TANG YING LOI v. TANG YING IP AND OTHERS

HCA 2487/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2487 OF 2009

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J U D G M E N T

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INTRODUCTION

1.  The 1^st defendant is one of the two administrators of the estate (“the Estate”) of Tang Pui King alias Tang Yum (or Yam) Wan alias Tang King Cheung, deceased (“the Deceased”), who died intestate in Hong Kong on 4 July 1978, pursuant to Letters of Administration granted to him and the 2^nd defendant on 21 February 1983.

2.  The plaintiff and 1^st defendant are two of the Deceased’s 6 children.

3.  In this action, the plaintiff claims against the 1^st defendant for:-

(1)  mis-use or misapplication of funds, in the amount of HK$11,480,000, belonging to the Estate to finance his acquisition of the property known as Nos 129-131, Castle Peak Road (sometimes referred to as the “Main Road”), Yuen Long, New Territories, Hong Kong (“the Property”), which was subsequently assigned to or vested in the 3^rd defendant (the 1^st defendant’s corporate vehicle) on 8 November 2004; and

(2)  a shortfall (“the Shortfall”) in the amount of HK$3,650,694 in the cash and bank balances of the Estate.

4.  Following a contested trial, I handed down a written judgment (“the Liability Judgment”) on 7 January 2015, in which I found that the 1^st defendant, by using money belonging to the Estate to finance the acquisition of the Property, abused his position as administrator of the Estate and mis-used the Estate’s funds in breach of his fiduciary duties owed to the Estate.  I directed an inquiry on the profit for which the 1^st defendant should account to the Estate derived from the acquisition and holding of the Property, and ordered him to pay the amount due upon the inquiry.

5.  At paragraphs 91 to 94 of the Liability Judgment, I said the following:-

“91. … On the facts of the present case, such profit should be ascertained by reference to:

(1) The increase in the value of the Property, ie the difference between the open market value of the Property as at the date of the inquiry and the purchase price (HK$27,300,000).

(2) The rentals and other income (if any) derived from holding the Property between the date of acquisition (7 April 2003) and the date of the inquiry.

92. Credit should, however, be given to the 1^st defendant for:

(1) stamp duty (HK$1,023,750) and solicitors’ costs and disbursement (HK$89,300) incurred in the acquisition of the Property;

(2) the amount of HK$200,900, being interest paid to the Estate on 27 October 2003;

(3) all government rents and rates if paid by the 1^st or the 3^rd defendants in respect of the Property between the date of acquisition and the date of the inquiry; and

(4) all proper costs of repair and maintenance of the Property incurred by the 1^st or 3^rd defendants during the period from the date of acquisition to the date of the inquiry.

93. There could be legitimate arguments as to whether interest on some of the amounts referred to in paragraphs 91 and 92 above should be provided for, and if so what would be the appropriate period(s) for which such interest should run, the appropriate interest rate(s) that should be applied, and whether interest should be calculated on simple or compound basis. All such questions are to be dealt with in the inquiry.

94.  &The total acquisition costs of the Property, including stamp duty and solicitors’ costs and disbursement, came to HK$28,413,050.  Accordingly, the proportionate share of the profit that the 1^st defendant should account to the Estate should be 11,480,000/28,413,050 x 100% (= 40.40%).”

6.  In the Liability Judgment, I also found that the 1^st defendant failed to keep proper accounts of the income received and expenses incurred by the Estate, and was liable to pay compensation for the loss suffered by the Estate arising out of the Shortfall.  I ordered the 1^st defendant to compensate the Estate by paying interest on the Shortfall, the principal amount of the Shortfall having been repaid by him to the Estate’s Hang Seng Bank account on 17 December 2012.  I reserved the question of the interest rate, the interest period and whether interest ought to be calculated on simple or compound basis to be dealt with at the same time as the inquiry (see paragraph 114 of the Liability Judgment).

7.  The 1^st and 3^rd defendants’ appeal against the Liability Judgment was dismissed by the Court of Appeal on 6 November 2015.

8.  The inquiry took place on 23 and 24 February 2016 and 10, 14 and 22 March 2016.  Further written submissions were filed by the plaintiff and the 1^st and 3^rd defendants on 3 and 10 May 2016 respectively pursuant to directions given by the court.

9.  Having regard to the submissions of the parties, it would appear that the there are broadly 6 issues to be determined in this inquiry:-

(1)  market value of the Property;

(2)  rental income received by the 1^st or 3^rd defendants from letting out the Property;

(3)  management fees paid to Welsen Limited (“Welsen”);

(4)  payments to Mr Yick Chun Kin and Mr Chau Woo Loi;

(5)  directors’ remuneration paid to the 1st defendant and his wife; and

(6)  interest on (a) the profit for which the 1^st defendant is liable to account to the Estate, and (b) the Shortfall.

10.  There are various items of expense paid by the 1^st or 3^rd defendants for which the plaintiff accepts the 1^st defendant should be given credit.  I shall refer to those items later in this judgment.

MARKET VALUE OF THE PROPERTY

11.  The Property comprises a 6-storey building (“Longfield Centre”) situated on the northern side of Castle Peak Road (at the junction with Tung Lok Street), in Yuen Long, New Territories.  The Ground Floor of Longfield Centre is used as shops while the 1^st to 5^th Floors thereof (“the Upper Floors”) are used as offices.  There is a lift and a common staircase serving the entire building, as well as an internal staircase serving the 4^th and 5^th Floors of the building.  Although the Ground Floor of Longfield Centre has been divided into, and is currently occupied by, a number of shops, both valuation experts, namely, Mr Siu L H Keith for the plaintiff and Ms Sat Wai Ling for the 1^st and 3^rd defendants, have treated the Ground Floor as comprising two shops (hereinafter referred to as the “Main Shop” and the “Side Shop” respectively) for the purpose of valuation.

12.  As mentioned in the Joint Statement of Experts dated 22 January 2016 (“the Joint Statement”), the two valuation experts agreed to adopt the valuation date of 22 December 2015.  However, in the course of the inquiry, the parties agreed that the valuation date of 29 February 2016, being a date closer to the date of the inquiry, should be adopted instead.  Accordingly, the valuation figures appearing in the Joint Statement will require further “time adjustment” by reference to the “Private Retail – Rental and Price Indices” published by the Rating and Valuation Department (“the RVD Retail Indices”) for the period from December 2015 to February 2016, that being the common methodology adopted by the experts for making time adjustment.

13.  Leaving aside for the time being the time adjustment which I shall return to later in this judgment, the market value of the Property as assessed by Mr Siu and Ms Sat is set out in Annex 1 to the Joint Statement, as follows:-

Floor/Unit	Assessed Market Value (HK$)		Difference (HK$)
	Mr Siu	Ms Sat
Main Shop	$231,858,157	$182,003,051	$49,855,106
Side Shop	$18,337,008	$17,484,784	$852,224
1st Floor	$18,687,267	$18,245,939	$441,328
2nd Floor	$18,762,589	$18,319,608	$442,981
3rd Floor	$18,837,911	$18,393,140	$444,771
4th Floor	$19,223,681	$18,751,124	$472,557
5th Floor	$14,981,652	$14,974,200	$7,452
Total	$340,688,265	$288,171,846	$52,516,419

(a)   The Side Shop and Upper Floors

14.  It can be seen immediately that the major difference between the two experts relates to the valuation of the Main Shop.  Their differences in relation to the valuation of the Side Shop and Upper Floors are all less than 5%.  In her evidence, Ms Sat said that a difference of 3 to 5% in the valuation of any property would be an acceptable margin of difference between two reasonable valuers.  It seems to me clear that the range of an acceptable margin of difference would depend on the nature of the property being valued.  For an ordinary flat in a large residential estate, a difference of 3 to 5% would be well within the range of acceptable margin of difference.  For a ground floor shop on a high street, a considerably larger difference is not uncommon. According to Mr Siu, a range of up to 10% could be acceptable for such a property.  Bearing in mind the inherently imprecise and subjective nature of the valuation exercise undertaken by the experts, I consider their differences in the valuation of the Side Shop and Upper Floors to be insignificant. 

15.  In my view, it would be meaningless to further analyse the valuation of the Side Shop and the Upper Floors carried out by the two experts with a view to assessing their “true” market values.  Any result derived from such analysis would give an appearance of precision which cannot be justified.  I consider that the court should, in the present circumstances, adopt the practical approach of taking the average of the figures produced by the two experts in so far as the valuation of the Side Shop and Upper Floors is concerned.

(b)   The Main Shop

16.  The difference in the valuation of the Main Shop is, however, more substantial.  As can be seen from Annex 4 to the Joint Statement, the two experts differ on the following issues in relation to the valuation of the Main Shop:-

(1)  Choice of comparables: both Mr Siu and Ms Sat rely on 5 common comparables in the vicinity of the Property along Castle Peak Road.  In addition, Mr Siu relies on a comparable (namely, Shop 7 on G/F, Yuen Long Trade Centre, 99-109 Castle Peak Road, Yuen Long, referred to as “ER2”) which Ms Sat considers should not be used because it fronts onto Fook Hong Street (instead of Castle Peak Road) and it has a much smaller size (effective area of 27.9 sq m compared to the Property with an effective area of 134.8 sq m).

(2)  Location adjustment: Mr Siu considers that a downward adjustment should be made for two comparables (“ER3” and “ER5”) because they are located near several major bus stops and a Hong Kong Jockey Club Off Course Betting Centre and therefore are superior when compared to the Property, whereas Ms Sat considers that an upward adjustment should be made for those comparables because they are situated further away from the busiest part of Castle Peak Road which is at the junction with Kuk Ting Street/Tai Tong Road.

(3)  Frontage adjustment for comparable “ER2”: both Mr Siu and Ms Sat adopt a frontage adjustment of 4% per m for a comparable fronting onto Castle Peak Road.  In relation to “ER2”, Mr Siu adopts the same 4% per m for frontage adjustment even though it fronts onto Fook Hong Street, whereas Ms Sat considers that a lower frontage adjustment of 2% per m should be applied for “ER2” because Fook Hong Street is a side street and has a lower pedestrian flow when compared to Castle Peak Road.

(4)  Return frontage adjustment for the Property (on account of an additional frontage onto Tung Lok Street): Mr Siu and Ms Sat adopt different return frontage adjustments of 40.1% and 30% (or 2.5% per m) respectively.

(5)  Layout/depth adjustment: Ms Siu makes adjustment by reference to the depth to frontage ratio, whereas Ms Sat makes adjustment by reference only to the depth of the Property (namely, 1% for every 1m increase in the depth of the shop).

(6)  Size/quantum adjustment: Mr Siu and Ms Sat adopt different size/quantum adjustments of 1% per 500 sq f (approximately 46.5 sq m) and 1.5% per 10 sq m respectively.

(7)  Weighting of comparables: Mr Siu arrives at the unit rate for the Property by taking a simple arithmetic average of the adjusted unit rates of the comparables, whereas Ms Sat adopts a weighted average approach, giving less weight to comparables “ER4” and “ER6” on the ground that they require higher location adjustment (namely, -35%) when compared to the other 3 comparables.

17.  At the conclusion of the evidence and prior to adjourning the inquiry for final submissions, I indicated to the parties certain provisional findings on the above issues and invited the parties’ experts to produce revised valuations on the basis of those provisional findings, as follows[1]:-

(1)  disregard comparable “ER2”;

(2)  adopt Ms Sat’s location adjustment for all 5 remaining comparables;

(3)  adopt Ms Sat’s return frontage adjustment of 30% for the Property;

(4)  for layout/depth adjustment, do two calculations, one based on Mr Siu’s approach and one based on Ms Sat’s approach;

(5)  for size/quantum adjustment, adopt a mid-way position between Mr Siu’s formula (1% per 46.5 sq m) and Ms Sat’s formula (1.5% per 10 sq m); and

(6)  adopt Mr Siu’s simple arithmetic average approach to derive the unit rate for the Property.

18.  In his final submissions, Mr Chain informed the court that he did not intend to make further submissions in respect of the issues mentioned in paragraph 16(1), (2), (3), (6) and (7) above, but maintained that the court should adopt Mr Siu’s approaches regarding (i) return frontage adjustment, and (ii) size/quantum adjustment.  On the other hand, Mr Mok contended that the court should accept Ms Sat’s evidence in respect of all disputed issues.  My views are as follows.

19.  In respect of the choice of comparables (relevant to the issues mentioned in paragraph 16(1) and (3) above), I accept Ms Sat’s view that “ER2” is not an appropriate comparable because (i) it fronts onto Fook Hong Street, and (ii) it is much smaller in size when compared to the Property (with effective areas of 27.9 sq m and 134.8 sq m respectively).

20.  In respect of location adjustment (relevant to the issue mentioned in paragraph 16(2) above), I also accept Ms Sat’s view that an upward (instead of downward) adjustment should be made for “ER3” and “ER5” because they are situated further away from the busiest part of Castle Peak Road at the junction with Kuk Ting Street/Tai Tong Road.

21.  In respect of the return frontage adjustment for the Property (relevant to the issue mentioned in paragraph 16(4) above), the approach adopted by Mr Siu is a complicated one.  In simple terms, he envisages the two frontages of the Main Shop, being a corner shop, as the two sides of a right-angled triangle. He first calculates, using the well known mathematical “Pythagoras’ theorem”, the length of the hypotenuse of a right-angled isosceles triangle with a length of 1 unit for the two equal sides.  From the length of 1.414 units for the hypotenuse as so calculated, he derives the factor of 41.4%.  He next adjusts the actual lengths of the two frontages of the Main Shop (8.9 m for the main frontage and 12.3 m for the return frontage) by reference to what he considers to be the relative pedestrian flows of 1 and 0.7 respectively. Lastly, he applies the factor of 41.4% to the adjusted lengths of the two frontages and comes up with the final figure of 40.1% as the return frontage adjustment for the Property.  Ms Siu frankly admitted in cross examination that his approach was an unorthodox one in the sense that he had not seen it in any standard textbook or literature on valuation or being applied by other valuers.  I do not accept Mr Siu’s approach for determining the return frontage adjustment for the Property, which does not seem to me to be based on either principle or logic.  I prefer Ms Sat’s approach, ie applying a fixed percentage for each metre in length of the return frontage, which I accept is a common or usual approach adopted by other valuers.  I also accept her adjustment of 30% as being appropriate for the return frontage adjustment for the Property.

22.  In respect of layout/depth adjustment (relevant to the issue mentioned in paragraph 16(5) above), while Mr Siu’s approach of using the depth to frontage ratio is sometimes employed by valuers to determine the unit rate for different “zones” of a shop using the Reduced Zoning Method, the particular formula used by him (namely, 10% per increase of ratio of 1) to directly calculate the magnitude of adjustment for the whole shop is something which, as accepted by Mr Siu, does not come from any standard textbook or literature on valuation and has not been used by other valuers in Hong Kong.  Mr Siu accepted that he had not done any research or verification to support or substantiate his formula.  Mr Siu also accepted that Ms Sat’s approach of making adjustment by reference only to the depth of the Property was a method used by at least some valuers to account for the difference in shape or depth of an ordinary rectangular shop. Again, I prefer the approach of Ms Sat.  I accept her formula of 1% for every 1 m increase in the depth of the shop as being appropriate in the present case for depth adjustment.

23.  In respect of size/quantum adjustment (relevant to the issue mentioned in paragraph 16(6) above), neither of the formulae applied by the two experts (namely, 1% per 46.5 sq m and 1.5% per 10 sq m respectively) is supported by any objective justification or valuation practice.  Their formulae are, I understand, based on their professional (in other words, subjective) judgment. There is not much to choose between the two formulae.  I would adopt a mid-way position between the two formulae for size/quantum adjustment in the present case.

24.  In respect of weighting of comparables (relevant to the issue mentioned in paragraph 16(7) above), while I accept that in some circumstances, it may be justifiable to give different weights to different comparables, in the present case all 5 comparables seem to me to be reasonably good ones with some adjustments being required to be made on account of various characteristics mentioned above.  I do not consider that it is right to single out “ER4” and “ER6” and give them half weight merely because they require higher location adjustment to be made. As a matter of fact, if one considers the net adjustment required to be made to the 5 common comparables, “ER4” and “ER6” would require the lowest adjustment to be made (namely, 10.6% and 9.5% respectively).  I appreciate that individual items of adjustment may operate in opposite directions, and thus a small net adjustment may be the result of a number of large adjustments operating in different directions.  Nevertheless, valuation by using the comparative approach is inherently an imprecise exercise.  One should adopt a global view and should not be bogged down by fine details.  Both experts consider the 5 comparables to be appropriate comparables in the present case.  They should, prima facie, be given equal weight in the absence of some strong justification to the contrary.  On the whole, I would accept Mr Siu’s approach of giving equal weight to each of the 5 comparables and reject Ms Sat’s weighting approach.

25.  In passing, I should mention that Mr Mok has raised quite a number of criticisms against the evidence of Mr Siu in his final submissions.  I have considered them but do not consider it necessary to deal with them separately in this judgment.  I acknowledge the force of some of Mr Mok’s criticisms, but do not consider that they are sufficient to cause me to reject, or totally reject, his opinions on (i) size/quantum adjustment, and (ii) weighting.

(c)    Time Adjustment

26.  Lastly, on the issue of time adjustment, by the time of the final submissions, the latest published RVD Retail Indices for December 2015 and January 2016 were 540.3 and 528.9 respectively, both being provisional figures only.  Those figures should be used.  For February 2016, I would adopt a further downward adjustment of 2% for the Main Shop, taking into account the observed trend in the few preceding months.  These figures for time adjustment should also be used for the valuation of the Side Shop as at 29 February 2016.

27.  In so far as time adjustment for the Upper Floors is concerned, the latest “Private Offices – Price Indices by Grade (All Districts)” published by the Rating and Valuation Department (“the RVD Offices Indices”) available at the time of the final submissions on 22 March 2016 (including provisional figures for December 2015 and January 2016) should be used. For February 2016, I would adopt a further downward adjustment of 1%, taking into account the observed trend in the few preceding months.

28.  After the conclusion of the inquiry, the plaintiff applied to adduce further evidence and make further submissions on time adjustment.  In summary, the plaintiff argued that more updated RVD Retail Indices and RVD Offices Indices had been published by the Rating and Valuation Department in April 2016.  The updated RVD Retail Indices and RVD Offices Indices provided not only provisional figures for February 2016, but also revised the previous provisional figures for December 2015 and January 2016.  The plaintiff submitted that the court should have regard to the updated RVD Retail Indices and RVD Offices Indices when making time adjustment.  The 1^st and 3^rd defendants objected to the plaintiffs’ attempt to adduce the updated RVD Retail Indices and RVD Offices Indices as evidence for the purpose of this inquiry.  I directed the parties to file and serve written submissions on this issue, which they did.  I have considered their submissions.  I agree with the 1^st and 3^rd defendants that there ought to be finality in the evidence for the purpose of the inquiry.  Further, it should be noted that the figures for the last six months in the updated RVD Retail Indices and RVD Offices Indices are, in any event, provisional only.  I consider that the time adjustment ought to be made by reference to the RVD Retail Indices and RVD Offices Indices published by the Rating and Valuation Department in March 2016 (which contained provisional figures up to January 2016 and were available by the time of the final submissions), and that the time adjustment for the Main Shop/Side Shop and Upper Floors for February 2016 should be as indicated in paragraphs 26 and 27 above.

RENTAL INCOME RECEIVED BY THE 1^st or 3^rd DEFENDANTS

29.  The actual rents received by the 1^st or 3^rd defendants from letting out the Property are not in dispute.  The total amount, calculated up to 29 February 2016, comes to HK$60,538,310.50: see Annex 5 to the Closing Submissions for the 1^st and 3^rd defendants dated 21 March 2016 (“Ds’ Closing Submissions”).

30.  The plaintiff has, however, raised two complaints regarding the rental income received by the 1^st or 3^rd defendants.  First, the plaintiff says that:-

(1)  the 2^nd Floor of Longfield Centre has been let to the 1^st and 3^rd defendants’ solicitors at below market rent; and

(2)  the 3^rd Floor of Longfield Centre has been let to various companies owned by a “friend” (Mr Man Tat Shing) of the 1^st defendant at much below market rent (in the words of the 1^st defendant, he gave the companies “a good deal” as a favour to Mr Man based on their long term friendship).

31.  Second, the plaintiff complains that the 4^th Floor and a portion of the 5^th Floor of about 624 sq ft (“the 5^th Floor Portion”) have been used by the 1^st defendant or his companies, but no rent has been paid or received for his use of those premises.

32.  In relation to the first complaint, it is important to bear in mind that under the Liability Judgment, the 1^st defendants is only required to account to the Estate for the profit which he has made from the acquisition and holding of the Property.  There is no finding that the 1^st or 3^rd defendants hold the Property on trust on behalf, or for the benefit, of the Estate, nor is there any order made requiring the 1^st defendant to compensate the Estate for loss(es) for failing to let the Property at market rent.  There is also no evidence that the 1^st or 3^rd defendants have derived any pecuniary or material benefit from letting the 2^nd and 3^rd Floors of the building at below market rent.  I do not therefore consider that the 1^st defendant should be required to account to the Estate for any notional market rent in respect of the 2^nd and 3^rd Floors of the building.

33.  The second complaint stands, however, on a different footing.  The 1^st defendant has derived material benefit from occupying the 4^th Floor and the 5^th Floor Portion free of charge.  Such free occupation should properly be regarded as a form of “profit” which the 1^st defendant has derived from the acquisition and holding of the Property.  He should therefore account to the Estate for such profit.  The 1^st defendant says that he rarely uses those promises and they have been left idle most of the time.  It is not disputed, however, that those premises have been reserved for his use.  In my view, it is a matter entirely of the 1^st defendant’s choice whether and how often he makes use of those premises.  The “profit” that the 1^st defendant has derived from his free occupation of the 4^th Floor and the 5^th Floor Portion should, I consider, be quantified by reference to the market rent of those premises.

34.  Mr Siu has produced valuation evidence regarding the market rent of the 4^th Floor and the 5^th Floor Portion, while Ms Sat has not produced evidence on this issue.  Mr Siu refers to a total of 7 comparables and opines that an adjusted effective unit rent of HK$11 per sq ft (as at 2003) should be used.  Apart from his criticisms on various other aspects of Mr Siu’s evidence, Mr Mok argues that Mr Siu should not have relied on a particular comparable (referred to as “TO7”) because it was a tenancy which had been concluded before SARS had hit Hong Kong in mid-March to April 2003.  It may be noted, however, that Mr Siu has made time adjustment for “TO7”.  This having been said, even if one were to take into account “TO7”, there are other comparables referred to by Mr Siu which would support an adjusted effective unit rent of lower than HK$11 per sq ft (as at 2003).  I note that Mr Siu has disregarded comparables “TO1” and “TO3” on the basis that they are “below market range after analysis”.  However, in the absence of evidence that those transactions were not arms-length market transactions, I do not consider that they should be disregarded altogether.  In all the circumstances, I would adopt a simple arithmetic average in respect of all 7 comparables listed by Mr Siu to derive the adjusted effective unit rent of HK$9.7 per sq ft (as at 2003)

35.  As envisaged in paragraph 78.4 of Ds’ Closing Submissions, I shall leave to it the parties to agree on the calculation of the market rental of the 4^th Floor and the 5^th Floor Portion for the period from the date of acquisition of the Property in 2003 to 29 February 2016.

EXPENSES NOT IN DISPUTE

36.  The following expenses paid or incurred by the 1^st or 3^rd defendants, totalling HK$10,055,711.20, are agreed:-

(1)  re-construction and renovation expenses (HK$5,607,597);

(2)  rates and government rent (HK$1,623,353);

(3)  repairs and maintenance expenses (HK$218,814);

(4)  security service expenses (HK$1,525,722.70);

(5)  fire alarm expenses (HK$57,326);

(6)  insurance (fire and liability) expenses (HK$123,999);

(7)  elevators maintenance expenses (HK$298,912)

(8)  staff salary, including Ms Wan Lin Heung (HK$481,481.50); and

(9)  professional fee and commission (HK$118,506).

37.  Accordingly, credit should be given to the 1^st defendant for the sum of HK$10,055,711.20 in ascertaining the profit for which he is liable to account to the Estate.

MANAGEMENT FEES PAID TO WELSEN LIMITED

38.  Welsen is 50% owned by the 1^st defendant, the other 50% registered shareholder being Tang Ying Sau (deceased).  The directors of Welsen are the 1^st defendant and his wife. The 1^st defendant’s wife is also the secretary of Welsen.

39.  The management fees paid to Welsen did not feature much in the course of the hearing.  In the Plaintiff’s Skeleton Submissions dated 18 March 2016 (“P’s Skeleton Submissions”), it is said that “even on the documents the services provided were not so much ‘property’ related”.  There is also a complaint that the management fees paid to Welsen increased substantially from HK$13,000 to HK$60,000 per month from 2009 to 2016, with the latest increase at 50%.  The “documents” referred to are, I understand, the management agreements entered into between the 3^rd defendant and Welsen.  It appears from those management agreements that Welsen provides two types of services to the 3^rd defendant, namely: (i) management, and (ii) secretarial.  Clause 2 of the management agreements further specifies the services to be rendered by Welsen, as follows:-

(1)  company management relating to administration, correspondence, accounting, banking, filing, public relations and individual matters; and

(2)  receipt and delivery services.

40.  Apart from the management agreements, there is little evidence regarding the actual services rendered by Welsen to the 3^rd defendant which (according to the 1^st defendant) was acquired solely for the purpose of holding the Property.

41.  As pointed out by the plaintiff, no claim was made in respect of the management fees paid to Welsen in the initial disclosure by the 1^st defendant in his 3^rd affirmation filed on 4 June 2015: see paragraph 7 of Plaintiff’s Synopsis dated 22 February 2016 (“P’s Synopsis”), and paragraph 40 of P’s Skeleton Submissions.

42.  The burden is on the 1^st defendant to prove that he should be given credit for the management fees paid to Welsen in ascertaining the profit for which he is liable to account to the Estate.  It is wholly unclear, on the existing evidence, as to whether the whole or only a part of the services rendered by Welsen should be treated as relating to the management of Longfield Centre.  In paragraph 81.4 of Ds’ Closing Submissions, the 1^st and 3^rd defendants submit that the 1^st defendant should be given credit for 60% of the payments made to Welsen (and Mr Yick, as to which see further below).  There is, however, no justification given for this apportionment in so far as the managements fees paid to Welsen are concerned.

43.  In all the circumstances, I am not prepared to give credit to the 1^st defendant for any part of the management fees paid to Welsen.

PAYMENTS TO MR YICK CHUN KIN AND MR CHAU WOO LOI

(i)    Mr Yick Chun Kin

44.  Mr Yick is an employee of Welsen.  Welsen makes monthly salary payment to Mr Yick and the 3^rd defendant in turn pays management fees to Welsen. In addition, Mr Yick receives allowances and bonuses from the 3^rd defendant directly.  The total amount received by Mr Yick during the period from 2009 to 2015 comes to HK$2,103,777.

45.  According to Mr Yick, he assists in the maintenance and overall management of the Property, including administration, secretarial, accounting, banking, filing, rent collection, issuing receipts, public relations and other incidental matters.

46.  The 1^st defendant says that Mr Yick also assists him in relation to his personal financial matters and the accounts of the Estate, and estimates that the work that Mr Yick does relating to the Property represents about 60% of his overall workload.

47.  In Ds’ Closing Submissions, it is accepted that the 1^st defendant should be given credit for only 60% of the payments made to Mr Yick.  I am prepared to accept the 1^st defendant’s evidence regarding the apportionment of Mr Yick’s overall workload, and give credit to the 1^st defendant for 60% of the payments made to Mr Yick (ie HK$2,103,777 x 60% = HK$1,262,266) for the purpose of ascertaining the profit for which he is liable to account to the Estate.

(ii)  Mr Chau Woo Loi

48.  The payments to Mr Chau were made over a period of time from 2009 to 2015, in the total sum of HK$970,000. 

49.  According to the 1^st defendant:-

(1)  Mr Chau is the 1^st defendant’s general advisor and advises him on the management of Longfield Centre.

(2)  He attended all meetings with architects and contractors and helped the 1^st defendant supervise work progress in relation to the reconstruction and renovation works carried out after the acquisition of the Property in 2003.

(3)  He also provides technical support (including the use of computer) to the 1^st defendant.

50.  According to Mr Yick, Mr Chau assisted in advising on and monitoring the reconstruction and renovation works of the Property, and the payments made to him by the 3^rd defendant were for the purpose of “retrospectively” remunerating him for such effort and contribution. 

51.  As mentioned by the 1^st defendant, the reconstruction and renovation works were completed in 2006.  There is no evidence of any agreed arrangement regarding the payment of any remuneration to Mr Chau for his services rendered in advising on and monitoring the reconstruction and renovation works of the Property.  There is also little evidence regarding the actual services rendered by Mr Chau.  That Mr Chau was paid during the period from 2009 to 2015 for services allegedly rendered between 2003 and 2006 is, to say the least, unusual.  It is not known how the various payments to Mr Chau (ranging from HK$100,000 to HK$220,000) were arrived at, and whether they related exclusively to the services rendered in connection with the reconstruction and renovation of the Property or to on-going services provided by him to the 1^st defendant or both.  Also, in relation to any on-going services provided by Mr Chau, it is not clear whether they relate to the management of the Property.

52.  I do not accept Mr Yick’s evidence that the payments made to Mr Chau represented retrospective remuneration for his effort and contribution in relation to the reconstruction and renovation of the Property.  I am also not prepared to find, on the existing evidence, that those payments were “expenses incurred for the repair and/or maintenance of the Property” as argued by the 1^st and 3^rd defendants (see paragraphs 82.2 of Ds’ Closing Submissions).  Accordingly, no credit should be given to the 1^st defendant for the payments made to Mr Chau.

DIRECTORS’ REMUNERATION PAID TO THE 1^ST DEFENDANT AND HIS WIFE

53.  In Phipps v Boardman [1964] 1 WLR 993 at 1018, Wilberforce J (as he then was) said, in relation to a claim for an account of profit improperly obtained by a fiduciary, that:-

“Moreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised. But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill? This is a subject on which authority is scanty; but Cohen J. in In re Macadam gave his support to an allowance of this kind to trustees for their services in acting as directors of a company. It seems to me that this transaction, i.e., the acquisition of a controlling interest in the company, was one of a special character calling for the exercise of a particular kind of professional skill. If Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, had they been well advised, have employed) an expert to do it for them. If the trustees had come to the court asking for liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question. It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.”

54.  The plaintiff accepts that, as a matter of principle, the 1^st defendant is entitled to claim an “allowance” for his own time, energy and skill which contribute to the profit for which he is now required to account to the Estate (paragraph 7 of the P’s Skeleton Submissions).

55.  In the present case, the 1^st and 3^rd defendants submit that the director’s remuneration paid to the 1^st defendant and his wife, in the total amount of HK$43,100,000 (HK$32,900,000 to the 1^st defendant and HK$10,200,000 to his wife), during the period from 2003 to 2015 should be regarded as “allowance” to the 1^st defendant for his skill and labour in producing the profit (see paragraph 83 of Ds’ Closing Submissions).

56.  There is no evidence that the 1^st defendant’s wife has done anything which contributes to the “profit” for which the 1^st defendant is liable to account to the Estate.  On any view of the matter, the amount of HK$10,200,000 paid to the 1^st defendant’s wife cannot be regarded as “allowance” to the 1^st defendant for his skill and labour contributing to such profit.

57.  In so far as the 1^st defendant’s own skill and labour is concerned, he says, in paragraph 5 of his 4^th affirmation, as follows:-

“I have spent a lot of time and effort in designing and causing the property to be upgraded and then maintaining it to high standards. Negotiations of leases and tenancies with the tenants are also carried out by me. I believe that my expertise in the property market within Yuen Long is an added asset in this regard. As a result, I truly believe that I am entitled to be properly remunerated for enhancing the marketability of Longfield Centre. Yearly ‘bonus’ in the form of directors’ remuneration is paid to me and my wife in about March each year.”

58.  In paragraphs 85 of Ds’ Closing Submissions, Mr Mok also refers to:-

(1)  the 1^st defendant’s skill and effort in procuring and underwriting the long term investment opportunity provided by the acquisition of the Property during the SARS period in 2003;

(2)  the 1^st defendant’s sourcing and identification of the investment opportunity, application of his market judgment and experience, as well as negotiating the acquisition of and underwriting the risk of the investment in the Property; and

(3)  the 1^st defendant’s contribution of substantial follow-up services including undertaking the renovation, upgrading and ongoing management of the Property.

59.  Mr Chain submits, however, that apart from the initial improvement/renovation, little was required of the 1^st defendant’s time, energy and skill (paragraph 49 of P’s Skeleton Submission).  There is, I consider, considerable force in this submission.  Apart from the bare statement quoted in paragraph 57 above, little (if any) evidence has been adduced by the 1^st and 3^rd defendants regarding the skill, labour or effort allegedly exercised or expended by the 1^st defendant in relation to the matters mentioned in paragraph 5 of his 4^th affirmation. In this regard, it is relevant to note that:-

(1)  The Ground Floor has all along been leased to the same tenant (namely, Crocodile Garment Ltd);

(2)  The Second Floor has for many years been leased to the 1^st and 3^rd defendants’ solicitors; and

(3)  The Third Floor has been leased to companies belonging to a long time friend of the 1^st defendant and the 1^st defendant has said that he gave them “a good deal” as a favour to his friend.

60.  In respect of such leases, the 1^st defendant would not have to look for tenants, but would only need to “negotiate” the rent upon each renewal of the leases.

61.  While I have some reservation on whether allowance should be given for the 1^st defendant’s skill and labour in identifying the investment opportunity and negotiating of the purchase of the Property (because that was the very same transaction complained of by the plaintiff involving the 1^st defendant’s misuse or misapplication of money belong to the Estate), I have nevertheless decided that some allowance should be given to the 1^st defendant for such skill and labour. Taking everything into account, I consider that a sum of HK$5,000,000 would amply compensate the 1^st defendant for his time, energy, skill and labour in producing the profit for which he is now required to account to the Estate.

INTEREST

62.  In what follows, the HSBC best lending rate (from time to time) plus 1% pa shall be referred to as the “Base Rate”.

63.  Mr Chain has not argued that compound interest shall be paid by the 1^st defendant on the amount due found on the inquiry.  Accordingly, all references to interest below shall be to simple interest.

64.  In respect of the profit for which the 1^st defendant is required to account to the Estate, Mr Mok argues that there should be no interest on the rental income during the period from 2003 to 29 February 2016.  He supports his submission by reference to the decision of Stirling J in Silkstone and Haigh Moor Coal Company v Edey [1900] 1 Ch 167 to the effect that, upon the setting aside of a sale by a trustee of trust property to himself and the reconveyance of the property to the beneficiaries, it is not the practice of the court to charge the trustee with interest on the rents and profits received by him since the date of the sale. This practice is also referred to in the current (2013) edition of Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, at paragraph 57-57.

65.  I am not, however, here dealing with the setting aside of any sale of trust property by a trustee to himself.  I am concerned with ascertaining the profit made by the 1^st defendant arising from his use of money belonging to the Estate to purchase the Property.  In determining the profit made by him, I need to have regard to, amongst other things, the rental income which the 1^st or 3^rd defendants have received, as well as the expenses that they have reasonably and properly incurred to enable the profit to be made.  I cannot see any reason in principle why interest should not be allowed on both the rental income and the expenses.

66.  I bear in mind Mr Mok’s submission that there has been an overall increase in rental over the years (paragraph 91 of Ds’ Closing Submissions) and thus it may put the 1^st defendant at a significant disadvantage to adopt the “simplified” formula proposed by Mr Chain, ie at half of the Base Rate from July 2006 (paragraph 53 of P’s Skeleton Submission).

67.  On the other hand, the approach advocated by Mr Mok, namely, calculating interest on all receipt and expense items with reference to the actual times at which the amounts were received or paid (paragraph 92 of Ds’ Closing Submissions), seems to me to be unduly complicated. In making an award of interest, the court is not undertaking a scientific exercise of precision. What the court should seek to achieve is practical justice to both parties.

68.  I also take into account the fact that although there was no rental income received in respect of the Side Shop and the Upper Floors during the period from 2003 to June 2006, the Main Shop started to generate rental income as from 2003.

69.  I consider that practical justice would be achieved in the present case by allowing interest on:-

(1)  the total amount of all rental incomes (including the notional rental income in respect of the 4^th Floor and the 5^th Floor Portion occupied by the 1^st defendant); and

(2)  the total amount of all deductible expenses and allowances,

at 40% of the Base Rate from 1 July 2006 to 29 February 2016.

70.  In respect of the Shortfall, it was first revealed in the PwC Report on 10 October 2005 and was repaid by the 1^st defendant on 17 December 2012.  As mentioned in paragraph 109 of the Liability Judgment, the 1^st defendant says that the Shortfall represented mainly cumulative bad debts arising from unpaid rent receivables for the period from 1983-2004 covering different plots of land of the Estate.

71.  The purpose of an award of interest is to compensate the Estate for its loss of the rental income which ought to have been received during the period from 1983 to 2004.  In the absence of further details regarding the unpaid rent receivables, I consider that the 1^st defendant should be required to pay simple interest on the amount of the Shortfall as follows:-

(1)  for the period from 21 February 1983 to 9 October 2005, at half of the Base Rate; and

(2)  for the period from 10 October 2005 to 17 December 2012, at the Base Rate.

CONCLUSION

72.  I shall leave it to the parties to agree on the exact form of the order to give effect to this judgment, with liberty to the parties to apply in the event of disagreement.

73.  I make an order nisi that the plaintiff shall have the costs of the inquiry, to be taxed if not agreed.

74.  Lastly, it remains for me to thank counsel for their helpful assistance rendered to the court.