ANTHONY ERIC RYAN HOTUNG AND ANOTHER v. HO YUEN KI

CACV 315/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 315 OF 2002

(ON APPEAL FROM HCMP NO. 2031 OF 2002)

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J U D G M E N T

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Hon. Cheung JA: (giving the judgment of the court)

The Trusts

1. By two declarations of trust (the "declaration") Madam Ho Yuen Ki (the defendant) agreed that certain shares in two companies registered in her name were held upon trust for three beneficiaries, namely, Michael Eric Hotung ("Michael"), Sean Eric Mclean Hotung ("Sean") and Anthony Eric Ryan Hotung ("Anthony").

2. The first declaration was made on 29 November 1979 in respect of 10,002 shares in a company called Hotung Enterprises Limited. Each of the beneficiaries are entitled to 3,334 shares. The second declaration was made in 1980 (the document did not specify the exact date). It was in respect of three shares in a company called Hotung Investment (China) Limited. Each of the beneficiaries has one share.

The request

3. Two of the beneficiaries namely, Anthony and Sean (the plaintiffs) requested the defendant to execute four powers of attorney to appoint them as her attorney in respect of their respective shares in the two companies. The appointment is stated to be

“ with full power of substitution to be my true and lawful attorney ("the Attorney") to exercise, when the Attorney may deem fit, all of my powers as the registered holder of ("the Shares") ....... and in particular but without prejudice to the generality of the foregoing to execute all deeds, sign all documents and do all such acts and things which I in my capacity as the registered holder of the Shares would be capable of doing myself.

I hereby undertake to ratify and confirm all that the Attorney shall lawfully do or cause to be done under this Power of Attorney.

This Power of Attorney is given by way of security to secure a proprietary interest of the Attorney and I declare that this Deed is irrevocable. This Power of Attorney shall be governed by and construed in accordance with the laws of Hong Kong."

4. The defendant refused to execute the powers of attorney. The plaintiffs commenced the present proceedings, seeking an order compelling the defendant to execute the documents. Chung J. refused the application. The plaintiffs now appeal.

The plaintiffs' case

5. The plaintiffs' case is that the defendant is a bare trustee or a nominee of the shares. She has no active duty or discretion to perform in respect of the shares. They are entitled to call for a transfer of the legal title of the shares and terminate the trust. However, they are not obliged to do so. They are entitled to keep the trust in place. Since they are entitled to give lawful orders or instructions to the defendant, for example, to vote in a particular way at meetings and the defendant is duty bound to obey such instructions, the execution of the powers of attorney in their favour would give them full beneficial enjoyment of the shares. This will also eliminate the risk that the defendant trustee may fail or refuse to carry out their instructions. Since the defendant had assumed the trusteeship voluntarily, acting an accordance with their lawful orders, including execution of the powers of attorney, is simply part of the obligations she undertook.

The novel point

6. No authority is cited by the plaintiffs that a beneficiary may demand a trustee, be he a bare trustee, to execute a power of attorney in his favour. The absence of a precedent is, of course, not a reason for the court to decline to make an order if the application is justified. But in the well established area of trust, the absence of such an authority is clearly an indication of the problem involved. We can only echo what Vaisey J. said 54 years ago in In Re Brockbank, Ward v. Bates [1948] 1 Ch. 206 that "This case involves a question which is said to be novel. It is possible, I think, that the novelty is that the courage required for the raising of it has hitherto been lacking".

First Principles

7. This is a case that will have to be decided on first principles. It is important at the outset to identify the relevant principles.

Trust

8. A trust is the relationship which arises wherever a person (called the trustee) is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons (of whom he may be one and who are termed beneficiaries) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustees, but to the beneficiaries or other objects of the trust : Snell's Equity 30th Ed., paragraph 6-01.

Power of Attorney

9. A trust is a relationship imposed by law. The trustee remains to be the one who performs the task of the trust. On the other hand after the execution of a power of attorney, which is "a formal instrument by which one person empowers another to represent him, or act in his stead for certain purposes" : Bowstead & Reynolds on Agency (7th Ed. paragraph 2-039 ), the beneficiary will perform the tasks which are vested in the trustee. There is a complete reversal of roles of these two parties.

Delegation

10. Related to this is the question of delegation of the powers of the trustee. It is clearly established that, subject to the provisions in the trust or statutory exceptions, a trustee cannot delegate his office, the rationale being the office of the trustee is one of personal confidence, and so, in general, cannot be delegated : Snell paragraph 12-14.

11. Under s. 25(1) of the Trustee Ordinance "trustees or personal representatives may, instead of acting personally, employ and pay an agent, whether a solicitor, banker, stockbroker, or other person, to transact any business or do any act required to be transacted or done in the execution of the trust, or the administration of the testator's or intestate's estate, including the receipt and payment of money, and shall be entitled to be allowed and paid all charges and expenses so incurred, and shall not be responsible for the default of any such agent if employed in good faith." This section has been construed as not conferring any power to delegate the duties of a trustee generally, e.g. by a power of attorney : see the judgment of Eve J. in Green v. Whitehead [1930] 1 Ch. 38 at page 45. The judgment was affirmed on different grounds by the Court of Appeal.

12. Section 27(1) which allows a temporary delegation of trust for a period of 12 months obviously has no application to the present case.

Bare trust

13. We will now examine the nature of a bare or simple trust. It is one in which property is vested in one person on trust for another, the nature of the trust not being prescribed by the settlor but being left to the construction of the law, as where property is transferred to T "on trust for B absolutely." In such a case, T must permit B to enjoy the property, and must obey his instructions as to disposing of it. A special trust, on the other hand, is one where the trust itself imposes duties on the trustees, e.g. a trust for sale; the great majority of trusts are thus "special". Such trusts may be either ministerial or discretionary, the former merely requiring the application of ordinary intelligence and business aptitude by the trustee, the latter calling for a greater element of judgment and discretion, as where it lies with the trustee to determine how much of the income of the trust property should be paid to each beneficiary : Snell paragraph 6-30.

14. A bare or simple trustee, especially of shares in a limited company, is often called a nominee. He is a mere name or dummy for the true owner : Lewin on Trusts 17th Ed., paragraph 1-21.

15. In case of bare trustee, the beneficiary may call for a conveyance of the legal estate at any time, and the trustee must comply. In the meantime the trustee has no duties to perform and must deal with the trust property in accordance with the instructions of the beneficiary : Hanbury & Martin on Modern Equity 16th Ed. page 71.

16. A simple trust is a trust in which the trustee is a mere repository of the trust property, with no active management duties to perform. Such a trustee is called a bare trustee. The trustee of a simple trust is regarded as a bare trustee or agent or nominee. Where a trustee holds property for a beneficiary or beneficiaries absolutely entitled to call for the property to be transferred to them or at their direction under the rule in Saunders v Vautier, but until such call has powers and discretions to exercise, then he will be an active trustee and not an agent or nominee or bare trustee. However, usage of the term 'bare trustee' may extend in context to trusts where beneficiaries are absolutely entitled under the rule in Saunders v Vautier, so the property is held to their order : Underhill and Hayton : Law Relating to Trusts and Trustees 15th Ed., pages 44 and 45.

17. In Halsbury's Laws of England 4th Ed. 2000 Reissue Vol. 48, para. 650, a bare trustee is described as "a person who holds property in trust for the absolute benefit and at the absolute disposal of other persons who are of full age and sui juris in respect of it, and who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey or transfer it to persons entitled to hold it, and he is bound to convey or transfer the property accordingly when required to do so."

18. In Ford and Lee : Principles of the Law of Trusts 3rd Ed., para. 9620 the authors commented that there is ambiguity and disagreement about the ambit of the term of bare trustee. In Corumo Holdings Pty. Ltd. v. C Itoh Ltd. (1991) 24 NSWLR 370 Meagher J.A., referring to a bare trust observed at 398 that "as a matter of strict logic, almost no situation can be postulated where a trustee cannot in some circumstances have active duties to perform" describing a bare trustee at 399, as "no more than a nominee or cypher, in a commonsense commercial view", a description approved in Australian Securities Commission v. Bank Leumi Ler-Israel (1955) 18 ACSR 639 at 685.

Are the trusts bare trusts?

19. The next question is whether the trusts here are bare trusts or not. Mr. Yin, Counsel for the defendant, pointed out that the trusts were created at a time when the beneficiaries were minors and the settlor obviously intended the trustee to perform duties in respect of shares. A trustee who holds land or other assets in trust for a minor absolutely is not a bare trustee : Lewin paragraph 1-21.

20. This historical fact was not disputed by Mr. Shieh. However, he stated that the beneficiaries are all of full age and legal capacity. A bare trustee may originally have had duties in respect of the property which had since ceased and on the requisition of the beneficiaries, he is compellable to convey the estate to them or by their direction : Christie v. Ovington (1875) 1 Ch. D. 279.

Scope of the direction

21. Let us assume for the moment that the trusts in question are bare trusts, the authorities that had been cited so far only indicated that what the beneficiaries in such a trust can do is only to request the trustee to convey or transfer the property to them or at their direction under the rule of Saunders v. Vautier. There is no indication that they can direct the trustee to do anything else. The reference in Hanbury & Martin to the "instructions of the beneficiary" means the instruction to convey the property. This is apparent from a reading of the case of Re Cunningham and Fray [1891] 2 Ch. 567 cited in support of the statement.

In re Brockbank

22. On the contrary, the cases cited by Mr. Yin indicated that the beneficiaries cannot dictate the trustee what to do. In Brockbank, there were two trustees, one wishing to retire. The beneficiaries wished to appoint a bank trustee. The remaining trustee was unwilling to do so. The beneficiaries applied for an order that the remaining trustee might be directed to concur with the retiring trustee to make appointment. Vaisey J. dismissed the application and held that the beneficiaries cannot "arrogate to themselves a power which the court disclaims possessing and to change trustees whenever they think fit at their whim or fancy ....". He said :

“ Either they must keep the trusts of the will on foot, in which case those trusts must continue to be executed by trustees duly appointed pursuant either to the original instrument or to the powers of s. 36 of the Trustee Act, 1925, and not by trustees arbitrarily selected by themselves; or they must, by mutual agreement, extinguish and put an end to the trusts, with the consequences which I have just indicated."

23. In Napier v. Light (1975) 119 S.J. 166, the facts are somewhat complicated, but the issue there was whether the beneficiary of a trust could grant a tenancy of the trust property to a tenant which bound the trustees. The court held that there was no general common law power in a trustee for sale to delegate the powers of management, including the powers of letting, which were conferred upon him either by a statute or by a trust instrument. Further the trustee had not granted any delegation pursuant to the relevant statute.

24. In re George Whichelow Ld, Bradshaw v. Orpen [1954] 1 WLR 5, a mother left shares in a company to her three daughters respectively for life with remainder to their children who should attain 21. The three daughters and their children directed the trustees to appoint the eldest of the daughters as their proxy, or to vote in a certain way on the resolutions at the meeting of the company. The trustees declined stating that they would use their votes in accordance with their discretion. The beneficiaries applied to court to direct the trustees to comply with their directions. The court refused the application. While holding that not all the beneficiaries were before the court, Upjohn J. also referred to the Brockbank line of cases, in particular the judgment of Jessel MR in Tempest v. Lord Camoys (1882) 21 Ch. D. 571 where he held that :

“ It is settled law that when a testator has given a pure discretion to trustees as to the exercise of a power, the court does not enforce the exercise of the power against the wish of the trustees, but it does prevent them from exercising it improperly."

Upjohn J. did not follow the earlier decision of Butt v. Kelson [1952] Ch. 197. In that case, the trustee held shares in a company on certain trust according to the testator's will. The plaintiff was entitled to a life interest in a substantial portion of the testator's residuary estate. Romer L.J. held that :

“ the beneficiaries are entitled to be treated as though they were the registered shareholders in respect of trust shares, with the advantages and disadvantages (for example, restrictions imposed by the articles) which are involved in that position, and that they can compel the trustee directors if necessary to use their votes as the beneficiaries, or as the court, if the beneficiaries themselves are not in agreement, think proper, even to the extent of altering the articles of association if the trust shares carry votes sufficient for that purpose."

25. In Ingram v. I.R.C. [1997] 4 All ER 395 at 424, Millett L.J. (as he then was) repeated the principle in Brockbank. He held that :

“ It is important not to understate Mr. Macfadyen's [the trustee] position. He was not independent of Lady Ingram [the beneficiary], but neither was he a mere cipher. His duty was 'to deal with the land as Lady Ingram might direct'. He was bound to convey the land to her or to whom she might direct. But he was not bound to comply with other directions which she might give (see Re Brockbank (decd), Ward v Bates [1948] 1 All ER 287, [1948] Ch 206 and Re Whichelow (decd), Bradshaw v Orpen [1953] 2 All ER 1558 at 1560-1561, [1954] 1 WLR 5 at 8). He could not have been compelled to grant the lease, though if he had refused to do so Lady Ingram could simply have found someone willing to do her bidding and require Mr Macfadyen to convey the land to him. It is not, in my opinion, correct to identify Mr Macfadyen's mind with Lady Ingram's for the purposes of the two-party rule. "

Only applicable with special trust?

26. Mr. Shieh, submitted that the Brockbank line of cases are all dealing with special trusts in which the trustees had duties to perform under the trusts. He also expressly stated he would not rely on Butt which is also a case concerning special trust. As to the judgment of Millett L.J., he submitted that while the principles stated are correct, the judge expressed his view by way of observation only as the issue in that case was not concerned with the application of the Brockbank principle to a bare trust but rather on the question of the two-party rule. Although the dissenting decision of Millett L.J. was upheld by the House of Lords, it does not mean that particular part of the judgment of Millett L.J. was accepted.

27. He referred to Kirby v. Wilkins [1929] 2 Ch. 444 where Romer J. held that where a shareholder holds shares as a bare trustee for a third person, he is obliged to exercise his voting power in the way that the beneficiaries desires. Romer J. also held that until the beneficiaries intervened, the trustee must exercise the voting power according to this discretion in the best interests of his beneficiaries.

28. Kirby was followed in In re Castiglione's Will Trusts [1958] 1 Ch. 549 and Zwicker v. Stanbury [1954] 1 D.L.R. 257 (Supreme Court of Canada). In American International Bank et al v. Oriental Mills et al 23A. 795, 17R1 551, shares were bought and paid for although the transfer was incomplete. Matteson C.J. of Rhode Island held that the holders of the legal title of the shares were naked trustees. They held the legal title to the shares without any interest in it and they must vote as their beneficiaries direct.

29. In Inland Revenue Commissioners v. Silverts Ltd. [1951] 1 Ch. 521 the question was whether the directors of the company were holding controlling interest when the shares they held included shares held on trust for others. Evershed MR at page 530 held that :

“ We confess that we feel strongly, as did Romer, J. (i.e. the judge below), the weight of the argument based on common sense; and where the registered shareholder is a bare trustee in the sense of being a mere name or "dummy" for the true owner, we should feel strongly inclined to answer the question reserved by the House in the Bibby case in the same way as Lord Greene, M.R."

In the Bibby case 29 Tax Cas. 167, Lord Greene MR of the Court of Appeal was of the view that if the trustees had been bare trustees, the "controlling interest" would be in the beneficial owner. The House of Lords, however, reserved this question. This case does not deal with the issue of a trustee complying with the instruction of the beneficiaries.

30. There are some academic works which supported the view that in case of a bare trust of shares the trustee can be dictated by the beneficiary on the manner of voting : see Finn on Fiduciary Obligations (1977, paragraphs 46-47)(Australia) (The author actually described Butt as an anomalous case); Scott on the Law of Trusts (3rd Ed. 1967, page 1597) (United States of America); Dal Pont and Chalmers : Equity and Trusts in Australia and New Zealand (2nd Ed.), page 601 citing Kirby. In another publication, Ford and Lee : Principles of the Law of Trusts (paragraph 1220) the authors suggested that the distinction is between management of trust property (share-beneficiaries can direct voting) and other functions of a trustee (for example, appointment of new trustees, a matter outside the power of beneficiaries).

Only instance of direction

31. Drawing all these threads together, it seems that the only situation where the trustee could be dictated to by the beneficiary, other than conveying the trust property under the rule in Saunders v. Vautier, is in respect of the manner of voting as stated in the Kirby line of cases. This is supported by some academic views that the rationale is based on the fact the trust in question it is in the nature of a bare trust.

Principle extends to bare trust

32. Although Millett L.J. might not have the issue of bare and special trustees in mind when he referred to Brockbank, we are not convinced that the Brockbank line of authorities is applicable only to special trust and not to bare trust. While there is a distinction between bare and special trust, it is too much of a generalization to say the restriction on interferring with the trustee's powers does not apply to a bare trust. Take the present case as an example, while the shares are held for the beneficiaries absolutely, the trustee obviously still has duties to perform as a registered owner of the shares in order to safeguard the interest of beneficiaries. For example, she can attend shareholders' meeting, she can requisition company meetings, she has to ensure the operation of the company is properly run and she can receive and direct payment of dividends of the shares. See also the discussion of the role of bare trustee in Dal Pont at page 601. This includes the requirement that he cannot divest himself of his legal duty to preserve the trust property so long as his trusteeship subsists.

33. What Walton L.J. said in Stephenson v. Barclays Bank Trust Co. Ltd. [1975] 1 WLR 882 best illustrates the point : The beneficiaries of a trust who hold the entirety of the beneficial interests and of who are of full age and legal capacity can direct the trustee how to deal with the trust funds. This does not mean they can at the same time override the pre-existing trusts and keep them in existence. By so doing they would be pursuing inconsistent rights.

34. The authors of the textbooks did not really discuss in detail the application of Brockbank principle to bare trust.

35. All that the plaintiffs can show on the authorities is the rather narrow situation of a beneficiary being allowed to dictate a trustee how to vote. It is clear from Kirby that the main issue was on the purchase by a company of its shares. What Romer J. said about a bare trustee being obliged to exercise his voting power as directed by the beneficiary was an observation made in deciding the main issue. In any event, the extent of the direction by the beneficiary envisaged by the learned judge was rather limited. Until the direction is given, the trustee must exercise the voting power according to his discretion. This envisages the trustee continuing to exercise his power. This is a long way away from saying that a beneficiary is also entitled to call for a power of attorney from the trustee.

36. Mr. Yin argued that the voting cases can be explained on the basis that the trustee there was simply an agent of the beneficiaries and hence he must observe the instruction of the principal. He submitted that the term "bare trustee" may include both a wider sense such as under the Saunders v. Vautier situation and the narrower sense such as "a trustee cum agent".

37. It is not necessary to go into too fine an analysis on the true basis in which the trustee can be directed by the beneficiary in the method of voting. In our view, the voting cases must be considered in a class of its own and does not support the wider proposition now advanced by Mr. Shieh.

38. Trusts are a well established concept. It is not necessary, for historical interest, to dwell on the rationale or the advantages of establishing a trust. On first principles, if a party wishes his legal relationship with another to be governed by a trust, then he should observe that relationship and not insist that he is still entitled to perform the role of a trustee himself. If he wishes to do so, then the proper way is to terminate the trust and do whatever he likes with the property. What he can not do is to say to the trustee that since you have to obey my instructions on voting you may as well let me do the job for you. To us this is the answer to the plaintiffs' claim. The beneficiaries having agreed to be bound by a trust, the trustee must be allowed to carry out her task. What the beneficiaries want here is to have all the rights of the legal and beneficial ownership of the shares, without assuming the burden of the ownership. We are not satisfied that they are entitled to do so.

39. Further, in respect of the principle against delegation of trust, it draws no distinction between a bare or special trust. The statutory exceptions are not applicable. We are not convinced by the argument that the trustee here is not being asked to delegate anything. She is being asked to delegate her office as a trustee. The court should not force an agency on an unwilling party. Why should an unwilling party be ordered to grant a power of attorney even if the agent is prepared to and will provide an indemnity. By granting the power of attorney, the trustee is exposed to claims by third parties.

Other matters

40. Mr. Yin had also referred to the problem of the undivided shares under the two declarations of trust. It is not necessary to deal with this matter in the light of our decision.

Conclusion

41. We shall dismiss the appeal and order the plaintiffs to pay the defendant the costs of the appeal on a common fund basis.