KUNG KWOK WAI DAVID, the executor of the last Will of KUNG WONG SAU HIN, deceased v. THE COMMISSIONER OF ESTATE DUTY

HCED 1/2011

[2021] HKCFI 2111

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ESTATE DUTY APPEAL NO 1 OF 2011

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BETWEEN

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J U D G M E N T

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INTRODUCTION

1.  By an Originating Summons dated 21 February 2011, Kung Kwok Wai David (“the Plaintiff”), as executor of the last Will of Kung Wong Sau Hin, deceased (“the Deceased”), seeks to challenge the Commissioner of Estate Duty (“the Commissioner”)’s assessment of the values of various items comprised in the estate of the Deceased (“the Estate”) for the purpose of the Estate Duty Ordinance, Cap 111 (“the Ordinance”).

2.  By the time of the hearing, the parties have reached agreement on most of the items in dispute, save for 2 outstanding matters which require determination by the court:

(1) whether 8 loans (hereinafter referred to as “the Loans” or “the Debts”, as appropriate), in the total sum of HK$41,534,925.83, allegedly taken by the Deceased pursuant to 8 promissory notes (“the Promissory Notes”), were bona fide debts incurred for full consideration for money or money’s worth, wholly for the Deceased’s own use and benefit and taking effect out of her interest, such that an allowance ought to be made under s 13(1); and

(2) what is the proper valuation of the Deceased’s half share in various lots of land in the New Territories (collectively “the Tin Ha Road Property”) mentioned in §2(v)(c) of the Originating Summons as at the date of death of the Deceased (19 October 1996) (“the Valuation Date”).  The Plaintiff’s case is that the proper valuation should be HK$10,960,000, while the Commissioner’s case is that the proper valuation should be HK$30,000,000.

3.  In what follows, unless the context indicates otherwise:

(1) references to “Section” or “s” shall be to the Ordinance;

(2) “Fenn X” shall mean the X^th Affirmation of Ms Fenn Kar Bak Lily (“Ms Fenn”) filed in these proceedings; and

(3) “Kung X” shall mean the X^th Affidavit of the Plaintiff filed in these proceedings.

BRIEF BACKGROUND

4.  The Deceased died testate in Hong Kong on 19 October 1996.  The Plaintiff was the Deceased’s son.  Under the Deceased’s last will dated 25 July 1985, the Plaintiff was appointed as the sole executor and beneficiary of her estate.

5.  On 18 April 1997, T L Ip & Co (“TLI”, the Plaintiff’s solicitors at the time) applied to the Commissioner for provisional estate duty clearance papers to facilitate the Plaintiff’s application for a Limited / Provisional Grant of Representation for the purpose of conducting various legal proceedings in the High Court, namely, HCMP 1614/1990 and HCA 12229/1994.  The solicitor at TLI handling the Plaintiff’s application was Ms Fenn.  Enclosed with TLI’s letter was an Affidavit for the Commissioner signed by the Plaintiff sworn on 18 April 1997 (“the 1997 Affidavit”).

6.  The 1997 Affidavit disclosed that the Deceased, as the sole beneficiary of the estate of her late husband, Kung Yeuk Man (“Kung Senior”), who died on 4 October 1981, was interested in one moiety or half part or share of and in 20 lots of land in the New Territories making up the Tin Ha Road Property, namely, Lots Nos 2000 RP, 2001, 2002, 2003, 2004, 2005, 2006, 2007 RP, 2009 RP, 2032, 2204, 2205, 2206, 2209 ARP, 2209 B1RP, 2210, 2212 RP, 2213, 2214 and 2217 RP in DD No 124 (“the Lots”): see Schedule C to the Affidavit.

7.  The 1997 Affidavit further disclosed 8 debts of the Deceased under the Promissory Notes as set out in Schedule E to the 1997 Affidavit:

	Name of Creditor	Description of Debt	Amount (HK$)
1.	David Kung	Promissory Note dated 20/7/1992 HKD1,300,000	$1,300,000.00
2.	David Kung	Promissory Note dated 5/8/1992 USD1,000,000.00	7,723,000.00
3.	David Kung	Promissory Note dated 5/8/1992 NZD2,200,000.00	12,100,000.00
4.	Laypark Company Limited (“Laypark”)	Promissory Note dated 5/8/1992 HKD340,000.00	340,000.00
5.	Yeuk Man Company Limited (“Yeuk Man”)	Promissory Note dated 5/8/1992 HKD290,000.00	290,000.00
6.	The Sam Kwong Weaving Factory (1952) Limited (“Sam Kwong”)	Promissory Note dated 7/8/1992 HKD7,000,000.00	7,000,000.00
7.	Sam Kwong	Promissory Note dated 21/9/1992 HKD243,300.00	243,300.00
8.	Capacious Investments Limited (“Capacious”)	Promissory Note dated 29/1/1993 USD1,623,543.42	12,538,625.83
		Total:	41,534,925.83

8.  By a letter dated 9 July 1997, the Estate Duty Office (“EDO”) requested TLI to provide documentary evidence in respect of the Loans.  A long process of piecemeal disclosure of documents by the Plaintiff, with the last batch of documents being disclosed only on 16 October 2020 (Day 9 of the hearing), followed.  I shall come back to the matter of discovery by the Plaintiff later in this judgment.

9.  On 30 March 1999, Joseph S C Chan & Co. (“JSCC”, TLI’s successors) wrote to the EDO enclosing (inter alia) a corrective affidavit dated 30 March 1999 (“the 1999 Affidavit”), in which the Plaintiff swore, in Schedule C thereto, that the half share of the Tin Ha Road Property had a value of HK$30 million as at the Valuation Date.  The EDO accepted the Plaintiff’s then valuation of the Tin Ha Road Property.

10.  On 23 November 2010, the Commissioner issued a final Certificate of Assessment (“the Final Certificate of Assessment”) pursuant to s 14(15) to Lily Fenn & Partners (“LFP”) as representative of the Plaintiff, assessing the value of the Estate at HK$124,349,500, and the amount of the estate duty payable at HK$12,059,027.50 (plus interest thereon).

11.  On 21 February 2011, the Plaintiff commenced the proceedings herein to appeal the Final Certificate of Assessment to the Court of First Instance pursuant to s 22(1).

THE LOANS

12.  The first issue to be determined is whether the Loans qualify for allowance under s 13(1)(i) in assessing the value of the Estate for the purpose of estate duty.

(A) The evidence of the Plaintiff and Ms Fenn

13.  The Deceased had been a client of Ms Fenn since 1984 when she was still in the employ of TLI.  The Deceased was already in her 80s at that time.  Ms Fenn handled the Deceased’s contentious probate action regarding her late husband (Kung Senior)’s estate.  Probate of Kung Senior’s will, in which the Deceased was named as the sole executrix and beneficiary of his estate, was granted to the Deceased eventually in May 1992 after she had successfully propounded the will in solemn form.

14.  Prior to the grant of probate, in 1991, Ms Fenn introduced the Deceased to a friend (Miss Chan) who was working as a bank officer in the private banking department of Coutts Bank in Switzerland (“Coutts”), and assisted the Deceased to open 2 bank accounts, namely, (i) Account No Z553454 (“the Coutts Account”), (ii) Account No 9032 33478 AFENDI (“the AFENDI Account”).  According to Ms Fenn, the Deceased was the sole legal and beneficial owner of the accounts, and the governing law of the accounts was Swiss Federal Law.

15.  Ms Fenn says that the Deceased decided to open the two Coutts accounts because her late husband’s estate (which the Deceased anticipated she would soon receive) consisted mainly of landed property or shares in private companies in Hong Kong holding land or immovable properties, and she wanted to put part of her assets overseas due to her concern about the future of Hong Kong arising from the change of sovereignty in 1997, the political and economic impact of such change, her dislike of keeping money in Hong Kong currency, and her family’s suffering in their ancestral village in Mainland China during the period from 1950 to 1980.

16.  Ms Fenn said that the Deceased told her that she (the Deceased) wished to borrow money from his youngest son (the Plaintiff) and various Hong Kong companies in which either she or her son had an interest, and have the monies taken out of Hong Kong by remittance to her bank account in Coutts.  Accordingly, in August and September 1992 and January 1993, Ms Fenn prepared the Promissory Notes for the Deceased’s signature in her presence, when the Deceased borrowed the Loans from the Plaintiff and various companies as set out in §7 above (see Fenn 3, §§11-13).

17.  Pausing here, I should mention that in Ms Fenn’s oral evidence, she stated that in fact she was the one who suggested to the Deceased to borrow the Loans as the Deceased wanted to invest overseas and remit money out of Hong Kong, and as the Deceased’s late husband had a lot of cash on hand, it would save estate duty if the money was remitted out of Hong Kong.  The Deceased agreed and fully understood the mechanism for borrowing the Loans.

18.  According to the Plaintiff, in July and August 1992, he made the 1^st, 2^nd and 3^rd Loans to the Deceased:

(1) a sum of HK$1,300,000.00 paid by him to TLI at the Deceased’s request on or before 20 July 1992;

(2) a sum of US$1,000,000.00 paid by him to TLI at the Deceased’s request on or before 5 August 1992; and

(3) a sum of NZ$2,200,000.00 paid by him to TLI at the Deceased’s request on or before 5 August 1992.

Further, the Plaintiff says that the Deceased also borrowed from the following companies (collectively “the Companies”) during the period from August 1992 to January 1993:

(4) a sum of HK$340,000.00 paid by Laypark to TLI at the Deceased’s request on or before 5 August 1992;

(5) a sum of HK$290,000.00 paid by Yeuk Man to TLI at the Deceased’s request on or before 5 August 1992;

(6) a sum of HK$7,000,000.00 paid by Sam Kwong to TLI at the Deceased’s request on or before 7 August 1992;

(7) a sum of HK$243,300.00 paid by Sam Kwong to TLI at the Deceased’s request on or before 21 September 1992 for her medical expenses; and

(8) a sum of US$1,623,543.42 paid by Capacious to TLI at the Deceased’s request on or before 29 January1993 for her investment purposes.

At all material times, the Companies were controlled by the Plaintiff.

19.  Between September 2016 and October 2016, the Companies (ie Laypark, Yeuk Man, Sam Kwong and Capacious) issued written demands to the Plaintiff (as Executor of the Estate) or LFP (as solicitors for the Estate) demanding for immediate repayment of the relevant loans.  The Plaintiff says that, to avoid litigation, he (through LFP) acknowledged the relevant loans on behalf of the Estate to the Companies in writing on 13 March 2017.

20.  Both the Plaintiff and Ms Fenn have confirmed that the Loans have not been repaid by the Deceased or the Estate, and are still outstanding.

(B) Documentary evidence in respect of the Loans

21.  Besides the Promissory Notes, each of which contained a written receipt of the relevant amount of the loan[1] and was signed by the Deceased as the “Borrower”, the Plaintiff has, over the years and in a piecemeal fashion, produced various documents as evidence of the Loans, including:

(1) In respect of the 1^st Loan - a receipt issued by TLI to the Plaintiff dated 20 July 1992 marked “Re Loan Agreement” for the amount of HK$1,300,000 said to be a “Loan to Kung Wong Sau Hin” paid by means of a HSBC cashier order no 45257.

(2) In respect of the 2^nd Loan - (i) a receipt issued by TLI to the Plaintiff dated 5 August 1992 for the amount of US$1,000,000 said to be a “Loan to Kung Wong Sau Hin” paid by means of “TT”, and (ii) a Telegraphic Transfer Application Form dated 6 August 1992 in respect of a remittance of US$1,000,000 by TLI to “National Westminster Bank, U.S.A., New York” in favour of “Coutts & Co. A.G.” with Kung Wong Sau Hin as the “Beneficiary”.

(3) In respect of the 3^rd Loan - (i) a receipt issued by TLI to the Plaintiff dated 5 August 1992 for the amount of NZ$2,200,000 said to be a “Loan to Kung Wong Sau Hin” paid by means of “TT”, (ii) a Telegraphic Transfer Application Form dated 6 August 1992 in respect of a remittance of NZ$2,200,000 by TLI to “ANZ Banking Group (New Zealand) Ltd, Wellington, New Zealand” in favour of “Coutts & Co. A.G.” with Kung Wong Sau Hin as the “Beneficiary”, (iii) a Credit Advice dated 10 August 1992 issued by Coutts to the Deceased stating that the amount of NZ$2,200,000 had been credited to the account No 553454.00-02 by “Order of Payment from” TLI, (iv) a “Fiduciary Call Deposit” slip dated 10 August 1992 issued by Coutts to the Deceased stating that a deposit in the sum of NZ$2,200,000 had been placed exclusively for the Deceased’s account No 553454.00-02, and (v) a “Fiduciary Call Deposit” slip dated 27 August 1992 issued by Coutts to the Deceased confirming the repayment of the amount of NZ$2,200,000 (plus interest) to be credited to the account No 553454.00-02.

(4) In respect of the 8^th Loan - (i) a Telegraphic Transfer Application Form dated 29 January 1993 in respect of a remittance of US$1,623,543.42 by TLI to “National Westminster Bank, U.S.A., New York” in favour of “Coutts & Co. A.G.” with Kung Wong Sau Hin as the “Beneficiary”, and (ii) a Credit Advice dated 3 February 1993 issued by Coutts to the Deceased stating that the amount of US$1,623,543.42 had been credited to the account No 553454.00-01 by “Order of Payment from” TLI.

At this juncture, it may be noted that the Coutts Account appeared to have two sub-accounts, namely: (i) No 553454.00-01 being a US$ account, and (ii) No 553454.00-02 being a NZ$ account.

22.  In addition, in relation to the 1^st, 4^th, 5^th and 6^th Loans totalling HK$8,930,000:

(1) The Plaintiff has produced (i) a Telegraphic Transfer Application Form dated 19 August 1992 in respect of a remittance of HK$10,200,000 from TLI to “National Westminster Bank, U.S.A., New York” for the account of “Coutts and Co. A.G., Zurich, Switzerland” for the attention of “Mr. Reto Davatz” (who, according to Ms Fenn, was a bank officer handling the Deceased’s accounts at Coutts), and (ii) a Credit Advice dated 21 August 1992 issued by Coutts to the Deceased stating that the amount of US$1,319,095.16 had been credited to the account No 553454.00-02 by “Order of Payment from” TLI.

(2) The amount of US$1,319,095.16, together with bank charges of US$12.5 as stated on the Credit Advice of 21 August 1992, came to the total of US$1,319,107.66, which matched exactly with the sum of HK$10,200,000 mentioned in the aforesaid Application Form of 19 August 1992 (at the exchange rate of US$1 to HK$7.7325 as stated on the Application Form)[2].

(3) Mr Edward Chan, SC (for the Plaintiff) submits, or surmises, that the difference between amount of HK$10,200,000 mentioned in the Application Form of 19 August 1992 and the total amount of the 1^st, 4^th, 5^th and 6^th Loans (HK$8,930,000) represented some other money of the Deceased in the client’s account of TLI.

23.  In so far as the 7^th Loan is concerned, it is the Plaintiff’s case that the proceeds thereof were not transferred by TLI to the Deceased’s account at Coutts because they were applied for paying the Deceased’s medical expenses in Hong Kong (see Fenn 3, §14).

24.  Mr Chan also refers the court to a “Fiduciary Call Deposit” slip dated 2 March 1993 issued by Coutts to the Deceased stating that a deposit in the sum of US$4,231,000 had been placed exclusively for the Deceased’s account No 553454.00-01.  It is not clear how this sum of US$4,231,000 was related to the Loans allegedly taken by the Deceased.  I do not consider that this document takes the Plaintiff’s case any further.

25.  Other than the Promissory Notes, there has been very substantial delay in the Plaintiff’s discovery or disclosure of the above documents:

Documents Disclosed	Date of Disclosure
8 Promissory Notes	TLI’s letter dated 18 April 1997
(i) Credit Advice for NZ$2,200,000 dated 10 August 1992 in respect of the 3rd Loan; (ii) Fiduciary Call Deposit Slip for NZ$2,200,000 dated 10 August 1992 in respect of the 3rd Loan; (iii) Fiduciary Call Deposit Slip for NZ$2,201,537.91 dated 27 August 1992 in respect of the 3rd Loan; (iv) Credit Advice for US$1,319,095.16 dated 21 August 1992 in respect of 1st, 4th, 5th and 6th Loans (as submitted by Mr Chan); (v) Credit Advice for US$1,623,543.42 dated 3 February 1993 in respect of the 8th Loan; (vi) Fiduciary Deposit Advice slip for US$4,231,000 dated 2 March 1993 (collectively “the 2016 Discovered Documents”)	Kung 2 dated 9 November 2016
(i) TLI Receipt HK$1,300,000 dated 20 July 1992 in respect of 1st Loan; (ii) TLI Receipt for US$1,000,000 dated 5 August 1992 in respect of 2nd Loan; (iii) Telegraphic Transfer Application Form for US$1,000,000 dated 6 August 1992 in respect of 2nd Loan; (iv) TLI Receipt for NZ$2,200,000 dated 5 August 1992 in respect of 3rd Loan; (v) Telegraphic Transfer Application Form for NZ$2,200,000 dated 6 August 1992 in respect of 3rd Loan; (vi) Telegraphic Transfer Application Form for US$1,623,543.42 dated 29 January 1993 in respect of 8th Loan; (vii) Telegraphic Transfer Application Form for HK$10,200,000 dated 19 August 1992 in respect of 1st, 4th, 5th and 6th Loans (as submitted by Mr Chan) (collectively “the 2020 Discovered Documents”)	Fenn 10 filed on 16 October 2020

26.  The Plaintiff’s explanations for the delay in the disclosure of the 2016 Discovered Documents and 2020 Discovered Documents are as follows:

(1) In respect of the 2016 Discovered Documents, the Plaintiff said in Kung 3 filed on 9 November 2016 that they had recently been “unearthed” when boxes in which the Deceased’s personal effects had been packed and sealed and kept in Sam Kwong’s warehouse were opened (see Kung 3 at §7, and Fenn 2 at §6).

(2) In respect of the 2020 Discovered Documents, Ms Fenn said in Fenn 10 filed on 16 October 2020 that on or about 15 October 2020, she was advised by Mr Chan to look for some relevant documents in TLI’s files for HCMP 1614/1990 (relating to the adverse possession claims more particular described below), and upon going through the old files of TLI retrieved from the warehouse she came across a folder which contained original copies of those documents.

Having regard to the history of this matter, in particular the previous attempts of the Commissioner to seek discovery of relevant bank documents by the Plaintiff in respect of the Loans (see §28 below), the attitude of the Plaintiff to the matter of discovery of relevant documents can only be described as cavalier.

(C) The Commissioner’s case in respect of the Loans

27.  The Commissioner was not privy to the transactions in respect of the Loans, and has not been able to adduce positive evidence to prove that the Loans were never made to the Deceased, or the transactions as contained in or evidenced by the Promissory Notes were sham transactions, or the various documents produced by the Plaintiff to prove the Loans were not genuine documents.  Nevertheless, Ms Yvonne Cheng, SC on behalf of the Commissioner has mounted a forceful case that the Plaintiff has failed to prove on the totality of the evidence and materials before the court that the Loans represented debts incurred by the Deceased bona fide, for full consideration for money or money’s worth, wholly for the Deceased’s own use and benefit, and taking effect out of her interest qualifying for allowance under s 13(1).  Specifically, Ms Cheng argues that:

(1) There is no reliable evidence that the Loans were ever made as alleged.  In particular, there is a conspicuous lack of evidence to support the Plaintiff’s allegations that the money advanced under the Loans had, in fact, either been transferred from the alleged creditors or to the Deceased.  Apart from two credit advices showing that there was an amount of NZ$2.2m and an amount of US$1,623,523.42 received in the Coutts Account, there are no other bank advices, remittance slips etc. corresponding to the amounts of any of the Loans and showing payment from the creditors or to the Deceased (“First Submission - No Reliable Evidence of the Loans”).

(2) Even if any of the Loans were made, there is no reliable evidence that the Debts were incurred bona fide, or that they were wholly for the use and benefit of the Deceased in the light of the Plaintiff’s case as to what the funds were for (“Second Submission - No Reliable Evidence of Use and Benefit”).

(3) The contemporaneous evidence undermines the Plaintiff’s claim in respect of the Loans.  The Plaintiff’s case as to how and why the Loans came to be made is not supported by the evidence.  Apart from the Promissory Notes and certain bare assertions, there is no reliable evidence of either any loan agreement, or intention that the Deceased would repay the Loans to the alleged creditors.  Contrary to the Plaintiff’s own case, the Deceased was wealthy and had no need to borrow money at the time.  Further, even if there have been any flows of money into the Deceased’s Coutts Account, they could simply have been the proceeds of sale of the Deceased’s properties (“Third Submission - Contemporaneous Evidence Undermines Claim of Alleged Loans”).

28.  Ms Cheng also submits that there has been extraordinary delay and evasiveness on the Plaintiff’s part in responding to the EDO’s queries since 1997.  Ms Cheng refers to and relies upon the following facts and matters in the Commissioner’s closing submissions[3]:

(1) By letter dated 9 July 1997 (“the 09.07.1997 Letter”), the EDO requested TLI to provide further information on the assets and liabilities disclosed in the 1997 Affidavit, including:

(a) the financial accounts of all the private companies listed in Schedule A to the 1997 Affidavit for the 3 years prior to the Deceased’s death (“Financial Accounts”); and

(b) documentary evidence to show how the Loans were used by the Deceased, and if they were deposited into the Deceased’s bank accounts, copies of bank statements showing the receipt of the loan money.

(2) In the absence of any response by the Plaintiff, the EDO sent a reminder to TLI on 21 October 1997, and in the meantime sought to agree with the Plaintiff on the valuations of certain properties listed in the 1997 Affidavit.

(3) Notwithstanding further reminders sent by the EDO on 9 December 1999, 7 March 2000, 24 April 2000 and 21 June 2000, the Plaintiff failed to respond to the outstanding matters set out in the 09.07.1997 Letter.

(4) On 22 June 2000, the Plaintiff wrote to the Commissioner through his 3^rd set of solicitors, Christine M. Koo & Company (“CMK”), and stated that the Financial Accounts of the private companies were to be provided to the EDO in due course.

(5) However, CMK failed to provide the Financial Accounts or respond to any other queries despite the EDO’s chasers issued on 18 August 2000, 16 October 2000 and 28 November 2000.

(6) On 27 January 2001, CMK wrote to the EDO.  But instead of producing the Financial Accounts or responding to any of the outstanding queries (since 9 July 1997), they wrote to -

(a) inform the Commissioner that the Plaintiff had succeeded in the HCA 12229/1994 proceedings and been awarded HK$8,862,207.46, and

(b) apply for a 2nd set of provisional estate duty clearance papers for the purpose of receiving compensation from the Government for the resumption of certain portions of land listed under items 2 and 3 of Schedule C to the 1999 Affidavit.

(7) On 18 May 2001, the EDO granted the 2nd set of provisional estate duty clearance papers to the Plaintiff.

(8) In the absence of any response from the Plaintiff, the EDO issued further reminders on 3 January 2002, 27 February 2002 and 19 April 2002.

(9) On 25 April 2002, LFP wrote to inform the EDO that they had been instructed to act in place of CMK (as the Plaintiff’s 4^th set of solicitors).

(10) By letter dated 14 June 2002, LFP requested the Commissioner to summarise “all outstanding matters” which had to be addressed by the Plaintiff, notwithstanding that Ms Fenn had all along been the handling solicitor of the Plaintiff’s application since the outset and throughout her previous stints at TLI, JSCC and CMK.

(11) By letter dated 9 July 2002, the EDO listed the matters awaiting the Plaintiff’s response – many of which had been outstanding since the 09.07.1997 Letter – including:

(a) provision of the Financial Accounts of the private companies;

(b) the status of the proceedings in HCMP 1614/1990;

(c) provision of documentary evidence showing how the Loans were used by the Deceased, and if they were deposited into the Deceased’s bank accounts, copy of bank statements showing the receipt of the loan moneys; and

(d) confirmation of whether the Deceased had operated any bank accounts within 3 years prior to her death, and if so, provision of the details and copies of such bank statements.

(12) Following the EDO’s chasers issued on 16 August 2002, 30 September 2002 and 12 November 2002, LFP eventually replied by letter dated 11 December 2002.

(a) In that letter, LFP claimed that the “various debts due from [the Deceased] to various companies in Hong Kong were deposited to the [Deceased’s] own bank accounts in Switzerland maintained with Coutts Bank (Switzerland) Limited… for her own benefits and use”.

(b) It was further claimed that the Deceased had not operated any bank accounts (including joint) within 3 years prior to her death.

(c) However, other queries remained outstanding, and no Financial Accounts of the private companies were supplied to the EDO.

(13) By letter dated 23 December 2002, the EDO requested LFP to follow up on a number of matters, including the provision of:

(a) documentary evidence showing how the 3 Loans said to have been advanced by the Plaintiff to the Deceased (totalling HK$21.123 million) were made available to the Deceased and the source of funds therefor;

(b) copies of statements of the Deceased’s bank account No. Z553454 held with the Coutts Bank (Switzerland) Limited (ie the Coutts Account) covering the period from 20 July 1992 to 19 October1996; and

(c) documentary evidence to support the claim that the Loans were made available to the Deceased at the age of 93 for her benefits and use.

(14) Despite 6 further reminders sent by the EDO, LFP did not respond until almost 1 year later on 20 November 2003.  In that letter, LFP claimed (inter alia) that:

(a) the Loans had been provided by the alleged creditors in cash and remitted through the clients’ account of TLI into the Coutts Account in Switzerland;

(b) LFP had “touched base with T.L. Ip & Co. for their assistance” to ascertain whether such records were still available; and

(c) the Plaintiff had contacted Coutts for the bank statements of the Coutts Account covering the period from 20 July 1992 to 19 October 1996, and these would be provided to the EDO if it did not violate the secrecy law in Switzerland and if Coutts was prepared to release them to the Plaintiff.

(15) By letter dated 21 January 2004, the EDO repeated its requests for various outstanding queries which LFP still failed to address.

(16) Over the next 6 years, the EDO issued a total of 16 chasers to LFP between 19 March 2004 and 23 March 2010, and still no response was forthcoming.

(17) By letter dated 30 June 2010, the EDO requested that LFP respond within the next 30 days, failing which an estimated assessment might be raised under s 14(15).  The EDO further repeated that based on the available information, the Plaintiff’s claim for the Debts was not acceptable for estate duty purposes.

(18) On 30 July 2010, LFP replied to the EDO, stating (inter alia) that the Loans had been used for the medical, nursing and housing expenses of, and overseas investments by, the Deceased.  It was also claimed that copies of the Deceased’s bank statements of the Coutts Account had been provided to and inspected by LFP and then returned to the Plaintiff, who was trying to locate the originals of such statements to be provided to the EDO.

(19) By letter dated 19 August 2010, the EDO requested LFP to provide further outstanding information to substantiate the Plaintiff’s claims, and to make provisional payment of estate duty and interest in the sum of HK$10,323,882.50.  This was paid by the Plaintiff on 27 August 2010 and 22 September 2010.

(20) By letter dated 13 October 2010, the EDO set out the estimated value of the Deceased’s interest in various private companies (which had not been included in the previous draft computation dated 19 August 2010), and reiterated that in the absence of sufficient documentary evidence, the Plaintiff’s claim for the Debts would not be accepted for estate duty purposes.  The EDO further stated that due to LFP’s failure to respond to the previous outstanding queries, an estimated assessment would be raised in due course.

(21) In the absence of any response from LFP, the EDO issued the Final Certificate of Assessment on 23 November 2010 pursuant to s 14(15).

(22) On 11 February 2011, the Plaintiff commenced these appeal proceedings under s 22(1).

In the light of the aforesaid matters, I consider Ms Cheng’s submission that there has been extraordinary delay and evasiveness on the Plaintiff’s part in responding to the EDO’s queries since 1997 to be fully justified.

29.  I now turn to consider the three principal points made by Ms Cheng referred to in §27 above.  Ms Cheng’s detailed submissions are fully set out at pages 20 to 98 of her Closing Submissions dated 23 October 2020, for which I am grateful.  I do not propose to refer to all of them in this judgment, but shall refer to the more significant points made by Ms Cheng.

30.  In respect of the First Submission - No Reliable Evidence of the Loans, Ms Cheng says that the alleged creditors under the Promissory Notes are parties closely related to the Plaintiff, and the Promissory Notes are self-serving documents which cannot simply be taken at face value.  The veracity of what they assert must be tested by reference to the other evidence, in particular contemporaneous documentary evidence, and the lack thereof.  I set out below the main submissions made by Ms Cheng[4]:

(i) No evidence of transfer from alleged creditors

(1) Despite repeated requests, the Plaintiff has never provided any contemporaneous evidence to show that money under any of the Loans was transferred from any of the alleged creditors.  In Fenn 1, at §6, Ms Fenn claims that the amounts of the loans “were deposited” into the client accounts of TLI.  She did not identify who made the alleged deposits, nor did she exhibit any bank advices from the creditors’ accounts or bank statements of TLI to show the dates and amounts of the supposed deposits.

(2) The Plaintiff has never produced any cheque stubs, bank statements, bank slips, remittance advices or transfer instructions to evidence the withdrawal of his funds for the making of the 1^st, 2^nd and 3^rd Loans, despite the fact that he knew at the latest by 1997/1999 that the EDO was asking for documentary proof of the Loans.

(3) The Plaintiff could not explain why he did not keep cheque stubs or bank receipts or statements to prove his making of the Loans, save to say that nobody kept things from so long ago.  Even if the cheque stubs, bank receipts or statements had not been kept, copies could readily have been obtained from the bank had they been asked for.  There is no suggestion that copies of cheques or bank documents could not have been requested by either 1997 or 1999.

(4) If, as Ms Fenn said for the first time in the witness box, the setting up of the Debts was intended to be a tax-saving scheme, this should have been all the more reason why documentation would have been preserved to evidence the scheme.

(5) The failure to produce documentation to show the making of the Loans by any of the creditors, and the delay and evasion in responding to the EDO’s requests, gives rise to the inference that such documentation either does not exist, or, if produced, would have undermined the claim that the Loans were made as alleged.  The delay has meant that the EDO has been prevented from making inquiries into what really happened.

(6) There are suggestions in the affidavit evidence that the Plaintiff was too elderly and ill to tend to matters.  However, at the time of the Deceased’s death, the Plaintiff was only 56 years of age.  As demonstrated in the witness box, the Plaintiff is also a careful man, reading documents with care and asking for cross-references when questioned.  It is not credible to suggest that the Plaintiff could not have obtained documentary evidence to show the payments he made pursuant to the Loans, had he so wished.

(7) With respect to the other 4 company creditors, there is likewise a notable absence of any bank statements, bank slips, remittance advices or transfer instructions to evidence the substantial amounts of loans (totalling some HK$20.38 million) allegedly transferred from them.

(8) If any of these Loans had in fact been made, there is no reason why such documents were not produced in response to the EDO’s repeated requests over the years – especially when one or more of the Plaintiff, Ms Fenn and a related service company was the shareholder, director or secretary of those companies at the material times and must have had possession of the relevant documentation.

(9) There is also a notable lack of any other evidence to indicate that the 4 company creditors made any transfers of the loan amounts.

(10) The audited accounts of Sam Kwong relied upon by the Plaintiff do not provide any independent verification of the 6^th and 7^th Loans allegedly made by it to the Deceased.  The accounts, although it purported to show the assets and liabilities of Sam Kwong as at 19 October 1996, were prepared some 23 years after the making of the loans (23 October 2015).  The auditors never verified the loans, including whether any money was paid or received, and simply took the two promissory notes at face value.

(11) On 18 July 1997, the EDO sent letters to Capacious and Laypark asking for a copy of the statement of the Deceased’s current / loan account with the company, and whether any sums were owing by the Deceased to the company as at the date of her death.  No reply was ever received, despite the letters being sent also to JSCC on 9 December 1999 and numerous further reminders for years thereafter, save a mere holding reply given by CMK dated 22 June 2000.

(12) On 9 July 2002, the EDO once again asked for documentary evidence relating to the Loans from the four company creditors.  Again, the same pattern of non-reply, delay and deflection ensued.  There were reminders but no responses.  LFP’s letter of 11 December 2002 claimed that the financial statements of the private companies would be supplied “in due course” after audit.  On 21 January 2004, the EDO wrote again to ask whether the accounts could be submitted.  Again, there was no reply despite numerous reminders.  Only when the EDO threatened an estimated assessment by letter of 30 June 2010 did LFP reply, but still with no substantive response on the point.  On 19 August 2010, the EDO asked for a specific date by which the information would be available, the matter having been outstanding for 13 years, but even this was not given.

(13) If the companies had made genuine loans to the Deceased, there is no reason why they (or their solicitors) would not have replied to the EDO.  The failure to answer, over so many years, leads to the inference that they would not have been able to substantiate the Loans if asked.

(14) In respect of the 8^th Promissory Note, it does not claim that the Deceased received a loan from Capacious.  Instead, it reads: “RECEIVED from DAVID KUNG…” the alleged sum, not Capacious.  When asked, the Plaintiff was unable to explain this discrepancy.  This is yet another illustration of why the Promissory Notes are not reliable or conclusive evidence, and cannot be taken at face value without consideration of other contemporaneous evidence at the time.

(ii) No evidence of any receipt of funds by TLI

(15) It is the Plaintiff’s case (i) that each of the 8 Loans was in the first place transmitted from the respective creditor to the TLI clients’ account, and (ii) that 7 out of the 8 Loans (except the alleged loan under the 7^th Promissory Note) were then transferred onwards to the Deceased’s Coutts Account in Switzerland.

(16) Yet, there is a striking lack of documents to evidence the receipt by TLI’s clients’ account of funds from the alleged creditors, or substantial transfers into TLI’s clients’ account. The absence of contemporaneous documentation is all the more remarkable bearing in mind, amongst other matters, that (i) at the time the EDO first requested documentary evidence for the Debts on 9 July 1997, TLI was still the firm of solicitors representing the Plaintiff, and (ii) during oral testimony, Ms Fenn admitted that whilst she was still a partner at TLI, all the documents regarding the outward remittances of funds into the Deceased’s bank account, as well as the inward transfers from the alleged creditors, would have been kept by TLI’s accounting department at the time.  She admitted that these documents would have been readily available to her as a partner, and there would have been “no difficulty in tracing” them if she did it “early enough”, and (iii) TLI and Ms Fenn have been the handling solicitors for the Deceased’s family since the 1980s, and were involved in applying for grant of probate and estate duty clearance in respect of Kung Senior’s estate.  As experienced solicitors, they must have known what documentary evidence would be required to be produced for estate duty purposes, especially if, as Ms Fenn claimed, the making of the Loans was intended to be a tax-saving scheme.

(17) When asked why she failed to procure proof of remittance from TLI whilst she was still a partner at that firm, Ms Fenn claimed it was due to her “oversight” that she “forgot” to make photocopies at the time.  But this is not credible.  The EDO had been asking for the documents at the time when she was still a partner at TLI, so she could not have “forgotten” to retrieve the documents.  Pausing here, I should mention that the Plaintiff has, belatedly, in November 2016 and October 2020 produced some documents (ie Credit Advices and Telegraphic Transfer Application Forms) evidencing the remittance of some of the proceeds of the Loans from TLI to the Coutts Account (see §25 above).

(18) It is plain that Ms Fenn never made any serious attempts to obtain the TLI remittance records, whether before or after she left TLI.  The irresistible inference to be drawn is that such documentary evidence has not been produced as it would undermine the Plaintiff’s claim that that the Loans were made.

(iii) No evidence of receipt of the Loans

(19) According to the Plaintiff, the loan monies advanced under 7 out of the 8 Promissory Notes (ie all the Promissory Notes except for the 7^th one) were remitted from the TLI clients’ account to the Deceased’s Coutts Account in Switzerland between 1992 and 1993.

(20) However, despite the EDO’s repeated requests for supporting evidence of the Debts since 9 July 1997, the Plaintiff has never produced a single bank statement of the Coutts Account which evidences the receipt of the Loans.

(21) Instead, the Plaintiff and Ms Fenn have over the years proffered 5 different and mutating explanations (the details of which are set out in §§88-126 of Ms Cheng’s Closing Submissions) as to why the bank statements of the Deceased’s Coutts Account could not be produced.  Each of these 5 explanations is problematic and, when taken together, further contradict each other.

(22) In truth -

(a) The Plaintiff had the statements, and so did Ms Fenn, but they inexplicably failed to provide them to the EDO.

(b) Any replacement or additional copies of the Coutts Statements could have been obtained easily, as shown by LFP’s letter of request of 19 April 2016, and the consequent retrieval in May 2016 by Ms Fenn of the statements of the Coutts and AFENDI Accounts (from 1997 to 2001).  In particular, no grant of probate was necessary, nor were there any issues with breaching any Swiss secrecy laws; all the Plaintiff had to provide were certified copies of the Deceased’s death certificate, her will, and his passport.

(c) The Plaintiff never made any serious attempts to obtain from Coutts the Coutts Statements prior to LFP’s letter of 19 April 2016 (as is apparent from the terms of the letter).

(d) There is no credible explanation as to why the Plaintiff’s request for bank documents was not made in 1997, or in fact at any time during the 19 years up until April 2016 when it was known that it would be too late.

(23) The absence of the Coutts bank statements, together with the incredible explanations for such absence, give rise to the inference that the Coutts Statements would show that the Loans were not received by the Deceased in her bank account, or that even if they were, the treatment of the proceeds thereafter undermines the claim that the Loans were bona fide, or made for good consideration, or that they were for the Deceased’s own use or benefit.

(24) There is no documentary evidence that the loan money under the 7^th Promissory Note (allegedly used for the Deceased’s medical expenses) was ever received by the Deceased, whether in Hong Kong or in the Coutts Account.  The Plaintiff has proffered no documentary evidence or explanation as to how the sum of HK$243,000 was received by the Deceased.

31.  In respect of the Second Submission - No Reliable Evidence of Use and Benefit, I set out below the main submissions made by Ms Cheng[5]:

(i) Inexplicable delay of 13 years before any response was provided

(1) Notwithstanding repeated requests by the EDO (since 9 July 1997), the Plaintiff is unable to produce any documentary or contemporaneous evidence to show how the Deceased had allegedly used and benefited from the HK$41.5m odd of loans at the age of 93.

(2) The EDO first requested the Plaintiff in its letter dated 9 September 1997 to provide documentary evidence showing how the Loans were used by the Deceased.  It then took the Plaintiff 13 years before providing any response (in LFP’s letter dated 30 July 2010) as to how the Loans were said to have been used by the Deceased, notwithstanding the numerous chasers issued by the EDO over the years.

(3) During Ms Fenn’s oral testimony, she offered a number of unconvincing explanations (the details of which are set out in §152 of Ms Cheng’s Closing Submissions) as to why it had taken her and the Plaintiff 13 years to explain the alleged uses of the Loans by the Deceased.

(4) Even after years of delay, the Plaintiff and those representing him remained unable to provide any cogent evidence as to how the Loans were used by the Deceased during her lifetime.  Over the years, a number of varying accounts have been provided as follows -

(a) The Plaintiff’s first response was given in LFP’s letter dated 30 July 2010, which claimed that the Debts were “incurred exclusively for the benefits and use of the deceased” on (i) medical expenses, (ii) nursing expenses, (iii) household expenses, and (iv) investments overseas. However, no explanation was given as to why it had taken the Plaintiff over 13 years to respond, nor why he was unable to produce any documentary evidence as requested by the EDO since 9 July 1997.

(b) One month after issuance of the Originating Summons, Fenn 1 (§§4 and 8) and Kung 1 (§12) (both dated 14 March 2011) asserted that the Loans were used for medical and nursing expenses, and overseas investment.  This assertion in Kung 1 and Fenn 2 was unaccompanied by any supporting evidence, invoices, receipts or any sort of numerical breakdown.  Further, no mention was made of “household expenses” which had also been claimed in LFP’s 30 July 2010 letter.

(c) Over 5.5 years after the commencement of these proceedings, the Plaintiff applied to adduce Kung 2 and Fenn 3 (9 November 2016), wherein he produced, for the first time, any form of documents which were said to support his claim for the alleged uses of the loan money.

(d) Then in the Plaintiff’s opening, the Plaintiff raised for the first time (22 years after the EDO’s 1997 enquiry) a new claim that the Loans were used to “fund litigation”.

(5) If the contentions as to any of the uses of the Loans were true, the Plaintiff and/or Ms Fenn must have been in a position to provide such basic information and produce contemporaneous evidence at the time of the EDO’s first request.  It can be inferred from the Plaintiff’s marked silence up until 2010 that these claims cannot be supported by evidence, and the Loans (even if made) were never applied for the Deceased’s sole use and benefit.

(ii) Alleged use of funds for medical, nursing expenses

(6) In past correspondence and affidavits, the Plaintiff sought to give the impression that a considerable amount of the Loans was used for medical expenses.  In particular, Kung 1, §12, claimed that the Loans were used “to cover [the Deceased] medical and nursing expenses and investments overseas”, exhibiting a letter from LFP of 30 July 2010 claiming that the medical expenses incurred “were in eight (8) digits”, and that the Deceased had spent “at least one year in private ward at the Hong Kong Sanatorium and Hospital”.

(7) However, in cross-examination, the Plaintiff resiled from the $10m figure.  He was evasive and refused to say what portion of the $41m of the Loans was supposedly spent on medical expenses.  Finally, he said that $2m was spent on hospital bills, which related to 6 months of hospital stay.  Since the Deceased spent 10 months, a bit more than $2m would have been spent on hospital bills.  Then when asked further whether there were any other significant amounts spent on medical expenses apart from hospital bills, the Plaintiff said “Not that I know of”.

(8) Thus on the Plaintiff’s testimony, at most only $2-3m of the $41m odd was spent on the Deceased’s medical bills, contrary to what was asserted previously to the EDO.

(9) Yet even this figure is incorrect, because other evidence shows that the Loans were not used on payment of medical expenses.  According to Ms Fenn -

(a) out of the 8 Loans, the Deceased only retained HK$243,000 (under the 7^th Promissory Note) in Hong Kong, and this was used for payment of medical expenses;

(b) all the other Loans were remitted through the TLI clients’ account to the Coutts Account in Switzerland; and

(c) “all the money remitted by T.L. Ip & Co. to the personal bank account of Madam Kung maintained with Coutts Bank in Switzerland had never been remitted back by Madam Kung to Hong Kong for whatever purposes howsoever” (Fenn 9, §57).

(10) From this evidence, it must follow that at most only HK$243,000 out of the HK$41,534,925.83 was used for payment of medical expenses in Hong Kong.

(11) In fact, there is no evidence that even this HK$243,000 was spent on the Deceased’s medical expenses.  There is no evidence or explanation at all as to how this sum was dealt with after being allegedly transferred from Sam Kwong to the TLI clients’ account.  The Plaintiff has not adduced any bank transfer slips, bank statements, credit advices, cheques, bills, receipts, or any other document to show that payment was made out of this account to settle medical bills for the Deceased’s benefit.  It is not usual for solicitors to be involved in the payment of clients’ hospital bills and in the absence of any evidence that this was the case (eg cheque stubs from TLI, file notes from TLI, medical bills, receipts), the court should decline to find that HK$243,000 was spent on medical expenses.

(12) Insofar as the Plaintiff claims that the Loans were spent on “nursing” expenses, the Plaintiff agreed that this was not a separate category of expenditure from “medical” expenses.  There is no other evidence of any other “nursing” expenses and in any event supposedly none of the HK$41m made its way back to Hong Kong in any way whatsoever.

(iii) Alleged use of loan monies for overseas investments

(13) Apart from medical and nursing expenses, the Loans were supposedly used for the purpose of making overseas investments: Kung 1, §12.  The Plaintiff further claimed that the Deceased’s intention in borrowing “was to invest in foreign currencies overseas and to earn interest for her own use and benefit absolutely”.

(14) On the Plaintiff’s own evidence, this means that apart from the HK$243,000 which was retained in Hong Kong, some HK$41.2m was used on overseas investments.

(15) It is inherently improbable that a 93-year-old lady, who was “in ill health and required constant medical attendance and nursing around the clock” since 1982, and who was not very literate, would have decided to take out substantial loans in 1992 and 1993 in order to spend some HK$41.2 million on investing in foreign currencies.

(16) In any event, there is a lack of evidence as to the supposed investments; and the evidence proffered by the Plaintiff and Ms Fenn is contradictory.

(17) The only documents which the Plaintiff could produce as evidence of the supposed investments were the fiduciary call deposit slips.  However -

(a) In respect of the ones referred to in §21(3) above, they showed that the NZ$2.2 million was put on a 48-hour notice deposit at 4.75% pa for an unknown period with effect from 11 August 1992, and that the deposit was terminated on 31 August 1992 – there is nothing to show what happened to this sum thereafter, to whom it was transferred or for whose benefit it was applied.

(b) In respect of the ones referred to in §24 above, it showed the placing of US$4.231 million with Coutts & Co AG (Overseas) Ltd on a 48-hour notice deposit at 2.25% pa for an unknown period of time, from 1 March 1993 – but (i) there is nothing to suggest that this sum has anything to do with the Loans in the first place; and (ii) in any event, there is nothing to indicate how this sum was used or to whom it was transferred thereafter.

(c) If the Deceased had indeed engaged in such “investments”, there ought to have been evidence of their existence as at the time of her death.  Yet the statement of account as at 1 July 1997 to 31 July 1997 shows a negligible balance.  No explanation has been given as to where the HK$41.3m worth of investments went.

(18) If the Deceased did use the Loans to make overseas investments, the Plaintiff and/or Ms Fenn must have assisted her and seen the supporting financial statements, given her state of health and lack of familiarity with English and general low level of literacy.  There is simply no conceivable reason why these have not been produced by the Plaintiff to make good his claim for an estate duty allowance, other than their non-existence or unfavourable tenor.

(19) Ultimately, the evidence which is most telling against the Plaintiff’s claim that the Deceased used the Loans for investments in foreign currencies is the state of the Coutts Account.  There was hardly any money in the account when it was closed by the end of 1997.  If investments in foreign currencies had been made, what became of them?  It is highly improbable that HK$41m worth of foreign currency deposits – if that was what they were – would have just vanished.  The Plaintiff and Ms Fenn claimed to have no knowledge of what happened to the money in the account.  The Plaintiff claimed that he went to Zurich after the Deceased’s death because there ought to be a lot of money in the account, yet he expressed no surprise on learning that there was no money left in the account.

(iv) Alleged used of loan monies for household expenses

(20) There was a passing reference to the use of the Loans on the Deceased’s household expenses in LFP’s letter of 30 July 2010, but no evidence has ever been produced to show that any of the HK$41.3m was spent on such expenses.

(21) When asked about it, the Plaintiff accepted that this was part and parcel of his reference to medical and nursing expenses.

(22) In any event, since all but HK$243,000 of the Loans were allegedly remitted overseas and never sent back to Hong Kong, the funds could not have been spent on household expenses in Hong Kong.

(v) Alleged use of loan monies to fund litigation

(23) In §40 of the Plaintiff’s opening, it was alleged for the first time that the loan monies were used to fund litigation.  This assertion was confirmed by the Plaintiff in his oral testimony.  This new contention was made more than 22 years after the EDO first asked about the use of the Loans.

(24) When asked why the alleged use for funding litigation had never been mentioned previously, the Plaintiff was unable to give a coherent answer, and merely disagreed with what was put to him without any explanation.

(vi) The signatories to the Coutts Account

(25) The Plaintiff has taken pains to emphasise that the Deceased was the sole legal and beneficial owner of the Coutts Account (and the AFENDI Account), so as to bolster the claim that the Loans were applied wholly for the Deceased’s use and benefit.

(26) However, and even if that be the case, the Deceased was clearly not the sole signatory to the Coutts Account.  As such, even if any sums were transferred to the Coutts Account, the Plaintiff fails to show that they were applied wholly for the Deceased’s use and benefit within the meaning of s.13(1), given the absence of evidence as to what became of such sums, and the fact that someone else (such as the Plaintiff) could have used and benefited from those sums instead.

(27) Ms Fenn gave evidence that the Deceased was the only person who could operate the Coutts Account, because she had witnessed the account opening mandate.  This assertion is wholly unsupported by any contemporaneous or documentary evidence, and is incredible for the reasons below.

(28) First, no documentary evidence (such as a bank mandate) has been provided to evidence that the Deceased was the sole signatory to the accounts.

(29) Second, the bank statements produced show movements in the AFENDI Account even after the Deceased had passed away in October 1996.  These show that someone else was able to operate the Deceased’s account.

(30) Further, by the time the Coutts Account and the AFENDI Account were closed (on 31 December 1997 and 28 February 2001 respectively), there was a negative balance of US$47 in the former, and a positive balance of only US$11,184 in the latter.

(31) If, as the Plaintiff and Ms Fenn claimed, the loan monies were placed on time deposit in the Coutts Account to earn interest, and no one else could operate the account, it is inexplicable what had become of the HK$41.2m odd of loan monies supposedly placed in the Coutts Account for the Deceased’s “use and benefit”.

(32) Furthermore, it is Ms Fenn’s evidence that, even after the period of the Loans (from July 1992 to January 1993), a sum of at least approximately HK$87m was further transmitted to the Coutts Account, after various properties were sold by the Deceased.

(33) If, on the Plaintiff’s case, (i) a total of HK$41.2m (1992-1993) and HK$87m (1994-1996) had been transmitted to the Coutts Account; (ii) no one else apart from the Deceased could have operated the Coutts Account; and (iii) by 1997, the Coutts Account was already in negative balance; then it is wholly inexplicable what had become of the HK$41.2m + HK$87m, which were very substantial sums at the time.  It is incredible that the Deceased would have directed the uses of such substantial amounts of monies without the assistance or knowledge of either the Plaintiff or Ms Fenn, bearing in mind that: (i) the Deceased was already in ill health at the time, and could not understand English, (ii) she obviously required assistance in dealing with legal or financial matters: by 14 December 1994, the Deceased could only sign her surname on legal documents, and by 5 September 1996, the assignments required to be signed by her were executed by the Plaintiff as her lawful attorney; and (iii) the sales proceeds of 24 Leighton Road and 22 Leighton Road (5, 7, 9/F) were said to have been received in 1996 shortly before the Deceased’s death, when she was bed-bound in the hospital.

(34) There must have been someone else who operated the Deceased’s Coutts Account, and dealt with the substantial amounts received before the bank account was depleted.

(35) During cross-examination, neither the Plaintiff nor Ms Fenn was able to explain why the balance in the Coutts Account dropped to being negative.  Furthermore, if the Plaintiff and/or Ms Fenn truly thought that the Deceased was the sole signatory to the Coutts Account, it is inconceivable that they would have accepted the subsequent state of affairs with no concern or surprise.

(a) When the Plaintiff was asked whether he, as the sole executor and beneficiary, was concerned about seeing that all the money in the Coutts accounts had left and the balance was negative, the Plaintiff became evasive, refused to answer the question, and finally resorted to saying that he was “not concerned”.  This is wholly incapable of belief.

(b) When Ms Fenn was asked about her reaction after receiving the Coutts statements in 2016 and seeing that the assets were no longer there, she at first said that she wondered what had happened, but then swiftly launched into a tirade about why she was not surprised in light of the prevalence of “Ponzi schemes” which could lead to tremendous losses of “zero net asset value”.  This evidence was far-fetched.

(c) The lack of surprise suggests that both the Plaintiff and Ms Fenn in fact know what had happened with the Coutts Account – and that funds, if any, deposited there had not been applied wholly for the Deceased’s use and benefit.

(36) Third, someone other than the Deceased closed the two accounts after her death.  Fenn 3, §21, refers to the two accounts being “closed by the bank” on a date after 1^st July 1997, ie. after the Deceased’s death.

(a) The Plaintiff denied that it was he who closed the Coutts Accounts.

(b) Ms Fenn was likewise unable to explain how, if the Deceased was the sole signatory, the Coutts Accounts could have been closed, save to suggest that the bank could have closed the Deceased’s accounts on their own initiative.

(37) The evidence of the Plaintiff and Ms Fenn is not credible.

(a) It is inconceivable that Coutts simply closed the account without authority and confiscated the funds in the accounts.  If Coutts was allegedly unwilling to even release bank account statements without a grant of probate, it would surely not have closed the accounts save on the instructions of an authorised signatory.

(b) More crucially, back in April 2016, the Plaintiff claimed to have already instructed Ms Fenn and Thomas Bahler to retrieve all the available information concerning the accounts under a Powers of Attorney.  It is inconceivable that they did not ask or were not informed of when and by whom these accounts were closed.

(c) After all, the Plaintiff is the sole executor and beneficiary of the Estate – it was plainly in his interest to realise all the available assets in the Coutts accounts after the Deceased died.  It is inconceivable that he never found out what happened to those accounts, particularly since, on his case, some HK$41.3m worth of investments should be in those accounts.

(38) It can be inferred that the Plaintiff and those representing him have failed to disclose the identity of the signatories to the Coutts accounts and information as to the operation of the accounts, including who closed the accounts and when, since they would reveal that (i) the Deceased was not the only signatory who could operate the Coutts Account, and (ii) transfers (if any) made into the Coutts Account were not applied for the sole use and benefit of the Deceased.

(39) In all, the Plaintiff has failed to prove that the Deceased was the sole signatory of the Coutts Account.  This is a further reason why, even if any of the Loans were transferred to the Coutts Account, the Plaintiff has failed to show that they were applied for the Deceased’s own use and benefit.  If there were other signatories to the account, the Deceased was not “master of a sum of money over which he, and he alone, has power of disposition” (AG v. Duke of Richmond and Gordon [1909] AC 466, at 472-473).

32.  In respect of the Third Submission - Contemporaneous Evidence Undermines Claim of Alleged Loans, Ms Cheng argues that, apart from the absence of crucial evidence in support of the Plaintiff’s case in respect of the Loans, the positive contemporaneous evidence that does exist further shows that it is unlikely that the Loans were made or applied as alleged.  In this regard, Ms Cheng points out that it is the Plaintiff’s own positive contention that (1) the Debts arose by way of loans, and (2) the Deceased had required the Loans because she was in need of funds at the time.  The veracity of these claims must therefore be taken into account in assessing the totality of the evidence and the credibility of whether the Debts were in fact incurred as claimed.  I set out below the main submissions made by Ms Cheng[6]:

(i) Plaintiff’s case - loans advanced to the Deceased by alleged creditors

(1) There are a number of notable features which would have existed if the Plaintiff’s case about the Loans were correct, but in respect of which evidence is demonstrably lacking or unreliable.

(2) First, if the Deceased and the alleged creditors had entered into genuine loans, there would have been an agreement between the parties that the Deceased would borrow the sums and repay them to the creditors at a later date.  However, in the present case, aside from the terms of the Promissory Notes, which cannot be taken at face value, there is no reliable evidence that there had been any agreement, or even any discussions, between the Deceased and the creditors regarding the Loans.

(3) Prior to the commencement of trial, in none of the affidavits/affirmations was there a single mention of any discussions between the Deceased, the Plaintiff and/or the other company creditors.  If the agreement to borrow money was genuine, such fundamental information as to the background and reasons for the loans would surely have been mentioned.

(4) During the trial, the Plaintiff and Ms Fenn gave inconsistent evidence as to whether the Loans were discussed at all -

(a) The Plaintiff gave evidence that he never had any discussions or direct conversations with the Deceased at all about any of the Loans.

(b) By contrast, Ms Fenn claimed that there were two discussions between her, the Plaintiff and the Deceased, and the three of them had discussed the Loans and the relevant figures to be advanced.

(c) This inconsistency highlights the unreliability of their evidence on such a central matter to the Plaintiff’s case.

(d) In any event, the undisputed evidence is that repayment of the loans was never discussed.

(5) Second, if the Plaintiff’s assertions were correct, there would have been an intention on the part of the Deceased to repay the monies, and an intention on the part of the creditors to seek repayment of the loans.

(6) There is no evidence from the Deceased regarding the loans, beyond the fact that she signed the self-serving Promissory Notes. The evidence indicates that it is highly unlikely that the Deceased would have intended to repay the Loans.

(7) Based on the evidence of the Plaintiff and Ms Fenn, it is clear that the Deceased regarded the properties of the creditor companies as her own at the material times.

(a) The Plaintiff agreed that the money for the properties which were held by Capacious, Yeuk Man and Sam Kwong, even Laypark, originally came from his parents and that they were owned by Kung Senior and then later passed to the Deceased upon Kung Senior’s death.

(b) He also agreed that if the properties of the companies were sold after Kung Senior’s demise, they would have become the Deceased’s properties, or at least the Deceased would have regarded the companies’ properties as her own properties, and in effect, a sale of properties which the Deceased regarded as her own.

(c) Likewise, Ms Fenn agreed that the Deceased would have considered the amounts of money advanced from the 3 companies (other than Laypark) as being her own money and her assets. Thus, it was put to her that in effect there would not be any repayment as such, because it was really her own money and her own assets (to which Ms Fenn said the debts would remain on the companies’ books – but there is nothing to suggest that the Deceased had in mind such legal niceties). It was further put that there was no genuine intention on the part of the Deceased to repay, to which Ms Fenn could only say that it was “up to Mr Kung to repay, on her behalf”.

(8) This is consistent with the evidence regarding how the amounts of the Promissory Notes were determined. The Plaintiff said that the figures were derived from the value of transactions of certain companies which “basically [the Deceased] controls”, while Ms Fenn confirmed that the figures of the Loans were determined by the sales proceeds or whatever was available in the companies at the time.

(9) The Plaintiff recounted numerous times that the Deceased wanted to get money out from whatever assets she had in Hong Kong, due to her fears of Communist China. He explained that whatever the Deceased could get from her assets, she would put out of Hong Kong for overseas investments. Ms Fenn also explained that the Deceased wanted to put part of her assets overseas, beyond the reach of Communist China.

(a) However, as observed by the Court at the hearing, whilst it might have been natural for the Deceased to wish to move her assets out of Hong Kong, it was unclear why the Deceased would have wanted to borrow money and move the Plaintiff’s assets (not her own) out of Hong Kong.

(b) The Plaintiff’s response was telling: he explained that “[the Deceased] wish to realise, to get money out of her, assets, outside, for investment” and that “first and foremost, she’s getting the, realising her assets, to go, outside Hong Kong”

(10) Therefore, if the Deceased was regarding the monies under the Loans to be her own assets anyway, it can be inferred that she never intended the Loans to be repaid or repayable. It was just a way for her to move her own assets abroad.

(11) Furthermore, according to the Plaintiff, the Deceased had plenty of assets and did not need to borrow, yet she supposedly did so. It was therefore not a matter of her having to wait for income before repaying the Loans. The Deceased was elderly. The reality was simply that she had no intention of repayment.

(12) Likewise, there is no evidence that the alleged creditors intended to seek repayment of the Loans, and the evidence before the Court strongly suggests that there was never such an intention by the creditors to do so.

(13) In respect of the company creditors -

(a) No demands were made for repayment even after the Deceased died in October 1996, and even when the EDO wrote to Laypark and Capacious in July 1997 to ask whether any sums were owing from the Deceased as at the date of her death, they remained completely silent.

(b) It was not until 20 years later, on 27 September 2016 and 4 October 2016, that letters were issued on behalf of the company creditors, purportedly demanding repayment of the loans from the Estate. However, these repayment demands were contrived by the Plaintiff in an attempt to give the impression that the Loans were arms-length transactions with independent third parties and therefore bona fide.

(c) The Plaintiff swore Kung 2 on 9 November 2016, exhibiting the demand letters, and saying in §28 that “Recently, [he] was informed by Lily Fenn & Partners and verily believe that they had received demand letters from the creditors”.

(d) However, during cross-examination, the Plaintiff admitted that he was in fact the person responsible for instructing the issuance of all said demand letters, and that the reason the letters were issued 24 years after events was for the purpose of this litigation – in other words, to create an appearance of a genuine demand for repayment. His evidence in Kung 2, §28, is misleading.

(e) In any event, despite their threats in the demand letters to commence proceedings against the Estate within 14 or 21 days of the demand letters back in 2016, none has ever been commenced. It is plain that these letters were only produced for show with no substance or genuine intention to seek repayment.

(f) The attempt to dress up the creditors as independent third parties, dealing at arms-length with the Deceased, was an attempt to obscure the fact that there was no genuine intention to create any loans in the first place.

(14) As to the Plaintiff, although he now claims that he fully intends all the Loans to be repaid, this ex post facto assertion is not credible at all. In the witness box, the Plaintiff claimed that he would “definitely get repayment” and that he would “sue for it”, if necessary, to recover the Loans. But he would hardly sue on his own 1^st to 3^rd Promissory Notes against himself as the sole executor and beneficiary of the Deceased’s Estate.

(15) Third, if the Loans were genuine, there would have been actual advancement of the loan monies from the creditors to the Deceased as alleged. There is, however, a lack of evidence on these matters.

(ii) Plaintiff’s case - Deceased in need of money to make overseas investments

(16) The Plaintiff’s case as originally presented was that the Loans were granted because the Deceased lacked cash and could “only borrow money to finance her overseas investments, and remit the money overseas” (Fenn 9, §53). In particular, the Plaintiff and Ms Fenn sought to justify the need for the Deceased to incur over HK$41.5 million of debts by claiming that she had been “cash poor” in the 1980s (Fenn 9, §23), and was deeply in debt due to the funding of litigation costs and payment of the estate duty for Kung Senior’s estate. Fenn 9, §§19 to 22, explained how because Kung Senior’s estate was frozen at the time, the Deceased had to sell her personal assets to fund the heavy litigation before she could obtain Kung Senior’s probate, and thereafter she remained involved in a number of legal proceedings.

(17) These assertions are improbable. First, it is inherently incredible that the Deceased at the age of 93, in poor health at the time with round-the-clock nursing care and medical needs, would have requested some HK$41.2m odd of cash in order to make overseas investments.

(18) Second -

(a) The Plaintiff confirmed in oral testimony that the Deceased was very wealthy at the time of the Loans. When asked why the Plaintiff decided to advance loans to his mother in 1992, his answers to the Court were: (i) the Deceased was “so wealthy” in the sense that she practically owned all the assets in the companies, which provided the “best collateral”, (ii) the Deceased could repay the loans, and (iii) the Deceased “could not run away from it”.

(b) The Plaintiff also gave evidence to the effect that the Deceased had no need to borrow money at the time.

(c) When asked whether the Plaintiff was worried about repayment by the Deceased, he said that he was not worried at all, since the Deceased had “far far more assets” than the amounts advanced under the Promissory Notes.

(d) During re-examination, the Plaintiff confirmed that he was not worried about repayment because the Deceased had got a lot of assets.

(e) Ms Fenn also claimed that that the two supposed reasons for the Loans were (i) to reduce estate duty, and (ii) to invest her money overseas.

(19) Third -

(a) On Ms Fenn’s own evidence (which was confirmed by Kung 8), only certain units of 22 Leighton Road (namely G-1/F, 2-4, 8/F and 6/F) were sold between 1987 and 1995 to fund litigation costs, which sale proceeds fetched a total of over HK$5m.

(b) In 1992, the Deceased sold some other units of 22 Leighton Road (namely, 5, 7, 9/F) to the Plaintiff for HK$4.5m. Clause 2 of the agreement for sale and purchase dated 28 January 1992 provided that only a sum of HK$10,000 was payable as initial deposit. The balance of HK$4.49m was only required to be paid by the Plaintiff to the Deceased on or before 1 March 1996, some 4 years after the agreement. Ms Fenn claimed that those proceeds were transferred to the Deceased’s Coutts Account for her use and benefit.

(c) Similarly, in January 1992, the Deceased agreed to sell the entire building of 24 Leighton Road to the Plaintiff for a purchase price of HK$22m. Clause 2 of this Agreement for Sale and Purchase dated 28 January 1992 likewise provided that only a HK$10,000 initial deposit was required to be paid by the Plaintiff. The remaining balance of HK$21.99m need only be paid by the Plaintiff to the Deceased on or before 1 March 1996.

(d) If, as claimed by Ms Fenn and the Plaintiff, the Deceased had been so in need of money at the time of the Loans, it is inexplicable that she would have (i) agreed in January 1992 to delay the Plaintiff’s payment of the balance of (HK$4.49m + HK$21.99m) HK$26.48m of purchase price until 1996, but (ii) asked the Plaintiff, a few months later in July and August 1992, to advance her 3 loans in the total sum of HK$21.123m.

(20) Fourth, upon the grant of probate of Kung Senior’s estate in May 1992, the Deceased inherited from Kung Senior’s estate assets valued at HK$96m, including around HK$25m in cash. It is not credible that just 2 months after the grant of probate, the Deceased would have had a need to borrow some HK$41.5m odd of loans from (i) her son, to whom she had just sold 2 properties but deferred payment for 4 years, and (ii) companies in which she was substantially interested.

(21) Fifth, whilst Fenn 9, §51, sought to suggest that the Deceased was so in need of cash that she needed to borrow money to fund the payment of Kung Senior’s estate duty, this is incorrect. In fact, the Deceased did not have to pay for most of the estate duty out of her own pocket.

(22) Sixth, Ms Fenn and the Plaintiff listed a number of pieces of litigation as purportedly requiring funding, but none of these in fact bears out the Deceased’s alleged need for loans from July 1992 to January 1993.

(23) Finally, according to the Plaintiff, since around May 1986, the Deceased had moved into the Fu Kar Court Property whilst keeping her residence at 3/F, 24 Leighton Road. In cross-examination, the Plaintiff confirmed that in the early 1990s, when he used to spend a few months a year in Hong Kong, he would sometimes stay at Fu Kar Court and sometimes at 24 Leighton Road. The fact that neither property was rented out during that time again goes against the contention that the Deceased was in need of funds.

(24) The fact that a person may have ample assets and cash does not preclude him/her from borrowing money to make investments. But in the present case, the Plaintiff’s claim is that the Deceased was in debt, short of cash, and thus could only borrow money to finance her overseas investments. This is demonstrably false, and further brings into question whether she borrowed at all.

(iii) Possible source of funds: sales of Deceased’s properties

(25) Even if the transfers of the Promissory Notes sums were in fact made to the Deceased (which the Plaintiff has not established), the Plaintiff is unable to show on balance of probabilities that they were in the nature of loans, such as to have created bona fide debts for good consideration wholly for the Deceased’s use and benefit.

(26) The burden is not on the Commissioner to disprove the Plaintiff’s case or to show why those sums were remitted (if at all). But the point is that the mere fact money was transferred does not prove (as is required of the Plaintiff) that bona fide debts were created, for full consideration, and wholly for the use and benefit of the Deceased.

(27) For example, any such transfers could well have been remissions of proceeds from sales of properties which were also handled by TLI.

(a) On Day 5 of the hearing, the Plaintiff explained that the sums of the Loans were derived “from the related transaction” – “if it’s related to buying a piece of land, or something. So it would be, the value of the land”. When asked by the Court why it was decided that the Plaintiff would lend her HK$1.3m, and not HK$1.4m or HK$1.5m, he answered that “all this is related to fair market value” of some property, as done by a surveyor.

(b) In particular, as for the loan by Capacious under the 8^th Promissory Note, both the Plaintiff and Ms Fenn have confirmed that the sum was derived directly from the sales proceeds of the houses at Kam Sheung Road auctioned by Capacious in January 1993.

(c) Ms Fenn admitted that for all the properties sold by the Deceased, TLI handled the sale proceeds, which were paid into the clients’ account.

(d) This would help explain why the Loans had to be remitted to the Deceased via TLI’s clients’ account.

(e) The Plaintiff at one point (on Day 5 of the hearing) admitted in answer to questions from Mr Chan, perhaps inadvertently, that the monies under the 1^st to 3^rd Promissory Notes (that is, for the loans made by himself) were the purchase price he paid for various properties sold by the Deceased to himself. Pausing here, it would be fair to point out that the Plaintiff later retracted that answer upon further questions put to him by Mr Chan, and maintained that they were loans.

(28) After all, the Deceased sold a number of properties to the Plaintiff and related companies in the years leading up to her death; the sums remitted to the Coutts Account through TLI’s clients’ account are perfectly consistent with the remission of sales proceeds.

(a) The Deceased sold 24 Leighton Road for HK$22m to the Plaintiff by an agreement dated 28 January 1992, with HK$10,000 paid on signing of the agreement and the balance of HK$21.99m to be paid on or before 1 March 1996. Fenn 8, §10, says that the proceeds of sale were remitted to the Coutts Account, but does not give a date, and says that the records were not retained.

(b) The Deceased sold 5/F, 7/F, 9/F of 22 Leighton Road for HK$4.5m to the Plaintiff by another agreement dated 28 January 1992, again with HK$10,000 paid on signing of the agreement and the balance of HK$4.49m to be paid on or before 1 March 1996. Fenn 8, §30, says that the proceeds of sale were remitted to the Coutts Account, albeit in March 1996, but no record was produced to substantiate this.

(c) DOJ had specifically written to LFP to enquire about when the Deceased received the consideration for these sales (letter dated 11 November 2018), but no reply was ever provided.

(d) No evidence has ever been produced to show the Plaintiff’s source of funds. Although the EDO asked by letter of 23 December 2002 for the Plaintiff’s source of funds to make the loans and documentary evidence in support, the only response was in LFP’s letter of 30 July 2010 with a bare assertion that the loans from the Plaintiff of over HK$21m were sourced “from his own savings and capital gains through his investments in the past decades during his working career”.

(29) In light of the above evidence, even if any transfers had been made to the Coutts Account it cannot be ruled out that such transfers made to the Coutts Account in fact represented sales proceeds of properties belonging to the Deceased or her companies.

(D) Discussion

33.  Section 13(1) states, so far as relevant, as follows:

“In determining the value of an estate for the purpose of estate duty, allowance shall be made … for debts and incumbrances but an allowance shall not be made -

(i) for debts incurred by the deceased and incumbrances created by a disposition made by the deceased, unless such debts or incumbrances were incurred or created bona fide for full consideration for money or money’s worth wholly for the deceased’s own use and benefit and take effect out of his interest”.

34.  Thus, in order to qualify for allowance under this section, the debt must be:

(1) incurred or created bona fide;

(2) for full consideration for money or money’s worth;

(3) wholly for the deceased’s own use and benefit; and

(4) take effect out of his interest.

35.  For the purpose of this section:

(1) A debt is “bona fide” if it is “not fictitious or colourable, but real and genuine to all intents and purposes”[7], or “real and genuine as opposed to colourable” and not “unreal, colourable or sham transactions”[8], or “a real and genuine transaction intended to have full and real operation without any secret or covinous arrangement or reservation”[9].

(2) A debt is incurred or created for “full consideration for money or money’s worth” if the deceased “received an equivalent addition” which became part of his estate passing upon his death (unless alienated prior to death)[10], and there is “no element of bounty or gift to the creditor”[11].

(3) A debt is “wholly for the deceased’s own use and benefit” if the deceased received “the full consideration in money or money’s worth as his own, to be disposed of by him in any way he pleases, free from the control or interference of others”. However, it is not relevant for the court to further inquire into how the deceased subsequently dealt with the consideration received by him[12]. The consideration is regarded as being for the deceased’s own use and benefit “whether it was paid to him and then passed on to a third person, or … passed to that third person by his order or by his direction”; and it is not necessary to show that the deceased had “become master or had dominion over or had in his hands the consideration for the debt”[13].

36.  I have set out extensively Ms Cheng’s submissions on the Loans in §§30-32 above, which I consider to have force, save that I do not consider that there is sufficient evidence to support a positive finding that any sums which had been, or might have been, remitted to the Coutts Account were remissions of proceeds from the sales of the Deceased’s properties.

37.  Mr Edward Chan, SC’s responses to some of the points raised by Ms Cheng can be found in his Closing Submissions dated 23 October 2020, at §§30 to 50, and also in a document titled “Other Comments on Defendant’s Closing Submissions”.  In addition, Mr Chan makes the following general submissions:

“[8] … the present case is not one where the Defendant has expressly alleged fraud or conspiracy against the Plaintiff. Indeed, there is not even a positive case that the events or state of affairs as now given in evidence by the Plaintiff and Lily Fenn at trial did not exist or that they were lying. No such allegation had been put to the Plaintiff and Lily Fenn. Nor has it ever been suggested to David Kung and Lily Fenn that they conspired to put up a false story about the payment of the loan monies through TL Ip & Co or the remittance of the monies to the Deceased’s account with Coutts... For completeness, the Defendant has not argued that the Ramsay principle applies in the present case.

[9] In the Defendant’s oral opening submissions, the Defendant agrees that the Defendant is not saying that certain things did not happen, but argues that this does not mean that the Defendant or the Court is constrained to accept or reject the Plaintiff’s events…

[10] The Plaintiff accepts that the legal (or persuasive) burden of proof is on the Plaintiff, but as submitted above, the Defendant also has the evidential burden to raise issues that there was no loan qualified for estate duty reduction under the EDO. Whatever is the burden of proof on the Plaintiff, the standard of proof is only the civil burden of balance of probabilities…

[11] The parties are also at odds with whether it is for the Court to investigate and consider how the Plaintiff (or more precisely, the Deceased) had dealt with the Loans. The Defendant argues that:

(a) A signed document is not conclusive under EDO s.13(1);

(b) It is not the case that any or all debts can be deducted so long as they have been made; but rather the debts must be ‘incurred or created bona fide for full consideration for money or money’s worth’ and ‘wholly for the deceased’s own use and benefit’ as prescribed by EDO s.13(1)(i). The Defendant submits that in both AG v Duke of Richmond [1909] AC 466 and Re Whitfield’s Estate [1976] Ch 264, the court did consider how the debt monies were used; and

(c) By submitting that it is irrelevant for the Court to investigate and consider how the Plaintiff has dealt with the monies under the Loans, the Plaintiff has shifted his position.

[12] The Plaintiff does not dispute (a) above. However while plainly there is nothing in the EDO to say that a signed loan document or receipt was conclusive, there is likewise nothing in the EDO or the general law to say that the loan or indebtedness could only be proved by indisputable documents. As to (b) there is no dispute that in order to qualify for deduction the taxpayer would have to satisfy that the ‘debts or incumbrances were incurred or created bona fide for full consideration for money or money’s worth wholly for the deceased’s own use and benefit and take effect out of his interest.’ (see s13(1)(e)(i).)…

[13] Further, merely because the Plaintiff has put in evidence in relation to how the Deceased had dealt with the monies under the Loans is not a shifting of position and cannot turn an irrelevant consideration or issue under EDO s.13(1) into a relevant consideration or issue.

[51] It is acknowledged that the Plaintiff has been tardy in responding to the Defendant’s requests for evidence for a significant period of time. However, the delay does not show that there were in fact no Loans or that the loans were repaid. The fact that in the years after the loans especially in 1996, the Deceased had had proceeds of sale from many of her properties but there was nothing to show that she had repaid the loans. The Deceased was hospitalized in the last year of her life and it could be the case that because of her state of health she did not take any active interest in her property and assets especially those abroad. At any rate, the loans were made after consultation with Lily Fenn and part of the reasons for the loans and the transfer of assets abroad is to avoid estate duty. It does not make sense for the Deceased to want to retrieve her assets abroad to repay the loan only with the result of increasing her estate duty liability. This is particularly the case that she must know that her entire estate was bequeathed to the Plaintiff.

[52] Given his age and the relevant events occurred over 25 years ago, the Plaintiff may not be very clear in his recollection of the details of many events. However the documentary evidence and the overall circumstances and how the Deceased’s monies and assets were handled is clear.  The Plaintiff submits that the best evidence of the Loans were the documents especially the Promissory Notes which are undischarged. Typically, if a debt is repaid, the promissory note is returned and/or cancelled.”

38.  I have carefully considered Mr Chan’s Closing Submissions (including those contained in the “Other Comments on Defendant’s Closing Submissions”).  I do not consider it a helpful exercise to examine individually Mr Chan’s responses to the detailed points made by Ms Cheng. Many of Ms Cheng’s criticisms of the Plaintiff’s case on the Loans and of the evidence of the Plaintiff and Ms Fenn are unanswered, or unanswerable.  There remain a lot of significant inconsistencies, illogicalities, and inherent improbabilities in the case and evidence advanced by or on behalf of the Plaintiff.  The Plaintiff’s delay and evasiveness in responding to the EDO’s inquiries mentioned in §28 above also casts doubt on the credibility of his case on the Loans.  In all the circumstances, I am not prepared to give weight on the oral evidence of the Plaintiff or Ms Fenn in respect of matters which are controversial, but would focus principally on the contemporaneous documentary evidence before the court.

39.  There is no dispute that the Deceased did sign the Promissory Notes.  I agree, however, with Ms Cheng’s submissions that the Promissory Notes cannot taken at face value, and the veracity of what they assert must be assessed by reference to other evidence, in particular contemporaneous documentary evidence, or the lack thereof.  I am prepared to accept that (i) monies were received by TLI from the Plaintiff as stated in the 3 receipts referred to in §21(1), (2) and (3) above (relevant to the 1^st, 2^nd and 3^rd Loans), and (ii) TLI remitted monies to the Coutts Account as per the Telegraphic Transfer Application Forms referred to in §21(2), (3) and (4) above (relevant to the 2^nd, 3^rd and 8^th Loans) and the Credit Advices referred to in §21(3) and (4) above (relevant to the 3^rd and 8^th Loans).  In respect of monies shown to have been received in the Coutts Account, I also accept that they should be treated as evidence that the consideration for the relevant loans were received by the Deceased wholly for her own use and benefit.  I do not accept, however, that the Telegraphic Transfer Application Form or Credit Advice both dated 21 August 1992 referred to in §22 above as being relevant to, probative of, the 1^st, 4^th, 5^th or 6^th Loans, because of the significant difference between the amount transferred (HK$10,200,000) and the total amount of those 4 loans (HK$8,930,000).  Neither do I accept the Fiduciary Call Deposit slip dated 2 March 1993 for the sum of US$4,231,1000 referred to in §24 above as being relevant to, or probative of, any of the Loans.

40.  In the aforesaid premises, I find that:

(1) The 2^nd, 3^rd and 8^th Loans (in the amounts of US$1,000,000, NZ$2,200,000 and US$1,623,543.42 respectively) do qualify for allowance under s 13(1)(i).

(2) The 1^st Loan does not qualify for allowance because there is no, or no sufficient, evidence that the sum of HK$1,300,000 was remitted to the Coutts Account as alleged by the Plaintiff, or otherwise received by the Deceased for her own use or benefit.

(3) The 4^th, 5^th and 6^th Loans (in the amounts of HK$340,000, HK$290,000 and HK$7,000,000 respectively) do not qualify for allowance because there is no, or no sufficient evidence, that the relevant amounts were paid by Laypark, Yeuk Man and Sam Kwong respectively to TLI, or were remitted to the Coutts Account or otherwise received by the Deceased.

(4) The 7^th Loan does not qualify for allowance because there is no, or no sufficient, evidence that the sum of HK$243,300 was paid by Sam Kwong to TLI, or used to pay or discharge the Deceased’s medical expenses as alleged.

THE TIN HA ROAD PROPERTY

41.  The second issue to be determined concerns the proper valuation of the Tin Ha Road Property as at the Valuation Date.

42.  Under s 13(5):

“(a) The principal value of any property shall be estimated to be the price which, in the opinion of the Commissioner, such property would fetch if sold in the open market at the time of the death of the deceased.

(b) In estimating such principal value the Commissioner shall not make any reduction in the estimate on account of the estimate being made on the assumption that the whole property is to be placed on the market at one and the same time …”

43.  Essentially, the court’s task is to determine the open market value of the Tin Ha Road Property as at 19 October 1996.

(i) Background

44.  On 30 March 1999, JSCC wrote to the EDO enclosing (inter alia) the 1999 Affidavit, in which the Plaintiff swore, in Schedule C thereto, that the half share of the Tin Ha Road Property had a value of HK$30 million as at the Valuation Date.  This valuation was, apparently, based on a report (“the Lawson Report”) prepared for the Plaintiff by Lawson David & Sung Surveyors Limited (“Lawson”) dated 3 December 1998, a copy of which was also enclosed with JSCC’s letter of 30 March 1999.

45.  On 9 December 1999, the EDO wrote to inform JSCC that, on the advice of the Rating and Valuation Department (“RVD”), the Plaintiff’s proposed valuation of HK$45.51 million for the properties disclosed in Schedule C to the 1999 Affidavit (which included the Tin Ha Road Property) was acceptable to the EDO for estate duty purposes.

46.  On 22 June 2000, CMK responded on behalf of the Plaintiff, noting that they were pleased at the EDO’s acceptance of the Plaintiff’s proposed valuation of (inter alia) the properties listed in Schedule C.

47.  Thereafter, up to January 2018, the Plaintiff never alleged that the valuation of HK$30 million for a half share of the Tin Ha Road Property was incorrect, or that there was any “mistake” in the Lawson Report.

48.  As earlier mentioned, on 11 February 2011, the Plaintiff made the present application.  Although in the Originating Summons, at §2(v)(c), the Plaintiff sought a declaration that the Commissioner’s assessment of estate duty set out in the Final Certificate of Assessment was excessive in relation to the Deceased’s interest in the estate of Kung Senior in respect of, inter alia, the Tin Ha Road Property, there was no suggestion in the supporting affirmations (Fenn 1 and Kung 1) that there was any “mistake” in the Lawson Report.

49.  It was only in Kung 6, at §11, filed on 19 January 2018 that the Plaintiff alleged for the first time (19 years after the 1999 Affidavit) that Lawson “made a mistake in valuing the Said Land based on the wrong assumption that the entire block/piece of the Said Land was vacant and not subject to any adverse possession claims or incumbrances”.  This mistake, according to the oral evidence of Ms Fenn, had been discovered even before the commencement of the proceedings in 2011[14].

50.  The allegation that Lawson’s valuation was based on a wrong or mistaken assumption that the entire Tin Ha Road Property was vacant and not subject to any adverse possession claims or incumbrances is, in my view, plainly unsustainable:

(1) The Lawson Report included a letter dated 3 December 1998 to JSCC (for the attention of Ms Fenn), in which Lawson stated that their instruction was to “prepare a valuation to assess the Open Market Value of ½ share of the captioned property (ie the Tin Ha Road Property) as at 19^th October 1996”.

(2) At page 3 of the Lawson Report, it was stated that, according to the information provided by the instructing party (ie JSCC), the subject lots, as at the date of valuation, were “unlawfully occupied”. A table was set out, in which 16 out of the 20 Lots were said to have been occupied by permanent/temporary structures, while the remaining 4 lots were said to be “vacant”. It was also stated that the subject lots were related to a claim for possession against the unlawful occupation “originally made in the High Court by the then owner… in 1980 (H.C.M.P. No.708 of 1980) and subsequently made again by the owner, (namely Lam Chak Man Estates Limited and Kung Wong Sau Hin (as the sole executrix of the estates of Kung Yeuk Man, deceased)) in 1990 (H.C.M.P. No. 1614 of 1990)”

(3) At page 6 of the Lawson Report, in the section under the heading “Basis of Valuation”, the following was stated:

“In accordance with its state of occupancy, we are instructed by the party to assess the Open Market Value of ½ of the subject property as at the date of valuation”. [emphasis added]

(4) At page 9 of the Lawson Report, in the section under the heading “Valuation”, the following was stated -

“After taking into consideration of the remarks and the state of occupancy, it is in our opinion that the Open Market Value of ½ share of the subject property as at 19^th October 1996 is HONG KONG DOLLARS THIRTY MILLION ONLY (HK$30,000,000.00).” [emphasis added]

(5) At pages 10-11 of the Lawson Report, under the heading “Conditions of Liability”, it was stated that -

“(1) … Unless otherwise stated, it is assumed that the property is free from incumbrance …

(9) We have relied to a very considerable extent on the information given by you and have accepted advice given to us on such matters as statutory notices, easements, tenure, occupation, lettings, site and floor areas and all other relevant matters. We assume no responsibility for their accuracy.” [emphasis added]

51.  Having regard to the contents of the Lawson Report quoted above, it is, in my view, plain that Lawson was fully aware that some of the 20 Lots making up the Tin Ha Road Property were not vacant but were subject to adverse possession claims, and Lawson made, or purported to make, a valuation of the Tin Ha Road Property on that basis as instructed by JSCC.  I pause to observe that although the Lawson Report referred to a total of 6 comparables which they used for the purpose of valuation, the detailed calculation was not set out.  Thus, it is not possible to tell from the Lawson Report what, if any, downward adjustment had been made to take into account the fact that some of the 20 Lots were understood to be subject to adverse possession claims.

52.  I also accept Ms Cheng’s submission that Ms Fenn’s evidence that the alleged “mistake” had been discovered even before the commencement of these proceedings in 2011 is incredible.  If the mistake had been discovered as early as before 2011, it is wholly inexplicable why the issue was not raised until 2018.  These having been said, it has not been suggested that the Plaintiff is estopped, or otherwise precluded by some principle of law, from disputing the valuation made in the Lawson Report.  In the circumstances, the court must still assess the market value of the Tin Ha Road Property as at the Valuation Date on the basis of the evidence and materials before it.

(ii) The parties’ respective contentions

53.  At the hearing, the Plaintiff relied on:

(1) the valuation made by his expert, Mr Kwan Lok Ping Denys (“Mr Kwan”), contained in a joint statement of experts dated 14 August 2015 (“the Kwan/Poon Statement”); and

(2) a Supplemental Valuation Report (“Kwan II”) of Mr Kwan dated 22 January 2018, as further supplemented by 2 sheets of calculation produced in the course of the hearing referred to as “Kwan IIA” and “Kwan IIB”, for the purpose of cross-checking against his valuation in the Kwan/Poon Expert Statement.

54.  On the other hand, the Defendant relied on:

(1) the valuation made by Ms Poon Sin Tik (“Ms Poon”) contained in the Kwan/Poon Joint Statement; and

(2) the Supplemental Valuation Report (“the Chiu Report”) of Ms Chiu Shuk-man (“Ms Chiu”) dated 15 June 2018, which primarily dealt with the methodology and valuation in Kwan II.  Mr Kwan and Ms Chiu also prepared a joint statement of experts dated 25 July 2018 (“the Kwan/Chiu Joint Statement”).

55.  In the Kwan/Poon Joint Statement:

(1) Mr Kwan opines that the market value of a half share of the Tin Ha Road Property as at the Valuation Date was HK$10,960,000.

(2) Ms Poon opines that the market value of a half share of the Tin Ha Road Property as at the Valuation Date was HK$30,000,000.

(3) Both Mr Kwan and Ms Poon use the conventional comparative method in the assessment of the market value of the Tin Ha Road Property. The two valuers differ on various adjustments, and also on the issue of whether any value should be given for lands which were subject to adverse possession claims. I shall come back to these matters later.

56.  I accept that Mr Kwan, Ms Poon and Ms Chiu are all properly qualified experts to give evidence on the market value of the Tin Ha Road Property.

(iii)    Kwan II, IIA and IIB

57.  In Kwan II, Mr Kwan adopts what has been referred to as a “work-back approach” to assess the market value of the Tin Ha Road as at the Valuation Date by using the auction price (HK$72,500,000) of some portions of the Tin Ha Road Property on 23 October 2017 as the starting point and seeking to derive, by making various adjustments, the value of the Tin Ha Road Property as at 19 October 1996.  The auction in 2017 was only for some portions of the Tin Ha Road Property because (i) some of the Lots (or portions thereof) had been resumed by the Government in 2000, and (ii) Lot No 2209 B1B (being a portion of Lot No 2209 B1RP) had been sold to Yu Mei Chun (being the substituted 1^st Defendant in HCMP 1614/1990) for a nominal consideration (HK$999) in 2016.  Mr Kwan’s calculations in Kwan II, Kwan IIA and Kwan IIB produce figures of HK$12,120,000, HK$10,962,768 and HK$11,283,114 respectively.

58.  In my view, the methodology adopted by Mr Kwan in Kwan II is questionable, and the valuation of the Tin Ha Road Property as at the Valuation Date arrived at in Kwan II is unreliable, for the following reasons.

(1) It is well established that where there are available suitable comparables for valuation purpose, the comparative method is the preferred method to assess the open market value of a property, and should be adopted. As admitted by Mr Kwan in the Kwan/Chiu Joint Statement, his work-back approach is “unconventional”.

(2) The conditions of the land lots sold in 2017 were not identical to the land comprising the Tin Ha Road Property in 2016. In particular, the areas said to be adversely possessed (or “encroached”) as at the time of the 2017 auction (11,256.16 sq m) were about 50% more than the areas said to be adversely possessed as indicated in the Kwan/Poon Joint Statement (in Table B2).

(3) In 1996, the 20 Lots were zoned “R(B)2” (for 5 lots), “R(C)” (for 11 lots) or “V” (for 4 lots). By 2017, the zoning of the 20 Lots had changed -

(a) 6 lots originally zoned “R(C)” had been rezoned to “Village Type Development”;

(b) 1 lot originally zoned “R(C)” had been rezoned to “R(A)3”;

(c) 5 lots originally zoned “R(B)2” had been rezoned to “R(A)3”;

(d) 1 lot originally zoned “R(C)” had been rezoned to “R(A)3”; and

(e) 2 lots originally zoned “R(C)” had been rezoned to “Major Road and Junction”/“Village Type Development”/“R(A)3”.

It does not appear that these changes of zoning have been taken into account by Mr Kwan. While some of these changes would probably have enhanced the land value of the affected lots (eg those upgraded to “R(A)3” zone), some would have the opposite effect (eg those downgraded to “Village Type Development”). The question, however, is not whether the ultimate result is favourable or unfavourable to the Plaintiff’s case, but whether the methodology adopted by Mr Kwan is sound or unsound.

(4) In order to arrive at the market value of the Tin Ha Road Property as at the Valuation Date, Mr Kwan has to make a “time” adjustment between 2017 and 1996. For this purpose, Mr Kwan utilizes the basic rate for agricultural land in the Ex-gratia Compensation Rates for Resumed Land (HK$1,000 per sq in 2017 and HK$345 per sq ft in 1996) as a proxy for the time adjustment. However, as pointed out by Ms Chiu, the Ex-gratia Compensation Rates is an alternative to statutory compensation in land resumption situation - they are used for making compensation offers in land resumption cases for administrative purposes and will likely encompass non-market considerations. Further, the basic rate for agricultural land is a general rate for a broad compensation zone, which consists of land parcels with different development restrictions. The change of the basic rate over time cannot truly reflect the price movement of land in different locations or with different development potential. There is, in my view, no or no sufficient basis to regard the change in the basic rate for agricultural land in the Ex-gratia Compensation Rates for Resumed Land as properly reflecting the change in the open market unit rate of agricultural land with different zonings between 2017 and 1996.

(5) Even when one uses the comparative method in the valuation of a property, it is well established that one should choose comparables which are close in time to the valuation date so that only a relatively small time adjustment is required to be made. In this case, the time difference is over 21 years, and the time adjustment applied by Mr Kwan comes to over 289%. In my view, the open market value of a property derived by the application of such a massive time adjustment is inherently unreliable.

59.  The above criticisms equally apply to Kwan IIA and Kwan IIB, save that in Kwan IIB, Mr Kwan seeks to address the criticism in (4) above by using the Private Domestic - Price Indices by Class (A, B & C) instead of the basic rate for agricultural land in the Ex-gratia Compensation Rates for Resumed Land to derive the time adjustment factor. However, the other criticisms remain applicable to Kwan IIB.

60.  In all, I reject Mr Kwan’s work-back approach in Kwan II, IIA and IIB.

(iv) The Kwan/Poon Joint Statement

61.  I shall assess the open market value of the Tin Ha Road Property as at the Valuation Date based on the Kwan/Poon Joint Statement, and seek to resolve the differences between the two experts in the succeeding paragraphs.  Mr Kwan and Ms Poon have reached a broad measure of agreement on many matters in relation to the proper valuation of the Tin Ha Road Property, including:

(1) the particulars of the Lots, including their size and zoning;

(2) the adjusted unit rate for agricultural land zoned “V” (HK$2,700 per sq m);

(3) the adjusted unit rate for building land (AV HK$11,000 per sq m);

(4) the market value of the agricultural land zoned “V” which was not subject to adverse possession claims, namely, Lot No 2009 RP (HK$1,168,570);

(5) the market value of the building lands, namely, portions of Lot Nos 2212 RP, 2214 and 2217 RP (HK$1,216,600);

(6) the valuation methodology – direct comparison; and

(7) the valuation date – 19 October 1996.

62.  The differences between the expert relate to:

(1) the adjusted unit rate for agricultural land zoned “R(B)2” and “R(C)”;

(2) whether any value should be given for lands which were subject to adverse possession claims, and

(3) the share disability discount.

63.  In respect of the adjusted unit rate for agricultural land zoned “R(B)2” and “R(C)”, Mr Kwan and Ms Poon agree on the 3 comparables to be used (namely, Lot Nos 2207 ARP, 2954 and 2955/2958 in DD 124), but disagree on the adjustments to be made in respect of “quantum”, “zoning”, “time”, and “site condition”.

64.  In respect of “quantum”, the experts agree that the adjustment should be 1% for every 500 sq m - the larger the size the lower the value.  Mr Kwan considers that the adjustment should be applied to the total size of the lots in each zoning (“R(B)” and “R(C)”) comprised in the Tin Ha Road Property, whereas Ms Poon considers that it should be applied to the average size of the lots in each zoning.  I reject Mr Kwan’s approach, for the following reasons:

(1) Both experts value each lot separately. There is, in my view, no good reason why the areas of the lots in each zoning should aggregated to derive the quantum adjustment for an individual lot. In this regard, as submitted by Ms Cheng, although the “R(C)” and “R(B)2” lots were largely grouped together, they were not wholly contiguous, and it is not at all inevitable that all the “R(C)” lots, or all the “R(B)2” lots”, would have to be sold together. Also, s 13(5)(b) provides that in estimating the principal value of any property, the Commissioner “shall not make any reduction in the estimate on account of the estimate being made on the assumption that the whole property is to be placed on the market at one and the same time”.

(2) The total area of the “R(C)” lots comes to 10,281.3 sq m.  Although Mr Kwan ascribes no market value to those “R(C)” lots which he thought were subject to adverse possession claims (namely, Lot Nos 2000 RP, 2001, 2002, 2006, 2007 RP and 2213), he includes them for the purpose of calculating the total area of the “R(C)” lots to arrive at the large quantum adjustments of -13%, -20% and -19% respectively for the 3 comparable. This approach is, in my view, illogical, and serves only to depress the adjusted unit rate for the “R(C)” lots.

The use of the average size of the lots in the 2 zonings for the purpose of deriving the quantum adjustment is, I consider, a reasonable and practical alternative to calculating the quantum adjustment for each lot individually. In short, I accept the evidence of Ms Poon on quantum adjustment as set out in the Kwan/Poon Joint Statement.

65.  In respect of “zoning”, the three comparables are all agricultural land with “R(B)2” zoning, and thus no adjustment is required to be made to derive the unit rate for the “R(B)2” lots.  Both experts agree that there should be a discount for the unit rate for the “R(C)” lots because the permissible development intensity for R(C) zone is lower than R(B) zone.  For the “R(C)” lots, Mr Kwan applies an adjustment of -32%, while Ms Poon applies an adjustment of -10% only.

(1) Remark 2 on page 3 of the Kwan/Poon Joint Statement shows how Mr Kwan came to the adjustment figure of -32% -

“Zoning adjustment: the plot ratio allowed for R(C) is 0.4; whereas the Plot Ratio for R(B)2 is 1.26. CS opines that a downward adjustment of 32% is appropriate to reflect the difference in plot ratio”.

(2) Mr Kwan confirms in his oral evidence that the figure of 32% was derived from 0.4/1.26. This reasoning discloses an erroneous approach in principle. Since the discount is supposed to reflect the lower development intensity permissible for land in the “R(C)” zone, logically the smaller the permissible plot ratio, the bigger should be the discount factor. Thus, on the basis of Mr Kwan’s reasoning, the discount factor should be 68% (instead of 32%). When this error was pointed out to Mr Kwan in cross examination by Ms Cheng and he was pressed to explain why he adopted the 32% reduction, he admitted that the figure was “arbitrary”, and subsequently tried to justify the adjustment on the basis that the discount should be about 1/3 based on his experience or judgment.

(3) I reject Mr Kwan’s zoning adjustment of -32% for the “R(C)” lots, and accept Ms Poon’s zoning adjustment of -10%, which she explains is based on professional judgment.

66.  In respect of “time”, Mr Kwan uses the Private Domestic - Price Indices by Class (All Classes) published by the RVD to derive the adjustment between the date of each comparable transaction and the Valuation Date, while Ms Poon uses the Private Domestic - Price Indices by Class (A, B and C) but further reduces the adjustment by 50% “to reflect the less volatility of the agricultural land market as compared to the residential property market”. There is, in fact, no difference to the outcome whether one uses the Private Domestic - Price Indices by Class (All Classes) or the Private Domestic - Price Indices by Class (A, B and C). The difference between the experts lies in the 50% reduction applied by Ms Poon to reflect the difference in the volatility of the agricultural land market vis-à-vis the residential property market. It seems to me that even if the agricultural land market is less volatile (ie smaller ups and downs) than the residential property market, it does not follow that over any given period of time, the net change, whether positive or negative, in the price of agricultural land would be smaller than residential property. I reject the evidence of Ms Poon on this issue, and accept the evidence of Mr Kwan on time adjustment as set out in the Kwan/Poon Joint Statement.

67.  In respect of “site condition”, Mr Kwan applies a downward adjustment of 10%, whereas Ms Poon makes no adjustment.  Mr Kwan admitted, in cross examination, that he did not in fact have any objective evidence as to the site condition of the Lots in 1996, and relied on what the instructing party told him, namely, that the site condition at the time of his inspection in 2012 was the same as in October 1996.  Although he also claimed that he had made reference to the “survey plans” or aerial photos, in further cross examination by Ms Cheng, Mr Kwan accepted that these plans were the “base plans” whose information was put into the Lot Index Plans, and that it was not possible to discern two key aspects of site condition of a lot (whether formed/levelled or vegetated)[15] from such plans.  Mr Kwan has not referred to or identified the specific plans or aerial photos to demonstrate the relevant differences in site condition between the Tin Ha Road Property and the comparables in 1996.  Overall, I consider Mr Kwan’s evidence on this issue to be vague and imprecise, and I am not prepared to accept his evidence on this issue.  I therefore find that there should be no adjustment for site condition.

68.  In respect of the issue of whether any value should be given for lands which were subject to adverse possession claims, I do not consider that no value whatsoever should be given to those lands. As at the Valuation Date, the owners had a High Court judgement in their favour against the adverse possessors, namely, the judgment of Le Pichon J (as she then was) dated 15 March 1996 in HCMP 1614/1990. Although the judgment of Le Pichon J was subsequently reversed by the Court of Appeal[16], apparently some of the defendants did not appeal, some subsequently left the land(s) occupied by them[17], and some settled with the owners[18]. Also, some of the defendants’ appeals were dismissed[19]. The history of the litigation is complicated, and it is not necessary to set out the full details in this judgment. What is clear is that the mere fact that there are adverse possession claims, even if meritorious, does not necessarily mean that the paper title has no value. On the other hand, I do not accept that the lands which were subject to adverse possession claims should be valued as if the claims did not exist.  To do so would be to ignore reality.  For the purpose of valuation:

(1) One should, in principle, take into account the merits of each adverse possession claim in determining what discount (if any) should be applied to the relevant lot. I note that the Plaintiff has said that he has no evidence to dispute the adverse possession claims. However, as pointed out by Ms Cheng in her closing submissions, it would appear that some of the claims by the occupiers were primarily for tenancy or licence, and the proceedings in HCMP 1614/1990 never got to the stage of the occupiers producing evidence of adverse possession.

(2) If there is evidence of appropriate market transactions in respect of lands in the New Territories known by the parties to be subject to adverse possession claims, such evidence would also be relevant. No such evidence is, however, before the court.

Overall, in the absence of better evidence and subject to the qualifications mentioned in §69 below, I would apply a 50% discount to the market value for those lots which were subject to adverse possession claims.

69.  In respect of the question of which lots were actually subject to adverse possession claims, Mr Kwan’s valuation in the Kwan/Poon Joint Statement proceeds on the basis that Lot Nos 2000 RP, 2001, 2002, 2003, 2004, 2005, 2006, 2007 RP and 2213 (a total of 9 lots) were subject to adverse possession claims (see Table B2 in the Kwan/Poon Joint Statement). However, in Fenn 1, §16, it was said that the following lots were the subject matters of the adverse possession claims: Lot Nos 2000 RP, 2006, 2007 RP, 2209 B1RP, 2213, 2214 RP and 2032 (a total of 7 lots). Following the court’s suggestion that the parties should focus on those lots with supporting documentary evidence of adverse possession claims, Mr Chan and Ms Cheng have produced revised calculations[20] in their closing submissions in which the following lots are identified as being subject to adverse possession claims: Lot Nos 2000 RP, 2002, 2005, 2007 RP, 2009 RP, 2209 B1RP, 2213, 2214 and 2217 RP (a total of 9 lots). I shall proceed on the basis that these are the lots which were subject to adverse possession claims and a 50% discount should be applied to them, subject to the following qualifications:

(1) In respect of Lot No 2209 B1RP, it would appear that only a portion of that lot (252 sq m out of 1,406.6 sq m) was subject to the adverse possession claim of D1 (as subsequently sold to her). The 50% discount should therefore apply only to that portion of Lot No 2209 B1RP (252 sq m) which was subject to D1’s adverse possession claim.

(2) In respect of Lot No 2217 RP, it consisted partly of agricultural land (90.90 sq m) and partly of building land (114.7 sq m). The Plaintiff has, it appears, proceeded on the basis that the building land portion had a value calculated on the basis of AV HK$11,000 per sq m (see Table B2 in the Kwan/Poon Joint Statement, and Versions A, B and C in Mr Chan’s Closing Submissions), even though Lot No 2217 RP (or a part thereof) was subject to adverse possession claim(s). Subject to any special agreement of the parties or matters that I am not aware of, I consider that, as a matter of principle, a discount of 50% should also be applied to the building land portion of Lot No 2217 RP.

70.  Lastly, in respect of “share disability”, it is common ground that a discount should be applied due to the fact that the Deceased only had a half share or interest in the Tin Ha Road Property. Mr Kwan applies a discount rate of 20%, while Ms Poon applies a discount rate of 10%. Neither expert has produced any objective evidence to support the discount rate chosen. Mr Chan has referred the court to 2 previous decisions[21] where discount rates of 25% and 15% respectively were applied, but those decisions do not contain any principle or guidance for the determination of the appropriate discount rate in any given case. In all the circumstances, I would adopt a discount rate of 15% for share disability in this case.

71.  The above findings should enable the parties to calculate the market value of a half share of the Tin Ha Road Property as at the Valuation Date.

DISPOSITION

72.  The Plaintiff’s appeal against the Final Certificate of Assessment is allowed to the extent indicated in §40 and §§64-71 above.  I shall invite the parties to agree on the calculation of the value of a half share of the Tin Ha Road Property based on the findings in this judgment, and on the form of the order to be made, with liberty to apply to the parties in the event of disagreement (including the matter mentioned in §69(2) above).

73.  On the question of costs, there are two principal issues raised for determination: (i) whether the Loans qualified for allowance under s 13(1)(i), and (ii) what is the proper valuation of the Tin Ha Road Property.

(1) In respect of the first issue, the Plaintiff has been partially successful (in relation to the 2^nd, 3^rd and 8^th Loans). However, the court’s finding in the Plaintiff’s favour in relation to those loans is based primarily on documentary evidence which was disclosed by the Plaintiff only after years of delay, including documents which were only disclosed on 16 October 2020 (Day 9 of the hearing). As earlier mentioned, I have considerable reservation on the oral evidence of the Plaintiff. Also, I consider that the Plaintiff has substantially delayed and been evasive in responding to the EDO’s inquiries in respect of the Loans. In all the circumstances, I make no order as to the costs in relation to the first issue.

(2) In respect of the second issue, the Plaintiff has also been partially successful. Taking into the account the individual issues which I find in favour of the Defendant, I would order the Defendant to bear 50% of the Plaintiff’s costs in relation to the second issue, to be taxed if not agreed, with certificate for 2 counsel.

74.  For the benefit of the taxing master, I shall apportion 50% of the Plaintiff’s costs as being attributable to the first issue, and 50% to the second issue.

75.  Lastly, it remains for me to thank counsel for their assistance in this matter.