EDWARD WALECKI v. THE GENERAL FIDUCIARY CO LTD (as trustee of the WALECKI FAMILY TRUST) AND OTHERS

HCMP 100/2020

[2020] HKCFI 2921

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 100 OF 2020

____________

____________

_____________

D E C I S I O N

_____________

Introduction

1.  The 1^st Defendant (“Trustee”) is the trustee and the 2^nd Defendant is the protector, respectively, of a family trust.  The Plaintiff and his sisters (D3 and D4) are among the class of discretionary beneficiaries to that trust.

2.  By an originating summons filed on 21 January 2020, the Plaintiff seeks: (i) removal of the Trustee, alternatively his appointment as a judicial trustee; (ii) orders restraining the Trustee from dealing with the Trust assets and restricting the Trustee’s distributive powers; (iii) disclosure of tax accounting and legal advice received by the Trustee and financial statements and accounts of the Trust and its company assets/subsidiaries from 2013 onwards (“disclosure order”).  The Plaintiff alleges that he needs such information for dealing with Belgian tax authority but the Trustee has failed to provide the same.

3.  By this summons, the Trustee seeks security for costs in the amount of over HK$2,700,000.

4.  The grounds relied on by the Trustee are that the Plaintiff resides out of Hong Kong and has no assets in Hong Kong to satisfy any adverse costs order against him.  These are admitted by the Plaintiff.

5.  The Plaintiff, however, invites the Court to exercise its discretion not to make an order for security on the grounds that (i) he has a strong claim; (ii) he is impecunious and that an order for security will stifle his claim and; (iii) he is not a usual foreign plaintiff to the Trustee.  He also alleges that the quantum of security is excessive.

The parties’ cases

6.  The Walecki Family Trust is a trust set up by the Plaintiff’s father for the benefit of multiple generations of the family.  In particular, it is to enable children to have high level of education and to take care of their medical needs.  It is a fully discretionary trust and gives no right to a beneficiary to any part of the trust property.

7.  The Plaintiff has identified 3 issues in this claim:

8.  Firstly, the Belgian tax issue.  The Plaintiff is domiciled in Belgium and so is D3.  Under Belgian law, beneficiaries have to declare to the tax authorities the capital and income of the trust in his tax return.  However, he had no right to see the accounts of the trust and was therefore left unable to know what to declare.  A known omission of tax or incorrect tax return can be penalized with a sentence of imprisonment.  The Plaintiff said that D3 faced the same situation. They may face “a tax bomb” upon the death of their father, the settlor.

9.  The Plaintiff claimed that he and the Trustee disagreed on the extent of potential tax liability arising out of beneficial interest under the Trust faced by the beneficiaries domiciled in Belgium.  However, the Trustee has not provided sufficient information of the Trust to enable those beneficiaries to fulfil reporting obligations to the Belgian tax authorities.  Likewise, the legal advice that the Trustee obtained was silent on whether or how the beneficiaries would be able to fulfil such obligations.

10.  Secondly, the “Cave” issue.  Cave is a reference to the shares in a company named Cave SA SPF, incorporated in Luxembourg.  One of the Plaintiff’s concern was whether the Cave shares were validly injected into the Trust and the management of the Trust assets.  These uncertainties exposed the Trust and beneficiaries to potentially serious liabilities.  The Trustee’s response did not address the Plaintiff’s concerns.  The Plaintiff stated that for the sake of the Trust and the beneficiaries, it would be reasonable to have each of the affected beneficiaries independently advised and for all stakeholders to work towards remedying the beneficiaries. 

11.  Thirdly, the breakdown in relationship issue.  The Plaintiff claimed that there were conflicts between him and Ms Mathias (the person to whom the Trustee delegated administration of the Trust) and mutual distrust between him and the Trustee.

12.  The Trustee denied the allegations.  The Trustee stated that the Plaintiff’s discontent with the Trustee’s performance stemmed from the fact that some of the distribution requests were not met to his satisfaction.  The Plaintiff appeared to misunderstand the fundamental purpose of the Trust stated in paragraph 6 above.

13.  The Trustee deposed that it had invested considerable time, effort and resources to investigate and address the Plaintiff’s concerns.  Those included engaging independent expert tax advisors from 2 reputable Belgian law firms to advise on matters raised by him.  In particular, the tax advisors’ advice was that neither the Plaintiff nor D3 would become a “founder by heirship” (which would expose them to Belgian tax liability on the death of the settlor); and that the maximum rate of tax on distribution to the Plaintiff and D3 as Belgian resident beneficiaries was 30%.

14.  The Trustee has already provided documentary evidence to the Plaintiff to confirm the Trust’s ownership of the shares in Cave.  The Trustee has also obtained Luxembourg and Belgian legal advice on the matter and explained the position to the Plaintiff.  As the Plaintiff’s concerns were not well-founded, the Trustee did not consider it appropriate to expend more of the Trust resources on the issue.

15.  An ongoing problem faced by the Trustee has been that the Plaintiff did not provide proper and adequate evidence of his financial position, all the while alleging financial difficulty.

16.  The same advice from tax advisors had been explained to D3.  She, in contrast to the Plaintiff, was content with her own tax position.  She and D4 opposed the Plaintiff’s claims.

Legal principles for ordering security for costs

17.  The legal principles are not in dispute.  The Court has complete discretion whether to order security or not.  It must carry out a balancing exercise, weighing the injustice to the plaintiff for being prevented from pursing a proper claim by an order for security, against the injustice to the defendant if the defendant finds itself unable to recover costs from the foreign plaintiff in due course.  Wing Hing Provision, Wine and Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461.

18.  In general,

(1)  Where a plaintiff is ordinarily resident out of jurisdiction and has no fixed assets in Hong Kong, the court would be inclined towards making an order for security for costs.

(2)  Unless it can be clearly demonstrated that the plaintiff has a high degree of probability of success, the practice of going into the merits of the case in a security application is to be deplored.

(3)  Where the plaintiff asserts that an order for security would stifle his claim, the burden is on him to demonstrate that it is more likely than not that funds are not available from any source (whether from him, through commercial borrowing or from other backers) to provide security.

(4)  The court has unfettered discretion to order such amount of security as it thinks just taking into account all the circumstances of the case and adopting a “broad-brush” approach instead of a line by line evaluation of the bill of costs.

See Hannelore De Lasala-Debring v Ernest Ferdinand Perez De La Sala(HCMP 1029/2013, 8 July 2015) §§5-13, B Chu J; Bart Willem Jozef Bost v Jerry Teng Mei Sheng, HCCW 141/2007, 20 June 2011, §33, Barma J (as he then was).  Po Hio Chua v Hang Seng Bank Ltd, CACV 146/2008, 23 September 2008, CA.

Strong claim on the merits

19.  Ms Ifan Chan, counsel for the Plaintiff, submits that the Plaintiff’s claim turns on one core issue of law – whether the Trustee has a duty to produce documents to the Plaintiff, an issue independent of any personal disputes among the family members and the Trustee.  The rest about breakdown in relationship is just the background to these proceedings.  She submits that the Trustee holds a similar position on its own case, relying on a passage from the legal opinion dated 19 April 2020 of Tiberghien, Belgian tax advisors commissioned by the Trustee (“the Legal Opinion”):

“The legal position of Alexandra and Edward can be summarized as follows:

…

When receiving a distribution, the existence of [the Walecki Family Trust] and of the underlying entities should be disclosed in their corresponding income tax return related to the year of distribution …”

20.  I am unable to accept Ms Ifan Chan’s arguments for the following reasons:

21.  Firstly, Ms Chan has not shown an authority which supports what she defines to be the core issue of law to demonstrate that she has a high probability of success on the merits.  In fact, she states in her written submission that the law “is yet to be determined”.

22.  At common law, no single beneficiary has an absolute right to disclosure of information by the trustee. The matter is subject to the Court’s supervisory discretion.  The Trustee may be required to make disclosure if there is an order for his removal or replacement.

23.  Clauses 32 and 33 of the Deed of Settlement of the Trust in fact prohibit disclosure and other disclosure is a matter of discretion of the Trustee.

24.  Secondly, whilst the Legal Opinion acknowledged the need to disclose the existence of the Walecki Family Trust and the underlying entities, it was also the Trustee’s case that it has already given the necessary information (including legal advice) to the Plaintiff to enable him to deal with his tax authority.  The Trustee even invited the Plaintiff to go to the Trustee’s office to inspect the documents but the Plaintiff declined.

25.  It was the Plaintiff who was not satisfied with the disclosure without specifying what additional information was required and why.  In fact, under the Trust, the Trustee had no duty to meet the Plaintiff’s tax liabilities and he must bear his own responsibility over tax.

26.  Thirdly, the Trustee has already considered it appropriate to make further distributions to cover any Belgian taxes associated with payment of school fees and distribution made to cover medical costs of the Plaintiff’s children.

27.  Fourthly, even if the Plaintiff has a case for seeking the disclosure order, he has never even asserted that he has a high probability of success on the rest of his claims, amongst others, for removal of the Trustee or the appointment of the Plaintiff as judicial trustee.

28.  The Court will not remove a trustee “at the mere caprice of a beneficiary without any reasonable cause shown” or because “a dissension has arisen between the trustee and a beneficiary”: Lewin on Trusts, 20^th ed, §14-083.

29.  D3 and D4 are in the same class of beneficiaries as the Plaintiff.  D3 is resident in Belgium and has the same potential tax issues as the Plaintiff. Both D3 and D4 were satisfied with the Trustee’s performance and tax advice obtained.  D3 and D4 expressly opposed the Plaintiff’s appointment as a judicial trustee.  There was thus evidence to support the Trustee’s case that the Plaintiff was driven by his own self-interest rather than acting for the overall benefit of the beneficiaries.

30.  Ms Ifan Chan criticizes D3 and D4’s position to be “dubious” and that if they had a position to take, they should have filed affirmations instead of stating their views through letters addressed to whom it may concern.

31.  With respect to Ms Ifan Chan, in an interlocutory application, the Trustee could rely on hearsay evidence provided that it stated its source of information.  The Trustee has done just that.  And D3 and D4’s positions were clearly provided in writing.  Ms Ifan Chan’s complaint was unfounded.

32.  Given the above analyses, Ms Ifan Chan’s description of the core issue is an oversimplification of the Plaintiff’s case.  I am not satisfied that the Plaintiff has demonstrated a high probability of success on the merits on any issue.

33.  What is more, the Plaintiff has caused the Trustee to expend significant legal costs on addressing his issues on tax.  This would prejudice the other beneficiaries in the event such costs are ultimately irrecoverable from him. 

34.  I hold that, in principle, security for costs should be ordered.

Claim will be stifled by an order for security

35.  As part of this ground in opposition, Ms Ifan Chan submits that the Trustee has been completely silent on the issue of disclosure of documents, although they have tried to deal with the Belgian tax issue, the Cave issue and the relationship breakdown issue.  They say that this issue is likely to disappear if the Trustee could stop the Plaintiff from proceeding further.

36.  I reject this line of submission.  This is not the occasion for the Trustee to dwell into issues of disclosure.  More importantly, as Mr Abraham Chan SC points out, this is a false accusation because the Trustee has offered to allow the Plaintiff to visit the Trustee’s office and see relevant trust accounts and trust documents.

37.  In any case, the Trustee’s brief account of the Belgian tax issue, the Cave issue and the relationship breakdown issue, if established, would go towards dismissal of the Plaintiff’s claim for a disclosure order.

38.  Ms Ifan Chan than submits that the Trustee knew full well that the Plaintiff would not be able to raise funds to satisfy an order for security.  Before he found employment with his current employer, the Plaintiff had been unemployed for more than a year after being asked by the Trustee’s representative to resign from all positions at the companies held by the Trust in November 2017.

39.  The Plaintiff is the sole breadwinner of his family of 6, including 4 young children.  He claimed to barely make ends meet even for conventional household expenses.  The Plaintiff even had to rely on the Trust for funds to fix his boiler. 

40.  The Trust helped him to buy his family home, pay his children’s private school fees, provided financial support to the Plaintiff especially from January 2018 onwards and that the Trust is the Plaintiff’s most likely recourse in terms of additional financial need.

41.  The Plaintiff says that mortgaging the house would put his family at risk of losing the family residence for the purpose of proceeding with an action to sort out issues of the Trust, and that was disproportionate and unreasonable in the circumstances.

42.  In my view, the Trustee’s knowledge of the Plaintiff’s perceived impecuniosity justified the present application.  But could the Plaintiff show that he has no recourse at all to funds?

43.  The Plaintiff is now a Senior Private Banker.  His income including quarterly distributions from the Trust is in the region of €265,800 (HK$2,426,000).  Ms Ifan Chan accepts that he receives annual after-tax income of about €177,600 (HK$1,620,955.20).

44.  The Plaintiff has the following assets:

(a)  A house worth about €2,000,000, of which the Trust has lent an interest-free loan of €1,200,000;

(b)  25% ownership stake in a company that holds a ski chalet worth €1,500,000;

(c)  An investment of €200,000 at the end of 2018 in a private company called Proxistore;

(d)  Pension;

(e)  100% interest in the Plaintiff’s consultancy company, which had a credit balance of €1,945;

(f)  Credit line at an unidentified bank(s); and

(g)  A family car.

The net worth of these assets were at least €1,386,945 (or HK$12,662,807.85).

45.  For present purposes, I accept the Plaintiff’s evidence that item (c) is not currently income generating and that item (d) is not available until his retirement.  The screen shots of his bank account balances were contemporaneous information existing at a time well before the Trustee’s application for security.

46.  The Plaintiff has not explained why he could not raise funds, in particular, using the house (which has a net equity of €80,000) or his investment in Proxistore as security.

47.  Further, in 2018, the Plaintiff had received net proceeds of €405,000 from the sale of a property in Luxembourg when he had no significant financial liabilities at that time.  He invested €200,000 in a private company and spent €80,000 on improvement works for his home (including altering the size of the swimming pool).  Meanwhile, distributions (including the recent quarterly distribution of €200,000) have continued to be made to the Plaintiff in addition to the financial support of the Trust towards the education costs of the Plaintiff’s children.  The Trustee also waived the loan to him for fixing the boiler and heating system.

48.  One has to remember that in 2018, the tax bomb issue was already a live issue between the Plaintiff and the Trustee.  There was no explanation why he had not set aside funds to engage in that issue.

49.  Further, the Plaintiff has submitted a costs statement for HK$375,800 for opposing this application for security.  The Plaintiff has not explained how he could fund such costs despite his alleged impecuniosity.

50.  The Plaintiff has not shown that he did not have funds from any source to provide security or that the claim would be stifled by an order for security.

The Plaintiff is not a usual foreign plaintiff to the Trustee

51.  Ms Ifan Chan submits that the Plaintiff is not foreign from the perspective of the Trust.  The two are intrinsically financially intertwined and there is simply no issue of enforceability of a potential cost order against the Plaintiff.

52.  With respect, the fact that the Plaintiff is a discretionary beneficiary to the Trust would not make enforcement easier. 

53.  Failure to recover costs from the Plaintiff would in fact prejudice other beneficiaries who do not support the Plaintiff’s claims; and the Plaintiff has no answer to this.

Balancing exercise

54.  I am not satisfied that the Plaintiff has discharged his burden of showing that he has high probability of success on the merits or that an order for security would stifle his claim. Balancing all factors, I am of the view that the Plaintiff should provide security.

Quantum of security

55.  The quantum of security claimed in respect of Hong Kong lawyers is HK$2,768,233.

56.  Insofar as security for costs are concerned, there is a wide array of allegations advanced by the Plaintiff.  With the protracted background dating back several years when the Plaintiff first raised the tax bomb issue, the volume of documentary evidence is expected to be high.  I accept that there should be provision for 2 counsel.

57.  The draft legal costs put forth by the Trustee cover:

(i)  costs of a 2-day hearing for the originating summons; and

(ii)  costs in relation to this summons for security, which the costs statement states to be $1,746,275.

58.  Item (ii) should not form part of the security application as the Court will summarily assess the costs which shall be paid by the Plaintiff (within 14 days) instead of being part of the security. 

59.  To incur costs of $1,021,958 for this originating summons cannot be said to be excessive, but I do not think it requires a 2-day hearing.  I order the Plaintiff to provide security in the sum of $800,000 in respect of the originating summons.

Costs of the security application

60.  There are 2 sets of costs to determine.

61.  Firstly, with regard to the Plaintiff’s application for leave to adduce his 3^rd affidavit in opposition, the Plaintiff should bear costs.

62.  However, there is little justification for 3 Hong Kong fee earners to be involved in deciding whether to concede or oppose the grant of leave to adduce the 3^rd affidavit and for 2 fee earners to prepare and attend the hearing on 16 October 2020.  Junior counsel briefed for the security for costs application would have handled it adequately.

63.  Therefore, even on trustee basis, I would summarily assess the costs at HK$40,000.

64.  Secondly, with regard to the summons for security for costs, the law is fairly settled.  The facts are not complicated.  But for the fact that costs are on trustee basis in this case, I would not have granted certificate for senior counsel.

65.  The amount of over HK$1.7 million incurred by the Trustee is plainly excessive.  However, I take note of the fact that the Plaintiff himself incurred over HK$375,000 costs on party-and-party basis for opposing the security application.

66.  Taking into account all the circumstances and without disrespect to counsel, I will only allow the costs of one counsel (the senior counsel) and award an amount of HK$600,000.

Conclusion

67.  The Plaintiff do provide security for costs of this action in the sum of $800,000 by 4 pm on 15 December 2020, failing which these proceedings shall be stayed.

68.  On a nisi basis, the total costs payable by the Plaintiff for this application for security are summarily assessed at $640,000.

69.  I thank counsel for their assistance.