LAU HING KAY v. LAU HING WING AND ANOTHER

HCMP 998/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 998 OF 2010

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J U D G M E N T

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1.  By these proceedings, the Plaintiff seeks the determination of the court in respect of several aspects of the administration of the estate of his late father, Lau Cheong [“the Deceased”]. The two defendants are his brothers and they were appointed by the Deceased to be the executors of his estate by his last will dated 4 May 2001 [“the Will”]. The Deceased died on 24 April 2004 and probate was granted to the Defendants on 5 September 2007. Though certain steps had been taken in the administration of the estate, there has not been any distribution of the residue estate.

2.  Initially, in the originating summons, he asked for accounts and an order for the removal of the Defendants as executors of the estate.  It was later accepted by him that it would be more appropriate to seek the court’s determination on certain issues.  Thus, pursuant to the directions of the court given on 9 November 2010, the Plaintiff filed a Statement of Issues for the court’s determination on 3 December 2010.

3.  The Plaintiff also amended his Originating Summons on 14 April 2011.  This court has some reservations as to the relief set out in the amended Originating Summons.  Be that as it may, at the hearing, counsel agreed that the court should determine the outstanding issues first (as the court has the jurisdiction to do so under Order 85 in any event) and parties can address this court on the proper relief after such determination.

4.  Some of the issues raised in the Statement of Issues and skeleton submissions were no longer pursued by the Plaintiff.  By the close of the hearing, the outstanding issues can be summarized as follows,

(a)  Whether the estate should bear the incidence of the estate duty for some properties deemed to be passed upon death (including some inter vivos gifts and properties held under joint names) as opposed to be borne by the respective beneficiaries upon whom the joint properties vested by reason of the death of the Deceased and the donees of the relevant gifts.  Counsel agreed that the answer depends on the construction of the Will.

(b)  Whether the estate should challenge the liabilities of the Deceased in respect of his debts due to and the losses incurred by Lau Cheong Kee Shipyard [“the Shipyard”].

5.  Counsel for the Plaintiff informed the court at the hearing that the Plaintiff decided not to pursue the other issues after the court indicated that they might involve dispute of facts which cannot be resolved on affirmation evidence alone.

Estate duty

6.  The relevant joint properties and inter vivos gifts are identified at Paragraphs 1 and 2 of the Statement of Issues and I see no need to recite them in this judgment.  According to the skeleton submission of Mr Cheng (counsel for the Plaintiff), the amount paid by the estate on account of the estate duty for the joint properties is $842,433.70 and the amount paid by the estate on account of the estate duty and interest for the gifts is $2,478,766.00.

7.  It should be noted that in respect of some (but not all) joint properties and inter vivos gifts, the 1^st and 2^nd Defendants are the beneficiaries.  By way of background, the inter vivos gifts included a cash gift of $6,622,882.34 to the 1^st Defendant and a cash gift of $8,006,857.55 to the 2^nd Defendant.  The Defendants are also the joint owners of some of the joint properties.

8.  As mentioned, counsel agreed that the answer to this issue depends on the proper construction of the Will.  Mr Leung (counsel for the 1^st Defendant) argued that Clause 8 of the Will provided for the payment of these estate duties by the estate.  The relevant part of Clause 8 is in the following terms,

“My Trustees shall hold the net proceeds of sale calling in and conversion and my ready monies and all parts of my Residuary Estate for the time being unsold upon the following trusts:

(a) UPON TRUST to pay thereout all my just debts and funeral and testamentary expenses and all estate and other duties payable on or by reason of my death. ..”

9.  Counsel invited the court to contrast Clause 8 with Clause 9 where the Deceased gave explicit direction for the incidence of estate duty regarding specific gift.  Clause 9 reads,

“I DIRECT that all property comprised in any specific gift made by this my will or any codicil hereto shall bear a rateable proportion of the estate duty payable on my death.”

10.  The argument runs as follows,

(a)  The wordings of Clause 8 are wide enough to cover estate duty payable in respect of the joint properties and inter vivos gifts: “estate … duties payable on or by reason of my death”.

(b)  Clause 9 provided special treatment in respect of specific gift made by the Will.  It does not cover the joint properties and inter vivos gifts.

(c)  The estate duty in respect of the joint properties and inter vivos gifts should therefore be paid by the estate as per the direction in Clause 8.

11.  Mr Cheng submitted that Clause 8 should not be construed to include estate duty payable for the joint properties and the inter vivos gifts and invited this court to adopt the approach in Re Walley [1972] 1 All ER 222.

12.  In that case, the court had to construe a will which direct the estate to pay “all death duties”.  The question was whether this provision covered the estate duty payable in respect of the moneys in a bank account for which a nomination was made by the testatrix 4 years before her death and some inter vivos gifts made by her.  Ungoed-Thomas J held that the court the direction in the will covered estate duty payable in respect of the moneys in the bank account (the nomination took effect upon death) but not the inter vivos gifts.

13.  The rationale of the learned judge was as follows,

(a)  There was a separate direction in the will to provide for payment of testamentary expenses, which included estate duty on personal property that a testator is competent to dispose of at the time of his death.  And the properties bequeathed under the will were all personalty.  Thus, to give the direction as to the payment of death duties some meaning, it must be referring to gifts other than those under the will.

(b)  Where a testator provided for payment of estate duty out of residue, he is doing so as part of the will and presumably and prima facie with reference to what falls within the ambit of the will, thus providing prima facie for estate duty ancillary to the disposition which he makes in his will.

(c)  Though on the facts of the case, due to the consideration in (a), to avoid the direction to pay death duty to become otiose, the direction should cover dispositions outside the ambit of the will, it should be limited to the estate duty payable in respect of the nomination which took effect upon death.

(d)  The direction would not be extended to the inter vivos gifts because, as observed at p. 224g,

“I have hesitated whether the testatrix or a draftsman, drawing a will containing such well-established common form phrases for payment of testamentary expenses and all death duties contemplated that death duties should be payable in respect of dispositions made in the testatrix’s lifetime.”

14.  Of the four propositions, Mr Cheng seems to derive support for his construction by reference to (b) and (d).

15.  On the other hand, Mr Leung submitted that Re Walley is distinguishable because of the difference in wordings in the relevant wills.  In particular, there is no equivalent of Clause 9 and the wordings of Clause 8 are wider than the relevant clause in that case.

16.  As in all cases of construction, previous decisions on different instruments with different (or even similar) wordings may not be of much assistance.  In re Neeld (No 2) [1964] 2 All ER 952 at p. 954, Lord Evershed MR said the following in respect the citation of an earlier case on the construction of a will with similar wordings,

“I do not take it that this court in Re King intended to lay down some rule of construction which would bind us in this case or bind courts in other cases … because it is, of course, notorious that in doing one’s best to construe testators’ wills, everything must depend on the language in the particular instrument before the court.”

See also Re Williams (deceased) [1974] 1 All ER 787.

17.  I agree with Mr Leung that the duty of the court is to give effect to the intention of the Deceased as expressed in the Will.  In performing that duty by way of construction, the court must have regard to the whole of the will.  If there were ambiguity, the court should examine the surrounding circumstances with a view to find out the real intention of the Deceased, see In re Allsop [1968] 1 Ch 39 at p. 47.

18.  The Will contained two provisions for specific gifts under Clauses 5 and 6.  The incidence of estate duty regarding those gifts is governed by Clause 9.  I agree with Mr Leung that the Deceased made a distinction between the specific gifts and other testamentary disposition in terms of the incidence of estate duty.  But the question is whether the intention of the Deceased to have the estate duty paid out of the residuary estate covers non-testamentary dispositions.

19.  All the landed properties held in joint names had been so held before the making to the Will.  From the schedule of properties annexed to the Probate, all properties subject to testamentary disposition are personalty.  Thus, if one were to adopt the approach in Re Walley, the estate duty payable in respect of testamentary disposition not subject to specific gifts under the will (and as such dealt with under Clause 9) was catered for in the direction to pay testamentary expenses.  In this respect, similar observation was made by Templeman J in Re Williams (deceased) [1974] 1 All ER 787 at p. 790h.

20.  On the facts of the present case, in order to avoid the direction regarding the payment of estate duty in Clause 8(a) being rendered otiose, it must be referring to estate duty other than those coming within the meaning of testamentary expenses, viz. estate duty payable in respect of joint properties and/or the inter vivos cash gifts.

21.  The three inter vivos cash gifts were made by the Deceased in February 2003.  In contrast, though the joint properties were held in joint names well before the making of the Will, the interest of the Deceased transmitted by operation of law upon death to the other joint owners.  Should there be any distinction between the two categories in terms of the applicability of Clause 8(a)?

22.  In Re Walley, the court drew a distinction between the nomination in respect of funds in the bank account and the inter vivos gifts.  The learned judge was of the view that the testatrix was unlikely to contemplate that estate duty would be payable in respect of the latter.

23.  With great respect, I have difficulty with such distinction.  It has to be remembered that based on the circumstances of the case, this court is driven to the conclusion that the intention of the Deceased was to direct the executors to pay the estate duty in respect of non-testamentary gifts (because otherwise the direction would be otiose).  Once this point is reached, for my part, I see no reason why it should be presumed that a testator would only seek to protect the joint owners from the incidence of estate duty but not the donees of the inter vivos gifts.

24.  I therefore determine the estate duty issue in favour of the Defendants.  I hold that they acted in accordance with Clause 8(a) in paying the estate duty in respect of the joint properties and the inter vivos gifts.

Affairs of the Shipyard

25.  Since about 1946, the Deceased carried on a shipbuilding and repair business under the style of the Shipyard in Tsing Yi.  In 2000, the Defendants were admitted as partners to the Shipyard.  Since then, each partner held 1/3 interest in the firm.  Due to the decline in the health of the Deceased, the Defendants took more active part in the running of the business.

26.  Under Clause 6 of the Will, the Deceased bequeathed his shares and interest in the Shipyard to the Defendants.

27.  After the death of the Deceased, the 1^st Defendant procured account of the Shipyard to be prepared.  In the account, the Deceased allegedly owed a total sum of $2,729,541.94 by way of debt to the Shipyard and a further sum of $2,446,984.00 as the Deceased’s share of the loss arising from the revaluation of the assets of the Shipyard.  Based on such account, the 1^st Defendant as executor paid the Shipyard these sums by way of discharge of the liabilities of the Deceased.  Since the Defendants are now the only partners of the Shipyard, in effect the payments were made to them.

28.  The Plaintiff challenged these payments.  In addition, the Plaintiff said the 1^st Defendant should account for the Deceased’s share of retained profit reflected in the Shipyard’s account in the sum of $2,047,099.00.  Mr Cheng submitted that the 1^st Defendant was in a conflict of interest position in the making of such payments.

29.  At the hearing, Mr Leung submitted that the figure of $2,047,099.00 was derived from a figure of $6,428,973.00 in the relevant account which was a typo.  Whilst there seems to be some justification for Mr Leung’s submission on the face of the relevant account[1], I do not feel able to accept the assertion from the Bar table when the 1^st Defendant in his third affirmation filed on 24 June 2011 did not correct this figure despite the clear identification of the issue in the Statement of Issues.

30.  Mr Leung, in his skeleton submission, contended that the retained profit should not be a matter of the Plaintiff’s concern as the interest in the Shipyard was given to the Defendants under Clause 6 of the Will.  In response, Mr Cheng contended that though the Plaintiff does not have any direct interest in the retained profit, the Defendants should have used the deceased’s share of the retained profit to pay off (at least partially) the debts allegedly due from the Deceased to the Shipyard.

31.  As a matter of legal analysis, I am of the view that this is a situation covered by Section 64 of the Probate and Administration Ordinance.  Under that section, where a person disposes of an interest in property by will and the property is at the time of his death charged with the payment of money, and he has not by will signified a contrary or other intention, the interest so charged shall be primarily liable for the payment of the charge.  The charge within the meaning of this section is wider than a mortgage or equitable charge.  It can cover a lien like a lien on shares for debts owed to the company by a shareholder, see Williams, Mortimer & Sunnucks, Executors, Administrators & Probate (2008) para. 50-12.  In my judgment, it extends to a partnership’s lien over the interest of a partner in respect of the debt due from the partner to the firm, see Lindley & Banks on Partnership 18^th Edn Paras. 19-27 to 19-37.

32.  Thus, primarily the debts (and also the loss, if any) due to the Shipyard should be paid out of the Deceased’s interest in the Shipyard.  Payment should only be made from the residuary estate when the value of the Deceased’s interest is insufficient to pay off these debts and loss.

33.  Mr Leung submitted that in any event the interest of the Deceased in the Shipyard was of negligible value and would not be enough to cover the alleged debts and loss.  Counsel referred this court to the account of the Shipyard as at the time of death (24 April 2004) exhibited in the latest affirmation of the 1^st Defendant filed on 24 June 2011[2].

34.  As regards the alleged losses, Mr Cheng submitted that they were only paper adjustments and the Plaintiff did not accept the revaluation of the assets to be correct.  Counsel said the so-called losses were “non-existent” and the 1^st Defendant should not have regarded this as a liability of the Deceased and made payment on that account to himself and the 2^nd Defendant.

35.  In reply, Mr Leung contended that there is no evidence from the Plaintiff challenging the revaluation and the figures had been accepted by the Estate Duty Office.  He submitted that upon death of the Deceased, the partnership was dissolved and there had to be a notional winding up of the affairs despite the continuation of the business of the Shipyard by the Defendants.  The account as at the date of death was prepared on that basis and it was also accepted by the Estate Duty Office.

36.  The consideration of the Estate Duty Office focused on the estate duty aspect and different factors might come into play when the matter is examined from the point of view of a residuary legatee, as in the case of the Plaintiff.  For example, the Estate Duty Office could legitimately take the view since estate duty was payable in respect of the inter vivos gifts it needed not be too concerned about the cash movement between the Deceased and the Shipyard and the Defendants.  But these cash movements and the attribution of substantial loss to the Shipyard might have different implications for the Plaintiff.

37.  I agree, in general, in the absence of agreement to the contrary, death of a partner would result in the dissolution of the partnership and the affairs of the firm should be wound up.  However, the fact is that the business of the firm had not been wound up and the Defendants had, pursuant to Clause 6 of the Will, taken over the interest of the Deceased in the Shipyard.  Mr Leung submitted that the continuation of the business does not mean that the original partnership had not been dissolved.  As a matter of law, counsel said, the business is carried on by a new partnership.  That may be so.  But it does not follow that the accounts between the old partners should be settled on the basis of a notional winding up.  The difference lies in whether any value should be given for the goodwill of the business.  In a winding-up situation, the business would not be a going concern and the assets were to be sold.  However, if the business were to continue by the remaining partners, I do not see any reason why no value should be given to the goodwill of the business in settling the accounts between the estate and the remaining partners.

38.  The distinction has been highlighted by Lindley & Banks on Partnership 18^th Edn at para. 19-13,

“In the absence of any express provision in the agreement, the entitlement of the deceased or outgoing partner in respect of his share will, in the normal way, strictly be represented by his proportionate share in the net proceeds remaining after all the partnership assets have been sold and the partnership debts and liabilities paid and discharged. However, where there is an implied recognition on the part of the outgoing partner that the other partners will continue the business, those other partners will be treated as entitled to acquire his share at a valuation and the court will direct the necessary accounts and inquiries for that purpose. If, on the other hand, there is no such implied recognition but the other partners wish to carry on the business and are prepared to pay the outgoing partner the market value of his share, the court may, in its discretion, refuse to order a sale of the partnership assts and order an inquiry as to the market value of the share and the payment of that value by the continuing partners. …”

39.  In the present context, given the terms of Clause 6 in the Will and the continuation of the business of the Shipyard by the Defendants, I am of the view that it is a case where there was implied recognition on the part of the Deceased that the Defendants would continue the business.  The proper course, in terms of the settling of accounts (if necessary), would be the valuation of the Deceased’s share in the Shipyard at market value.  For the purpose of such valuation, goodwill should be taken into account.

40.  Such a valuation is not necessary as between the partners in the present case because the Deceased, by Clause 6, gave his shares and interest in the Shipyard to the remaining partners, the Defendants.  However, for the purpose of the administration of the estate, in the absence of agreement between the beneficiaries, such notional exercise has to be carried out before one can determine what is the value of the Deceased’s interest in the Shipyard which should bear the prime burden of discharging the outstanding liability on the part of the Deceased towards the Shipyard and the Defendants as continuing partners pursuant to Section 64 of the PAO.  It is only when there is still a deficit after the value of the Deceased’s interest has been exhausted that the executors could resort to the residuary estate for payment of the same.

41.  The 1^st Defendant produced the partnership account as at the date of death in his latest affirmation.  There is no valuation for the goodwill of the business in that account.  In the light of what I said above, the account need to be adjusted accordingly before it can be determined to what extent the Deceased’s liabilities in relation to the affairs of the Shipyard should be borne by the residuary estate.

42.  The partnership accounts produced so far have not been audited.  I have already explained why this court cannot simply accept these accounts even though they have been accepted by the Estate Duty Office.  I also have some reservations about the appropriateness of the valuer in the revaluation exercise adopting the scrape value for the machinery and facilities when they are continued to be used for the business of the Shipyard.  Given the personal interest that the Defendants have in the matter (as the valuation would affect how much they should be paid from the residuary estate on account of the affairs of the Shipyard), it is right and proper that the exercise should be conducted by an independent accountant.  The independent accountant should examine the appropriateness of adopting the scrape value in the revaluation exercise to arrive at the alleged loss.

43.  In view of the apparent contentment of the other beneficiaries with the administration of the estate, I am mindful of the potential costs of the exercise and the burden it might fall on the residuary estate.  Though the Plaintiff has indicated that he is willing to take the risk of bearing the costs of the exercise, I would wish to hear further submissions from the parties as to the directions that I should give in the light of my above determination.

44.  As I see it, there are different options.  First, I can direct the executors to instruct an independent accountant to prepare a valuation of the Deceased’s interest in the Shipyard and come up with a notional partnership account as at the date of death in accordance with the principles set out above.  When such account is prepared, the Plaintiff should be given an opportunity to put in his comments and, if necessary, his accountant’s evidence.  There can then be directions for joint meeting and joint report of the experts.  If there are disputes between the accountants, the court will have to adjudicate, probably after hearing evidence from the accountants.  This would be the conventional way to proceed and it would be costly.

45.  Another alternative is to appoint an independent accountant as the joint expert to perform these tasks.  The joint expert would prepare a report for the court.  Subject to what parties may say, this seems to me to be a more cost-effective means to proceed.

46.  Under Clause 8(b) of the Will, the Plaintiff has 1/18 share in the residuary estate.  In respect of the outstanding issues about the affairs of the Shipyard, viz. $2,729,541.94 by way of alleged debt to the Shipyard and $2,446,984.00 by way of alleged share of the loss paid out of the residuary estate, these can be translated into the respective value of $151,641.22 and $135,943.55 representing the Plaintiff’s interest in these disputes.  It is a matter for the parties to consider for themselves whether it is worthwhile for them to incur the costs of the exercise I suggested above.

47.  They also have to take into account the legal costs of these proceedings.  To facilitate the parties to assess the proportionality of the various options ahead, I direct that each of them should lodge a schedule of costs incurred so far and estimated costs to be incurred up to the conclusion of the proceedings within 14 days of the handing down of this judgment.

48.  As indicated, the parties shall come back to this court for a 9:30 am hearing to deal with directions as to further conduct of the matter.  Each of them should file proposed directions at least 5 days before the hearing.