UNITED KESVICK LTD v. TSANG WING FAI AND OTHERS

HCA 804/2019

[2020] HKCFI 160

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 804 OF 2019

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R U L I N G

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1.  This is the plaintiff’s application to enter judgment in default of defence in respect of a claim against the defendants arising out of the estate of the 1st defendant’s mother.  The plaintiff company is an asset-holding company of her estate.  The 1st defendant is a director of the company and was executor of the estate; however, he was removed on 13 August 2018 by order of Mr Justice Wilson Chan and replaced by a KPMG partner as administratrix of the estate.

2.  Earlier this year, KMPG, in effect, became or provided majority directors of the plaintiff company.  There are now five directors and the 1st defendant and the 3rd defendant constitute two of them.  The 2nd defendant is the 1st defendant’s wife.  She and her husband are directors of the 3rd defendant company which, as I have said, is in turn a director of the plaintiff company.

3.  The claim was issued by writ on 7 May 2019 and a freezing injunction granted against the 1st defendant the same day by Mr Justice Andrew Chan in the total sum of $21.3 million.  The nature of the claim against the 1st defendant is, essentially, that moneys were wrongly applied by him either as director or executor giving rise to both monetary claims and proprietary claims against him by the plaintiff company.

4.  The Statement of Claim was served on 2 October 2019 and after a delay caused by an unsuccessful application for Legal Aid, time for the defence expired on 2 and 4 December 2019, respectively.  In between those two dates, the defendants were given notice of intention to enter judgment.  However, despite the matters that have been raised by the 1st defendant and the 2nd defendant today in a courteous and careful manner, the fact is that no defence has ever been put in.

5.  The way to have dealt with their concerns about the claim would have been to put in a defence.  There is no suggestion, even today, that the defendants are proposing to file a defence in circumstances that would move the action forward.  The plaintiff could, of course, have entered judgment for the liquidated sums it claims, but it wishes to obtain declarations for these allegedly misappropriated funds on the basis that they are held on trust so as to found a proprietary claim.  That is important, the plaintiff submits, because a proprietary claim, as opposed to a simple money judgment, would give a basis for a tracing claim should that issue ever arise. There is also a claim for delivery up of a certain type of deeds relating to two of the four properties held by the plaintiff company.

6.  The defendants are unrepresented and it is clear that the administration of their relatively modest estate has become entangled with a number of sets of legal proceedings.  The underlying dispute is between the 1st defendant and his younger brother and, very unfortunately, a mediation order by the Court of Appeal in previous proceedings did not achieve a settlement.  There is always time for a settlement to be reached between the various beneficiaries but that is not something which I can say any more about today.

7.  The position is further overshadowed by illness on the part of the 1st defendant who suffers from advanced lung cancer and is having difficulty, he explained, in meeting his medical expenses.  It goes without saying that the court has every sympathy with his position in very difficult circumstances but, nevertheless, has to apply the law as best it can.

8.  The position is that the 1st defendant applied for an adjournment on 2 December 2019 on the grounds that the administratrix had given notice of her resignation upon leaving KPMG and a replacement is yet to be appointed.  This is a pity coming so soon after her appointment in the first place, but there is no reason to suppose that the administration will be prejudiced in any way.  The evidence before the court is that various steps have been taken to ensure continuity.

9.  In any case, in response to the letter of 2 December 2019 which the 1st defendant sent to the court, the court indicated that an application to adjourn should be made by summons in the usual way. 

10.  A request for an adjourmment was made again on 30 December 2019 after the 1st defendant received the plaintiff’s skeleton arguments.  I gave my reasons earlier today for refusing an application for an adjournment and will not repeat what I said.

11.  I am, in any case, satisfied that the 1st defendant and, I should add, the 2nd defendant, are fully aware of the nature of these proceedings and have had the opportunity to express their position which they have done both orally and in writing.

12.  The nature of the dispute is, of course, very well known to them and was specified in detail in the October Statement of Claim.  I shall deal with each of the claims in respect of which the plaintiff seeks judgment in default by category as presented to me by counsel for the plaintiff. 

13.  Counsel for the plaintiff has also drawn my attention to the various authorities decided by the courts as to the proper approach where a claim contains a proprietary element in circumstances where the defendants have not filed a defence and, in particular, how the court should go about dealing with the matter in those circumstances.  I shall follow the approach in the authorities that have been cited to me.

14.  The first category of claim relates to the delivery up of title deeds to two of the four properties.  In short, the plaintiff maintains that the 1st defendant, as the previous executor of the estate and/or director of the plaintiff company, had possession of title deeds which are defined in the Statement of Claim at paragraphs 44 and 48, but despite requests has failed to produce them or return them. 

15.  It is important to note that this was, in fact, a part of the order of Mr Justice Andrew Chan made on 7 May 2019 when granting a freezing injunction against the 1st defendant.  The 1st defendant says that he has handed over all the documents that he has and cannot find the others.  The plaintiff says that it asked him to give a statutory declaration to this effect but without success. 

16.  I shall give judgment as asked noting however that I have no doubt that the administratrix will not take up time or money on documents that are unnecessary to prove title and achieve a sale, because the 1st defendant, on the face of it, has given a reasonable explanation given the age of some of these documents and that may be enough.

17.  I should, however, say that it has become clear during the course of the hearing today that the question of a sale of the two properties is a highly controversial one so far as the beneficiaries are concerned.  The court on this occasion cannot get into that aspect of the dispute but it is right that I should say that it is clear that the administratrix has a difficult task in this case in attempting to fulfil her duties.  One way or another, those duties have to be fulfilled and it is for the court to facilitate that, whilst at the same time trying to avoid any injustice that may be done to the defendants.

18.  In that regard, it is important to mention that in an affirmation of the administratrix who is, of course, appointed as an independent professional administrator, she does allude to an important practical point.  The affirmation is dated 6 May 2019 and was the affirmation that was placed before the judge in support of the plaintiff’s ex-parte application for the Mareva injunction.  She says at paragraph 97, and I quote:

“According to the will of the deceased, the defendant, that is the 1st defendant, appears to be entitled to 40 per cent of the estate. If the above properties are liquidated in the future, the defendant’s entitlement may exceed the amount that is currently claimed in this action. However, this is without taking into account any withdrawals made before my appointment as administrator to the estate which are for his personal benefit that should be returned to the plaintiff.”

19.  It is entirely correct that the 1st defendant under his mother’s will is entitled to 40 per cent of the estate.  That is an important point to bear in mind in the conduct of the administration.  It was debated at some length during the hearing, but I should record that the response given on behalf of the administrator was that it was difficult for the administrator to perform an account before knowing what the various debits and credits were.  I need say nothing more about that at present but it does arise again in relation to one other head of claim, in particular.

20.  So I come to the second category which relates to legal fees.  Here, there were four batches of payments which were made after 30 September 2013 but before 21 June 2018.  These payments totalled $2,786,970 and they were paid by the plaintiff company to a firm of lawyers as legal fees of the 1st defendant in three sets of proceedings.  The plaintiff was not a party to these proceedings.  The short point made on behalf of the plaintiff is that in using money from the plaintiff company in actions concerning the 1st defendant personally there was a breach of his fiduciary duty as director.

21.  The 1st defendant says that although the fees were paid to him personally, he was acting as an executor in the litigation.  That is his basic position.  However, the company is a separate entity and cannot simply be treated as a source of funds in that way. 

22.  It is important to state that this is subject to a ruling which is forthcoming but has not yet been handed down in an action involving another company known by the initials, OTIL.  In that regard, the plaintiffs will undertake not to enforce the judgment insofar as it relates to the first three payments in paragraph 23 of the statement of claim pending the judgment of Madam Justice Marlene Ng in HCMP 793/2018.  Subject to that, the plaintiffs are entitled to the relief sought.

23.  The third category contains what are described as initial unauthorised withdrawals.  These are set out in paragraph 26 of the Statement of Claim. They were withdrawals, payments and/or transfers which were made after the 1st defendant was removed as executor of the estate but before the appointment of the new directors.  So at that time the only directors of the plaintiff company were the 1st defendant and the 3rd defendant.

24.  The issues in relation to these payments are set out in some detail in the Statement of Claim in paragraphs 26 to 31.  The subject matter are repayments of an alleged loan advanced by the 3rd defendant to the plaintiff with interest, refund of a rent payment, various payments to the 1st defendant and/or the 3rd defendant which are unexplained, and payment of costs in proceedings which the plaintiff was not concerned with but which the 1st defendant was party to.  

25.  The total amount involved in this part of the claim is HK$15,401,037.72.  These debits were in favour of the 1st defendant, the 2nd defendant and/or the 3rd defendant directly or indirectly.

26.  The 1st and 2nd defendants say that 11 withdrawals relate to repayments of debits made by the defendants on the holding company’s account.  He says that these payments had to be made to avoid a forced sale.  The 2nd defendant has added to that by saying that the situation as regards to the loan was that this accrued interest at the request of the deceased and the 1 per cent monthly interest reflected rising property values at that time.

27.  She says further that the deceased provided an educational fund in her will for her two grandsons, that is the sons of the 1st defendant and his wife, who went to university in the United States and live in the United States.  However, that money was not sent to the sons at the time and would only be available when the property was sold.

28.  I was concerned to explore with counsel for the administrator whether the order could be claused in such a way as to defer enforcement of the order pending sale of the properties and distribution.  The point being that at that stage the ability to take an account of what may have been due to the 1st defendant under the will would have crystallised.  However, the 1st  defendant says, and of course I respect this, that the beneficiaries by which he means, I think, all the beneficiaries, are opposed to a sale at the present time and I do not think it is practical in those circumstances to seek to reflect in the order anything along the lines that I had in mind.

29.  There will have to be at some point a proper accounting but, equally, the administrator has to get on with the administration in the way that the administrator independently considers best.  This is plainly far from easy when the beneficiaries are as antagonistic to each other as, unfortunately, they appear to be in this case.

30.  The fourth and last category of withdrawals can be dealt with relatively quickly. These were three withdrawals which were made, efectively, by the 1st defendant after the new defendants had been appointed but without any participation on the part of those new directors.  The proceeds were then paid into the joint account of the 1st defendant and the 2nd defendant.  What the defendants say about this is that debits were made to the account without their consent, specifically, a debit of $750,000 by the administrator on 26 April 2019, then later moneys were also transferred by the administrator.

31.  The 1st defendant’s fundamental point as put to me today is that the properties remaining are worth a substantial amount, he believes are worth about $60 million, and he wishes to protect the property for his two sons.  That is a wholly understandable wish on his part, but the fact of the matter is that these withdrawals were made by him, not only from the plaintiff company account, but at a time when new directrors had been appointed to the company.  There cannot be any justification for that and in each of these cases the plaintiff is entitled to its declaration in relation to holding on trust.  It does not add to the monetary claims but it does, as I have said, give the foundation for a tracing claim should that need to be pursued by the administrators.

32.  The plaintiff’s skeleton argument contains at the end a form of draft order. Broadly, in my view, the plaintiffs are entitled to that subject to one exception.  There was a summons taken out on 30 December amending or seeking to amend the summons in various ways.  That was partly to add in further claims for damages, equitable compensation and an account of profits.  I do not accept that amendment.  It was applied for far too late.

33.  More generally, in these difficult circumstances, the issue is not so much, in my opinion, what further losses might be calculated by a commercial party bringing proceedings in a commercial transaction but, rather, what the numbers are including what is due to the 1st defendant in the context of this difficult administration.  That is my ruling.