YIU LIN TEI v. LIU PUI LAN AND ANOTHER

CACV 183/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 183 OF 2011

(ON APPEAL FROM HCMP NO 1359 OF 2008)

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REASONS FOR JUDGMENT

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Hon Kwan JA:

1. This is an appeal of the defendants against the exercise of a statutory discretion in an application for reasonable financial provision under the Inheritance (Provision for Family and Dependants) Ordinance, Cap 481. Deputy High Court Judge Tam, SC made an inexplicable error in an otherwise careful judgment given on 26 August 2011 that the retained profits of two companies of the deceased amounted to $64,645,417.44 when such retained profits were $6,645,417.44 on the plaintiff’s case. As a result, the value of the net estate of the deceased was found to be $42,277,476, whereas the plaintiff’s own estimation was in the region of $32 million.

2. By reason of this error and on other grounds, the defendants’ counsel, Mr William Wong, contended in his written submission that the lump sum order of $7,338,400 in favour of the plaintiff should not just be reduced but the application for reasonable financial provision should be dismissed altogether.

3. For the plaintiff’s part, Mr Jenkin Suen contended on her behalf that notwithstanding the erroneous finding of the value of the net estate, the lump sum order should remain undisturbed on appeal.

4. Both sides would appear to have taken extreme positions. We allowed the appeal at the conclusion of the hearing, setting aside the lump sum award of the judge and substituting it with a lump sum of $5,498,800. These are the reasons for our judgment.

The background and the judgment below

5. The deceased Liu Wing On died intestate on 22 December 2004. The plaintiff, Madam Yiu Lin Tei, had cohabited with the deceased from 1977 until about 1995, when they drifted apart and he cohabited with the 1^st defendant, Madam Liu Pui Lan. The deceased married the 1^st defendant in June 1998. The plaintiff gave birth to the deceased’s son, Liu Ka Shu Charles, who is the 2^nd defendant, in 1984. The 1^st defendant gave birth to the deceased’s daughter in 1998. Letters of administration of the deceased’s estate were granted to the 1^st and 2^nd defendants in August 2009. The 1^st and 2^nd defendants and the deceased’s daughter, aged 14 at the time of the trial, are the only beneficiaries of the estate under the Intestates’ Estate Ordinance, Cap 73. The 2^nd defendant’s relationship with his mother the plaintiff had broken down since about 2006.

6. The deceased established a stationery manufacturing business with Yip Man Sing (“Yip”) in about 1990. The business was incorporated as Tsun Tat Stationery Manufactory Limited (“Tsun Tat”) in 1998, with the deceased and Yip as equal shareholders and the only directors. Tsun Tat’s business was profitable. It owned two 3-storey factory buildings and one block of staff quarters in Huiyang City, Guangdong Province valued in 2005 at RMB 8.8 million. The deceased and Yip were also equal shareholders in a property holding company, Swallow Sweet Company Limited (“Swallow Sweet”), which held three properties at the time of the deceased’s death: (i) Unit 30 and 31 Beverley Commercial Centre, sold for $1,820,000 in 2010; (ii) 1/F Wing Sum Industrial Building, valued at $9,900,000 in 2010; and (iii) Flat Duplex H and Roof, 32/F, Block 1 Kingswood Villas Phase 7 with a current valuation of $6,040,000.

7. The deceased had been providing for his two families in his life time. In 1993, he assigned as a gift to the plaintiff a property known as Kiu Yip Mansion, Yuet Wah Street, Kowloon, which was sold by the plaintiff in 1998 at $1,400,000. She also received a total of $1,650,000 in cash gifts from the deceased within the three years prior to his death. When the 2^nd defendant attained 18 years of age in 2002, the deceased purchased two adjoining properties in Laguna City, Kowloon (“the Twin Properties) as a gift to the 2^nd defendant. The Twin Properties were sold in 2005 and the proceeds were deposited into an account in the joint names of the plaintiff and the 2^nd defendant. The 1^st defendant had cash gifts made to her by the deceased in the sum of $2,670,000 in the last three years of the deceased’s life. The judge found the deceased to be a fairly generous man in terms of sharing his earnings with his families.

8. The plaintiff issued the present proceedings claiming reasonable financial provision under Cap 481 and for transfer to her of a property in the deceased’s estate known as Flat H, 27/F and Roof Area H, Block 31, No. 2 East Laguna Street, Laguna City, Kowloon (“the Property”) relying on proprietary estoppel and part performance.

9. The judge dismissed the plaintiff’s claim on the ownership of the Property. She also declined to exercise her power under Cap 481 section 4 to order the Property to be transferred to the plaintiff as reasonable financial provision. She held that the plaintiff is not a “wife” within section 2 of Cap 481 and her application under this ordinance could only be made under section 3(1)(ix), being “any person (not being a person included in the foregoing paragraphs of this subsection) who immediately before the death of the deceased was being maintained, either wholly or substantially, by the deceased”. There is no cross-appeal on any of these matters.

10. The plaintiff claimed $35,000 per month for reasonable financial provision and an additional $10,000 per month if it should be held that she was not to be given the Property and had to rent accommodation. After considering the factors in section 5(1) (being the deceased’s obligation to the plaintiff and the three beneficiaries in his estate, the plaintiff’s financial resources and financial needs, the beneficiaries’ financial resources and financial needs, the identified medical conditions of the plaintiff, the size and nature of the net estate, and the conduct of the parties), the judge found a fair and reasonable monthly sum for the plaintiff’s maintenance to be $30,000 and accepted that $10,000 should be added to the monthly sum for the cost of the plaintiff’s accommodation. She decided to award a lump sum and applied a discount of 0.73 on a life expectancy of 21 years (the plaintiff was aged 59 at the time of trial) on the principle in Duxbury v Duxbury [1992] Fam 62. The amount arrived at was $40,000 x 12 x 21 x 0.73 = $7,358,400. From this sum, she deducted $20,000 being the amount that the plaintiff received from the defendants as interim relief pursuant to a court order and arrived at the final figure of $7,338,400.

11. The judge made an order nisi that the defendants do pay the plaintiff half of the costs of the proceedings. On 24 October 2011, this was varied to an order that the defendants do pay the plaintiffs the costs of the proceedings (i) on a party and party basis in respect of costs incurred up to 1 April 2010, and on an indemnity basis in respect of costs incurred from 2 April 2010, with interest on those costs at a rate of 3% above judgment rate. No reasoned decision was given in respect of the plaintiff’s application to vary the costs order nisi. The reason for the variation would appear to be a sanctioned offer made by the plaintiff on 4 March 2010 (which could be accepted without leave on or before 1 April 2010) to accept the transfer of the Property to her in full and final settlement of the whole of her claim. It was submitted by the plaintiff that as the Property was valued at $6,810,000 at the date of the hearing and she was awarded a lump sum of $7,338,400 which exceeded the value of the Property, she has obtained a judgment more advantageous than the proposal in the sanctioned offer.

12. The existence of the sanctioned offer and its contents were mentioned in Mr Suen’s written submission. As I have mentioned to the parties at the outset, it is inappropriate for this court to be apprised of the contents of the sanctioned offer until after the appeal on the financial provision to the plaintiff has been disposed of. The defendants’ appeal on the costs below would depend on the disposal of the substantive appeal, and only then should the court be told of the contents of the proposal in the sanctioned offer. 

Reasonable financial provision

13. As mentioned earlier, the judge mistook the retained profits of Tsun Tat and Swallow Sweet up to the end of 2004 as amounting to $64,645,417.44 and consequently arrived at the erroneous figure of $42,277,476 as the value of the net estate of the deceased. Mathematically, if the judge had taken $6,645,417.44 as the retained profits, the figure she would have arrived at as the value of the net estate would be $24,243,008.185. This is the sum total of:

(a)  half of the following items:

(i)  the retained profits of the two companies at $6,645,417.44;

(ii)  the value of the two 3-storey factory buildings and one block of staff quarters of Tsun Tat at $10,460,598.93 (the valuation in RMB 8.8 million odd in 2005 converted to HK dollars at the current exchange rate); and

(iii)  the value of the three properties held by Swallow Sweet at the time of the deceased’s death as stated above at $17,760,000; and

(b)  the value of the Property at the time of hearing at $6,810,000.

14. The figure of $24,243,008.185 is $7.8 million less than the figure put forward by the plaintiff at the trial and $18 million less than the figure arrived at erroneously by the judge as the value of the net estate.

15. Mr Suen submitted that this should make no difference to the amount of the lump sum ordered by the judge as reasonable financial provision, as the size of value of the net estate was just one of the factors the court should have regard under section 5(1) of Cap 481. He argued that it does not necessarily follow the court should make a lump sum order of a lesser amount if the value of the net estate was $24 million instead of $42 million as found by the judge, as the award was not arrived at as a percentage of the value of the net estate. The court was not concerned with the plaintiff’s entitlement to a share of the estate but with reasonable financial provision that should be made to her. The plaintiff’s financial needs and resources should not be affected by any change in the value of the net estate. As for the financial needs and resources of the beneficiaries in the estate, Mr Suen submitted that it is not in dispute the 1^st defendant owns a property in Greenpark Villa, Fanling valued at $3,470,000 with a car parking space. Other than that, there is no evidence to substantiate the financial needs and resources of the beneficiaries. The lump sum ordered by the judge at $7,338,400 could clearly be met out of the estate even if the value of the net estate should be reduced to $24 million after rectifying the arithmetic error.

16. Mr Suen also sought to revive his submission in the court below that the court should have regard to the potential claims by the administrators of the estate against Yip for breach of fiduciary duty (Yip had diverted the business of Tsun Tat to a new company he caused to be incorporated in April 2005 in a similar name, Tsun Tat Stationery Limited (“New Tsun Tat”)), even though the value of the potential claims against Yip were not to be included as part of the net estate as held by the judge.

17. I am unable to accept Mr Suen’s submissions. The serious error in the value of the net estate could not be regarded as immaterial, even though the value of the net estate is just one of the factors to be taken into account under section 5(1). The court is to have regard also to the financial resources and needs of the beneficiaries, not just those of the plaintiff, and any obligations and responsibilities which the deceased had towards the plaintiff and the three beneficiaries. The judge had found that the deceased considered himself responsible for the maintenance of all four individuals. The size of the net estate is clearly relevant to the determination of an appropriate sum that should be made as reasonable financial provision in the light of all the circumstances. 

18. Although little evidence was adduced regarding the personal financial circumstances of the defendants, the teenage daughter of the 1^st defendant would be wholly dependent on the deceased for financial support until she is to complete full time education. The judge also inferred from the amount of the cash gifts made to the 1^st defendant of $2,670,000 during the last three years of the deceased’s life that she would not have been expected to rely on any income of her own for the maintenance of herself and her daughter. As for the 2^nd defendant, he did not appear to have earned a steady income since he had ceased to be a student. The proceeds from the sale of the Twin Properties gifted by the deceased to him on his 18^th birthday paid into his joint account with the plaintiff had been exhausted, save for an asset acquired in their joint names being a shop space with a value of $700,000. It is not necessary for the court to form a view as to the amount of the financial provision that should be made to each of the beneficiaries, save to have regard to the fact that the deceased had assumed responsibility towards the maintenance of the beneficiaries and that the obligations he assumed were substantial.

19. Assuming that the net estate is of the value of $24 million without making further discount owing to the fact that the assets consist of shares in a private company, being a matter I will deal with next, the lump sum award to the plaintiff would be approaching 1/3 of the net estate when there are three other dependants who would expect to be supported financially by the estate. I do not think this can be justified in the circumstances.

20. Mr Wong made the point that the net estate comprised the deceased’s 50% shares in the two private companies, not the assets of the companies being the retained profits and the landed properties held by these companies. He submitted that the judge should have made a discount to the valuation to take into account that shares in private companies were less marketable than quoted shares.

21. Mr Suen submitted that no discount should be made in the particular circumstances here, having regard to the nature of the assets held by Tsun Tat and Swallow Sweet and the stance of Yip. Firstly, Yip had made an offer before the trial that he would pay the estate $12 million for acquiring the deceased’s interest in the two companies and the factory premises in the Mainland. Secondly, it is apparent from the financial statements of Tsun Tat and New Tsun Tat that the former had become dormant and its business was largely transferred to the latter, so all that remained in Tsun Tat are the retained profits and the landed properties in the Mainland, leaving aside the potential claims of the estate against Yip and New Tsun Tat for the diversion of the business. Thirdly, Swallow Sweet had all along been a vehicle to hold property with no active trading or business. Fourthly, Yip confirmed in evidence he was prepared to consent to the immediate sale of the two remaining properties of Swallow Sweet and distribute half of the net proceeds to the defendants.

22. As pointed out by Mr Suen, the judge focused entirely on the asset value of the companies and had not attributed any additional value to the business and goodwill of the companies as going concerns. The valuation the judge arrived at represented the value of the assets that could be realised and distributed. In the special circumstances, I am inclined to agree with Mr Suen no discount should be made to the valuation of the net estate on account of the deceased’s shares in private companies.

23. Next, I turn to consider Mr Wong’s submissions that no financial award should be made. I do not think there is merit in any of his contentions.

24. It was argued that in arriving at $30,000 as a reasonable monthly sum for the plaintiff’s maintenance, the judge had failed to take into account that the monthly payments she received at between $12,000 to $50,000 from 1994 to 2004 and the cash gifts of $1,650,000 within three years of the deceased’s death were not for the plaintiff alone but were for both the plaintiff and the 2^nd defendant, who was then living with her. I do not think this was overlooked by the judge. In considering the level of monthly expenses of $35,000 put forward by the plaintiff, the judge expressly noted that an adjustment should be made as the 2^nd defendant would not be part of the plaintiff’s household in future.

25. Mr Wong attacked the award of $10,000 for reasonable expenses to rent accommodation. He referred to past property transactions of the plaintiff in the sale of the gift to her of Kiu Yip Mansion and the sale of the Twin Properties gifted to the 2^nd defendant and submitted that the deceased had already provided for the plaintiff’s accommodation. I reject this submission. Kiu Yip Mansion was sold six years before the deceased’s death. Although she lived in the Twin Properties with the 2^nd defendant at the time of the deceased’s death, there was no property to her name at the time. If she is to vacate the Property, it is reasonable that her accommodation needs should be provided for.

26. Mr Wong argued that in awarding a lump sum of $7.3 million, the judge failed to take into account that value of the Property was only $6.8 million and it would take some time for the defendants to obtain a reasonable price for the half share of the deceased’s interests in the private companies. There is nothing in this point. The judge clearly had this in mind when she provided in the order that the lump sum was to be paid by three instalments, and that the last instalment of $3.6 million was only to be paid within nine months of the order.

27. Having rejected the submission that no order for maintenance should be made, I come back to the question of what reduction should be made to the lump sum award in view of the substantial error made by the judge in the valuation of the net estate. In their written submission, neither party had made any suggestion of an appropriate reduction.

28. In his oral submissions, Mr Wong took a fallback position and submitted that the figure of $30,000 assessed by the judge for the reasonable monthly maintenance of the plaintiff should be reduced. He argued that the judge should have taken as a starting point the figure of $23,516, being the amount put forward by the plaintiff as her monthly expenses in her application for interim relief in an affirmation made in August 2009, and deduct from that figure items of expenditure that would not be incurred if the plaintiff was not the owner of her residence. He pointed out that Deputy Judge L Chan had awarded $20,000 per month as interim relief, on the basis that the plaintiff was to continue to reside in the Property.  He submitted that the reduction made by the judge of $5,000 from the figure of $35,000 put forward by the plaintiff was plainly too little to take into account that this estimate had included the expenses of the 2^nd defendant who was not living with the plaintiff, that there was overlap in some items of expenses, and that some items were probably inflated.

29. There is substance in Mr Wong’s submission. Having regard to the plaintiff’s financial needs and resources, the value of the net estate as rectified, and the other factors in section 5(1) of Cap 481 as found by the judge, I would not disturb the monthly sum for renting accommodation of $10,000 but would reduce the monthly sum for living expenses to $20,000, making a total of $30,000. Using the same formula of a 21-year life expectancy and a discount of 0.73, the lump sum I arrive at as reasonable financial provision for the plaintiff is $30,000 x 12 x 21 x 0.73 - $20,000 = $5,498,800. As a rough cross check, this is approximately 22% of the net estate.

Costs below

30. Having arrived at the conclusion that the lump sum order should be set aside and substituted with an award of $5,498,800, it follows that the costs order as varied by the judge on 24 October 2011 should also be set aside as the judgment ultimately obtained by the plaintiff is not more advantageous than her proposal in the sanctioned offer on 4 March 2010.

31. It is appropriate to restore the costs order nisi made by the judge, namely, that the defendants do pay the plaintiff half of the costs of these proceedings, and that the plaintiff’s own costs to be taxed in accordance with the Legal Aid Regulations. I reject Mr Wong’s submissions that on the well established principles, there is room for this court to interfere with the exercise of the trial judge’s discretion in the award of costs.

Conclusion and costs

32. For the above reasons, we allowed the appeal and set aside the lump sum order and substituted it with one of $5,498,800. There is no basis to award interest thereon as the plaintiff’s sanctioned offer is not more advantageous than the lump sum award.

33. Regarding the payment of the lump sum by instalments, we would follow the same scheme as ordered by the judge, who had carefully considered all the circumstances in making provision for the timing and amount of the instalments. We have made the following orders:

(1)  a lump sum of $5,498,800 be paid to the plaintiff by the defendants in the following manner:

(a)  the first instalment in the sum of $138,800 be paid within one month of the date of this judgment;

(b)  the second instalment in the sum of $2,680,000 be paid within three months of the date of this judgment or within 14 days of delivery up by the plaintiff to the defendants of the vacant possession of the Property, whichever is later; and

(c)  the third instalment in the sum of $2,680,000 be paid within nine months of the date of this judgment;

(2)  the plaintiff do deliver up vacant possession of the Property to the defendants within three months of the date of this judgment.

34. We awarded half of the costs of this appeal to the defendants, taking into account the extent of their success of their appeal. The plaintiff’s own costs in the appeal are to be taxed in accordance with the Legal Aid Regulations.

Hon Chu JA:

35. I agree.

Hon Bharwaney J:

36. I agree with the reasons articulated by Kwan JA in her judgment.