HU MING TAT AND ANOTHER v. ZHANG RUI AND OTHERS

HCMP 566/2020

[2022] HKCFI 1947

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 566 OF 2020

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REASONS FOR DECISION

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1.  The is an application by the Originating Summons dated 12 May 2020 (the “OS”)  under O 85 r 2 of the Rules of the High Court (Cap 4A)  relating to the administration of the estate (the “Estate”)  of the late Mr Hu Tsz Man (the “Deceased”).

2.  In the hearing on 13 July 2021, I held that the Estate should be administrated in the manner as suggested by the Plaintiffs and I now give my reasons.

Background

3.  The Deceased passed away on 12 September 2017. 

4.  The Deceased had 2 marriages during his lifetime which bore 5 children:

(i)  the 1^st Plaintiff Hu Ming Tat (“HMT”), the 2^nd Plaintiff Hui Sai Tat (“HST”)  and the 4^th Defendant Hui Pui Yee Amy (“Amy”)  from the Deceased’s first marriage; and

(ii)  the 2^nd Defendant Hu Wang Tat Jacky (“Jacky”)  and the 3^rd Defendant Hu Ho Yee Huey (“Huey”)  from the Deceased’s second marriage to the 1^st Defendant Madam Zhang Rui (“Madam Zhang”).  As Jacky and Huey are both minors, Madam Zhang acts as their guardians ad litem in these proceedings.

5.  The Deceased made a last will dated 18 May 2017 (the “Will”).  Probate was granted on 21 November 2018 (the “Probate”)  to HMT, HST and Madam Zhang as joint executors (the “Executors”)  appointed under the Will.

6.  Jacky, Huey and Amy are the other beneficiaries of the Estate and are joined because the application may affect their interests.

7.  In summary, the Will provides as follows:

(i)  Under Clause 3, the Deceased’s shareholding in Tak Cheong Electronic (Holdings)  Co. Limited (“Tak Cheong Holdings”)  and Tak Cheong Semiconductor Co. Limited (“Tak Cheong Semiconductor”)  (together, the “Tak Cheong Companies”)  and any loans he made to those companies are to be given to Madam Zhang and the Deceased’s 5 children in equal shares.  The Tak Cheong Companies are companies by which the Deceased carried out his electronic products manufacturing business, and he held 80% shareholding in Tak Cheong Holdings.

(ii)  Under Clause 4, the real properties in Hong Kong (the “HK Properties”)  are to be given to Jacky and Huey in equal shares.

(iii)  Under Clauses 5 and 6, the other assets of the Estate which have not been specifically disposed of (the “Residuary Estate”)  are to be sold, and the proceeds are to be used to pay the Deceased’s: (1) taxes chargeable in respect of properties passing under the Will; (2) debts and liabilities incurred situate in Hong Kong; and (3) funeral and testamentary expenses situate in Hong Kong arising out of his death.

(iv)  Under Clause 7, the residue is to be given to Madam Zhang alone.

8.  HMT and HST have conducted preliminary valuation of the various assets of the Estate for the purpose of this application.  It can be seen that:

(i)  The total value of the Estate (in Hong Kong)  is $407,173,819.23.  The asset of most significant value is the shares in Tak Cheong Holdings (estimated at $354m).

(ii)  The total liabilities of the Estate (in Hong Kong)  amount to $21,648,865.76.  The two largest liabilities are (1) $15,761,233.38 owed to Tak Cheong Holdings; and (2) $3,678,666.60 owed to Tak Cheong Semiconductor (a wholly owned subsidiary of Tak Cheong Holdings).

(iii)  The total value of all the specific legacies amount to $405,698,259.20; and the value of the Residuary Estate is $1,475,560.03.

9.  The Deceased also owed a sum of $34,887,845.56 (or RMB30,622,000.00)  to a Mainland company Tak Cheong Electronics (Shanwei)  Co. Ltd.  This amount was not included in the Schedule because it is owed to a Mainland entity.  In this respect, it would appear that the Hong Kong Executors would need to pay off the foreign debts as well.[1] This amount is potentially relevant depending on whether there were foreign assets which would be or had been used to satisfy these liabilities.

10.  Given the significant value of the Estate’s assets, the Estate is clearly solvent.  There are significant liabilities owing by the Deceased at the time of his death, and how those liabilities are discharged would affect the entitlement of the different beneficiaries.  

11.  There is a dispute amongst the Executors, HMT and HST on the one hand and Madam Zhang on the other, on certain issues in the administration of the Estate.  By the OS, The Plaintiffs seek the determination by the court on the following questions arising from the administration of the Estate:

(i)  What assets of the Estate should be applied by the Executors to discharge the liabilities of the Estate?

(ii)  Whether the property tax on the real properties of the Estate accrued after the date of the death of the Deceased (the “Post-Death Property Tax”)  shall be paid out of the income of such real properties?  This issue is now no longer in dispute, as Madam Zhang has since acceded to the proposal by HMT and HST.

12.  There is no dispute that the Residuary Estate should be used to discharge the liabilities of the Deceased first.  The remaining difference between the parties lies on the issue as to whether the HK Properties should be used to discharge the liabilities of the Deceased in proportion to the interests of the different beneficiaries, or whether the Deceased had intended the HK Properties to be distributed to Jacky and Huey absolutely free from any liability for the discharge of the debts of the Deceased.  HMT and HST contend that the former should be the case because it is in accordance with the statutory order provided in s 63 and Part II of Schedule 1 of the Probate and Administration Ordinance (Cap 10)  (the “PAO”).  On the other hand, Madam Zhang argues the latter as there are contrary provisions in the Will such that s 63 of PAO does not apply.

Statutory order for the application of the properties of the estate to discharge the debts of a deceased and the related legal principles

13.  S 63(3)  of the PAO provides a statutory order for the application of the properties of the estate to discharge the debts of a deceased subject to, inter alia, the provisions in the will:

“Where the estate of a deceased person is solvent his estate shall, subject to rules of court and the provisions hereinafter contained as to charges on property of the deceased, and to the provisions, if any, contained in his will, be applicable towards the discharge of the funeral, testamentary and administration expenses, debts and liabilities payable thereout in the order mentioned in Part II of Schedule 1.”

14.  Part II of Schedule 1 sets out the statutory order:

“1. Property of the deceased undisposed of by will, subject to the retention thereout of a fund sufficient to meet any pecuniary legacies.

2. Property of the deceased not specifically devised or bequeathed but included (either by a specific or general description)  in a residuary gift, subject to the retention out of such property of a fund sufficient to meet any pecuniary legacies, so far as not provided for as aforesaid.

3. Property of the deceased specifically appropriated or devised or bequeathed (either by a specific or general description)  for the payment of debts.

4. Property of the deceased charged with, or devised or bequeathed (either by a specific or general description)  subject to a charge for the payment of debts.

5. The fund, if any, retained to meet pecuniary legacies.

6. Property specifically devised or bequeathed, rateably according to value.

7. Property appointed by will under a general power, rateably according to value.

8. The following provisions shall also apply-

(a)  the order of application may be varied by the will of the deceased;

(b)  this Part of this Schedule does not affect the liability of immovable property to answer the estate duty (if any)  imposed thereon in exoneration of other assets.”

15.  In applying §6 of Part II of Schedule 1, the relevant value is the value of each property at the testator’s death.[2]

16.  If §6 of Part II of Schedule 1 is engaged, the assets specifically given would have to be resorted to, and will have to be sold if strict rateability is to be followed.  It has been suggested that in practice, the beneficiaries can be asked to contribute the required amount in cash and thus keep the specific device or bequest in specie if that is desired.[3]

17.  Both s 63(3)  and §8(a)  of Part II of Schedule 1 provide that the statutory order may be varied by the will of the deceased.  In this respect, the following legal principles are relevant:

(i)  The statutory order may be varied in the manner directed by the will either by express provision or by implication.[4]

(ii)  In order to vary the statutory order, there must be found in the will, not only a devise or bequest of particular property for the payment of debts, but also an intention to exonerate another category of property disposed of by the will from the payment of debts.[5]  What this means is that if the direction does not have the effect of exonerating another category or property which would otherwise be used to pay the debts (such as where it is consistent with the statutory order), then the direction did not have any effect and thus was not intended to change the statutory order.

(iii)  The question whether a testator has varied the order of application of assets is therefore a matter of construction of his will.[6]

18.  The modern approach to interpretation of wills is well-established and a useful summary can be found in the case of HSBC Trustee (HK)  Ltd v Laufer[7]. In short:

(i)  Generally, one adopts the same approach to interpreting wills as one does to interpreting contracts and other legal documents.  This is confirmed by s 23B(1)  of the Wills Ordinance (Cap. 30)  (the “WO”).

(ii)  Thus, the approach is to identify the intention of the party or parties to the document by interpreting the words used in their documentary, factual and commercial context.

(iii)  One difference is that if one or more of the 3 requirements set out in s 23B(1)  is satisfied, even direct evidence of the testator’s actual intention is admissible.  The 3 requirements are: (1) where any part of the will is meaningless; (2) where the language used in any part is ambiguous on the face of it; (3) the surrounding circumstances show that the language used in any part is ambiguous.

(iv)  Such evidence may include what the testator told the drafter of the will or another person, or the contents of the notes the testator made or caused to be made for earlier drafts of the will.

The case of HMT and HST for the administration of the Estate following the statutory order

19.  As mentioned above, the Estate is clearly solvent and thus s 63(3)  of PAO is the operative provision.  The starting point is therefore that the statutory order provided for in Part II of Schedule 1 applies.

20.  According to Mr Lam, counsel for HMT and HST, the statutory order in in Part II of Schedule 1 should be applied in the following manner:

(i)  §1 is inapplicable because there are no undisposed properties under the Will.

(ii)  By §2, the Residuary Estate should first be applied to discharge the Estate’s liabilities.  This is consistent with the direction in Clauses 5 and 6 of the Will itself.[8]

(iii)  Since the value of the Residuary Estate is only about $1,475,560.03, this is insufficient to settle the Estate’s total liabilities (comprising of Hong Kong liability of $21,648,865.76 and potentially foreign liability of $34,887,845.56).  Thus, the entirety of the Residuary Estate must be used to discharge the Estate’s liabilities.

(iv)  As to the remaining liabilities, §§3 to 5 do not apply since there are no other properties specifically appropriated for or charged with the payment of debts, nor is there a fund retained to meet pecuniary legacies.

(v)  It follows that §6 would then apply, and the remaining liabilities should then be settled by applying the properties or assets which are the subject of specific legacies (under Clause 3 and 4 of the Will), rateably according to value.

The case of Madam Zhang for the administration of the Estate following the purported intention of the Deceased

21.  However, Madam Zhang contends that since the Deceased had expressed an intention in the Will and other documents that the HK Properties would be left to Jacky and Huey absolutely free from any liability for the discharge of the debts of the Deceased, the Executors should administer the Estate in such manner disregarding the statutory order.

22.  Madam Zhang relies on Clauses 3, 4 and 8(a)  in the Will.

23.  As mentioned above, Clauses 3 and 4 provide for the bequests of the Tak Cheong Companies and the HK Properties respectively to the various beneficiaries.  According to Mr Tsui, counsel for Madam Zhang, the same phrase “absolutely free of death duties, tax, charges and expenses” in the two clauses shows the Deceased’s intention that the HK Properties were devised to Jacky and Huey free from liabilities.

24.  Mr Tsui also contends that Clause 8(a)  of the Will gives additional powers to the Executors not to use the HK Properties to settle the Deceased’s liabilities owed to the Tak Cheong Companies.  The said Clause 8(a)  reads:

“(a)  to pay or apply for the benefit of any beneficiary as my Trustees think fit the whole or any part of the income from that part of my estate to which such beneficiary is entitled tor may in future be entitled and the whole or any part of the capital to which that beneficiary is entitled or may in future be entitled provided that on becoming absolutely entitled he shall bring into account any capital payments received under this Clause and any such payments may be made to the guardian or guardians of a minor beneficiary whose receipt shall be a full and sufficient discharge to my Trustees to the intent that my Trustees shall not be responsible for seeing to the application of any monies paid to a guardian or guardians;”

25.  In showing the purported intention of the Deceased, Madam Zhang also relies on the notes of a meeting on 18 May 2017 (the “2017 Confirmation Notes”)  and another meeting on 18 July 2016 (the “2016 Confirmation Notes”).  The 2017 and 2016 Confirmation Notes contained instructions of the Deceased given to the solicitors in preparing the Will and the earlier will in 2016 (the “2016 Wills”)  respectively which were prepared by the solicitors and signed by the Deceased.

26.  Madam Zhang relies on the following passages in the 2016 Confirmation Notes:

“1.4  除德昌電子（集團）有限公司及德昌半導體有限公司的股份外，許先生不打算在遺囑内對許世達、許佩怡及許銘達作出香港其他財產贈予安排，原因是許先生已分配了財產給他們，他們各自有物業、有生意及有錢。

1.5  許先生對兒子許弘達及女兒許昊怡作出較多財產的贈予安排，包括德昌電子（集團）有限公司及德昌半導體有限公司的股份及香港的所有物業，原因是他們年幼，要照顧他們。

1.6   此外，若許先生去世時，許弘達及許昊怡還未成年，他們仍絕對享有許先生的遺產。”

27.  As to the 2017 Confirmation Notes, it records that the only change brought by the Will is the addition of Madam Zhang as one of the beneficiaries of the bequest of the shares in the Tak Cheong Companies. Thus, Madam Zhang argues, the rationale for §§1.4-1.6 in the 2016 Confirmation Note still existed when the Will was executed.

28.  According to Madam Zhang, the above materials show that the Deceased’s intention was “to lump together his loan made to [the Tak Cheong Companies] and his interests in these two companies to [Madam Zhang and his 5 children]”, and that the properties given to Jacky and Huey, i.e. the HK Properties, should “remain intact and free of death duties, tax, charges and expenses”.

29.  Her contention is that the amount of the loan owed by the Deceased to the Tak Cheong Companies should be paid out from “his interests and dividends in [Tak Cheong Holdings]”.  She also proposes to use the “dividends” of the Tak Cheong Companies, referring to the fact that they had retained earnings of $398 million.  She appears to be suggesting that the Estate should procure the Tak Cheong Companies to declare dividends.

30.  She also makes the point that the effect of the proposal of HMT and HST is that Madam Zhang, Jacky and Huey would have to come up with $12 million in cash, otherwise the devises and bequests would have to be sold, and that this “is clearly contrary to the provisions of the Will and the Confirmation Notes and could not have been the intention of the Deceased.”

31.  Madam Zhang also surmises that there might be undrawn salaries and allowances to the Deceased by the Tak Cheong Companies which could be used to set off the liabilities owed to them.

Discussions

32.  In my judgment, Madam Zhang’s contentions have no merit.

33.  Firstly, it is plain that Clauses 3, 4 and 8(a)  do not go anywhere to showing a contrary intention.  Clause 3 gives the Deceased’s shares in the Tak Cheong Companies to Madam Zhang and the Deceased’s 5 children.  Clause 4 gives the real properties in the Deceased’s name to Jacky and Huey.  Clause 8(a)  provides that the Executors have power to apply income and capital from the Estate for the benefit of any beneficiary (including if he/she is a minor).  These clauses do not deal with the debts and liabilities owed by the Estate to the Tak Cheong Companies, nor do they say anything about how debts and liabilities of the Estate are to be paid, nor do they exonerate any other class of assets from such debts and liabilities.

34.  I agree with Mr Lam that the reference to “lumping together” the shareholders’ loans and the shares in the Tak Cheong Companies is unrelated to the debts owed by the Deceased to the Tak Cheong Companies.  Both Clauses 3 and 4 state that the gift would be given to the beneficiary “absolutely free of death duties, tax, charges and expenses”.  However, “death duties, tax, charges and expenses” do not refer to the general debts and liabilities of the Estate.  As shown by Clause 6, the drafter of the Will would use the phrase “my just debts and liabilities” instead.  In any event, this phrase is used for both the devise or bequest under Clauses 3 and 4.  Thus, the use of this phrase does not show any intention to use one devise or bequest to pay for the liabilities and at the same time to exonerate the other devise or bequest from such liabilities.

35.  Similarly, the suggestion that the Deceased did not intend Madam Zhang and Jacky and Huey to have to sell their gifts is misconceived.  The Will prima facie intended all the specific devices and bequests under Clauses 3 and 4 to all the beneficiaries to be completed without them being used to discharge the liabilities, and did not otherwise indicate any preference for any asset to be used first.  Thus, if the Residuary Estate specifically identified to pay for debts are not sufficient, then the statutory order would have to be applied.

36.  Indeed, the only reference in the Will as to how the Deceased’s debts and liabilities are to be paid is Clause 6 which states that the Residuary Estate should pay for the “just debts and liabilities”. This has the same effect as the statutory order under §2 of Part II of Schedule 1.

37.  Secondly, there is nothing in the 2016 or 2017 Confirmation Notes which can advance Madam Zhang’s case.

38.  Given that the various clauses in the Will do not contain any ambiguities or meaningless parts, the two sets of Confirmation Notes, which purportedly contain evidence of the actual intention of the Deceased, are not admissible under s 23B of the WO.[9]

39.  In any event, the Confirmation Notes add nothing to the provisions in the Will.  Madam Zhang suggests that the Confirmation Notes would show the “thinking of the Deceased” to the effect that: (i)  the paramount consideration of the Deceased was to make provisions for Jacky and Huey; (ii)  HMT, HST and Amy would receive less properties because the Deceased had already given properties to them; and (iii)  Jacky and Huey should enjoy the bequests and devise absolutely even if they are still minors.  Yet, none of these points relate to how the Estate’s debts and liabilities are to be paid for.  In my judgment, the contents in the 2017 and 2016 Confirmation Notes are simply an elaboration of the provisions in the Will and the 2016 Will, which do not contain anything that indicate the Deceased’s intention as to how his debts and liabilities are to be discharged. 

40.  Thirdly, there is no basis to support Madam Zhang’s contention that the liabilities owed to the Tak Cheong Companies should be paid out from the Deceased’s “interest and dividends” in Tak Cheong Holdings.  Apart from the fact that there is nothing in the provisions in the Will which supports such contention, the same has no merit for the following reasons:

(i)  It is trite that the decision to declare dividend is a matter for the directors, not shareholders, and the shareholders have no right to dividends until they are declared.  The directors can legitimately decide to retain the company’s profits for its business and not to recommend a dividend. This is a matter of internal management of the company in respect of which the court will generally not interfere.[10].

(ii)  Here, the Estate is an 80% shareholder in Tak Cheong Holdings. The Estate is thus not entitled to be paid any dividend unless the board of directors, which comprise of HMT and the outside shareholder[11], considers it appropriate to declare one.

(iii)  Any suggestion that the Estate should as shareholder procure the directors to declare dividends is also impractical and inappropriate.  This is a matter of the business decision of the board of directors, as to which the shareholders and the court should not interfere.  Further, any directors would owe duties to the company to act in its best interest.  If the sole purpose of declaring dividends is to allow the shareholder to pay off its liabilities, that would clearly be contrary to the duties owed by the directors.

41.  Fourthly, as regards Madam Zhang’s speculation that there may be undrawn salaries and allowances owing by Tak Cheong Holdings to the Deceased, HMT has confirmed in evidence (with the confirmation of the company’s secretary, Ms Donna Tse)  that there is no such unpaid amount.  In particular, the reliance on Note 8 in the 2018 accounts of Tak Cheong Holdings is misconceived because the $11.4m of “salaries and allowances” recorded there is plainly a reference to amounts actually paid during the financial year.

42.  For the above reasons, I find that the liabilities of the Estate should be discharged in accordance with the statutory order provided in s 63 and Part II of Schedule 1 of the PAO.  There are no contrary provisions in the Will such that s 63 of PAO does not apply.

43.  For the costs, there is no dispute that the costs of the parties in respect of the claim in the OS be paid out of the estate.  But since Madam Zhang, Jacky and Huey have effectively abandoned the counterclaim, I ordered that they shall bear their own costs in respect of the counterclaim.