HO YUEN KI WINNIE v. ANTHONY ERIC RYAN HOTUNG AND OTHERS

HCMP 641/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 641 OF 2009

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DECISION

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Introduction

1.  These proceedings concern two trusts created by the 4^th defendant, who is the father of the 1^st to 3^rd defendants.  The plaintiff is the trustee (“the Trustee”) of the two trusts and the 1^st to 3^rd defendants are the beneficiaries of the trusts.  The trust properties are shares in two private companies.  The primary issues before the court are whether the Trustee’s application to resign from trusteeship should be heard, and whether the trust properties may be distributed without the concurrence of all of the beneficiaries. 

The relevant facts

2.  By a declaration of trust dated 29 November 1979 and as a result of the judgment in HCA 571 of 2003, the Trustee held 10,001 shares in Hotung Enterprises Limited (“HEL”) upon trust for the 1^st to 3^rd defendants (“HEL Trust”) and 1 share on trust for the 4^th defendant: see paragraph 9 below.  The remaining 10,002 shares in the company were held on trust for the sisters of the 1^st to 3^rd defendants.

3.  By a Deed of Renunciation dated 13 May 2009, the 4^th defendant relinquished all his interest in the one share held on his behalf.  By another Deed dated 26 May 2009, the 4^th defendant sought to vest his one share in the HEL Trust.  Mr Yin, who appeared for the Trustee has queried whether the 4^th defendant has validly vested the share in the HEL Trust by the subsequent deed, when he had by the previous deed given up all his rights in the one share.  I am of the same view.  

4.  Pursuant to another declaration of trust dated 1980, the Trustee held three shares in Hotung Investment (China) Ltd (“HICL”) upon trust for the 1^st to 3^rd defendants (“HICL Trust”).  Another three shares in HICL were held on trust for their sisters.  The remaining 90 shares were held by HEL.

5.  Since 2001, the 1^st and 2^nd defendants have brought several litigations against the Trustee in connection with the administration of the two trusts. In HCMP 5851 of 2001, the 1^st and 2^nd defendants sought disclosure by the Trustee of the share certificates held on trust for them and documents and information relating to HEL and HICL.  In HCMP 2031 of 2002, the 1^st and 2^nd defendants sought to compel the Trustee to execute powers of attorney in their favour in respect of the trust shares.  These actions were dismissed by the court on 16 April and 26 June 2002.  The appeal against the dismissal in HCMP 2031 of 2002 was dismissed by the Court of Appeal on 7 November 2002.

6.  In November 2002, the 1^st and 2^nd defendants commenced HCMP 4815 of 2002, seeking a declaration that each of them is beneficially entitled to 3,334 shares in HEL and 1 share in HICL, and an order that the Trustee shall requisition or convene meetings of the two companies and to exercise her power of voting as directed by the plaintiffs. By order dated 14 February 2003, the proceedings have adjourned sine dine with liberty to restore.

7.  On 9 December 2005, the 1^st defendant issued HCMP 2701 of 2005, seeking an order that the Trustee furnished to them a variety of documents relating to the two trusts.  By an order dated 26 April 2006, the Trustee was ordered to provide to the 1^st defendant ten items of documents and information that are available to the Trustee in her capacity as trustees of the two trusts or alternatively to the extent that the documents and information are available to her by way of diligent demand for the same.   The Trustee appealed against the order under CACV 178 of 2006.  By order dated 10 July 2007, the Court of Appeal allowed the appeal in part and reduced the scope of the documents and information that the Trustee has to furnish to the 1^st defendant.

8.  The 1^st defendant says that the Trustee has failed to comply with the order of the Court of Appeal and has applied to the Court of Appeal to commit the Trustee for contempt of court.  After an inter-partes hearing, the Court of Appeal on 25 September 2009 gave leave to the 1^st defendant to commence committal proceedings.  The substantive application has not yet been heard. 

9.  In the meantime, the 4^th defendant commenced HCA 571 of 2003 against, inter alia, the Trustee and the 1^st and 2^nd defendants seeking, inter alia, to set aside the two trusts.  By the judgment handed down on 4 March 2005, Tang JA (sitting as an additional judge of the Court of First Instance) dismissed the claim, but made a declaration that in respect of one share in HEL registered in the Trustee’s name, it is held by the Trustee on trust for the 4^th defendant absolutely.   

The originating summons

10.  By the originating summons (as amended), the Trustee seeks the following relief:

(1)   Determination of whether, upon the true construction of the declarations of trusts and in the events which have happened, the shares are held on trust for the 1^st to 3^rd defendants:

(a)    as tenants-in-common so that each of them is beneficially entitled to only a notional one-third undivided pat or share in every one of the shares, with the result that it is impossible to make any distribution of the shares without the concurrence of all; or

(b)   in severalty so that each of them is beneficially entitled to a number of specifically identifiable share.

(2)   Determination of whether any distribution of the shares ought to be made without the concurrence of the beneficiaries having regard to the prejudicial effects of a severance of a 50-percent shareholding.  

(3)   Determination of how (if any) distribution of the shares in HEL is to be effected, particularly having regard to one share having been adjudged to be held on trust for the 4^th defendant, with the consequence that the shares cannot be divided into three equal parts.

(4)   Alternatively, the Trustee may be permitted to retire from the trusts and that some other persons be appointed to replace her as trustee of the trusts.

(5)   Further or alternatively, the trusts may be carried into execution by the Court.

(6)   Consequential directions.

11.  Notwithstanding the order in which the relief are set out in the originating summons (as amended), the Trustee’s primary position at the hearing is to seek permission to retire from the trusts and to have the trusts carried into execution by the court.  Alternatively, the Trustee seeks the court’s determinations on whether the shares held on trust could or ought to be distributed to the beneficiaries without the concurrence of all the beneficiaries, and if a distribution is to be made, how it may be effected.

12.  The 1^st defendant contests the originating summons.  The 2^nd defendant does not oppose and the 3^rd defendant has indicated he takes a neutral position and does not participate in the proceedings.  Consequent upon the Deed of Renunciation dated 13 May 2009, the Trustee had, by a Notice dated 25 May 2009, wholly discontinued this action against the 4^th defendant.

Applications before the court

13.  There were originally, apart from the originating summons, three other applications made returnable at the hearing date.  They are:

(1)   The 1^st defendant’s summons filed in these proceedings on 1 June 2009, seeking a stay of the originating summons until the Trustee complies with the Order dated 10 July 2007 made in CACV 178 of 2006.  Alternatively, the 1^st defendant asks that the matter be adjourned pending the determination of the committal proceedings against the Trustee.

(2)   The 1^st defendant’s summonses issued in these proceedings and also in HCA 1216 of 2006 on 26 June 2009, seeking an order that the two actions be consolidated and to be tried or heard together.

(3)   The 2^nd defendant’s summons filed in these proceedings on 9 July 2009, seeking an order for transfer in his favour of a portion of the shares held on trust by the plaintiff.  The 2^nd defendant indicated in submission that he would only seek a transfer of 3,333 shares in HEL and 1 share in HICL.

14.  Shortly before the hearing, four other applications were taken out by the parties and made returnable at the hearing. They are:

(1)   The 1^st defendant’s summons filed in these proceedings on 8 September 2009, seeking leave to file his third affirmation.

(2)   A summons issued in HCA 1216 of 2006 on 8 September 2009 by the Trustee (who is the defendant in that action) to strike out the statement of claim and to dismiss the claim of the 1^st defendant therein.

(3)   A summons issued in HCMP 4815 of 2002 on 2 September 2009 by the Trustee (who is the defendant in that action) for consolidation of the action with these proceedings and for the two actions to be tried together.

(4)   A summons issued in HCMP 4815 of 2002 on 9 September 2002 by the 1^st defendant (who, together with the 2^nd defendant, are the plaintiffs in that action) for an order that the 2^nd defendant ceased to be a plaintiff of, and be made a defendant, in that action.

15.  At the hearing, an order was made granting leave to the 1^st defendant to file and rely on his third affirmation.  The two summonses relating to HCMP 4815 of 2002 were adjourned sine dine with liberty to restore.    Pursuant to the Trustee’s application, the 1^st defendant’s claim against her in HCA 1216 of 2006 had since been struck out.  The order is currently under appeal.  No order is therefore made on the 1^st defendant’s summons to consolidate this action with HCA 1216 of 2006.

16.  The upshot of all these is that the matters to be adjudicated upon are the originating summons and the three applications set out in paragraph 1 above.  While the 1^st defendant opposes the originating summons herein, particularly the application relating to the retirement of the Trustee from the trusteeship, he neither opposes nor consents to the 2^nd defendant’s application for a transfer to him of a portion of the shares held on trust.  In the course of the hearing, Mr Alder after taking instructions accepted that the 1^st defendant’s stay application should not affect the 2^nd defendant’s application.

17.  Accordingly, I will first consider the 1^st defendant’s stay application and the Trustee’s application to retire from the trusts, and then proceed to consider the 2^nd defendant’s application for transfer of shares.  As shall be seen, the issues involved in the 2^nd defendant’s application substantially overlap with the construction aspect of the originating summons.

The retirement application and the stay application

18.  The main reasons given by the Trustee for seeking to retire from her trusteeship are that she is of advanced age and she finds the trusteeship too burdensome.  The Trustee says that she is caught in a family feud between the settler and his sons, with various allegations of breach of trusts (which she says are unfounded) being made against her by the beneficiaries.  She further says that after rendering some 30 years of unpaid service as trustee and at the age of 86, she is finding the series of litigations that the beneficiaries have brought against her very exhausting.

19.  The Trustee has made no proposal on the substitute to be appointed upon her retirement.  She is seeking to have the trusts administered by the court.

20.  The 1^st defendant’s opposition to the Trustee’s application to retire is based on the following grounds:

(1)   As the Trustee is in contempt of the Court of Appeal order made in CACV178 of 2006, she should not be heard.  The Trustee’s application was cynically made and for the purpose of defeating the effects of the order.  To the extent that the question of whether the Trustee is guilty of contempt is yet to be heard by the Court of Appeal, this court should adjourn the Trustee’s application until after the determination of the Court of Appeal.

(2)   Alternatively, the court should exercise its discretion to refuse the Trustee’s application to retire from trusteeship because this would defeat the purpose of the committal proceedings pending in the Court of Appeal.

(3)   The court has no power under section 42 of the Trustee Ordinance, Cap.29 to permit retirement without the appointment of a suitable substitute trustee and in the absence of proceedings to administer the trusts.

(4)   The inherent jurisdiction of the court to make an order for removal of trustee without substitution should only be made in cases of urgency.  It would be difficult to identify someone suitable and willing to take up the trusteeship.  The suggestion that the three beneficiaries be appointed their own trustees is unsatisfactory as this is bound to lead to conflicts and further litigations. It appears that the 1^st defendant has no trust or confidence in the 2^nd defendant.  

21.  On the argument that the Trustee should not be heard because she is in contempt, the legal principles are as stated by Denning LJ in Hadkinson v. Hadkinson [1952] 1 All ER 567 at 574-575 (applied by the Court of Appeal in Hotung v. Ho Yuen Ki [2007] 4HKLRD 384, 397 at para.32):

“... It is a strong thing for a court to refuse to hear a party to a cause and it is only to be justified by grave considerations of public policy.  It is a step which a court will only take when the contempt itself impedes the course of justice and there is no other effective means of securing his compliance.   In this regard I would like to refer to what Sir George Jessel MR said (46 L.J. Ch. 383) in a similar connection in Re Clements & Costa Rica Republic v Erlanger:

‘I have myself had on many occasions to consider this jurisdiction, and I have always thought that necessary though it may be, it is necessary only in the sense in which extreme measures are sometimes necessary to preserve men’s rights, that is, if no other pertinent remedy can be found.  Probably that will be discovered after consideration to be the true measure of the exercise of this jurisdiction’.

Applying this principle, I am of opinion that the fact that a party to a cause has disobeyed an order of the court is not of itself a bar to his being heard, but if his disobedience is such that, so long as it continues, it impedes the course of justice in the cause, by making it more difficult for the court to ascertain the truth or to enforce the orders which it may make, then the court may in its discretion refuse to hear him until the impediment is removed or good reason is shown why it should not be removed”. 

22.  Whether the Trustee is in contempt of the order of the Court of Appeal in CACV178 of 2006 is a matter yet to be determined.  At this stage, this court cannot proceed on the basis that she is guilty of contempt and to therefore refuse to hear her.  Hence, insofar as the 1^st defendant seeks to stay the originating summons because the Trustee is in contempt or until she has complied with the order of the Court of Appeal, the application cannot be acceded to.

23.  As an alternative, the 1^st defendant seeks to adjourn the Trustee’s application until after the determination of the contempt proceedings.  It is suggested that the 1^st defendant’s efforts to enforce the order of the Court of Appeal would be frustrated and the contempt proceedings would be thwarted if the Trustee were to be permitted to retire at this point in time.  Without expressing a view on the merits of the contempt proceedings, I note from the evidence before me that the 1^st defendant’s case of contempt is not only premised on the Trustee’s failure to take steps to comply with the order to obtain and/or furnish the documents and information ordered, but also on acts of the Trustee set out to avoid the effects of the orders made in the Court of First Instance and the Court of Appeal: see also the judgment dated 25 September 2009 of the Court of Appeal in CACV 178 of 2006.  The commencement of these proceedings in fact forms part of the 1^st defendant’s complaint in the contempt proceedings.  It is said that the present action is an attempt to put an end to the trust and was brought to circumvent the jurisdiction of the Court of Appeal.

24.  There is force in the 1^st defendant’s argument that the contempt proceedings may be rendered academic or futile if the Trustee were permitted to retire from the trusts now.  It is also relevant to note that the court retains a discretion on whether to permit a trustee to retire from her office.  I am of the view that the Trustee’s application to retire from the trusts should be held over pending the determination of the contempt proceedings.  This being the position, it is not necessary to come to a conclusive view on the other objections raised by the 1^st defendant, although I am inclined to agree with the Trustee that it is within the Court’s inherent jurisdiction to permit her to retire and to give consequential directions on the administration of the trusts. 

The 2^nd defendant’s application for transfer

25.  I turn now to the 2^nd defendant’s summons for an order directing the Trustee to transfer to him a portion of the trust shares.  He asks that 3,333 shares in HEL and 1 share in HICL be transferred to him.  His application raises issues of construction that are the same as the questions put forward by the Trustee for determination in the originating summons: see paragraph 10(1) to (3) above.  The important question is whether distribution of the trust shares may or ought to be made without the concurrence of all the beneficiaries.

26.  The material part of the 1979 declaration of trust relating to the HEL Trust provides:

“I, HO YUEN KI  … hereby declare that the 10,002 (Ten thousand and two) shares in Hotung Enterprises Limited …, specified in the schedule hereinbelow now registered in my name are now held by me upon trust for MICHAEL ERIC HOTUNG, SEAN ERIC MCLEAN HOTUNG and ANTHONY ERIC RYAN HOTUNG … respectively in the proportions set out after the names of the beneficiaries in the Schedule hereto.

  …

SCHEDULE

 

Names of Beneficiaries	Share Cert. No.	No. of Shares
Michael Eric Hotung )		3,334
Sean Eric Hotung  )	2	3,334
Anthony Eric Ryan Hotung )		3,334
	Total No. of Shares	10,002

27.  As noted above, Tang JA held in HCA 571 of 2003 that out of these 10,002 shares, one share is held on trust for the 4^th defendant, who had subsequently by a Deed of Renunciation relinquished all his rights in the share and by another deed sought to vest the share in the trust in favour of the 1^st to 3^rd defendants.

28.  The 1980 declaration of trust relating to the HICL Trust are in similar terms. It provides:

““I, HO YUEN KI  … hereby declare that the 3 (Three shares) in Hotung Investment (China) Limited …, specified in the schedule hereinbelow now registered in my name are now held by me upon trust for MICHAEL ERIC HOTUNG, SEAN ERIC MCLEAN HOTUNG and ANTHONY ERIC RYAN HOTUNG … respectively in the proportions set out after the names of the beneficiaries in the Schedule hereto.

…

SCHEDULE

Names of Beneficiaries	Share Cert. No.	No. of Shares
Michael Eric Hotung )		1
Sean Eric Hotung  )	1	1
Anthony Eric Ryan Hotung )		1
	Total No. of Shares	3

29.  The evidence of the Trustee shows that since 2006, the 1^st and 2^nd defendants had requested for the transfer of 3334 share in HEL and 1 share in HICL to each of them, although in early 2007 the 2^nd defendant had withdrawn his consent for transfer of shares.  The Trustee had declined to consider the request transfer without the unanimous consent of the beneficiaries.  In explaining the issuance of the originating summons, the Trustee considers she cannot safely comply with the requests to transfer shares without the sanction of the court, having regard to the obvious hostility between the defendants and their divergent views and more importantly because of the language of the declarations of trust.

30.  It is pointed out by Mr Yin who appears for the Trustee that according to the tenor of the two declarations of trust, the shares are settled en bloc to be held on trust for the three beneficiaries in specified proportions. The position is said to be different from that of a trustee holding property on separate trusts where each of the beneficiaries is absolutely entitled to a distinct and separate trust fund.  And because of the stance of the 3^rd defendant, the rule in Saunders v. Vautier (1841) Cr & Ph 240 is inoperative.  It is further pointed out that the Trustee has no power to appropriate or sever the trust assets. In Mr Yin’s submission, it is doubtful whether each of the beneficiaries, who are only entitled to an undivided share of the trust property, has any right to call for distribution of his aliquot share when the trustee has no power of appropriation and absence a severance of the beneficial interests.

31.  Pivotal to the determination of whether distribution or transfer of the trust shares should be made is whether the shares are, as the Trustee sees it, being held on trust for the beneficiaries as tenants-in-common in equal notional undivided parts.  This is a matter of construction of the trust instruments.

32.  The Trustee had previously in other litigations, albeit in different context and for different purpose, made submissions on the basis that property as a whole.  In her appeal in CACV 178 of 2006, the Trustee argued, on the premises that the 1^st defendant only has a notional one-third undivided share in the trust shares, it was not competent for him to act in the absence of the other beneficiaries. In rejecting the argument, Yuen JA, with whom the other members of the Court agreed, stated ([2007] 4 HKLRD 384, 402 at para.49):

“I am afraid I do not follow that argument at all.  The terms of the Declarations of Trust were that Anthony, Michael and Sean were given 3,334 shares each in HEL and 1 share each in HICL.  The total of 10,002 shares in HEL and 3 shares in HICL happened to be put under 1 share certificate respectively.  But that is not to say that Anthony obtained only a 1/3 undivided share in 10,002 shares in HEL or a 1/3 undivided share in 3 shares in HICL.  Each individual share in a company is a right to a specific amount of the share capital, with rights and liabilities.  The fact that a number of shares happen to be bundled under one share certificate does not alter the nature of a share.  Nor does it matter that the actual serial numbers of the shares given to Anthony had not been set out in the Declarations of Trust.  There is no evidence that any of the shares was any different from the others.  It can therefore be presumed that they all rank pari passu.”

33.  Yuen JA went on (at para.50) to acknowledge there is a complication in the HEL Trust as a result of the one share held on behalf of the 4^th defendant and that “[it] may be arguable that the court should imply a term that each son would have 3,333 shares with the two remaining shares to be held jointly by them”.  The Court of Appeal however did not consider it necessary to decide the issue because “in any event Anthony is the beneficiary of at least 3,333 shares in HEL and 1 share in HICL”.

34.  Mr Yin is correct to say that the decision in CACV 178 of 2006 is not binding on the 2^nd and 3^rd defendants, inasmuch as they were not parties thereto.  It is also correct that the issue in CACV 178 of 2006 was whether it was competent for the 1^st defendant alone to bring proceedings against the Trustee, and not the right of a beneficiary acting alone to demand distribution.  I accept, too, that the judgment of the Court of Appeal does not prevent this court from analysing and construing the terms of the declarations of trust in order to determine whether distribution may be made without the concurrence of all the beneficiaries.  However, the views expressed by the Court of Appeal are not without relevance and should not be ignored in that its rejection of the Trustee’s argument that each of the three beneficiaries only has a notional one-third undivided share in the trust property as a whole was premised upon a construction of the terms of the two declarations of trust.

35.  In this connection, it is of interest to note that in the appeal from HCMP 2031 of 2002, Cheung JA (giving the judgment of the Court of Appeal), when describing the two trusts, stated that each of the three beneficiaries has 3,334 shares in HEL and 1 share in HICL: Hotung & Another v. Ho Yuen Ki [2002] 3 HKLRD 641, 643 at para.2.

36.  For my part, I do not agree that the terms of the declarations of trust indicate that the shares are held on trust for the three beneficiaries as tenants-in-common.  Both declarations of trusts state that the shares specified in the schedule thereto are held by the Trustee “upon trust for MICHAEL ERIC HOTUNG, SEAN ERIC MCLEAN HOTUNG and ANTHONY ERIC RYAN HOTUNG … respectively in the proportions set out after the names of the beneficiaries in the Schedule hereto.” (Emphasis added)  These words demonstrate that the shares in HEL and in HICL are held in severalty for the respective beneficiaries, each of whom is entitled to the proportion of shares set out in the schedules to the declarations of trust.   Each of the beneficiaries is therefore beneficially entitled to 3334 shares in HEL and 1 share in HICL. 

37.  It follows that prima facie a beneficiary such as the 2^nd defendant has a right to call for transfer of his aliquot share, without the concurrence of the other beneficiaries.  Mr Yin submits that even so, the court should further consider whether there is some good reason to the contrary. 

38.  The originating summons has raised the issue of whether distribution should be made without the concurrence of all the beneficiaries having regard to the prejudicial effects of the breaking up of a 50-percent shareholding.  The 1^st defendant also in his affirmation (although in a different context) alluded to the harm and damage to him caused by the breaking up of the shareholding.  In this regard, it should be noted that as a result of the judgment in HCA 571 of 2003, only 10,001 out of a total of 20,004, shares in HEL are held on trust for the three beneficiaries.  This does not amount to a 50-percent shareholding.  Even though the 4^th defendant has renounced his rights in the one share, whether he has by the second deed validly vested the one share in favour of the three beneficiaries is, for the reasons articulated by Mr Yin, in doubt: see paragraph 3 above.  Consequentially, even taking into account the 90 shares held by HEL, the concern about breaking up the controlling interest is not important in the case of HICL.  

39.  Even assuming that distribution will break up the controlling interests in HEL and HICL, and so reduces the value of the whole, this fact alone will not be enough to amount to good reason or special circumstances for not making immediate distribution: In re Weiner, dec’d [1956] 1 WLR 579, In re Sandeman’s Will Trusts [1937] 1 All ER 368. 

40.  As for the complication caused by the one share held on behalf of the 4^th defendant, as identified by Yuen JA, this is not a concern for the 2^nd defendant’s application for transfer since the 2^nd defendant is content to receive 3333 shares in HEL and to leave the balance of 6668 shares to the 1^st and 3^rd defendants.

41.  For the above reasons, I am of the view that the 2^nd defendant’s application for an order directing transfer to him of 3333 shares in HEL and 1 share in HICL should be allowed.

Costs

42.  I make an order nisi that the costs of the parties on the originating summons, the 1^st defendant’s summons for stay dated 1 June 2009 and the 2^nd defendant’ summons for transfer dated 9 July 2009 be paid out of the trust estates.  In the case of the Trustee, this will be on trustee basis.  In the case of the 1^st and 2^nd defendants, this will be on common fund basis.

43.  The Trustee has already provided a statement of costs for summary assessment dated 4 September 2009.  This is not an updated statement as there were further activities after that date.  Accordingly, within 7 days from the costs order nisi being made absolute, the Trustee is to lodge with the court and serve on the defendants an updated statement of costs.  Within 14days thereafter, the 1^st and 2^nd defendants may lodge with the court and serve on the other parties their objections or comments on it (if any).  Within 14 days thereafter, the Trustee may lodge with the court and serve on the parties her reply (if any).    

Drawing up of the order

44.  The Trustee shall draw up a draft order on this decision and circulate to the parties for comments to be made within 14 days from the service of the draft order.  Thereafter the draft order, incorporating the parties’ comments (if any), shall be lodged with the court for approval.