CHUN HON WAI AND ANOTHER v. JUNICHI TAKASHIMA

CACV 67/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 67 OF 2000

(ON APPEAL FROM HCMP 6794/1998)

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J U D G M E N T

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Hon Godfrey VP :

Introduction

1. This is an appeal from a judgment of Yuen J (reported [2000] 1 HKC 673) who, on 4 January 2000, resolved a dispute between vendor and purchasers in favour of the purchasers. The vendor now appeals.

Background

2. The vendor (the defendant in the action) agreed on 14 November 1998 to sell to the purchasers (the plaintiffs in the action) for HK$7,750,000 a duplex apartment in Tower 1, Parc Oasis, Kowloon, with completion to take place on 15 December 1998. The agreement recited that Leung Po Wan, deceased, the owner of this property, died on 15 August 1997, having by her last will dated 4 October 1995 (probate of which had been granted to the vendor on 20 October 1998) appointed the vendor to be the executor thereof. The vendor was expressed to sell "as personal representative".

3. On the purchasers' investigation of the vendor's title, their solicitors noted that the will gave all the deceased's estate (subject to the payment of her funeral and testamentary expenses and debts) to her son (described as "the Beneficiary"). They also noted that clause 5 of the will contained the following provision :-

"5. The Executor may not sell or otherwise dispose of any of the assets forming any part of my residuary estate before the Beneficiary attains the age of 18." (emphasis added)

4. In these circumstances, the purchasers' solicitors conceived it to be their duty to inquire whether the Beneficiary had (i) survived the deceased and (ii) attained the age of 18. They made that inquiry, but the vendor's solicitors never answered (ii). The purchasers' solicitors also conceived it to be their duty to inquire (in effect) whether the sale was necessary for the purposes of the administration of the deceased's estate. The vendor's solicitors did answer the purchasers' solicitors' inquiries in this connection, but not to the satisfaction of the purchasers' solicitors. The purchasers therefore refused to complete; the contract went off; the vendor forfeited (or purported to forfeit) the purchasers' deposit; and these proceedings accordingly ensued. I shall have to consider later in this judgment the specific inquiries made by the purchasers' solicitors and the answers they were given, but I apprehend that, before doing so, it will be convenient to indicate in general terms what is the duty of a purchaser's solicitors when investigating title on a sale by a personal representative. The following basic principles are relevant.

Sales by personal representatives

1. The powers of a personal representative, when the deceased dies testate, are derived from the will itself, from common law and from statute, and frequently from all three. These powers remain available until the administration is complete and the residue (after payment of funeral and the testamentary expenses and debts) is ascertained, after which the residuary estate is held upon trust for the persons beneficially entitled. While a deceased's estate remains in the course of administration, no beneficiary has any interest in any specific asset comprised in it.

2. It is a general rule of law and equity that a personal representative has an absolute power of disposition over all the personal estate of the deceased. This rule is based on the principle that the executor or administrator is, in many cases, driven to realise the assets in order to perform his duty in paying debts and distributing the estate : and no-one would deal with an executor or administrator if liable afterwards to be called to account.

3. So, personal representatives can, by virtue of their office, dispose absolutely of terms of years vested in them as representatives and can make a good title even as against a specific legatee.

4. A personal representative purporting to act for administrative purposes only will generally confer a good title upon a person in whose favour he makes a transfer or conveyance of the legal estate.

5. A personal representative selling part of the deceased's estate will be presumed to be acting in discharge of the duties imposed upon him as such representative.

6. A sale by a personal representative not for the purpose of administration is not liable to be set aside by reason only of the fact that the purchaser had notice that all debts, etc. had in fact been paid : see section 66(4) of the Probate and Administration Ordinance, Cap. 10, and cp. section 36(8) of the Administration of Estates Act 1925, from which section 66(4) was taken.

7. It follows that solicitors for a purchaser from a personal representative are generally under no duty to inquire and indeed ought not to inquire whether the sale is necessary for the purposes of the administration.

8. If, however, they do so inquire, and the answers given then indicate that the sale is in breach of trust (as opposed to a mere inference arising from knowledge that all debts have been paid) then, but only then, is the purchaser at risk of losing the protection he would otherwise have had. (For a convenient statement of the above general principles, reference may be had to Williams, Mortimer and Sunnucks, on Executors, Administrators and Probate (1993) especially at pp. 664 to 678.)

The instant case

5. In the instant case, it has been suggested that a special problem is created by clause 5 of the deceased's will. But, before dealing with that problem, it will be helpful to consider how the matter would stand if clause 5 is for the moment put to one side.

6. On that basis, the purchasers' solicitors here were entitled to assume that the sale was for the purposes of administration. They need not and should not have inquired into that matter. However, they did so. The question then arises whether the answers to their inquiries disclosed that all debts, etc. had been paid; that the sale was not necessary for the purposes of administration; and that there were facts which put them on notice of a breach of trust by the vendor. If the answers gave the purchasers' solicitors no reason to suppose that all the debts, etc. had been paid, or to suspect some breach of trust, there was no justifiable reason for refusing to accept those answers. In this connection, I should add that, in the instant case, in which the deceased left all her estate to one beneficiary, any question as to how any mortgage debt on the property being sold should be discharged, i.e., whether the property itself should be treated as primarily liable to the exoneration of other assets, which is a matter dealt with by section 64(1) of the Probate and Administration Ordinance, Cap. 10, and section 35(1) of the Administration of Estates Act 1925, from which section 64(1) was taken, does not arise; for those provisions are concerned only with the incidence of liability as between "different persons claiming through the deceased" (my emphasis).

Clause 5 of the Will

7. This clause clearly indicates the deceased's intention that after the administration has been completed and the residue accordingly ascertained, the assets comprised in the residuary estate should be retained by the vendor in specie during the Beneficiary's minority.

8. Clause 5 cannot and should not be construed as restricting the sale of the Parc Oasis apartment or, for that matter, any specific asset comprised in the deceased's estate.

9. But whatever clause 5 of the will means, and whatever it was intended to achieve, one thing is clear : it cannot operate to restrict or limit in any way the absolute power of the vendor to sell the property for the purposes of administration (which, as we have seen, is a power which the purchaser was entitled to presume the vendor was exercising). Nothing in a will can operate so as to displace the rule (confirmed by section 61(1)(a) of the Probate and Administration Ordinance, Cap. 10) that "the property of a deceased person, to the extent of his beneficial interest therein ..... [is an asset] for payment of his debts and liabilities ....." It follows that as between the vendor and the purchasers (different considerations might arise as between the vendor and the Beneficiary) the only question could be whether there was something here which operated to displace the presumption in favour of the purchasers that the sale was made for the purposes of administration, and to put the purchasers on notice of a breach of trust on the part of the vendor : and there was not.

10. However, the question arises whether, in Hong Kong, all this is contradicted in some way by the provisions of section 54 of the Probate and Administration Ordinance, Cap. 10. This section is taken, to some extent, from section 2(2) of the Administration of Estates Act 1925; but sub-sections (4) and (5) of section 54 are, so far as I am aware, not so taken.

11. Section 54 provides as follows :-

"54. Power of personal representative to dispose of property

(1) No conveyance of immovable property of a deceased person dying after the commencement of this Ordinance shall be made without the concurrence of all the personal representatives of the deceased or an order of the court.

(2) Notwithstanding subsection (1), where probate is granted to one or some of two or more persons named as executors, whether or not power is reserved to the other or others to prove, any conveyance of the immovable property may be made by the proving executor or executors for the time being, without an order of the court, and shall be as effectual as if all the persons named as executors had concurred therein.

(3) Save where subsection (1) or (2) applies, where there are several personal representatives the powers of all may, in the absence of any direction to the contrary in the will or grant of administration, be exercised by any one of them.

(4) A personal representative may charge, mortgage or otherwise dispose of any property vested in him, as he may think proper, subject to any restriction which may be imposed in this behalf by the will of the deceased and to the provisions of this section:

Provided that an executor may dispose of any property notwithstanding any restriction so imposed, if he does so in accordance with an order of the court.

(5) The disposal of property by a personal representative in contravention of the provisions of this section shall be voidable at the instance of any other person interested in the property."

12. The answer to the question whether anything in section 54, particularly, of course, in sub-sections (4) and (5), operates to limit the rights of a personal representative to sell property comprised in the deceased's estate for the purposes of administration is clearly that it does not. Were it otherwise, it would make nonsense of section 61(1)(a). What subsections (4) and (5) do is to preserve the right of a beneficiary to object, as an excess of power, to any disposition by a personal representative otherwise than for the purposes of administration. They do not affect a purchaser who takes an assignment from an executor who is selling in the course of administration, or who is to be presumed to be doing so, unless the circumstances are such that the purchaser is put on notice that the sale is in breach of trust; for example, when there is evidence that the administration has been completed and that the sale is not being effected for the purposes of administration. The suggestion that the vendor must satisfy the purchaser by proof that the sale is required for the purpose of administration is misconceived. The purchaser is entitled so to assume, and is protected if he does, unless there is evidence to the contrary. In that case (but only in that case) a purchaser would be entitled to demand either proof of the consent of the beneficiaries or proof (e.g. if a beneficiary is under age) that the court has sanctioned the transaction.

The purchasers' requisitions

13. At last (I fear at long last), I come to the requisitions on title raised by the purchasers' solicitors and the answers given to them. These requisitions and answers can now be critically examined in the light of the relevant principles; without an appreciation of those principles, it is not possible sensibly to evaluate what happened here.

The first requisition

14. By a letter dated 3 November 1998, the purchasers' solicitors raised the following requisition :-

"4. From the copy Grant of Probate No. HCAG007414/98 provided by you to us, we note that your client Junichi Takashima does not have the right to assign the property to our client until the beneficiary Tsuyoshi Takashima attains the age of 18. Please provide evidence to show that the said beneficiary survives the registered owner Leung Po Wan and that the said beneficiary has by now attained the age of 18 or he will be 18 before the completion herein."

15. It can now be seen that this requisition was misconceived. The vendor, who sold "as personal representative", did have power to assign the property to the purchasers; or at least, in the absence of any evidence to the contrary, could and should have been assumed to have such power, in the absence of any reason to believe otherwise. The provisions of clause 5 were no concern of the purchasers, in the absence of any evidence (and they had no such evidence) that the administration was complete; that the residuary estate had therefore been ascertained; that the property formed part of that residuary estate; that the Beneficiary was over 18; and that the Beneficiary had not consented to the sale.

The answer to the first requisition

16. By a letter of the same date, the vendor's solicitors replied as follows :-

"Your interpretation of the Grant of Probate is incorrect. Our client is in the course of winding up the estate of the deceased; more specifically, our client is liquidating property of the estate for the purposes of paying the just debts of the estate. It was only after all debts, estate duty and testamentary expenses are paid, the residuary estate will be formed and be given to the beneficiary and the Will only says that our client may not sell any property forming part of the residuary estate before the beneficiary attaining 18 years. Our client is clearly under duty to pay debt as well as other expenses with due diligence now by way of sale of the subject property before anything forming part of the estate can be named 'residuary estate'. Your observation and request is therefore rejected."

17. In his argument for the vendor before us, Mr Benjamin Chain described this as "a sufficient answer". I entirely agree. The vendor's solicitors exhibited in this answer a full and accurate understanding of the true legal position, and their answer should have been accepted. Unfortunately, it was not.

The reply

18. The purchasers' solicitors replied as follows :-

"4. We cannot agree with your interpretation of the Grant of Probate in question. Sale of the captioned property is not the only way of raising funds to pay debt. Besides the stocks and realty, we understand that the estate consists of cash over 2 million Hong Kong dollars in value. On the other hand, we are not advised that the debt is due for payment. The outstanding mortgage loan can still be repaid by instalment from other source of income such as rental. We fail to see how your client can by-pass the testator's express testamentary instructions without seeking a separate court order to sanction it. Please note that any general gift of property which is not comprised in a specific bequest or devise will be a residuary gift (Re Wilson 1967)."

19. This reply was, literally, impertinent. It was no business of the purchasers to inquire into the state of the administration.

The rejoinder

20. The vendor's solicitors' rejoinder, in a letter dated 6 November 1998, was as follows :-

"As regard the Grant, no matter how you read it, our client is duty bound to sell the property under the Probate and Administration Ordinance. Our client does not require any third party opinion regarding how to exercise its discretion nor is our client accountable to you or your client as to how he administer the estate."

21. This is couched in language on which I would not attempt to improve; it should have finally given the quietus to the point taken by the purchasers' solicitors.

The riposte

22. However, the purchasers' solicitors, still not satisfied, on 17 November 1998, delivered the following riposte :-

"Further to our requisitions item no.4, please address us how your client can escape from the statutory provisions as made in Section 54(4) and 54(5) of the Probate and Administration Ordinance Cap. 10."

23. For the reasons I have already attempted to explain above, this again is misconceived. The statutory provisions mentioned do not operate to constrain a personal representative in the exercise of his or her powers as such for the purposes of the administration.

The subsequent correspondence

24. In a letter dated 4 December 1998, the vendor's (new) solicitors referred the purchasers' solicitors to section 64 of the Probate and Administration Ordinance, Cap. 10. This was a red herring, as the purchasers' solicitors properly pointed out in a reply dated 8 December 1998. The purchasers' solicitors' letter continued as follows :-

"We note that your client has somehow sold another realty of the estate namely Flat H on 8th Floor of Block 6 of Whampoa Garden Site 11. Furthermore, besides stocks and realty, we understand that the estate consists of cash of over 2 million Hong Kong dollars in value. It is not necessary to realise the captioned property in order to raise the required fund and there is no emergence to repay the outstanding mortgage now anyway."

25. This is another impertinent observation.

26. The vendor's solicitors tried again to put the point to rest.

27. In a letter of 8 December 1998 to the purchasers' solicitors, they wrote as follows :-

"As regard our client's power to dispose of the above property, we repeat what had been put to you by our forerunner that our client is in the course of consolidating and ascertaining the estate and residuary estate of the Late Leung Po Wan, in particularly crystallizing assets for the purpose of payment of debts, liabilities, funeral and testamentary or administration expenses. Pursuant to the decision in WO YU WAI v CHAN WEI TSUN MP3561 of 1992, our client does have the power to dispose of the subject property.

As regard whether other resources are sufficient or should be used to pay off debt, liabilities, funeral and testamentary or administration expenses, our forerunner had already informed you that the cash, together with remaining of sale proceeds of Whampoa Garden are not sufficient in paying off ALL debts and liabilities bearing in mind that the total sum of Estate Duty and mortgage loans had already exceed HK$6.5 million and the sale proceeds of Whampoa Garden was only HK$3.2 million. Looking at the reality and S.64 of the PAO, the executor is compelled to sell the subject property."

28. Apart from the misguided reference to section 64, this was exemplary. It should have been enough (it was in fact more than enough) to satisfy the purchasers' solicitors. But still they persisted, as shown by their letter dated 10 December 1998, which reads as follows :-

"We refer to your letter of 8-12-98. We are still unable to see how your client can by-pass the testator's express testamentary instructions without seeking a separate court order to sanction it. The facts in Wo Yu Wai's case are different from the present case and can be distinguished easily. There was no express restriction in that will to dispose any property whereas there is a clear restriction on alienation in the present case.

Once again, we would like to draw your attention to Section 54(4) of the Probate and Administration Ordinance (Cap.10). You will see that the personal representative's power is subject to any restriction which may be imposed by the will of the deceased. Our client's worry is valid as Section 54(5) of the Ordinance provides that the disposal of property by a personal representative in contravention of the provisions of the said Section 54 shall be voidable at the instance of any other person interested in the property.

We re-iterate our view that Section 64 of the Ordinance does not give any additional power to your client. It only defines the source of fund out of which a charged property in the estate is to be discharged.

We understand that your client has paid HK$3,598,985.60 as estate duty and interest, but there is over HK$2 million cash in the estate. As a result, you client may have provided around HK$1.6 million from his own pocket. There is no duty whatsoever for your client to provide such money voluntarily. He may as executor of the estate obtain a loan from a bank by further charging one or both of the two realties. In fact, the net sale proceed from the sale of 'Whampoa' property should be more than enough to recover the said HK$1.6 million. Dao Heng Bank, being the mortgagee of the two realties of the estate, has not recalled the mortgage loan and there are other ways to raise money for the monthly instalment of mortgage repayment. We fail to see why your client is compelled to sell the captioned property. Your client may have difficulties in administrating the estate but it does not mean that, because of such difficulties, your client may by-pass the provisions of Section 54(4) of the Ordinance. In fact, your client should seek a court order to sanction the sale as suggested in the second paragraph of the said Section 54(4)."

29. And by a second letter of that date, they wrote as follows :-

"3. Your answer to our requisition on the power of your client to dispose the captioned property is still not satisfactory."

30. To the first letter, the vendor's solicitors replied as follows :-

"It is crystal clear from the judgement in Wo Yu Wai's case that 'The beneficiaries under the will did not have any legal or equitable interest in the deceased's assets until the residue was ascertained ...'

We reiterate that our client is in the course of ascertaining the estate and residuary estate of the late Leung Po Wan, the express restriction (if any) which may prohibit sale of property would not come into effect until the residuary estate has been ascertained AND the beneficiary cannot object to any disposition of property before the residuary estate has been ascertained.

Accordingly, our client as the proving executor has the necessary power to sell the subject property.

As to whether there is need to sell the subject property to settle debt, estate duty, funeral and testamentary expenses, we believe it is a matter of fact and we trust the executor has demonstrated faithfully that he has duly administered the estate to the best interest of the beneficiary who is now living with him and there is real need to sell the subject property to settle debts, including mortgage loan, management fee, rates and government rents, loan for funeral expenses and maintenance expenses of the beneficiary ... etc. We therefore maintain that our client's intended sale is proper, which your client is bound to complete the purchase in accordance with the terms of the Agreement for Sale and Purchase between them.

Furthermore, there is no duty on the part of the executor to pay estate duty out of 'his own pocket' as you suggested and in the present property market, it would be unrealistic to further charge the realties as the banks may not accept such charge. Moreover, it is extraneous for you to suggest to further charge the realties if you doubt whether our client has the right to dispose of it as such further charge amount no less than disposition.

Please verify on your allegation that why you suggest that Dao Heng Bank has not attempted to recall the mortgage loan and what are other ways to raise mortgage instalment. In any event, the same are not of your concern and you have no right to suggest on the same."

31. But this did not satisfy the purchasers' solicitors, who, on the date fixed for completion, 14 December 1998, wrote as follows :-

"1(a) Please confirm that the beneficiary Tsuyoshi Takashima has survived the testator Leung Po Wan.

(b) Please advise the present age of Tsuyoshi Takashima.

(c) Please advise whether Tsuyoshi Takashima can be seen physically with identification document which shows his age on formal completion."

32. To this, the vendor's solicitors replied on the same day as follows :-

"Point 1 of the Letter has been raised by you in point 4 of your letter dated 3rd November 1998 and our answer thereon was sent to you in our letter also dated 3rd November 1998. No further requisition thereon has been raised in respect thereof. In any event, we do not see any relevance on the age and attendance of the beneficiary, Tsuyoshi Takashima, on formal completion in particular, such request is made at this late stage when completion is to take place tomorrow. No further requisition in respect of the same shall be entertained."

33. In a final exchange, the purchasers' solicitors wrote a second letter reading as follows :-

"Further to our letter to you of the even date, please explain and verify the necessity of your client to dispose the captioned property by actual figures with supporting documents by today."

34. The vendor's solicitors wrote, rejecting this, as follows :-

"We repeat the content of our previous letters to you dated 8th and 10th December 1998.

We are of the view that the only person that are entitled to demand explanation and actual figures as requested to substantiate our client's need to sell the subject property is the beneficiary. With due reliance on the Wo Yu Wai's case, the executor is not even obliged to report/explain to the beneficiary at this stage as to the actual figures. We do not see any possibility of objection to the intended sale and purchase. Accordingly your request is rejected."

And so the sale went off.

Conclusion

35. I conclude, following the analysis of the correspondence which I have made in the light of the relevant principles, that every request made by the purchasers' solicitors to the vendor's solicitors was properly and more than sufficiently answered. The crux of the problem here was, I believe, the notion entertained by the purchasers' solicitors and shared by the judge that the provisions of clause 5 of the deceased's will entitled or even obliged the purchasers' solicitors to inquire into the details of the vendor's administration of the estate. This was incorrect, as I have tried to demonstrate.

Result

36. I would allow this appeal; declare that the vendor had sufficiently answered the purchasers' requisitions on title; declare that the vendor is entitled to forfeit the purchasers' deposit, and order an inquiry as to the damages suffered by the vendor by reason of the purchasers' breach of contract in refusing to complete. As to costs, I would order (subject to the provisions of Order 42 rule 5B(6) of the Rules of the High Court) that the costs of the vendor here and below be taxed if not agreed and paid by the purchasers to the vendor.

Hon Rogers JA :

37. I agree.

38. I only wish to add this. There was a belated attempt on the part of the purchasers' solicitors to make some use of information which they had learnt whilst speaking on the telephone to the vendor's solicitors on the 14 December. They had been told that the vendor had purchased some other property and was looking forward to receiving the balance of the purchase price of the sale of the property to the purchasers of the present property. The evidence of this conversation is contained in the Second Affirmation of Wing Tung Anthony Tang. What was sought to be said was that this was reason for the purchasers to believe that the vendor, as executor, had indeed paid all the debts and that the administration of the estate of Leung Po Wan was complete. That, in my view, cannot be correct. The fact that the vendor had contracted to buy another property, for an unknown sum, was no indication that the estate of the deceased had been administered, nor that the cash available to the executor was sufficient to discharge all liabilities without recourse to part of the proceeds of sale of the present property. When properly considered, the information conveyed in the telephone conversation could not have been in any way sufficient to dispel the clear statement in the letter of 8 December that the executor had to have recourse to the property to administer the estate. There was, therefore, nothing in my view to put the purchaser on notice that that statement was not correct.

Hon Keith JA :

39. For the reasons given by Godfrey VP, I agree that this appeal should be allowed with the orders which Godfrey VP proposes.