RE KWAN NGOK (EXECUTOR OF THE ESTATE OF FU STANLEY ZAI SUI, DECEASED)

HCMP 263/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 263 OF 2017

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DECISION

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A.  Introduction

1.  This is an ex parte application by an executor to ask for the court’s sanction to distribute the proceeds of sale of the deceased’s property when there is a potential but disputed claim against the deceased’s estate.

2.  The Applicant was the sole executor of the estate of Fu Stanley Zai Sui (“the Deceased”), who passed away on 14 January 2013.  He was granted probate of the Deceased’s estate on 30 July 2013 pursuant to the last will of the Deceased dated 9 October 2007 under which the property known as Flat 2 on the First Floor of Apartment D and Car Parking Space No 116 of Sunderland Estate, No 1 Hereford Road, Hong Kong (“the Property”) was bequeathed to Satake Akira (“Akira”), who was the younger son of the Deceased.

3.  The Applicant now applies for the court’s order that the proceeds of sale of the Property be released to the sole beneficiary, Akira, after deducting all costs and expenses incurred in the sale of the Property, and the due administration of the Deceased’s estate.

B.  Reasons for the application

4.  The reasons why the Applicant finds it necessary to make this application may be summarized as follows:

  (a) Since about January 2013, the Applicant received correspondence from the eldest son of the Deceased, Shoichiro Satake (“Sho”), that the Deceased owed huge debts to a Japanese company, namely, The Sansiao Trading Co Ltd (“Sansiao”), at the time of his death and that the Property should be used to settle such debts.  Sho was a director of Sansiao.

  (b) By letter dated 7 August 2015, Sansiao, through its Hong Kong solicitors, Messrs Deacons, alleged that the Deceased had agreed to pledge the Property to Sansiao as security for the loans advanced by Sansiao to Asian View Overseas Limited (“Asian View”), a BVI company owned by the Deceased.  The debts would become due and payable on 11 September 2015.  It was also alleged that the Deceased had personally guaranteed repayment of the said loans.

  (c) Subsequently, Deacons produced a number of documents to support Sansiao’s allegations, including some loan agreements in Japanese suggesting that the Deceased agreed to act as a guarantor, and a board minutes of Sansiao in Japanese suggesting that the Deceased agreed to pledge the Property.

  (d) The Applicant through his solicitors disputed the claims made by Sansiao.  First, they claimed that no valid charge or mortgage over the Property had been created in accordance with the requirements under the Conveyancing and Property Ordinance (Cap 219).  Second, they raised grave doubts whether the personal seals of the Deceased on the loan agreements, containing the alleged personal guarantee given by the Deceased, were in fact affixed by the Deceased, and pointed out that there was no mention of any term of the alleged personal guarantee at all.

  (e) By letter dated 4 September 2015, Deacons insisted that the said evidence amounted to an enforceable surety under Japanese law and an enforceable promise made by the Deceased to mortgage the Property.  They asked whether the Applicant’s solicitors had instructions to accept service of legal documents.

  (f) By email dated 16 November 2015, the directors of Sansiao repeated that it would not waive its rights against the Deceased’s estate.

  (g) However, Sansiao did not take any steps to make any claim against the Deceased’s estate as threatened.

  (h) On the other hand, the Applicant was advised by his lawyers that he was duty bound to deal with the Property in accordance with the last will of the Deceased.

  (i) Hence, the Applicant, after obtaining Akira’s written authorization dated 14 September 2015, sold the Property at HK$36 million on 26 October 2015.  The sale proceeds, after deduction of costs and expenses incurred, have since been held by the Applicant through his solicitors.

  (j)On 7 December 2015, the Applicant obtained an order under Rule 60A of the Non-Contentious Probate Rules (Cap 10A) to limit the time for creditors to send in their claims to 2 months from the date of publication of the last notice specified in that order.

  (k)Pursuant to the said order, publications and advertisements of notices on the Government Gazette, an English newspaper widely circulated in Hong Kong and a Chinese newspaper widely circulated in Hong Kong were made on 31 December 2015.

  (l)Yet, no claim was received from Sansiao or any other party.

  (m)Further, the Applicant through his solicitors sent various letters to Deacons on 31 October 2016, 14 November 2016 and 2 February 2017 asking Sansiao to confirm whether it still intended to make any claim against the Deceased’s estate and informing them of the Applicant’s intention to commence these proceedings.  There was no reply.

  (n)In addition, the Applicant through his solicitors wrote to Sansiao directly on 21 November 2016 and 6 December 2016. Again, there was no reply.

5.  In the circumstances, the Applicant takes the view that an order of the court is required to enable him to release the net sale proceeds of the Property to Akira without incurring any personal liability arising out of any potential claim from Sansiao.

6.  Although Sansiao has not made any claim pursuant to the notices pursuant to the order granted by the court pursuant to Rule 60A of the Non-Contentious Probate Rules, I agree with Mr Ho that, having regard to the Applicant’s actual notice of Sansiao’s alleged claims, this fact may not be sufficient to exclude the potential liability of the Applicant in this respect (cf Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (20^th ed, 2013), §51‑04 at p 852).  Hence, the court’s sanction is still necessary.

C.  Analysis

C1. The correct approach

7.  Mr Ho submitted that there is no Hong Kong authority concerning this type of application.  I have not been able to find any relevant Hong Kong authority.

8.  However, I have found useful guidance in this respect in Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (20^th ed, 2013), §62‑13 at p 1143 where the authors consider the topic “Lloyd’s names — potential creditors”:

“Personal representatives will be liable to contingent creditors if they distribute the estate to their beneficiaries without making a sufficient retention for the contingent debt. The court will, if necessary, fix the amount of the retention. That position is very inconvenient because it leaves the estate, or the retention fund, tied up indefinitely. The inconvenience became acute because of the difficulties at Lloyd’s, where “names” faced massive, unquantified potential liabilities. The liability for the underwriting years up to 1992 was covered by reinsurance into a body called Equitas. The court in Re Yorke declined to make a general ruling that the representatives should distribute the estate where there was reinsurance into Equitas, and the representatives of a name who were concerned about his potential underwriting liabilities had to obtain individual permission from the court to distribute the estate without making a reserve against such liabilities…”

For the law relating to contingent debts and distributions with retention, the authors cite Re Yorke [1997] 4 All ER 907 at 916 et seq; and also Re K (Deceased) [2007] EWHC 622 (Ch).

9.  In Re K (Deceased), the applicant asked for the court’s sanction to, inter alia, distribute the deceased’s estate without reference to the claims of a number of disputed and potential creditors.  The English judge, Richard Arnold QC sitting as a Deputy High Court Judge, referred extensively to Re Yorke and held at §24:

“Re Yorke was a case about the contingent liabilities of estates, as were most of the authorities cited in it. Counsel were unable to refer me to any authority as to the approach to be adopted in a case such as the present, where the cause of concern is a series of disputed and stale claims against the estate. In principle it seems to me that a similar approach should be adopted. While the court will be sympathetic both to the desire of administrators to be immunized from potential liability and to the desire of beneficiaries not to be kept out of their inheritance longer than is necessary, the court should consider whether any, and if so what, protection should be afforded to the potential creditors. Such protection may take the form of a retention, an indemnity from the beneficiaries or (as in Re Yorke) insurance. The court will take a practical view. It may in an appropriate case conclude that no protection beyond the personal liability of the beneficiaries is needed. Even if the court concludes that a greater degree of protection is required, it is not bound to protect the potential creditors in respect of the full value of their claims.”

10.  I take the view that this is the approach that I shall adopt in this application.

C2.  Whether the application may be made ex parte

11.  These proceedings were commenced pursuant to Order 85, rule 2, Rules of the High Court (“RHC’).  Order 85, rule 2(2)(a) expressly provides that an action may be brought for the determination of:

“any question arising in the administration of the estate of a deceased person …”

12.  Initially, I was concerned with the fact that the originating summons herein were issued ex parte. It seems to me that, generally speaking, administration and similar actions under Order 85 should be made inter parte (see eg Re Kwong Sin Tong HCMP2797/1993 (3 August 1993, unreported)).

13.  Having said that, the wording of Order 85 does not prohibit an ex parte application. As observed in Re Yorke [1997] 4 All ER 907 at 927e‑f:

“Nowadays under RSC Ord 85, r 2 personal representatives can raise `any question arising in the administration of the estate’. The parties, where such a question is raised, are prescribed but not in an exclusive way; the provision in Ord 85, r 3(2) begins by providing that all persons having a beneficial interest in or claim against the estate need not be parties. It goes on: ‘… but the plaintiff may make such of those persons … parties as, having regard to the nature of the relief or remedy claimed in the action, he thinks fit.’”

14.  Apparently, it is not mandatory to join a person who may have a potential claim against the estate of the deceased in these circumstances.

15.  As to whether potential creditors should be notified of the application, In Re K (Deceased), the English judge held in §27 that, in the particular circumstances of that case, notification would not be appropriate for reasons given by counsel, namely, notification carries the obvious risks of stirring up claimants who have been dormant for a long time and who might easily misinterpret notification of the application as in some way constituting an invitation to proceed with their claims when they would otherwise not do so.  It held that:

“While justice demands that the Court should consider the interests of the Potential Creditors, it does not follow that the Court should positively invite parties who have not themselves sought to pursue their claims for many years to press their cases.”

16.  In Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (20^th ed, 2013), §51‑02 at p 851, the authors state that:

“Although a representative is under a duty to pay the debts to the estate, he is not automatically under a duty to contact potential creditors to see if they wish to pursue claims that may be disputed or stale. Thus, in Re K, administrators were given permission to distribute the estate without the need to notify various potential creditors subject only to their having to make a retention to fund a defence to any future proceedings and obtaining an indemnity from the beneficiaries.”

17.  Returning to the facts of this case, I am satisfied that ample opportunities had been given to Sansiao to pursue its alleged claims against the Deceased’s estate or the Applicant but Sansiao failed to do so.  In these circumstances, I take the view that it would not be appropriate or reasonably necessary to notify Sansiao of this application, or to join Sansiao as a defendant.  It follows that I agree that this application may be made ex parte.  Having said that, I must make it clear that I do not intend to lay down any general rule in this respect; it all depends on the facts of each case.

C3.  Merits of the application

18.  I turn to consider the merits of the application.  I shall begin by considering whether Sansiao’s potential claims are legally viable.  As to the allegation that the Deceased had promised to mortgage the Property, I agree that, in the absence of any validly executed mortgage under the Hong Kong law, there is no viable claim against the Deceased’s estate in this respect.  On the other hand, in relation to the allegation that the Deceased had agreed to guarantee the debts owed by Asian View, as there appears to be factual disputes (such as whether the personal seals of the Deceased were affixed with his consent), I am unable to say that a potential claim in this respect is doomed to failure.

19.  Having said that, I must adopt a pragmatic view. As a matter of fact, although Sansiao alleged that the debts owed by Asian View had become due and payable on 11 September 2015, Sansiao and its Hong Kong solicitors had never made any formal demand against the Deceased’s estate or the Applicant for a definite sum of money.  It should be borne in mind that, according to Sansiao’s case, the potential liability of the Deceased’s estate is secondary only; it is not the primary debtor.

20.  More importantly, the last time Sansiao or its solicitors asserted or maintained any claim was in November 2015, which was about 17 months ago.  The fact that Sansiao or its solicitors has not made and pursued any claim, despite repeated invitations by the Applicant to do so, suggests that Sansiao’s claims are either not well-founded in the first place, or they have been satisfied in some other ways, or have simply been abandoned (cf Re K (Deceased), §65).

21.  Having regard to the above-mentioned matters, I take the view that the following passage in Re K (Deceased), §66, shall apply similarly to the present case:

“There must come a time when the Administrators are entitled to say that they have waited long enough for the Potential Creditors to pursue these stale claims, and that the Court should sanction payment of the Admitted Creditors and distribution without reference to those claims and without the Administrators incurring any risk of personal liability if it subsequently turns out that any of the Potential Creditors have valid and enforceable claims which the Estate no longer has assets to pay. In my judgment that time has now been reached; it would be unjust to make either the Admitted Creditors or the Beneficiaries wait any longer.”

22.  Having said that, I need to consider whether, and if so what, protection ought to be given to Sansiao.  I note that in the authorization letter from Akira to the Applicant dated 14 September 2015, clause 3 provides that:

“I hereby undertake to keep you indemnified against all claims proceedings loss damages and expenses or demands whatsoever as a result of carrying out the duties as an Executor by you and/or my instructions given to you from time to time…”

23.  In the circumstances, I am satisfied that this is a case where no protection beyond the personal liability of the beneficiaries is needed (cf Re K (Deceased), §24).

D.  Conclusion and Orders

24.  For these reasons, I conclude that the Applicant should have the court’s sanction to distribute the net sale proceeds of the Property (after deducting all costs and expenses in the sale and due administration of the Deceased’s estate) without reference to the alleged claims of Sansiao (cf Re K (Deceased), §71).

25.  Accordingly, I shall make an order in terms of the originating summons (including that the Applicant’s costs shall be paid out of the Deceased’s estate on an indemnity basis).  As this is a hearing before a judge in chambers, no certificate for counsel (as sought by Mr Ho) is necessary.  Mr Ho has agreed that this decision may be released for publication.