ZENG QILING (A MINOR, BY MOTHER AND NEXT FRIEND WANG LIMEI) v. HOU PO CHU ESTELLA AND ANOTHER

HCMP 156/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 156 OF 2014

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JUDGMENT
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Background

1. This is the hearing of an originating summons pursuant to section 36 of the Probate and Administration Ordinance, Cap 10 (“the Ordinance”).

2. The plaintiff is a minor suing by her mother and next friend Madam Wang Limei (“Madam Wang”).  The plaintiff is the biological daughter of Madam Wang and the late Mr Tsang Shu Hung (“the Deceased”). 

3. The 1^st defendant was the lawful wife of the Deceased.  They got married in the 1970s.  Soon they gave birth to the 2^nd defendant.  Later, the Deceased and the two defendants emigrated to the USA where the 2^nd defendant received his education.  The Deceased on the other hand established his business in the PRC. He mostly stayed in Hong Kong and the PRC to run a business of manufacturing and selling golf products.  The factory in the PRC was operated by a WOFE named 東莞暢航高爾夫用品有限公司 (“the Dongguan Company”).  The Dongguan Company was and is wholly owned by Kid Line Limited (“KLL”) which is a company incorporated in Hong Kong.  According to the Annual Return of KLL filed on 2 January 2009, the Deceased held 560,000 out of 800,000 shares in KLL.  Another person named Szeto Pui Ling held the other 240,000 shares. The Deceased and the 2^nd defendant were the only two directors of KLL.

4. In or about 1998, the Deceased met Madam Wang and they soon developed intimate relationship which was behind the back of the 1^st defendant.  In December 1999, they gave birth to the plaintiff.  The plaintiff is now 15 years old.

5. On 6 September 2009, the Deceased died as a result of an accident.  By reason of the coroner’s proceedings, a certificate of death was only issued in August 2010.  The Deceased died intestate.  An application for Letters of Administration was first made by the 1^st defendant alone as widow on 4 May 2011 (“the 1^st Application”).  In this application, the plaintiff was not listed as a lawful daughter of the Deceased.  In fact, Madam Wang and the defendants were engaged in legal proceedings in the PRC in which the defendants refused to acknowledge that the plaintiff is the biological daughter of the Deceased.  The PRC proceedings were commenced around January 2011.  Open court proceedings took place on 26 April 2011 and 8 August 2011.  The PRC court delivered its judgment on 9 August 2011.  It accepted the DNA evidence produced by Madam Wang and found that the plaintiff is the biological daughter of the Deceased.

6. The defendants did not appeal against the said PRC judgment.  On 11 July 2012, a second application for Letters of Administration was filed, this time on the joint application of the 1^st and 2^nd defendants (“the 2^nd Application”).  In the 2^nd Application, the plaintiff was listed as a daughter and beneficiary of the estate of the Deceased’s intestate estate.  It is quite obvious that the application was made jointly by the defendants because, according to section 25 of the Ordinance where there is minority interest involved, the grant shall be made to no less than two persons.  It is not in dispute that the plaintiff and the two defendants are the only three beneficiaries entitled to the intestate estate of the Deceased.

7. In fact, the plaintiff had (through Madam Wang) registered a series of caveats soon after the Deceased died in 2009.  Despite so, no warning notice was ever filed by the defendants.  In fact, on 5 November 2013, the 1^st defendant obtained a Letters of Administration Ad Colligenda Bona in respect of a property named as 5/F Viva Court, No 290 Prince Edward Road West, Kowloon and Car Parking Space No 4 on G/F thereof (“the Property”).  This was a property registered in the name of the Deceased.  By an Agreement for Sale and Purchase dated 21 August 2009 (less than a month prior to his death), the Deceased agreed to sell the Property to a purchaser.  Completion of the sale and purchase was scheduled on 30 September 2009.  Completion could not take place because of the untimely demise of the Deceased.  The sale and purchase was eventually completed on 14 February 2013 pursuant to the Letters of Administration Ad Colligenda Bona.  The balance of purchase price (after deduction of expenses) of roughly HK$5.3 million is now sitting in the client’s account of Jennifer Lee & Co, solicitors for the 1^st defendant pending distribution.  Other than the aforesaid and some negotiations between the parties which remained fruitless, there was apparently no further progress in the 2^nd Application.

8. Seeing the lack of progress in the 2^nd Application, the plaintiff issued the present originating summon on 16 January 2014.  The originating summons prayed for, inter alia, the following relief:

(1) an order that subject to the filing of all requisite papers leading to a grant of representation to the estate of the Deceased and the compliance with the requirement of the Registrar, Mr Kong Chi How Johnson and Mr Choi Man On, also known as Andy Choi of BDO (“the Administrators”) be jointly and severally appointed under section 36 of the Ordinance as administrators of the estate of the Deceased and Letters of Administration of all and similar the real and personal estate and effects of the Deceased be granted to the Administrators pursuant to this order; and

(2) the Administrators shall take all necessary steps to have the formal grant of full Letters of Administration to be made in accordance with this order under section 36 of the Ordinance.

9. Mr Kong is the chief executive officer and Mr Choi a director of BDO, an accountancy firm.

10. The plaintiff’s application is opposed by both defendants.

The application

11. The applicable legal principle is not in dispute between the parties.  Under section 36 of the Ordinance, where it appears to the court to be necessary or convenient to appoint some person to be the administrator of a deceased’s estate or any part of such estate, other than the person who, if the Ordinance had not passed, would by law have been entitled to a grant of administration of such estate, the court may (subject to section 25) appoint such person as the court thinks fit to be such administrator. As explained by Poon J (as he then was) in Re Estate of LooChe Chin [2013] 2 HKLRD 739 at §9, the court has a broad discretion to be exercised in the best interests of the estate.  Whether the court will exercise the discretion depends on the actual circumstances of the case.  The circumstances are not limited to those in connection with the estate itself or its administration, but can extend to any other circumstances which the court thinks are relevant, which lead the court to think that it is necessary or convenient to pass over the person otherwise entitled to a grant.  The burden rests on the plaintiff applicant.  Poon J further emphasized that in approaching the issue in any given case, the court should approach the evidence objectively and with a good dose of common sense. 

12. In the present application counsel for the plaintiff Mr Tsui raised a number of grounds to suggest that the defendants have demonstrated themselves not to be suitable to act as administrators. In my judgment, one ground stands out to be determinative on the particular situation of this case.  I shall therefore deal with it at the forefront despite the order of Mr Tsui’s presentation.

13. This issue arose in this way.  In the affirmation of Madam Wang[1], she pointed out that the Deceased owned all interests in KLL which in turns owns the Dongguan Company.  She then alleged that according to what the Deceased told her, the yearly turnover of the Dongguan Company was in the range of HK$100 million.  In reply to this specific allegation, the 2^nd defendant stated in his 1^st affirmation[2] that the business volume and turnover of the Dongguan Company was never that high and he produced the PRC audited financial statements of the Dongguan Company for 2010, 2011 and 2012.  Legal representatives of the plaintiff thus discovered from the said audited financial statements that as of 31 December 2010, it was recorded that the Dongguan Company owed to the Deceased RMB10,341,323.37[3]. Yet, according to the 2011 audited financial statement made up to 31 December 2011, the said indebtedness was transferred to the 2^nd defendant[4].

14. Mr Tsui submitted that this purported transfer that took place after the death of the Deceased amounted to intermeddling with an asset of the estate.  He referred me to Williams Mortimer & Sunnucks on Executors and Administrators and Probate, 20^th edn, §7.01 and the case of Re Potticary [1927] P 202 in which an executor who intermeddled with the estate before grant was passed over and the court exercised its discretion under section 73 of the Court of Probate Act 1857, similar to section 36 of the Ordinance, to appoint a third person to act as administrator of the deceased’s estate.

15. The 2^nd defendant explained in his 2^nd affirmation[5] that in the operation of the Dongguan Company, problem arose from time to time due to insufficient cash flow.  The Dongguan Company would then borrow from the Deceased and such indebtedness would fluctuate from time to time.  The Deceased was the Legal Representative (法人代表) of the Dongguan Company when he was alive.  After he passed away, the 2^nd defendant replaced the Deceased as the company’s Legal Representative.  Due to “accounting treatment”, the amount due to the Deceased became transferred to him “for accounting purpose”.  He however confirmed that the sum was lent by the Deceased to the Dongguan Company and that it forms part of the estate.

16. In the course of the opening of Mr Sit, counsel for the 2^nd defendant, I pointed out that I did not understand the logic of the 2^nd defendant’s purported explanation and required the 2^nd defendant to provide adequate explanation in the box.  In the course of his evidence, the 2^nd defendant explained that in his point of view, the said sum of RMB10,341,323.37 was a “capital injection”.  He added that the PRC auditor was also of that view.  He was specifically referring to the PRC auditor who prepared the financial statements of the Dongguan Company.  The 2^nd defendant said that he was advised by the said auditor that it was impossible for that debt to be continually registered under the name of a person no longer alive.  If the tax authority sees a debt registered as owing by dead person for a long period of time, they would regard it as not recoverable.  For the same reason, this enterprise would not need to repay this debt owing to a dead person.  He further explained that the tax authority would charge a 25% tax.  He said he was advised by the auditor that he had become the Legal Representative and he was the son of the Deceased, he was the most suitable person to replace his father under this accounting item.  He stressed that most importantly, this sum was not actually a loan, it was a capital injection.

17. I must confess that I cannot understand the logic of such advice, if it had genuinely been given at all. Upon my question, the 2^nd defendant stated clearly that this sum was a capital injection brought in by KLL, the shareholder and investor of the Dongguan Company.  I then confronted him with §4(d) of his 2^nd affirmation in which he categorically stated that the said sum was a loan owed by the Dongguan Company to the Deceased.  He also stated in the same paragraph that the said sum constituted part of the Deceased’s estate.  Mr Sit did not seek to clarify in re‑examination such a glaring discrepancy between his affirmation and his evidence in court.

18. I find the purported explanation of the 2^nd defendant incomprehensible.  First of all, according to the PRC business registration record of the Dongguan Company, the shareholder and investor was and is KLL. If the said sum was a capital injection, it would be a capital injection of KLL, not the Deceased.  In that case, the said sum would not form part of the Deceased’s estate, which the 2^nd defendant has however surprisingly admitted to in his 2^nd affirmation.  Secondly, the said sum was specifically described in the 2010 audited financial statement as a sum repayable by the Dongguan Company to the Deceased[6]. Immediately following this entry was Item 12 which set out the capital injection into the Dongguan Company “實收資本” by KLL.  When asked by Mr Sit in re‑examination as to why the said sum was not recorded under Item 12, the 2^nd defendant said that Item 12 would only set out the capital that was injected at the time when the Dongguan Company was opened.  With respect, this answer is wholly disingenuous.  Item 12 was adumbrated in a tabular form with 3 separate columns: “年初金額”, “本期增減” and “期末金額”.  There was no entry in the “本期增減” column indicating that the auditor did not consider that there was any change in the amount of “capital injection”.  It is clear from the audited financial statement that the said sum was recorded and treated as a loan owing from the Dongguan Company to the Deceased. 

19. In my judgment, the 2^nd defendant’s evidence that the auditor shared his view of the said sum being a “capital injection” was flatly contradicted by the audited financial statement.  It is incredible that the same auditor who compiled the financial statement as aforesaid would have given the alleged advice to the 2^nd defendant. An understanding of the said sum as a “capital injection” would also be repugnant to the very reason put forward by the 2^nd defendant necessitating the transfer of the “indebtedness” to his name.  I find his evidence contrived and incredible.  His evidence in court was clearly contradictory to what he had stated in his 2^nd affirmation. Based on his evidence given in court, the said sum would not form part of the estate at all. Mr Yip cannot possibly reconcile such conflicts.  In fairness to Mr Yip, he did not even try to reconcile the discrepancy in his closing address.  I do not want to speculate on how the 2^nd defendant was able to convince the auditor to accept and record such a transfer of indebtedness.  The objective fact remains that the 2^nd defendant had caused the transfer of this chose in action from the Deceased’s estate to himself personally.  This was clear intermeddling with an asset of the estate.  It is further noteworthy that in so doing, he did not even consult the 1^st defendant or obtain her consent.

20. The above finding has important consequence. In my judgment, the 2^nd defendant had not only provided inconsistent versions under affirmation, he had decidedly provided disingenuous evidence to this court which I find wholly incredible.  I do not find him to be a suitable person to be entrusted with the task of administering the estate of the Deceased.  There are only three possible beneficiaries entitled to the intestate estate.  Under section 25, there should be at least two persons to be appointed as administrators.  The plaintiff is a minor.  I have found the 2^nd defendant not to be a suitable person. The 1^st defendant never suggested that she is willing to be appointed jointly with one professional person to be the co-administrators of the estate.  Her case has always been (and remained so in Miss Yeung’s closing submission) that she and the 2^nd defendant should be allowed to proceed with their joint application for Letters of Administration. In the circumstances, this court is left with no practical alternative other than considering appointing professional administrators.

21. Furthermore, I have been provided with an estimation of roughly HK$350,000 for the services of Mr Kong and Mr Choi. Upon my rough calculation, even discounting the equity of RMB13 million odd in the shares of KLL over the Dongguan Company[7], the Deceased’s estate consists of readily distributable cash/stock of over HK$7 million[8]. Adding to it, there is the said sum of RMB10 million odd owing from the Dongguan Company to the estate.  The size of the estate is such that the costs of engaging professional administrators would become insignificant.  In closing submission, neither Miss Yeung counsel for the 1^st defendant, nor Mr Sit suggested that the costs of engaging professional administrators are disproportionate.  In fact, Miss Yeung submitted at one stage that although the 1^st defendant was not experienced in administering estate, she could engage professionals to assist her.  In other words, such expenses may be incurable anyway. The appointment of the 2 professional administrators is thus necessary andconvenient in the circumstances of this case.

22. In the circumstances, I do not find it necessary to deal with the other grounds put forward by the plaintiff in support of her application.  I can understand from the background of this case and the contents of the affirmations that parties are to some extent emotionally charged.  Hence, the less I say the better.  I will simply point out that I do not find that the defendants have been guilty of culpable delay in processing the applications for Letters of Administration although I can see some lack of vigilance. Neither do I find that there was deliberate concealment of assets of the Deceased by the defendants. I accept the 1^st defendant that she knew little about the financial affairs of the Deceased and she relied on her former solicitors to conduct investigation. I also accept the 2^nd defendant’s explanation that he did not mention the said sum of RMB10 million odd in the Schedule of Assets because it purported to be a schedule of the Deceased’s assets in Hong Kong only.  Neither do I find that the defendants are currently holding hostile attitude towards the plaintiff to a degree that could cause concern to this Court, at any rate not after the PRC judgment.  I also find that despite some evidence of disagreement between the defendants in 2012, their current relationship is not such that they could not cooperate if I were to find that the 2^nd defendant is a suitable person that this Court can trust.

Conclusion

23. For the above reasons, I grant the relief prayed for in the originating summons.  I also order that costs of these proceedings be paid by the 1^st and 2^nd defendants to the plaintiff, to be taxed if not agreed, on party‑and‑party basis.  As for the plaintiff’s own costs, it will be taxed in accordance with the Legal Aid Regulations.