CHAN CHIU LAM AND OTHERS v. YAU YEE PING

HCAP 6/1991

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

PROBATE JURISDICTION NO. 6 OF 1991

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J U D G M E N T

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Introduction

1. This is an application relating to the administration of the estate of Sung Chuen Pao ("Sung"). Sung married Madam Chan, the 1st Plaintiff, in Shanghai in 1929. There was no issue arising out of that marriage. They legitimately adopted a daughter, the 3rd Plaintiff. In 1933, Sung took Madam Sung as his concubine. Madam Sung gave birth to two sons and a daughter. Madam Sung and her eldest son predeceased Sung. The second son, called "Momo", was married to Madam Lee. He survived Sung but died before this action was instituted. The daughter is the 2nd Plaintiff in this action. This concubinage was held to be illegitimate and the 2nd Plaintiff is to be treated as an illegitimate child of Sung and a total stranger to Sung's estate. In 1945 Sung took Madam Chu ("Chu") as his second concubine. There was no issue arising out of that concubinage. This concubinage was also found to be illegitimate and Chu is to be treated as a mistress and a total stranger to the estate of Sung.

2. Sung came and settled in Hong Kong in about 1951. A year later, Chu left China to join Sung and lived with him until he passed away in November 1985. Chu applied for grant of letters of administration of the estate of Sung. In support of her application, she made an affirmation in November 1986 deposing that she was the lawful kit-fat wife of Sung who had no other wife or concubine other than herself and had no issue. She was granted letters of administration of the estate of Sung. Chu died intestate on 26 November 1987. In July 1991, the Plaintiffs commenced proceedings against the estate of Chu seeking, inter alia, revocation of the letters of administration granted to Chu in respect of the estate of Sung and an order for an account of the assets of Sung. Initially Chu's estate was represented by her sister. After the sister's death, the niece ("the Defendant") was appointed to represent Chu's estate.

3. The litigation took a convoluted course including an appeal to the Court of Final Appeal. The Defendant is now prepared to submit to judgment so far as Sung's estate is concerned and would be prepared to consent to an order for an account in the common form. The outstanding issue remitted by the Court of Appeal to this court to determine is the footing upon which the account in respect of Sung's estate should be taken.

The law

4. There are two different modes of accounting, to which a personal representative may be ordered to give an account. The personal representative may be compelled to give an account on the common form or on the basis of wilful default. Accounting in the common form requires the personal representative to account only for what he has received of the testator's or intestate's personal estate. Ms Wong, for the Defendant, submitted that this is the appropriate form of accounting to be ordered. In contrast, on taking of an account on the footing of wilful default, the personal representative is accountable also for assets which he has not actually received but which he ought to have and might have received if he had acted with proper diligence. Mr Miu, for the Plaintiffs, submitted that the accounting should be taken on this basis.

5. The two forms of accounting proceed on totally distinct grounds. The former supposes no misconduct. It is assumed that the personal representative acted in good faith and without impropriety. The second form of accounting is based on wilful misconduct, wilful default, wilful neglect or acts known by any other name involving breach of duty. Lord Eldon often said that, as a general rule, in order to obtain an inquiry as to wilful default against an executor or a trustee, the plaintiff must allege a case for such an inquiry, must pray for it, and prove one act at least of wilful default, and that, doing so, the plaintiff may have a general decree as to wilful default. A party seeking such a decree has to prove a loss of at least one asset received in the hands of the personal representative or which might have been received but not so received and that the loss or omission occurred under circumstances as to show wilful default on the part of the personal representative. In other words, he must prove a causal connection between loss and breach of duty. The personal representative may have acted erroneously but in good faith. He may have made a wrongful payment and caused loss to the estate, but the wrong can be put right by disallowing the payment when he brings in his account. That wrongful payment does not bring all his dealings with the estate into question and it would not be right to charge him with loss attributable to some other breach of duty, unless that wrong is attributable to a proven breach of duty. The situation would be otherwise if the loss is shown to have been occasioned by wilful default on the part of the personal representative. Then all his other dealings with the estate must be viewed with circumspection.

The material circumstances

6. Before considering the loss and Chu's misconduct, it is useful to set out the circumstances peculiar to Chu. Though she was not Sung's concubine de juri, she was his de facto concubine. She was recognised as his concubine by all the members of Sung's family, by that I include his wife, his first concubine, his adopted daughter and their issues. She also considered herself as such and addressed the 1st Plaintiff as her elder sister, a term which in the particular context implied submission to the 1st Plaintiff's hierarchal status in the family. Similarly in her letters to the 3rd Plaintiff, she signed herself as mother, reflecting her belief of her status in the family. As written by Chu in her letter to the 1st Plaintiff dated 19 January 1986, she lived with Sung for more than 40 years and considered herself a spouse of Sung. She was concerned with the welfare of Momo and considered him as part of her family, if not as her own issue. She applied the proceeds of sale of her own flat towards the purchase price of a flat in North Point ("the North Point Premises") to be held in the joint names of herself, Momo and his wife and to live with Momo's family there. She must have done so with the knowledge that in normal course of event, her contribution to the purchase price would have passed to either Momo or his wife by survivorship. I have not the slightest doubt that Chu regarded herself as a Sung's lawful concubine, though as a matter of law she was not. But what she did in relation to Sung's estate must be understood in that light and the inference as to her intentions must be drawn bearing in mind those circumstances.

The loss and wilful default

7. Since a causal connection between the loss and wilful default must be proved, it is more convenient to deal with both issues together. According to the Particulars of Fraudulent Conduct filed by the Plaintiffs, the misconduct alleged are (1) Chu's selling of two tranches of a total of 22,359 shares of Hongkong & Shanghai Banking Corporation Limited ("HSBC shares"), (2) Chu's fraudulent declaration that Sung died without issue and had no other wife or concubine other than herself in her oath of administration and her failure to administer or attempt to administer Sung's estate after obtaining the grant of letters of administration.

8. The two tranches of HSBC shares had not been disclosed to the Estate Duty Office and were not included in the Schedule of Property of Sung's estate ("Sung's Schedule"). Upon production of the documents of transfer relating to these shares and the bought and sold notes in respect of the first tranche, the Defendant's solicitors conceded that Chu had sold the first tranche of shares but not the second tranche. However, they were prepared, for the purpose of disposing of the present application, to accept that the second tranche had also been sold by Chu. In her letter dated 17 December 1985 to the 1st Plaintiff, Chu wrote that two months before Sung's death, Sung transferred some shares to her for her "to make good arrangements if anything should happen to him". In my view, as the signatures of the transferor on the documents of transfer in respect of the second tranche are similar to those on the documents of transfer in respect of the first tranche and in view of the concession made in respect of the first tranche of shares, the inference that Chu had also sold the second tranche of shares could readily be drawn. Much has been commented by the Plaintiffs of the Defendant's initial refusal to admit selling the HSBC shares. The Defendant has no personal knowledge of what had happened. She was a total stranger appointed to represent Chu's estate. The cautious stance adopted by her is only to be expected. No adverse inference could be drawn against the Defendant or Chu for failing to promptly admit Chu's sale of these shares.

9. The Defendant explained that the cash assets in Sung's estate were exhausted in paying estate duty and that prior to obtaining letters of administration of Sung's estate on 15 January 1987, Chu made undisputed payments totalling $344,268.40 in paying funeral and related expenses, distributing $100,000 to the 1st Plaintiff on 7 March 1986 and 24 April 1986, paying $20,000 to the 2nd Plaintiff in July 1986 and April 1987 and in paying the last instalment of estate duty on 15 September 1986. Hence, Ms Wong submitted that the inference that could be drawn from these payments and the timing of the payments is that the proceeds of sale of these shares in the amount of $171,080.40 were applied to finance in part the discharge of these payment obligations. She argued that hence there was no loss to the estate and the question of Chu's conduct does not even arise.

10. This is a possible explanation or an account. As Chu was probably not a very sophisticated person with good knowledge of the law, she may not realise that Sung's transfer of the shares were caught as part of Sung's estate. Even if she was aware of that, she might have conveniently excluded those shares from Sung's Schedule for the purpose of saving estate duty. Dishonest as that may be, failure to include those shares in the Schedule as such is not evidence of misconduct which resulted in loss to the estate. The real question is whether by not including those shares in the Schedule and by selling them, Chu had appropriated those shares or their proceeds of sale to herself with the intention of permanently depriving the estate of those shares or proceeds of sale. Chu is not here to answer those questions. I shall have to make a finding based on inference from all the circumstances.

11. The second misconduct alleged is Chu's fraudulent declaration in the oath of administration and her failure to administer or attempt to administer the estate after obtaining letters of administration. Again, Ms Wong submitted that there was no loss to the estate. In my view, the issue is whether by transferring the property to herself or by failing to distribute the estate, Chu intended to permanently deprive the beneficiaries of their share in the estate.

12. I shall consider these issues by taking the most favourable view of Chu by assuming that she honestly believed she had acquired the status of Sung's concubine and she regarded herself as part of Sung's family. She must know that what she deposed was blatantly false. Sung was survived by his wife, the 1st Plaintiff and a son and a daughter by Madam Sung, apart from herself. Why Chu made the fraudulent declaration is now a secret buried in her grave with Sung in Shenzhen. I would have to make a finding of her intention based on inferences. It could be said that she did so for convenience to facilitate easy administration of the estate. But the overwhelming inference is to the contrary.

13. In her letter to the 1st Plaintiff dated 17 December 1985, she told the 1st Plaintiff that the value of Sung's estate was about $600,000. When the 1st Plaintiff asked for $150,000 by way of distribution, she tried to make further deductions from the said $600,000 and offered her $100,000 and the 2nd Plaintiff $20,000 only. She paid the 1st Plaintiff $100,000 by two instalments. On the receipt in respect of the second instalment, the 1st Plaintiff was asked to acknowledge giving up her right to Sung's estate in Hong Kong. According to the Sung's Schedule, the value of Sung's estate, excluding the 22,359 HSBC shares was $2,720,125.71. Her representation to the 1st Plaintiff was such a gross understatement that it could not have been an honest mistake. The inference is that Chu was engaged in a fraudulent design to deceive the Plaintiffs of their entitlement to Sung's estate. Even if that was done for the purpose of preserving the estate for Momo in the way she saw fit as Momo's parent, that was nevertheless a fraudulent preference, which if carried out would be a misappropriation of the estate and a breach of duty.

14. As the Schedule of Property of Chu's estate ("the Chu's Schedule") shows, the value of the shares under Chu's name at the time of her death two years later was $5,210,396.84. There is nothing to explain how a housewife, like Chu, could have acquired such a wealth. However, a tracing exercise carried out by the Plaintiffs showed that about 40% worth of the shares (i.e. about $2 million) shown in the Chu's Schedule could be traced to the Sung's Schedule. That effectively means, the majority if not all of the shares belonging to Sung's estate had been appropriated by Chu to herself. She could have appropriated the shares to herself as administrator of Sung's estate or to herself personally. But the fact is that she did not distribute them to the beneficiaries, such as the 1st and 2nd Plaintiffs or to Momo and the 3rd Plaintiff. This fact and the inference I drew earlier that she was deceiving the 1st and 2nd Plaintiffs out of their entitlement to Sung's estate points to the irresistible inference or conclusion that when appropriating the shares belonging to Sung's estate to herself, Chu did so by way of distribution to herself in her personal capacity with intention to permanently deprive the estate or the beneficiary of the shares and that since the transfer she held the shares in her personal capacity and not as administratrix of Sung. The shares were not held by her as administratrix pending distribution. She has therefore misappropriated the shares to herself and Sung's estate suffered significant loss.

15. Likewise, I conclude that the two tranches of HSBC shares were appropriated by Chu with intention to permanently deprive the estate of the shares. If there is any explanation the Defendant wishes to offer, that could be done by way of giving an account.

Conclusion

16. Accordingly, I am satisfied that the Plaintiffs have shown the estate suffered loss. The loss included the two tranches of HSBC shares sold by Chu and almost the entirety of Sung's estate which has found its way into Chu's estate. I am also satisfied that the loss was occasioned by Chu's wilful default in that she fraudulently declared she was the only surviving wife entitled to the estate of Sung which enabled her to obtain the letters of administration for Sung's estate and to appropriate Sung's estate to herself. Accordingly, I order that the account to be taken of the Sung's assets in accordance with the terms of Keith JA's second judgment on the footing of wilful default.

17. I agree with Ms Wong's submission that this is not an appropriate occasion to consider the other detailed questions raised by the 3rd Plaintiff, namely as to what should or should not be included in the account and as to how Chu's estate should restore the undisbursed and undistributed assets in Sung's estate to the 1st Plaintiff's estate and the 3rd Plaintiff. These matters should be dealt with in the course of taking of the account.

18. I make a costs order nisi that the Plaintiff shall have costs of this application, including those costs reserved by Deputy High Court Judge Woolley in respect of the hearing on 9 April 2002.