CHAN MAN PAN, the sole executor of the Estate of CHAN LAP PAN, deceased v. FU FUNG YAN CAFORNIA

CACV 29/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 29 OF 2017

(ON APPEAL FROM HCMP NO. 1293 OF 2016)

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J U D G M E N T

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Hon Cheung JA :

I. The appeal

1.1  The applicant (‘Chan’) who is the sole executor of the will of Chan Lap Pan (‘deceased’) applied and obtained a Beddoe order to defend High Court Action No. 882 of 2016 (‘the High Court Action’) commenced by the respondent (‘Fu’) and her children against the estate of the deceased.  L Chan J ordered that Chan be fully indemnified for all costs and liabilities for costs incurred in the High Court Action out of the assets of the estate up to and including the trial and all preparation thereof.

1.2  Fu now appeals.

1.3   In accordance with Practice Direction 20.3, Chan had lodged a confidential memorandum on the merits of Fu’s claim in the Court below.  He also filed in this Court a confidential memorandum and a skeleton submission on the merits of Fu’s claim. These documents will be sealed in the court file.

II.  Background

1)  The family

2.1  Chan was the older and only brother of the deceased.  Fu was the widow of the deceased.  The deceased died on 1 May 2015 at the age of 40, leaving behind Fu and their three children aged between 5 and 9. 

2.2  In November 2014 the deceased was advised that he had terminal cancer and would live for another six months.

2.3  In January 2015 the deceased discovered that Fu had an adulterous relationship with a married man since July 2014.  He revealed his discovery to Chan. 

2)  The will

2.4  In January 2015 the deceased was, amongst other things, the sole registered owner of a property situated in Tower 1, Harbour Green, 8 Sham Mong Road, Kowloon, Hong Kong (‘the Tower 1 flat’) which was the matrimonial home of the deceased and Fu.

2.5   On 3 February 2015, the deceased executed a will in which he bequeathed the Tower 1 flat to Chan and his residuary estate to Chan and Fu to be shared in the proportion of 30% and 70% respectively.  Probate of the will was issued on 18 January 2016 to Chan. 

3)  The assets

2.6  At the time of the hearing before the Judge in December 2016, the value of the Tower 1 flat was valued at nearly $14 million.  The residuary estate comprising of cash and stocks was valued at no less than $600,000. 

2.7  During the deceased’s life time, he owned two other properties jointly with Fu.  Fu became the sole owner of these two properties upon the death of the deceased by the rule of survivorship.  As summarised by the Judge, these two properties are the Brilliant Court flat and Nan Fung flat.  The Brilliant Court flat is worth $7 million.  It generates rental of $19,000 per month.  The Nan Fung flat has a net worth of $3.5 million.  It is valued at $5.2 million with an outstanding mortgage of $1.7 million.  It generates rental of $15,300 per month.  Net of the mortgage repayment, management fees and other outgoings, Fu receives a net rental income of about $20,300 per month.  In March 2016 she had about $2 million in her bank account, consisting of cash and stocks which the Judge said should have been significantly depleted by the time of judgment (January 2017).  She had on 1 May 2015 (the day when the deceased passed away) withdrawn no less than $3.2 million from two bank accounts of the deceased.

2.8  There are two alleged debts; one at $995,000 allegedly due to the father of Chan and the deceased and the other at $1.1 million allegedly due to Fu as part of her half share of the proceeds of the sale of a flat jointly owned by her and the deceased at Tower 5, Harbour Green, 8 Sham Mong Road, Kowloon (‘the Tower 5 Flat’).

4)  The actions

2.9  In the High Court Action, Fu as the 1^st plaintiff seeks a transfer of the Tower 1 flat from Chan to her.  She claims that the deceased held the Tower 1 flat on trust for her and himself as joint tenants so that on the death of the deceased, she would be solely entitled to the flat by the rule of survivorship.  She and her children also seek a declaration that Chan holds the entire estate with or without the Tower 1 flat on trust for her and her children. 

2.10  Fu claims that the estate (save the Tower 1 flat) should be distributed according to the intestacy rules (despite the existence of the will) to her and her childern on the basis of representations made by the deceased to her prior to his death that gave rise to a constructive trust or alternatively, proprietary estoppel.  The representation made by the deceased was that he would not make a will and all his assets/properties would automatically pass to Fu and their children upon his death.

2.11  Fu and her children had also commenced proceedings in the Family Court under section 4 of the Inheritance (Provision for Family and Dependents) Ordinance (Cap. 481) (‘the maintenance claim’) against Chan as the executor of the estate of the deceased seeking, among other things, reimbursement of HK$371,160 for alleged debts due from the estate, a total of HK$22,919,200 for maintenance of Fu and her children and transfer of the Tower 1 flat to her.

2.12  The Family Court had stayed the maintenance claim until the determination of the High Court Action.  There is no appeal against that decision. 

2.13  Although initially Chan was seeking a Beddoe order both for the High Court Action and the maintenance claim, he eventually only pursued his application in respect of the High Court Action.  

III.  Basis of the Judge’s decision

3.1  The Judge held that the High Court Action is a claim against the trust property.  Fu is in effect claiming that the deceased was not entitled to dispose of the Tower 1 flat in his will as the property belongs to her beneficially.  She and her children’s further claim covers the rest of the estate as they also alleged that the deceased was not entitled to dispose of the rest of the assets in the estate by will.  Although the High Court Action does not challenge the validity of the will, it, in effect, attacks the foundation of the will and is trying to destroy the effect of the will altogether by saying that the deceased was not entitled to dispose of anything in his estate by the will.

3.2  The Judge also held that the High Court Action is also a dispute between Chan as the major beneficiary under the will and Fu and her children as third party claimants as to who is entitled to what.  The Judge, however, held that it is not in every dispute of such a nature that the trustee or executor should stay neutral.  The Court’s discretion to order indemnity for costs and liabilities on costs may still be exercised in favour of the executor if there are special circumstances in the case.

3.3  He held that in the particular circumstances of this case, the need for Chan (notwithstanding he is a major beneficiary) to carry out the deceased’s wishes as contained in the will by defending the High Court Action is a sufficiently weighty countervailing consideration for him to exercise his discretion in Chan’s favour by granting him a Beddoe order.

3.4  The Judge further held that if the High Court Action had been brought against the deceased before his death, the deceased would have been entitled to use his assets to defend the action on the grounds now advanced in Chan’s defence.  Fu would not have been able to stop the deceased from using his assets in the defence as her claim, though based on trust, ‘is not of a significant proprietary nature.  Her only allegation of monetary contribution is $60,000’.

3.5  The Judge held that he came to this view ‘not because of any moral consideration of Fu’s conduct’.

IV.  Application for Beddoe order

1)  The categorisation

4.1  In the Court below reference was made to Alsop Wilkinson v Neary [1996] 1 WLR 1220 at 1223H where Lightman J observed that a trustee may be involved in three types of litigation, namely :

(1)   a trust dispute;

(2)   a beneficiary dispute; and

(3)   a third party dispute.

4.2  Lewin on Trusts 19^th Ed at paragraph 27‑195 is of the view that proceedings where issues are raised as to who is the true beneficial owner of the trust property are akin to trust proceedings in which questions arise as to the title of beneficiaries under the trust, and who are the beneficiaries.  The authors questioned whether this type of proceedings should also be treated as trust disputes within the classification in Alsop Wilkinson v Neary. 

4.3  It is no longer necessary to address the categorisation in this appeal because it is now accepted by the parties that the High Court Action brought by Fu and her children are against the trust in the sense that their objective is to upset it for the benefit of themselves.  On that basis Lewin suggested that :

‘ 27-197 ...... A trustee who actively defends proceedings against the trust or the trust property, even if there are reasonable prospects of success, is seriously at personal risk as to costs if his defence is unsuccessful, and cannot count on any right of indemnity which entitles him to defend. Unless arrangements are made which sensibly enable the trustee to take a neutral role in the proceedings, or the trustee is able to meet his costs without recourse to the property claimed in the proceedings, the best available course is for the trustee to make a Beddoe application.’

2)  Requirement of countervailing considerations

(1)  The issue

4.4    There is no dispute by the parties that the principle relevant to this application is that where the beneficiaries are all adults and sui juris (of full legal capacity) and can make up their own minds whether the claim should be resisted or not, there must be countervailing considerations of some weight before it is right for the action to be pursued or defended at the cost of the estate (per Nourse LJ in Evans v Evans and Others [1985] 3 All ER 289 at 292‑293).

4.5  The dispute by the parties in this appeal is whether the Judge had correctly applied this principle when he held there are countervailing circumstances which caused him to exercise his discretion in favour of Chan.

(2)  Appeal against exercise of discretion

4.6  This being an appeal against the Judge’s exercise of his discretion, it is well‑established law that an appellate court should not interfere with such an exercise unless it is satisfied that the Judge has erred in law or in principle, or if he has taken into account some matter which he should not have taken into account, or if the decision was so plainly wrong that it must have been reached by a faulty assessment of the weights of the different factors which have to be taken into account (cf Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394, applied in Lakhan v Wu Wing Tat [1987] 3 HKC 54).  See Yuen JA in Tai Fook Futures Limited v. Cheung Moon Hoi Jeff, CACV 103/2005.

(3)  Overview

4.7  In my view the relevant countervailing factors in the context of this case include the following :

i) whether it is unjust for the claimant to carry the risk of costs irrespective of the outcome of her claim,

ii) whether the wish of the deceased can also be put forward by a rival beneficiary to the claim other than the executor himself,

iii) whether the executor has a dual capacity both as an executor and a rival beneficiary, in other words, whether he has a substantial interest in the outcome of the claim, and

iv) whether the rival beneficiary is financially able to defend the claim.

4.8  It is important to bear in mind that Chan has two capacities in this dispute.   First, he is the executor of the will of the deceased and, second, he is the major beneficiary under the will.  In reality the High Court Action is hostile litigation between Chan and Fu as to who is beneficially entitled to the assets in the deceased’s name.  There will be serious implications on the estate for Chan to defend the High Court Action in his role as the executor with protection on costs by the Beddoe order.  In the event Chan succeeds in the High Court Action, he will be expected, on behalf of the estate, to seek to recover the costs from Fu.  However, if he fails, irrespective of what Fu may recover, the costs of the proceedings incurred by Chan in defending the action will fall on the estate itself.  In other words, the entitlement of Fu, even if she is successful, will be reduced.  In such circumstances, the Court should not only consider the merits and strengths of Fu’s claim against the estate and the benefit of defending the claim from the perspective of Chan as an executor but should also consider the injustice to Fu in suing the estate at her own risk as to costs whatever the outcome.  The Court should also consider whether Chan also has a substantial financial interest in his capacity as a beneficiary in defending the claim and his means to fund a defence. 

4.9  Further, the Court should consider whether the wish of the deceased can be effectively put forward by Chan in his capacity as a beneficiary.  Since Chan is one of the two adult principal beneficiaries in the estate, the Court should also give serious consideration to direct Chan (in his capacity as the executor) to join himself (in his capacity as a beneficiary) as a defendant in the High Court Action.  Lewin has this to say :

‘ 27-212 .... the trustee is seeking indemnity out of property which is claimed by the claimant, so that if the trustee’s defence is unsuccessful, the burden necessarily falls on the claimant and not on the beneficiaries. Accordingly, the court does not consider only the merits and strengths of the claim against the trust property and the benefits of defending the claim from the perspective of the express beneficiaries of the trust, but considers also the injustice to the claimant in fighting a hostile claim at his own risk as to costs whatever the outcome, and hence whether the express beneficiaries have a substantial financial interest in defending the claim and their means to fund a defence.’

‘ 27-213 Subject to consideration of the prospects of compromise and alternative dispute resolution, the court is likely to give serious consideration to the joinder of beneficiaries as parties, especially where all the beneficiaries are adult and few in number, and also, in our view, where the principal beneficiaries are adult and few in number and have a substantial financial interest in defending the claim, though there may also be minor, unborn or unascertained beneficiaries with secondary interests. If this is perceived by the court to be a just solution, the trustee will be directed to make an application in the main action for the joinder of additional defendants, and we consider that the court in the main action would be much more likely to override any objections from the claimant than in the case of a personal claim against the trustees, having regard to the beneficiaries’ direct interest in the subject matter of a proprietary c1aim.’

(4)  My view

4.10  In my view, the discretion has been wrongly exercised in this case.  With respect, the Judge had taken into consideration irrelevant matters, ignored relevant matters and the decision is plainly wrong.  

4.11  The Judge considered that it is necessary for Chan to defend the action in order to carry out the wish of the deceased.  Whilst this may be a relevant factor in other cases, in the context of this case, this is an irrelevant factor because Chan can advance the case of the deceased not only in his capacity as the executor but also in his capacity as a major beneficiary under the will.  Chan is an adult and the deceased had revealed to him the discovery of the adultery of Fu before the deceased made his will.  Chan is also able to adduce evidence regarding the making of the will and the intention of the deceased which the Judge summarised as follows :

‘ 19. The deceased in the company of a few friends attended the office of a firm of solicitors (which is acting for [Chan] now) on about 16 January 2015 for consultation with a view to making a will. He initially wanted to dispose by will all his assets including the properties jointly owned with [Fu]. He also considered putting all his assets in a trust so that they would be out of the reach of [Fu] and her lover. After he was advised of the rule of survivorship, he decided to bequeath the Tower 1 Flat to his brother [Chan]. He thought that after his death, [Fu] would have more than her fair share of his assets (taking into account the jointly owned properties) so that she could raise the children. He had also considered divorce. He executed the will on 3 February 2015.’

4.12  If Chan can put forward the wish of the deceased in his capacity as a beneficiary of the will, I do not see why the task of defending the claim should fall upon him in his capacity as the executor.  

4.13  The Judge referred to the hypothetical situation of Fu bringing her action on the Tower 1 flat during the lifetime of the deceased. The Judge was of the view that in such a case, Fu would not be able to stop the deceased from using his own assets in defending her claim.  With respect, this is an irrelevant consideration because the issue now is concerned with the duty of an executor towards the estate who is expected to remain neutral in hostile litigation between the beneficiaries.  See Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, 20^th Edition :

‘ 64-37 ....In general an executor has a duty to protect the estate in proceedings adverse to the estate, but where there is dispute between the persons entitled, whether contentious or non‑contentious, his right to an indemnity out of the estate will depend on his acting reasonably, which usually involves his remaining neutral.’ (emphasis added)

4.14  Arguments were made by the parties on the cases of Re Dallaway (deceased) [1982] 1 WLR 756 and Evans.  In the former case, a Beddoe order was granted.  In Evans, despite the English Court of Appeal’s view that the facts of the cases were comparable, it concluded that the first instance judge who granted a Beddoe order had misdirected himself ‘in adhering so closely to the decision in Dallaway’. This entitled it to interfere with the exercise of the discretion and set aside the Beddoe order. 

4.15  Whether a Beddoe order should be granted must be considered in the context or the factual background of the case.  Unless matters of principle are involved, it is generally not helpful to cite an authority merely because it had decided the dispute in a certain way.  In any event, this Court is less constrained in the use of precedents than the Court in Evans. In my mind, the better view is that Re Dallaway should not be followed because it had not properly addressed the issues.

4.16  Mr Hu on behalf of Chan referred to a passage in Evans where the Court had stated that there is no practical difference between an uninterested executor and one who has an interest in the estate.  In Evans,the administrator also had a one-sixth beneficial interest in the estate, Nourse LJ at 292 h compared the situation with Re Dallaway where the executor had no beneficial interest in the estate :

‘ First, there is indeed no practical difference between the positions occupied by the bank in Re Dallaway and the administrator in this case. His one-sixth beneficial interest in the estate does not render his capacity in the action any the less representative than the bank’s.’

4.17  However it is of note that Nourse LJ went on to hold at 293 that :

‘ First and foremost, every application of this kind depends on its own facts and is essentially a matter for the discretion of the master or judge who hears it.’

4.18  I do not regard the passage relied upon by Mr Hu can be of universal application so that the dual capacity of the executor may be ignored in the application for a Beddoe order.  In my view a substantial financial interest must clearly be a relevant consideration.

4.19  The Judge also referred to Fu’s common intention constructive trust claim as ‘not of a significant proprietary nature.  Her only allegation of monetary contribution is $60,000.’  In so doing, the Judge had ignored the fact that Fu’s claim is not a commercial claim but raised in the context of a marital relationship where monetary contribution is not the only factor to be taken into account.  

4.20  More significantly, the Judge had not addressed the injustice to Fu in fighting a hostile claim at her own risk because if Chan’s defence is unsuccessful, the burden of costs falls on her and not on Chan.  As pointed out earlier, the Judge is required not only to consider the merits and strengths of the claim brought by Fu against the estate and the benefits of defending the claim for the purpose of carrying out the intention of the deceased, but also consider the injustice towards Fu and the benefits to Chan.

4.21  Further, the Judge had failed to consider whether Chan had the means to fund the defence.  The Judge had made an order that Chan cannot sell the Tower 1 flat to feed his indemnity without prior approval of the Court.  This, in my view, does not really answer the point about whether Chan had the means to fund the litigation.  It is the duty of Chan as the executor to provide an estimate of the costs of the action.  At the moment, the estimate of $800,000 is only up to the date of the trial.  At the hearing of the appeal, the parties suggested that the costs likely to be incurred at the trial of the High Court Action is $1.5 million for each of the parties.  This will cause a not insignificant depletion of the estate if Chan is able to be indemnified of this sum from the estate even if he is unsuccessful in the High Court Action.

4.22  The Judge had also not considered the alternative arrangement of directing Chan in his capacity as the executor to consider joining himself as a second defendant so that he could be able to defend the claim in his capacity as a beneficiary of the will.  The joinder of an adult beneficiary as an additional defendant is clearly a practical solution developed from the principle in Evans which stated that adult beneficiaries should make up their minds whether to resist the claim or not. 

4.23  There are other arguments raised by the parties, such as the maintenance claim, in regard to the exercise of discretion but what I have stated above is sufficient to show that the discretion has been wrongly exercised.

4.24  This being the case, this Court is in a position to interfere and is able to exercise the discretion afresh.  In my view, in the light of the factors I have indicated above, the proper exercise of the discretion is for the Court not to grant the Beddoe order.  

V.  Conclusion

5.  Accordingly, the appeal is allowed and the order made by the Judge is set aside.

VI.  Costs

6.1  Mr Hu referred to Lewin paragraphs 27‑139 and argued that the present case falls within the first category of Buckton [[1907] 2 Ch 406 at 413‑417] in that the costs of all parties will normally be paid out of the trust fund, namely :

‘ (1) Proceedings brought by the trustee to have the guidance of the court as to the construction of the trust instrument or some other question of law arising in the administration of the trust or in relation to the trusts on which the trust property is held. In such cases, the costs of all parties are, whatever the outcome, usually treated as necessarily incurred for the benefit of the trust fund and ordered to be paid out of it. But a trustee is at risk as to costs if he commences a construction claim unnecessarily, though will be given credit if he does so on advice. In a case where any doubt is a slight one, consideration should be given to an application to the court under section 48 of the Administration of Justice Act 1985 as a convenient and inexpensive method of securing appropriate protection for the trustees.’

6.2   In my view, the costs below should come out from the estate.  However, I order Chan to pay Fu the costs of the appeal personally.  

Hon Yuen JA :

7.  I agree.

Hon Kwan JA :

8.  I agree with the judgment of Cheung JA.