HTMO, EXECUTRIX OF THE ESTATE OF TB, DECEASED v. TWK AND OTHERS

HCMP 3110/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3110 OF 2014

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DECISION
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Introduction

1.  This is a Beddoe application.  The parties will attempt mediation of the underlying action, failing which 2 camps of beneficiaries will litigate between themselves.  No order needs to be made by the court to involve the executrix in the underlying action.  The remaining question is one of costs of the Beddoe application. 

2.  The executrix seeks an order that her past costs in the administration action and costs of the Beddoe application be paid out of the estate; and that there be no order as to costs of the opponents, D1 and D2 (“P and S” respectively) in the Beddoe application.

3.  P and S seek an order that:

(a) The executrix should not be entitled to costs out of the estate from 13 February 2014;

(b) The executrix do bear her own costs of the Beddoe application;

(c) The costs of P and S be borne by the executrix personally on indemnity basis.

The background

4.  Mr T B (“the deceased”) died on 6 April 2011, leaving a will (“the will”).  The applicant (“O”) is his daughter and the sole executrix.

5.  By his will, the deceased left his sole proprietorship (“the business”) to his wife (now deceased), P and S (clause 3); his movable and immovable properties in the administration of the executrix with power of sale (clause 4); and his residuary “money” and “assets” after deduction of funeral expenses, liabilities and estate duty to his wife and his 7 surviving daughters (O and D3-D8) in equal shares (clause 5).  Accordingly, assets belonging to the business shall not be distributed to the daughters; assets not belonging to the business shall not be distributed to P and S.

6.  The will did not define what properties belonged to the business.  P and S asserted that 6 heads of assets formed part of the business to be distributed to them under clause 3, namely, a fixed deposit, 4 landed properties and a motor vehicle (collectively “the disputed assets”).  The executrix disagreed and considered that they fell within clause 5.

7.  If P and S were correct, the gross value of the estate will reduce from its current estimated value of $34.4m to $2.7m and the net value from $32.4m to $0.7m.

8.  On 24 September 2014, P and S took out an originating summons in [action no.] (“the administration action”) against the executrix and other beneficiaries of the estate.  It sought an order directing the executrix to, amongst others, distribute the disputed assets to them in accordance with clause 3.

9.  The executrix filed an affirmation in opposition setting out her evidence and her views on the case of P and S.  She stated that the administration action was entirely unnecessary and that the claim of P and S was totally unfounded and against the deceased’s last wishes.  She asked that the administration action be dismissed.

10.  Two months later, on 27 November 2014, the executrix took out this Beddoe application seeking directions as to whether she should defend the administration action as executrix on behalf of the estate. 

11.  At this hearing, the parties have agreed to mediate. If the administration action were to proceed, it will be a contest between P and S in one camp and the daughters in another.  O can take part in her capacity as one of the beneficiaries in the latter camp.  The mother’s estate (D9) and D6 remain neutral in this application.  D10 is absent at this hearing.

Legal principles

12.  In a Beddoe application, the court has to consider various factors set out in §7 of PD 20.3, amongst which are:

(a) The strengths and weaknesses of the trustee’s claim/defence;

(b) Options available to cover the trustee’s costs;

(c) Estimated value or other significance to the trust of the issues in the administration action; and

(d) Estimated costs likely to be incurred by the trustees in the administration action.

13.  The executor has to remain neutral and act reasonably:

“In general, an executor has a duty to protect the estate in proceedings adverse to the estate, but where there is a 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.” Williams, Mortimer and Sunnuck, Executors, Administrators and Probate, 20 ed, §64-37; Lewin on Trusts, 19 ed, §§27-208 to 27-209 (emphasis added); Chan Gordon v Lee Wai Hing (No.2) [2011] 2 HKLRD 1029at §20.

14.  This applies where the dispute is between beneficiaries as to who is entitled to what, notwithstanding it involves interpretation of the will. The executrix should leave the beneficiaries to litigate between themselves.  The beneficiaries’ dispute is regarded as “ordinary hostile litigation” in which costs follow the event and do not come out of the estate: Alsop Wilkinson v Neary [1996] 1 WLR 1220, 1224 F-G.

15.  Where an executrix wears more than one hat (as executrix and as beneficiary) and wishes to advance a case in favour of a particular beneficiary (including herself), it is unlikely that the court will grant a pre-emptive costs order in his favour: Law Shuk Hoi v Lo Lok Fung Kenneth & ors,HCMP 11053/2008, 17 January 2011, §34, Lam J (as he then was); HSBC International Trustee Limited v Tam Mei Kam, HCMP 716/2004, 11 October 2004, Lam J (as he then was), §§7-11.

Application of the legal principles

16.  Counsel have taken me to the pre-action correspondence between 16 October 2013 and 7 March 2014.  On 16 October 2013, Messrs Clifford Chance (solicitors for P and S) wrote to the executrix: (i) asserting that the disputed assets should be distributed under clause 3 of the will; (ii) alleging that the executrix would be in breach of her fiduciary duties towards the relevant specific legatees if she failed to do so; and (iii) threatening court action.

17.  Given such a letter, no blame could be laid on the executrix who investigated the claim and then communicated her contrary views to Clifford Chance on 13 February 2014.  Those views were supported by analyses and some authorities.  As subsequently analyzed in §§12-28 and 40 to Mr Ho’s skeleton submission, those views were reasonably arguable on the merits: Li Kwok Po David and anor v Mong Sien Yee Cynthia and ors re Mong, CACV 34/2012, 20 December 2012, Poon J, §§29-48.

18.  The executrix was clearly aware of her parallel duty towards the daughters’ camp.  She was rightly concerned about the threat directed at her personally.  Mr Dawes SC does not argue to the contrary but he submits that after 13 February 2014, she should not be entitled to costs.

19.  I do not agree as to this date.  When the executrix was served with papers in the administration action, she was entitled to consider them and come to a view.  Whilst maintaining neutral, she could have filed an affirmation setting out the salient facts, make the necessary discovery and state that she would administer the estate according to the court’s ruling: the Chan Gordon case, §23.  She had to consider the estimated costs of litigation and the practical effect of P and S being correct: paragraph 7 above.

20.  However, it would have been crystal clear from the papers in the administration action that the substance of the dispute would be between 2 camps of beneficiaries and was not directed at the executrix personally. 

21.  Whilst I have no doubt as to the good faith of the executrix, I agree with Mr Dawes SC that:

(a) She was in a position of conflict because she had the dual role as an executrix and a beneficiary of the daughters’ camp.  Her personal interest was in line with arguing against P and S.

(b) She allowed the other beneficiaries (except D9 who was separately represented) to instruct and be advised by her solicitors.

(c) She refused to produce, despite Clifford Chance’s request, the counsel’s opinion which apparently was obtained with funds of the estate.  According to the instructions of Mr Ho, counsel for the executrix, there was no such opinion.  If so, it was just puzzling why her then solicitors would have asserted privilege.

(d) Her affirmation in opposition to the administration action went beyond the scope in paragraph 19 above by advancing a case in favour of one class of beneficiaries of which she was a member.

22.  These matters revealed an adversarial approach which compromised the executrix’s neutrality.

23.  The difficulty pointed out by Mr Ho in his skeleton submission over whether the executrix should be indemnified by the estate, or P and S (under clause 3) or the residuary beneficiaries (under clause 5) aptly illustrated the dispute to be between beneficiaries.  I do not see why the estate should bear the costs of resolution of the dispute.

24.  The position of P and S as regards the disputed assets has always been clear in correspondence although the fact that they were not against the executrix personally was only made clear when they commenced the administration action 7 months later.  I do not think it just to order indemnity costs against the executrix.

25.  Considering all circumstances, as a matter of principle, the executrix should be granted costs in the administration action up to and including the filing of an affirmation in accordance with paragraph 19 above.  Since she had gone overboard in advancing a position in conflict with her role, I am of the view that she should have half of the costs of that affirmation.  She should not be allowed the costs of the Beddoe application.

Conclusion

26.  I order as follows:

(1) Costs of the executrix in the administration action is to be borne out of the estate for the period up to and including the filing of her affirmation in opposition for the administration action, provided that she should only have half of the costs of her affirmation;

(2) The executrix shall personally bear her costs of the Beddoe application;

(3) The executrix shall personally bear the costs of P and S in the Beddoe application.

27.  I thank counsel for their thorough preparation and assistance to the court.