LI KIN YAN AND ANOTHER v. LI LIM CHI DOROTHY, the sole administratrix of the Estate of Li Wan Lung, deceased

HCMP 3425/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3425 OF 2015

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JUDGMENT

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1.  This is an application for: (i) an order pursuant to s 56 of the Probate and Administration Ordinance (Cap 10) that the Respondent, as the administrator of the estate (“the Estate”) of the deceased Li Wan Lung (“the Deceased”), to exhibit on oath a just and true account of her administration of the Estate (“the Account Application”); and (ii) an order for interim distribution of the Estate to its beneficiaries, namely the Applicants and the Respondent (“the Interim Distribution Application”).

BACKGROUND

2.  The Deceased died intestate on 27 January 2009 and was survived by his 3 children, the Applicants and the Respondent, they being the only beneficiaries of the Estate each entitled to 1/3 share.

3.  The principal assets of the Estate were the Deceased’s business of manufacturing and selling plastic products and the premises from which it operated.  There were some minor assets.

4.  In 1986, the Deceased incorporated Lai Fung Plastic Factory Company Limited (“Lai Fung”) as a limited company in Hong Kong to act as a vehicle for the business.

5.  Lai Fung’s business premises were situated at Units A and B in an industry building in Hong Kong (“Units A and B”).

6.  In 1987, the Deceased established “Dongguan Qingxi Lin Fung Products Factory”, later renamed as “Dongguan Qingxi Lin Fung Plastics Hardware and Electronics Factory”, as a processing and assembling factory in Dongguan in the Mainland (“the Mainland Factory”).  He did so by means of a sole proprietorship registered in Hong Kong called “Lin Fung Industrial Co” (“Old Lin Fung”) which he described as an “I/E & Commission Agent”.  Old Lin Fung held 2 contracts for the use of the premises on which the Mainland Factory stood, the land of which is owned by the Dongguan Government.

7.  The modus operandi of the business of Lai Fung was that Lai Fung would purchase and supply to the Mainland Factory the necessary raw materials for production, and finished products would then be delivered from the Mainland Factory back to Lai Fung for distribution to customers.  It is the Applicants’ case that Old Lin Fung was purely a “conduit” through which Lai Fung supplied raw materials to the Mainland Factory and it operated as a “cost centre” for the Mainland Factory.

8.  Prior to 2000, the Applicants and the Respondent all lived and were educated in Canada.  The 2^nd Applicant came back to Hong Kong in 1999 and the 1^st Applicant in 2003.  They both went to work in Lai Fung with the Deceased.  The Respondent is a qualified accountant.  She also came back in 2000 but she did not work in the business (save for a day or so).

9.  The 1^st Applicant, being the eldest son, became a director of Lai Fung in 1999.  Upon the Deceased’s death in 2009, the Deceased held 85% of Lai Fung’s shares and the 1^st Applicant held the remaining 15%.

10.  The Applicants continued the business of Lai Fung after the Deceased’s death.  The 2^nd Applicant was appointed a director of Lai Fung on 27 January 2009 immediately after the Deceased’s death.

11.  In March 2009, in order to continue Old Lin Fung’s role with the Mainland Factory and upon the advice of his accountant, the 1^st Applicant established another sole proprietorship in Hong Kong called Lin Fung Industrial Company (“New Lin Fung”) to continue the production operation in the Mainland Factory.

12.  As the eldest son of the Deceased, it was agreed that the 1^st Applicant would become the administrator of the Estate. Letters of Administration were granted to the 1^st Applicant on 3 July 2009.

13.  Unfortunately, from about late 2009, differences began to emerge between the Applicants on the one hand and the Respondent on the other.  Over the period that followed, there was a complete breakdown of the relationship.

14.  In December 2013, the Respondent applied to remove the 1^st Applicant as the administrator of the Estate.  The 1^st Applicant did not contest the application and the Respondent was substituted as the administratrix of the Estate on 19 May 2014.

15.  In or about January 2015, the Respondent sold Units A and B.

16.  In June 2015, the Applicants resigned as directors of Lai Fung.

17.  After that, there were a series of litigations between the parties:

(i)     in July 2015, the Respondent, as the administratrix of the Estate, issued an originating summons against New Lin Fung and the 1^st Applicant in HCMP1695/2015, seeking order for, inter alia, the Respondent to be registered as the sole proprietor of New Lin Fung so as to enable her to collect and assert rights to the assets of the Deceased in the name of New Lin Fung;

(ii)    in October 2015, the Respondent, as the administratrix of the Estate,  issued a writ in HCA 2531/2015 (“the Main Action”) against the 1^st Applicant for breach of fiduciary duties during the course of his administration of the Estate and against the 2^nd Applicant for dishonest assistance and knowing receipt, and the commencement of such proceedings was sanctioned by a Beddoe order; and

(iii)   the 1^st Applicant made a petition in HCCW 397/2015 to wind-up Lai Fung on the grounds of, inter alia, insolvency and cessation of business for more than 1 year, which was opposed by the Respondent on behalf of Lai Fung.

18.  These 3 actions still continued at the time of this hearing on 4 August 2016.  There were other concluded actions between the parties including HCMP 3268/2013, HCMP 1004/2015 and HCMP 1695/2015.

19.  The present originating summons was issued by the Applicants on 28 December 2015 which include both the Account Application and the Interim Distribution Application.  I first deal with the Account Application which is a less contentious one.

THE ACCOUNT APPLICATION

20.  In the Account Application, the Applicants seek for an order that the Respondent do exhibit on oath a just and true account of her administration of the Estate.  It is the Respondent’s case that she has already provided full and sufficient account in the document exhibited as “LLC-16” of her affirmation made on 15 April 2016 (“the Account”).

21.  The Applicants complain that the Account provided by the Respondent is deficient for the following reasons:

(i)     the Respondent has not provided any supporting documents to verify the amount of the sale proceeds of Units A and B and the payments of various professional and legal fees;

(ii)    the Respondent has not provided the account of the Estate after 31 January 2016, in particular there seemed to be a depletion of about HK$6.66 million from the account of the Estate after the sale of Units A and B;

(iii)   the Respondent has not provided an account of any of the items in the Schedule of Assets and Liabilities of the Deceased annexed to the Letters of Administration for the Estate as amended; and

(iv)   no explanation has been given as to what is meant by “Due from Lai Fung” where an “Expenditure” of $3,363,251.59 is recorded in the Account.

22.  In respect of item (iv), the Respondent provided an explanation in her 2^nd Affirmation which is accepted by the Applicants.  For items (i) and (iii), the Respondent agrees to provide the supporting documents.  For item (ii), the Respondent agrees to provide the account after 31 January 2016.

23.  As the Respondent has to provide further documentation to support the Account, the parties agree for the court to make an order in terms of paragraph 1 of the originating summons.  I make the order accordingly.  The parties reserve their position on the issue of costs.

THE INTERIM DISTRIBUTION APPLICATION

24.  I then turn to the Interim Distribution Application.  There is no serious dispute between the parties that, after the sale of Units A and B, the Estate has available fund in the region of HK$40 million.  The Applicants ask for interim distribution at least in the sum of HK$8 million to each of the beneficiaries as offered by the Respondent through her solicitors in the letter dated 15 March 2016.

25.  The Respondent does not consider it appropriate to make interim distribution at this stage on the ground that the Estate has serious claims against the Applicants both under the Main Action and an intended claim involving US$12 million (“the Intended Claim”).  If the Estate succeeds in these claims, the Applicants would be liable to make substantial contributions to the fund of the Estate.  Under equity principle, the Applicants should not obtain interim distribution before making such contribution to the Estate.  In any event, the Respondent, as the administratrix of the Estate, has a duty to ensure that there would be sufficient fund in the Estate to make distribution to every beneficiary for their just shares of the Estate.

(i)  Nature of the claims against the Applicants

26.  The claim under the Main Action relates to certain questionable acts of the Applicants during their control of Lai Fung. After studying the financial statements, the Respondent found out that the administrative expenses of Lai Fung increased exponentially during the time of the joint directorship of the Applicants:

(i)     between 1 April 2009 and 31 March 2013, the Applicants obtained a total of HK$4,239,750 from Lai Fung as directors’ remuneration, which was a substantial increase as compared with the total amount of directors’ remuneration of HK$788,000 paid out in the preceding 3 years’ period; and

(ii)    during the same period, Lai Fung recorded a total of HK$4,918,970.15 as overseas travelling expenses and business entertainment expenses, which was a substantial increase as compared with the total amount of HK$436,665.47 for these expenses in the preceding 3 years’ period.

27.  The Respondent took out an application as the administrator of the Estate for a Beddoe order for leave to institute the claim in the Main Action.  The application was granted by DHCJ Seagroatt on 20 May 2015.

28.  According to the Respondent, the quantum of the claim under the Main Action amounts to about HK$11.1 million and the estimated costs of the Main Action would be in the region of HK$5 million.

29.  I then turn to the Intended Claim.  After the Respondent became the administratrix of the Estate and had the opportunity to study the financial account of Lai Fung, she, in around March 2016, found out that, during the time when the Applicants were directors of Lai Fung, over US$12 million were paid out from the bank accounts of Lai Fung to various third parties which did not previously have business dealings with Lai Fung during the Deceased’s lifetime.  Details of such payments include, inter alia, the following:

(i)     total sums of US$8,235,374.67 and HK$216,333.00 were transferred to a company known as Great Smart International Holdings Limited (“Great Smart”) between 25 February 2010 and 13 December 2013;

(ii)    total sums of US$1,139,982.85 and HK$1,561,039.69 were transferred to a company known as Everman Development Limited between 5 May 2010 and 10 January 2013;

(iii)   a total sum of US$1,413,496.06 was transferred to a company known as Trouver Limited (“Trouver”) between 3 January 2011 and 18 February 2014; and

(iv)   a total sum of HK$3,331,000 was transferred to New Lin Fung between 17 May 2010 and 26 July 2013.

30.  All these payments were made by way of cheques signed by the 1^st Applicant.

31.  According to the Respondent, these payments were dubious because:

(i)     Great Smart shared the same address (at different stages) with Lai Fung and a company known as Sino Pearl International Limited (“Sino Pearl”) in which the Applicants held shares;

(ii)    Great Smart held 3 patents whereby the 1^st Applicant was stated as the inventor;

(iii)   Trouver shared the same address as Sino Pearl, and one of the directors of Trouver (the other director being a corporation), Madam Lee Shook Wah, is the mother-in-law of the 2^nd Applicant;

(iv)   the payment to New Lin Fung in the sum of HK$3,331,000 did not show up in its financial statements;

(v)    many of these companies which received funds from Lai Fung were held by corporate or nominee shareholders meaning that the beneficial owners of the shares are not known; and

(vi)   a number of the recipient companies were incorporated shortly before they received funds from Lai Fung and were deregistered shortly after they ceased to receive funds from Lai Fung.

32.  On 1 March 2016, the Respondent’s solicitors sent a letter to the Applicants’ solicitors demanding for, inter alia: (i) explanations and supporting documents for these payments; and (ii) clarification as to the relationship between the Applicants and these recipients. In the 2 reply letters dated 10 and 16 March 2016, the Applicants maintained that: (i) these payments were made pursuant to legitimate arms-length business transactions between the parties; and (ii) they did not have any recollection about the details of these transactions.  It is fair to say that the Applicants had completely evaded the question as to whether they had any relationship with these recipient companies.

33.  The Respondent then sought advice from senior counsel and the Estate intends to commence legal proceedings against the Applicants in respect of the Intended Claim.

(ii)  Relevant legal principles

34.  The issue is then whether the administratrix of the Estate should proceed to make interim distribution under such circumstances.

35.  The parties take issue as to the proper approach that should be adopted by the court in considering such kind of application.

36.  Mr Kat SC, counsel for the Applicants, submits that the Respondent, as the administratrix, is not entitled to withhold distribution on account of her unsupported and unverified estimate of costs and damages which the Estate may be awarded in outstanding legal proceedings against the Applicants.  Unless the claim for such damages and costs is supported by an independent or at least professional evidence, the Respondent is not entitled to withhold distribution.

37.  According to Mr Kat, an administrator must exercise his or her discretion to make interim payments where the estate can afford to do so, the beneficiaries are entitled and there is no realistic prospect of their entitlement being cut down.  He or she may not simply refrain, or wait for the beneficiary to apply to the court.  The administrator must decide and, if in doubt as to the propriety or prudence of that decision, apply to the court for approval.[1]

38.  Mr Kat also relies on the following dicta expressed by judges in some Australian and Canadian cases.  In Gonzales v Charidades[2], Campell J, sitting in the Supreme Court of New South Wales, held:[3]

“47. Sometimes, it can be the duty of a legal personal representative to make an appropriation of estate assets so that he or she can ... ... make an interim distribution of pecuniary legacies or interests in residue, even though the duties of administration are not complete. If the legal personal representative is in a situation of knowing that there are some distributions of the estate which could be made in accordance with the will or the rules of intestacy which govern the distributions of that estate, that there was no realistic prospect that that distribution could be cut down or affected by those aspects of administration of the estate which remained underperformed, and that the remaining tasks of administration were not likely to be completed soon, then it may be the duty of the legal personal representatives to make an interim distribution to that extent.

... ... ...

50.  A further example can arise if there were expenses of administration which would need to be paid in the future from the estate.  If those expenses were of uncertain amount (as could be the case if the legal personal representatives were engaged in litigation on behalf of the estate) the legal personal representative would be entitled to adopt a very cautious (though not unrealistically cautious) view about the possible extent of those expenses might be, in deciding whether, or to what extent, a gift might be cut down.  If, however, after taking such a cautious view of what the expenses of the estate might be, it was clear that the assets of the estate were more than enough to meet them, and if there were no other problems of administration outstanding, it could be the obligation of a legal personal representative to make an interim distribution of those assets in the estate which are not at risk of being used up in the future administration of the estate, at least in circumstances when it was clear who the correct recipient of those assets was.”

39.  In Parson v McGovern[4], R Smith J, sitting in the Ontario Supreme Court of Justice, held that, when deciding whether to order estate trustees to make interim distribution to the beneficiaries, the court should consider numerous factors including: (i) Are the estate trustees deadlocked? (ii) Have the estate trustees acted with mala fides? (iii) Have the estate trustees failed to exercise their discretion to make an interim distribution? (iv) Have the estate trustees behaved unreasonably or breached their fiduciary duty and duty of good faith and fairness to the beneficiaries? and (v) Would a beneficiary suffer undue prejudice if an interim distribution was not made?[5]

40.  Mr Kat has emphasised the test of “no realistic prospect of [the beneficiaries’] entitlement being cut down”.  According to him, the Main Action and the Intended Claim have no realistic prospect of success, and so there is no realistic prospect that the entitlement of the Applicants would be cut down to less than HK$8 million for each of them.  In such circumstances, even a cautious administrator (though not unrealistically cautious) should have exercised the discretion to make interim distribution of at least HK$8 million to each of the beneficiaries.

41.  On the other hand, Mr Tang, counsel for the Respondent, relies on a number of authorities with a view to establish the principle that where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed to participate unless and until he has fulfilled his duty to contribute.  This principle is sometimes described as the “rule in Cherry v Boultbee”[6].

42.  In In re Rhodesia Goldfields Limited[7], the plaintiff, Partridge, was a director and a shareholder of the company.  He was also one of the trustees for the debenture stockholders of the company. The company was subsequently wound up and a receiver was appointed.  Legal proceedings were later instituted against Partridge, which if successful, would result in substantial sums being repaid.  The court held that, pending the ascertainment and establishment of the amount, if any, due from Partridge, the amounts due to Partridge and other debenture stockholders had to be retained and carried to separate accounts.

43.  In the judgment, Swinfen Eady J referred to the equitable rule in Cherry v Boultbee (which can be found in the 2^nd passage quoted below) and applied it to the facts of the case:[8]

“It is alleged that [Partridge] is largely indebted to the company. The amount, if any, of that indebtedness has not yet been ascertained, but the proceedings have been before me sufficiently for me to know that the claim him is of a very serious character ... ... there is a claim against Partridge in respect of moneys which it is alleged had not really been applied in buying stocks or shares, but have passed into his pocket, and, being moneys of the company, ought not to have passed into his pocket at all. This is a claim not in damages but in debt. ... ... At present I do not assume that the debt is established or that Partridge owes this money ... ...”

“The principle is well settled and is not open to question. It is to be found in number cases.

In In re Akerman Kekewick J says: ‘The principle is to be found laid down in Cherry v Boultbee in the passage to which I have just referred, and also in Courtenay v Williams and no doubt, if search were made, it would be found to have been laid down in many other cases.  It is this.  A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by a contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it.  Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back.  That is expanding what the Lord Chancellor calls in Cherry v Boultbee ‘a right to pay out of the fund in hand.’ rather than a set-off.’”

“In my judgment the rule is of general application that where an estate is being administered by the Court, or where a fund is being distributed, a party cannot take anything out of the fund until he has made good what he owed to that fund. It is immaterial whether the amount is actually ascertained or not. If it is not actually ascertained it must be ascertained in order that the rights of the parties may be adjusted, and it would be a strange travesty of equity to hold that in distributing the fund Partridge was entitled to be paid at once all that was due to him out of the company’s money, and subsequently to find, after it had been established that he owed money to the fund, that the amount could not be recovered from him.”

44.  In re Rhodesia Goldfields Limited was cited with approval in In re Jewell’s Settlement[9]. In the latter case, there was a marriage settlement in which the husband agreed, inter alia, to assign the husband’s life insurance to trustees upon trust on his death in favour of the wife during her life and after her death to hold the same on trust for the issues of the marriage.  The husband also covenanted with the trustees that he would not suffer anything whereby the said insurance policy should become void or voidable and that he would duly pay the premiums for the said policy.  Thereafter, owing to the husband’s default in paying the insurance premiums, the policy lapsed and became void.  The issue to be determined by the court was whether the husband was entitled to take anything out of the trust fund without first making good to the trust estate the loss occasioned by his default in allowing the insurance to lapse.  After considering authorities including In re Rhodesia Goldfields Limited, Younger J held that on general principles of equity, the husband could not take anything out of the trust fund without first making good to the trust the loss occasioned as a result of his breach of the covenant with the trustees.

45.  In Selangor United Rubber v Cradock[10], there was a further elaboration to the general principle set out in In re Rhodesia Goldfields Limited based on a principle known as the “VGM Principle” which was named after the case of In re VGM Holdings Limited[11]. Ungoed-Thomas J summarised the principle as follows:[12]

“A holder on trust of a trust fund, who establishes his claim against a defendant beneficiary, entitled to a share in the trust fund, to recover a sum for which the defendant is liable to the trust fund and obtain an order for party and party costs against that defendant, should plainly not make distribution to the beneficiary without retaining enough to satisfy the amount of these costs as well as of that sum.”

46.  The principle in In re Rhodesia Goldfields Limited was also applied by the Singaporean Court of Appeal in Re Estate of Lee Wee Nam[13], the facts of which are very similar to those in the present case.

47.  In Lee Wee Nam, there were allegations of breach of fiduciary duties against the trustee of the estate in the nature of intermeddling with the assets of a partnership firm which formed a significant part of the estate.  Before such allegations were determined in the court, some of the beneficiaries of the estate obtained interim distribution.  In light of the interim distribution to the beneficiaries, the trustee-cum-beneficiary alleged to have breached the fiduciary duties also sought interim distribution from the estate.  The application was initially allowed but overturned on appeal.  In the appellate judgment, Lai Kew Jai J held that the “trustee/beneficiary cannot obtain an interim distribution of the trust fund until the final disposal of the serious claims against him”.  The learned judge also observed that the facts in that case bore a striking resemblance to those in In re Rhodesia Goldfields Limited.

48.  From the authorities referred to me by the parties, I can identify some of the legal principles as follows.  First, in considering whether to make interim distribution, the court should take into account various factors including those identified by R Smith J in Parson v McGovern[14].  Second, at least in the context of the administration of a deceased’s estate, no interim distribution should be made to a beneficiary if the latter has caused any loss to the estate by breach of fiduciary duty (whether as a trustee or former trustee or otherwise) or intermeddling with the assets of the estate, unless there is sufficient fund for distribution to the other innocent beneficiaries without the contribution of the guilty beneficiary.  It is immaterial whether the amount of the claim is ascertained or not.

49.  The second principle above can be looked at from 2 different perspectives:

(i)     it would be inequitable to allow the beneficiary, who was in breach of fiduciary duty or intermeddled with assets, to obtain any distribution from the estate unless he first pays his contribution to the fund of the estate, which is developed from the equitable rule in Cherry v Boultbee; and

(ii)    it is the general duty of a cautious trustee of an estate to make sure that there would be sufficient fund for distribution to the various beneficiaries for their just shares of the estate.

50.  It seems that the only dispute between the parties is about the threshold for the strength of the case against the alleged guilty beneficiary before one can deny the making of any interim distribution to him.  Mr Kat accepts that the Respondent is not required to establish an existing liability for breach of fiduciary duty or intermeddling with assets before she can deny the making of interim distribution.  However, Mr Kat advocates for a higher threshold relying on the test of “realistic prospect”, while Mr Tang puts forward a lower burden saying that a claim of a “serious character” is enough.

51.  In my judgment, there is no great difference between the two thresholds proposed by counsel.  In determining whether an administrator should withhold distribution pending the adjudication of any claim against a particular beneficiary, the court will certainly examine the strength of the relevant claim.  On the one hand, bare allegation without substance is certainly not enough. On the other hand, the court does not require the administrator to establish an existing liability.  If an existing liability is required, an administrator is bound to make a distribution even before he or she has the opportunity to carry out any investigation relating to the administration of the estate, which simply cannot be right.

52.  It is common ground that an administrator has a duty to administer the estate cautiously.  He therefore has to ensure that there would be sufficient fund in the estate to make distribution to all the beneficiaries for their shares taking into account the potential size of the estate after the determination of any breach of fiduciary duty or intermeddling claim.  In my judgment, if the administrator takes a bona fide view that he has a serious claim against a particular beneficiary, and there are reasonable grounds, both subjectively and objectively, to support the merits of the claim, the court should be reluctant to interfere with the bona fide decision of the administrator to withhold distribution.  In determining the question of interim distribution, the court would also take into account the various factors identified in Parson v McGovern[15]. I will therefore adopt such approach in considering the present application.

53.  I make one more observation before leaving the issue of legal principles.  Mr Kat refers me to the decisions of In re Abrahams[16], In re Kaupthing Singer & Friedlander Ltd (in administration)(No 2) and In re Lehman Bros International (Europe)(in administration)(No 4), which seem to suggest that the rule in Cherry v Boultbee does not apply where the debt to the estate is not presently payable.  In other words, unless there is an established liability on the part of the guilty beneficiary to pay back the loss and damages to the estate which would be an immediate payable debt, the administrator is still bound to make distribution to the beneficiaries.

54.  However, I must point out here that the courts in Kaupthing Singer and Lehman Bros were mainly concerned about the application of the rule in Cherry v Boultbee in the context of the administration of an insolvent company.  As pointed out by the Supreme Court in Kaupthing Singer[17], there has been a long-standing principle of insolvency law known as the rule against double proof, and there may be conflict for such principle to be applied together with the rule in Cherry v Boultbee, especially in the context when suretyship is involved.  The issue in Kaupthing Singer therefore turned on what function, if any, the equitable rule in Cherry v Boultbee has to perform in the operation of the rule against double proof as it applies in suretyship situations.  Hence, the effect of these two decisions should be limited to the administration of estates in insolvency cases.

55.  On the other hand, In re Abrahams was a case on the administration of a deceased’s estate.  However, that case involved a debt owed by the beneficiary to the estate which was payable by way of future instalments which were not due.  Obviously, that was not a matter which should affect the immediate distribution of assets.  As observed by Younger J in In re Jewell’s Settlement[18], Warrington J in In re Abrahams “did not decide that the rule [in Cherry v Boultbee] only applied to a legal debt presently payable: what he did decide was that it did not apply even to a legal debt which was only payable in futuro – for present purposes a very different thing.”  Hence, these cases should not disturb the approach I mentioned above.

(iii)  Whether interim distribution should be made?

56.  Adopting such approach, I agree with the Respondent that it is not appropriate to make interim distribution at this stage.  I am satisfied that the Main Action and the Intended Claim are serious claims against the Applicants.  If the Estate succeeds in these claims, there is a real possibility that the Applicants may have to pay back the respective sums of HK$11.1 million under the Main Action and US$12 million under the Intended Claim to the Estate.  Including the existing fund of HK$40 million, the size of the Estate would amount to about HK$145 million and each of beneficiaries (including the Respondent) would entitle to receive about HK$47 million.  The Estate only has existing fund of HK$40 million and so I agree that it is prudent not to make interim distribution at this stage.

57.  In making the aforesaid calculation, I have not even taken into account the legal costs that may be incurred by the Estate in pursuing and defending the various claims against or by the Applicants, including the Main Action, the Intended Claim, HCMP 1695/2015 and HCCW 397/2015.

58.  Mr Kat submits that there is no real prospect that the distribution would be cut down or affected by the Main Action or the Intended Claim.  The claim in the Main Action is hotly in dispute, and the Applicants have put forward evidence to support the propriety of the various expenses involved.  So far as the Intended Claim is concerned, without an existing litigation, the Respondent does not have anything more than unsubstantiated allegations against the Applicants.  There may be many legitimate reasons for the making of various payments to the recipient companies.  Without the support of any professional advice about the prospect of success of these claims or cogent evidence of the quantification of the likely claims and costs, the court cannot assume that the Respondent has a good case against the Applicants.

59.  I disagree.  It is common ground that the court should not conduct a microscopic examination of the merits of these claims.  Yet the commencement of the Main Action has been sanctioned by the making of the Beddoe order.  It can be safely assumed that the court had properly examined the merits of the claim under the Main Action before granting a Beddoe order. Hence, I am satisfied that the Respondent does have a serious claim in the Main Action.

60.  For the Intended Claim, it is true that no legal proceedings have yet been commenced and no Beddoe order has been obtained for the institution of such proceedings.  Despite that, based on the dubious nature of the various substantial payments as mentioned above[19], it cries out for serious explanations by the Applicants about the propriety of these payments.  I must emphasise that the Respondent’s concern is not based on wild speculation, rather the company search records of the recipient companies, the financial statement of New Lin Fung and other documentation throw serious doubt about the propriety of these payments.  The Respondent has a legitimate concern that the Applicants had intermeddled with the assets of the Estate for their own benefit.  Despite the various opportunities given to them, the Applicants do not provide any explanation for these payments.  Even worse, they evade the question about their relationship with the recipients of these payments.

61.  Mr Kat submits that this should not be the time for the Applicants to give such explanations.  Again I have to disagree.  The Applicants were managing the assets of the Estate during the time when these substantial payments were made.  Just as the Respondent has the duty, even before the institution of any legal proceedings, to provide an account in respect of the Estate after she took over as the administrator of the Estate, the Applicants likewise have a duty to provide an account for the assets of the Estate during the time when they were managing those assets.  Since the court and the Respondent can only assess the merits of the claim by examining the explanations given by the Applicants, it is fair for the Respondent to defer the distribution pending the provision of these explanations.

62.  Mr Kat further argues that, knowing full well of the possible claims against the Applicants, the Respondent still offered, subject to conditions, to make interim distribution of HK$8 million to each of the beneficiaries in the letter by her solicitors dated 15 March 2016.  Mr Kat relies on such offer to show that even the Respondent considered that it was reasonable to make interim distribution of such amount back in March 2016.

63.  On the other hand, Mr Tang submits that the Respondent’s offer for interim payment has to be looked against the circumstances facing the Respondent at that particular time.  First, it was still in the early stage of the investigation and the Respondent took the view that more time should be given to the Applicants to provide the explanations. It was only when the Applicants refused to provide further explanations and clarification about their relationship with the recipient companies that the Respondent proceeded to obtain advice from senior counsel.  After obtaining such advice, the Respondent considered that the Estate would have a good claim against the Applicants and so she withdrew the offer for the making of interim distribution.  To me, there is nothing wrong with such stance taken by the Respondent.

64.  In considering the Interim Distribution Application, I have not lost sight of the fact that the present dispute is, in substance, a fight between 2 camps of beneficiaries.  Both camps have, at different stages, been responsible for the administration of the Estate.  Despite that, in light of the available materials before her, I accept that the Respondent has a genuine concern that the Applicants had breached their duties in the management of and intermeddled with the assets of the Estate, and as a result her interest in the Estate has been adversely affected.  I accept that there is no mala fide in respect of her decision in withholding distribution.

65.  Mr Kat also submits that there is continuing prejudice to the Applicants if there is no interim distribution.  In addition to the opportunity costs of being kept out of the money, by refusing any interim distribution, the Respondent maintains a tactical and practicable advantage of hampering the Applicants’ bona fide defence of the actions she brings against them in the name of the Estate.  According to Mr Kat, the Respondent is in effect obtaining the security for costs prohibited to a plaintiff.

66.  This may not be entirely correct.  According to the available evidence before the court, companies associated with the Applicants had received vast amounts of money from Lai Fung.  On the other hand, although the Respondent is in control of the existing fund of the Estate of about HK$40 million, there is no evidence that she has received any payments from the Estate herself.  In the absence of anything to show that the Applicants lack the financial resources to fight the present litigations, the tactical advantage alleged by the Applicants may be more apparent than real. In any event, it is the Applicants who are withholding the provision of explanations and supporting documents in relation to the substantial transfers of funds from Lai Fung to companies apparently associated with them when they were managing the business of Lai Fung.  If there are able to provide credible explanations for these payments, there may be justification for them to obtain interim distribution from the Estate.

67.  I also do not accept the Applicants’ argument that there was undue delay on the part of the Respondent in the administration of the Estate.  The present case is unique in the sense that the administration of the Estate had passed through the two rival camps of beneficiaries.  Since the Respondent was not previously involved in the management of the business, she had to rely on the information and documents provided by the Applicants to assist her in the administration of the Estate.  If the Applicants were not cooperative as it was in the present case, this would cause great difficulty to the Respondent in discharging her duties.   The court should therefore give some allowance to the Respondent for the time spent in the administration, and I do not accept that there was undue delay on the part of the Respondent.

68.  For the above reasons, it is only fair for the Respondent to withhold interim distribution to all the beneficiaries including herself pending the final determination of the claims against the Applicants or at least the provision of explanations and supporting documents relating to the substantial transfers.  Using the words of Swinfen Eady J in Re Rhodesia Goldfields Limited, it would be a “strange travesty of equity” to allow the Applicants to be paid out of the Estate only “subsequently to find after it had been established that [they] owed money to the fund, that the amount could not be recovered from [them].”

69.  Despite my ruling above, I have to emphasise that interim distribution application is a time-sensitive application.  The existing justification in not making interim distribution may no longer be valid if there is any material change in circumstances, for example, the Applicants are able to provide credible explanations for the making of the substantial transfers.  Hence, there should be liberty to the Applicants to make a fresh application in appropriate circumstances.

70.  I understand that the parties have reserved their position on costs.  Since this case relates to the administration of a deceased’s estate, the question of costs may not be a straightforward matter. I therefore give liberty to the parties to restore the hearing for argument on costs.  If they consider that the question of costs is simple enough to be dealt with on paper, they should try to agree on the directions for the filing of written submissions for consideration by the court.