidt v Rosewood Trust Limited [2003] 2 AC 709 delivered by Lord Walker of Gestingthorpemade clear at 724:

“It is fundamental to the law of trusts that the court has jurisdiction to supervise and, if appropriate, intervene in the administration of a trust, including a discretionary trust.”

65.  The judgment went on to quote with approval what Holland J said in the Australian case of Randall v Lubrano (unreported, 31 October 1975), cited by Kirby P (as he then was) in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 416:

“… no matter how wide the trustee's discretion in the administration and application of a discretionary trust fund and even if in all or some respects the discretions are expressed in the deed as equivalent to those of an absolute owner of the trust fund, the trustee is still a trustee.” 724F.

66.  Lord Walker went on to indicate that the discretionary object’s rights included “a right to require the trustees to account for their trusteeship”.  732H.

67.  Thus, it is clear that HSBC does owe enforceable obligations to the discretionary objects under the Karen Trust, which, of course, include the plaintiff and the final repository.

68.  Another complaint is that because HSBC is not obliged to make known the Karen Trust to any of the discretionary objects (which for brevity sake we shall refer to as “beneficiary”) it is void.  The Karen Trust is entitled to the residuary estate under the will.  So the existence of the Karen Trust is a matter of public record.  It is submitted that since clause 33 provides that HSBC is not obliged to inform any “beneficiary” of any detail about the Karen Trust or that he/she had been named as a “beneficiary”, that would render the Karen Trust void, presumably because neither the 4^th defendant nor the plaintiff would know that he/she could enforce the Karen Trust.

69.  HSBC informed the plaintiff voluntarily less than a month after the death of the deceased that she was one of the beneficiaries under the Karen Trust.  Presumably the 3^rd and the 4^th defendants were also informed.  It is unreal to say that nobody was in a position to enforce or to seek enforcement of the Karen Trust.  HSBC has fiduciary duties under the Karen Trust, and it is inconceivable that they would ignore the clear expression of the deceased’s wishes in the Trustee Memorandum, for example, in favour of her mother.  As soon as a monthly payment is made to the plaintiff in accordance with the deceased’s wishes, the plaintiff would know that she is a beneficiary.

70.  The plaintiff also complained that she was not told the identity of other beneficiaries in the terms of the trustee memorandum because HSBC only gave her a redacted form of the trust deed.  Nor did she know her daughter’s wishes regarding the provisions for her.  HSBC had refused to disclose these information, and HSBC was eventually ordered to make the disclosure.  How much disclosure a discretionary trustee should make is often a matter of judgment.  In any event, the non-disclosure of such information by HSBC, even though subsequently overruled by the court, could not render the Karen Trust null and void.

71.  The following authorities support the view that a discretionary trust would not be void if the trustees are not obliged to inform any person that he is a potential beneficiary.  Indeed, such a beneficiary might never know the identity of the trustees or the existence of a trust.

72.  In McPhail v Doulton [1971] AC 424, also reported as “In Re Baden Deed Trusts”, a fund was established by deed dated 17 July 1941, clause 9(a) of which provided:

“The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company (Mathew Hall and Co Ltd) or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit.”

73.  At the date of the deed, the company had a pay roll of some 1,300 employees.  The litigation over the validity of the deed was protracted.  In 1963, the trustees raised two issues for determination.  We are only concerned with the second, namely, whether the trust was void for uncertainty.  Goff J ([1967] 1 W.L.R. 1457) held that the deed gave mere powers as opposed to constituting a discretionary trust; and that it was valid.  On appeal, [1969] 2 Ch 388, the Court of Appeal by a majority upheld Goff J but having regard to the intervening decision of the House of Lords on 31 October 1998 in Re Gulbenkian’s Settlements [1970] AC 508 remitted the case to Goff J for further consideration of the issue of validity.  The executors, however, went on to the House of Lords in McPhail v Doulton([1971] AC 424) where, on 6 May 1970, it was determined that the relevant provisions constituted a discretionary trust and not mere powers and that (by a majority) the tests applicable as regards uncertainty were the same as if the trustees had been given mere powers,

“… namely, that the trust is valid if it can be said with certainty that any given individual is or is not a member of the class”. Per Wilberforce at 456C.

74.  Lord Wilberforce said of the decision in Re Gulbenkian’s Settlements:

“That case was concerned with a power of appointment coupled with a gift over in default of appointment. The possible objects of the power were numerous and were defined in such wide terms that it could certainly be said that the class was unascertainable. The decision of this House was that the power was valid if it could be said with certainty whether any given individual was or was not a member of the class, and did not fail simply because it was impossible to ascertain every member of the class.” 454D.

75.  The House of Lords remitted the matter to the Chancery Division to determine whether on such tests there was or was not an invalidating uncertainty.

76.  That was resolved by Brightman J (as he then was) in In re Baden Trust (No. 2) ([1972] Ch 607) in favour of validity and affirmed by the Court of Appeal ([1973] Ch 9).  Sachs LJ in the Court of Appeal emphasized the important difference between conceptual uncertainty and evidential uncertainty.  The latter, as Lord Wilberforce had said in McPhail v Doulton:

“… the court can appropriately deal (with) on an application for direction …” at 524.

77.   Sachs LJ said at 20:

“… (Conceptual uncertainty was in the course of argumentconveniently exemplified, rightly or wrongly matters not, by the phrase ‘someone under a moral obligation’ and contrasted with the certainty of the words ‘first cousins’). Once the class of persons to be benefited is conceptually certain it then becomes a question of fact to be determined on evidence whether any postulant has on enquiry been proved to be within it: if he is not so proved, then he is not in it. That position remains the same whether the class to be benefited happens to be small (such as ‘first cousins’) or large (such as ‘members of the X Trade Union’ or ‘those who have served in the Royal Navy’). The suggestion that such trusts could be invalid because it might be impossible to prove of a given individual that he was not in the relevant class is wholly fallacious …”

78.  Lord Wilberforce had also said at 450 in Gulbenkian:

“Correspondingly a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know. He would examine the field, by class and category; might indeed make diligent and careful inquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and needs of particular categories and of individuals within them; decide upon certain priorities or proportions, and then select individuals according to their needs or qualifications. If he acts in this manner, can it really be said that he is not carrying out the trust?”

79.  We believe it is implicit in the Re Baden Deed Trusts decisions that a discretionary trustee is not obliged to inform any potential beneficiary of his potential interest under a discretionary trust. 

80.  Indeed, in Schmidt Lord Walker said that offshore discretionary trusts:

“… may give no reliable indication of who will in the event benefit from the settlement. Typically, it will contain very wide discretions exercisable by the trustees (sometimes only with the consent of a so-called protector) in favour of a widely defined class of beneficiaries. The exercise of those discretions may depend on the settlor's wishes as confidentially imparted to the trustees and the protector.” 715G.

81.  In Schmidt, the claimant applied to the High Court of the Isle of Man for disclosure of documents relating to two settlements of which his deceased father was a co-settlor and under which the claimant claimed that he had discretionary interest both in his own capacity as well as being the administrator of his father’s estate.  The trustee resisted disclosure on the ground that the claimant was not a beneficiary under the settlements and his father was never more than an object of a power and as such had no entitlement to trust documents or other information.  On appeal, the Privy Council held that a beneficiary’s right to seek disclosure of trust documents is one aspect of the court’s inherent and fundamental jurisdiction to supervise and if appropriate intervene in the administration of a trust including a discretionary trust.  It decided that the jurisdiction did not depend on any distinction between transmissible and non-transmissible or discretionary interests, or between the rights of an object of a discretionary trust and those of an object of a mere power of a fiduciary character.  The beneficiaries’ proprietary right was therefore neither sufficient nor necessary for the exercise of the court’s discretion.

82.  In Murphy v Murphy [1999] 1 WLR 282, a potential beneficiary under discretionary trusts sought an order for disclosure of the identities of trustees of the fiduciary trusts against the settlor.  Neuberger J (as he then was) said at page 290:

“The facts that in this case the plaintiff is merely within the class of discretionary beneficiaries (as opposed to being someone with a vested beneficial interest in the trust property) and that there is no suggestion of wrong-doing on the part of the trustees appear to me to go to the question of whether to exercise the discretion [to exercise what the judge called the equitable jurisdiction] rather than whether the discretion exists at all.”

Then at page 291:

“If all the discretionary beneficiaries wished, for good reasons, to know the identity of the trustees of a settlement, and the settlor (who reserved the power of appointment of trustees) refuse to tell them it would be surprising – indeed, I suggest, remarkable – if the court had no power to compel him to do so. Similarly, if all but one or two of the beneficiaries wished to know, particularly if the one or two were receiving all the income. If that is right, it would seem to follow that one would expect the court at least to have jurisdiction to require the settlor in such circumstances to give the information to a single discretionary beneficiary.”

83.  In In Re Manisty's Settlement [1974] Ch 17 at 25F Templeman J (as he then was) said:

“… If a person within the ambit of the power is aware of its existence he can require the trustees to consider exercising the power and in particular to consider a request on his part for the power to be exercised in his favour. The trustees must consider this request, and if they decline to do so or can be proved to have omitted to do so, then the aggrieved person may apply to the court which may remove the trustee and appoint others in their place. This, as I understand it, is the only right and only remedy of any object of the power. …”

84.  Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 was concerned with a discretionary trust.  The issue before the Court of Appeal in New South Wales included the question whether the trustees might take into consideration a settlor’s wishes as stated in documents such as the trustee memorandum.  Not surprisingly, all three members of the court thought that it was proper to do so. 

85.  Mahoney JA went on to say:

“For myself, I doubt whether it is the duty of a trustee to inform all persons who may possibly take under a discretionary power of the nature and extent of that possibility. As I have indicated, a class of possible beneficiaries under a discretionary trust may be wide and may be capable, as in this case, of significant extension. I doubt that it is the duty of a trustee to seek out such persons and inform them of the possibility that, in certain circumstances, they may acquire rights under the trust. I do not think that, for example, where property may be appointed among a group of employees, past, present and future, of a company, the trustee has a duty to seek out and convey information of this kind.” Page 432.

One Testamentary instrument

86.  Another submission is that by reason of the doctrine of incorporation (In re Edwards’ Will Trusts [1947] 2 AER 521), the will and the trust deed are part and parcel of one testamentary instrument.

87.  This argument has been rejected by the learned judge, for reasons with which we are in respectful agreement.  We cannot see how it can be suggested that the Karen Trust has been incorporated into the will.  The Karen Trust is the residuary beneficiary. 

Rule against delegation of testamentary power

88.  The submission is that even if the Karen Trust was validly established inter vivos, a gift in favour of the Karen Trust by will is invalid because it infringes the rule against delegation of testamentary power.  In support, the plaintiff relies on the dictum of Fullagar J in Tatham v. Huxtable [1950] 81 C.L.R. 639, a decision of the High Court of Australia. 

89.  The Karen Trust was properly constituted.  The deceased had exercised her testamentary power: she bequeathed her residuary estate to the Karen Trust.  When the trustees of the Karen Trust perform their own fiduciary duties they would not be exercising the testamentary powers of the deceased.  If the deceased had bequeathed her residuary estate to a charitable trust, it is difficult to see how it could be said that she had delegated her testamentary power.  We see no relevant difference between the two.  Support for this view can be found in Gregory v Hudson (1997) 41 NSWLR 573, on appeal, (1998) 45 NSWLR 300, where it was held that it is not a breach of the rule against delegation of testamentary power to give property by will to the trustees of a valid pre-existing trust, in that case, also a discretionary trust.

90.  In any event, this argument has been fully dealt with by the learned judge in paras. 220 to 241.  For the reasons given by Hoffmann J in Re Beatty, which the learned trial judge had adopted (para. 228), we are respectfully of the view that the Fullagar J’s view does not represent the law in Hong Kong.

Collusion and conspiracy

91.  The plaintiff sought to argue that there was collusion and conspiracy.  Neither had been raised at trial.  We cannot allow a new case to be made on appeal.  Moreover, the new case lacks particularity and is no more than wild conjectures.  We give one allegation as example:

“there may well be handwritten file notes of Doris Lau reflecting such hard truth which were suppressed by Doris Lau who instead fabricated typewritten purported file notes to mislead the court to confuse the two different nature of trusts. Doris Lau and Sheila Fu must have both been guilty of perjury.”

92.  The plaintiff complained that her counsel at trial had not put forward such a case.  On the material made available to us, we can only say no responsible counsel would have advanced a case of collusion and conspiracy. 

Holes in Evidence

93.  We will not deal with the so-called holes in the evidence of Mrs Lau and Mrs Ho, which is another way of saying that the learned judge’s acceptance of their evidence is flawed.  The learned judge had accepted their evidence and he was entitled to do so.  We see nothing in the submission which makes us doubt the correctness of the learned judge’s conclusion.  Indeed, with respect, we agree with them.

Evidence

94.  The plaintiff wanted leave to adduce new evidence.  New evidence will not be admitted unless such evidence (a) could not have been obtained with reasonable diligence for case at the trial, (2) is such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive, and (3) is such as is presumably to be believed.  Ladd v Marshall [1954] 1 WLR 1489.  The new evidence included press and magazine cuttings in 1999-2000 showing that one of the deceased’s brothers assisted her in organising her performance in Las Vegas.  They are produced to show that the deceased was on good terms with her brother.  Such evidence does not satisfy the Ladd v Marshall tests.

Disposition

95.  For the above reasons we would dismiss the appeal and make an order nisi that the 3^rd and 4^th defendants’ costs are to be paid out of the estate, to be taxed if not agreed on a common fund basis.  We also make an order nisi the plaintiff should indemnify the estate in respect of such costs.