TANG YING LOI v. TANG YING IP AND OTHERS

HCA 2487/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2487 OF 2009

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J U D G M E N T

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INTRODUCTION

1.  The 1^st defendant is one of the two administrators of the estate (“the Estate”) of Tang Pui King alias Tang Yum (or Yam) Wan alias Tang King Cheung, deceased (“the Deceased”), who died intestate in Hong Kong on 4 July 1978, pursuant to Letters of Administration granted to him and the 2^nd defendant on 21 February 1983.

2.  The plaintiff and 1^st defendant are two of the Deceased’s 6 children.

3.  In this action, the plaintiff claims against the 1^st defendant for:-

(1)  mis-use or misapplication of funds, in the amount of HK$11,480,000, belonging to the Estate to finance his acquisition of the property known as Nos 129-131, Castle Peak Road (sometimes referred to as the “Main Road”), Yuen Long, New Territories, Hong Kong (“the Property”), which was subsequently assigned to or vested in the 3^rd defendant (the 1^st defendant’s corporate vehicle) on 8 November 2004; and

(2)  a shortfall (“the Shortfall”) in the amount of HK$3,650,694 in the cash and bank balances of the Estate.

4.  Following a contested trial, I handed down a written judgment (“the Liability Judgment”) on 7 January 2015, in which I found that the 1^st defendant, by using money belonging to the Estate to finance the acquisition of the Property, abused his position as administrator of the Estate and mis-used the Estate’s funds in breach of his fiduciary duties owed to the Estate.  I directed an inquiry on the profit for which the 1^st defendant should account to the Estate derived from the acquisition and holding of the Property, and ordered him to pay the amount due upon the inquiry.

5.  At paragraphs 91 to 94 of the Liability Judgment, I said the following:-

“91. … On the facts of the present case, such profit should be ascertained by reference to:

(1) The increase in the value of the Property, ie the difference between the open market value of the Property as at the date of the inquiry and the purchase price (HK$27,300,000).

(2) The rentals and other income (if any) derived from holding the Property between the date of acquisition (7 April 2003) and the date of the inquiry.

92. Credit should, however, be given to the 1^st defendant for:

(1) stamp duty (HK$1,023,750) and solicitors’ costs and disbursement (HK$89,300) incurred in the acquisition of the Property;

(2) the amount of HK$200,900, being interest paid to the Estate on 27 October 2003;

(3) all government rents and rates if paid by the 1^st or the 3^rd defendants in respect of the Property between the date of acquisition and the date of the inquiry; and

(4) all proper costs of repair and maintenance of the Property incurred by the 1^st or 3^rd defendants during the period from the date of acquisition to the date of the inquiry.

93. There could be legitimate arguments as to whether interest on some of the amounts referred to in paragraphs 91 and 92 above should be provided for, and if so what would be the appropriate period(s) for which such interest should run, the appropriate interest rate(s) that should be applied, and whether interest should be calculated on simple or compound basis. All such questions are to be dealt with in the inquiry.

94.  &The total acquisition costs of the Property, including stamp duty and solicitors’ costs and disbursement, came to HK$28,413,050.  Accordingly, the proportionate share of the profit that the 1^st defendant should account to the Estate should be 11,480,000/28,413,050 x 100% (= 40.40%).”

6.  In the Liability Judgment, I also found that the 1^st defendant failed to keep proper accounts of the income received and expenses incurred by the Estate, and was liable to pay compensation for the loss suffered by the Estate arising out of the Shortfall.  I ordered the 1^st defendant to compensate the Estate by paying interest on the Shortfall, the principal amount of the Shortfall having been repaid by him to the Estate’s Hang Seng Bank account on 17 December 2012.  I reserved the question of the interest rate, the interest period and whether interest ought to be calculated on simple or compound basis to be dealt with at the same time as the inquiry (see paragraph 114 of the Liability Judgment).

7.  The 1^st and 3^rd defendants’ appeal against the Liability Judgment was dismissed by the Court of Appeal on 6 November 2015.

8.  The inquiry took place on 23 and 24 February 2016 and 10, 14 and 22 March 2016.  Further written submissions were filed by the plaintiff and the 1^st and 3^rd defendants on 3 and 10 May 2016 respectively pursuant to directions given by the court.

9.  Having regard to the submissions of the parties, it would appear that the there are broadly 6 issues to be determined in this inquiry:-

(1)  market value of the Property;

(2)  rental income received by the 1^st or 3^rd defendants from letting out the Property;

(3)  management fees paid to Welsen Limited (“Welsen”);

(4)  payments to Mr Yick Chun Kin and Mr Chau Woo Loi;

(5)  directors’ remuneration paid to the 1st defendant and his wife; and

(6)  interest on (a) the profit for which the 1^st defendant is liable to account to the Estate, and (b) the Shortfall.

10.  There are various items of expense paid by the 1^st or 3^rd defendants for which the plaintiff accepts the 1^st defendant should be given credit.  I shall refer to those items later in this judgment.

MARKET VALUE OF THE PROPERTY

11.  The Property comprises a 6-storey building (“Longfield Centre”) situated on the northern side of Castle Peak Road (at the junction with Tung Lok Street), in Yuen Long, New Territories.  The Ground Floor of Longfield Centre is used as shops while the 1^st to 5^th Floors thereof (“the Upper Floors”) are used as offices.  There is a lift and a common staircase serving the entire building, as well as an internal staircase serving the 4^th and 5^th Floors of the building.  Although the Ground Floor of Longfield Centre has been divided into, and is currently occupied by, a number of shops, both valuation experts, namely, Mr Siu L H Keith for the plaintiff and Ms Sat Wai Ling for the 1^st and 3^rd defendants, have treated the Ground Floor as comprising two shops (hereinafter referred to as the “Main Shop” and the “Side Shop” respectively) for the purpose of valuation.

12.  As mentioned in the Joint Statement of Experts dated 22 January 2016 (“the Joint Statement”), the two valuation experts agreed to adopt the valuation date of 22 December 2015.  However, in the course of the inquiry, the parties agreed that the valuation date of 29 February 2016, being a date closer to the date of the inquiry, should be adopted instead.  Accordingly, the valuation figures appearing in the Joint Statement will require further “time adjustment” by reference to the “Private Retail – Rental and Price Indices” published by the Rating and Valuation Department (“the RVD Retail Indices”) for the period from December 2015 to February 2016, that being the common methodology adopted by the experts for making time adjustment.

13.  Leaving aside for the time being the time adjustment which I shall return to later in this judgment, the market value of the Property as assessed by Mr Siu and Ms Sat is set out in Annex 1 to the Joint Statement, as follows:-

Floor/Unit	Assessed Market Value (HK$)		Difference (HK$)
	Mr Siu	Ms Sat
Main Shop	$231,858,157	$182,003,051	$49,855,106
Side Shop	$18,337,008	$17,484,784	$852,224
1st Floor	$18,687,267	$18,245,939	$441,328
2nd Floor	$18,762,589	$18,319,608	$442,981
3rd Floor	$18,837,911	$18,393,140	$444,771
4th Floor	$19,223,681	$18,751,124	$472,557
5th Floor	$14,981,652	$14,974,200	$7,452
Total	$340,688,265	$288,171,846	$52,516,419

(a)   The Side Shop and Upper Floors

14.  It can be seen immediately that the major difference between the two experts relates to the valuation of the Main Shop.  Their differences in relation to the valuation of the Side Shop and Upper Floors are all less than 5%.  In her evidence, Ms Sat said that a difference of 3 to 5% in the valuation of any property would be an acceptable margin of difference between two reasonable valuers.  It seems to me clear that the range of an acceptable margin of difference would depend on the nature of the property being valued.  For an ordinary flat in a large residential estate, a difference of 3 to 5% would be well within the range of acceptable margin of difference.  For a ground floor shop on a high street, a considerably larger difference is not uncommon. According to Mr Siu, a range of up to 10% could be acceptable for such a property.  Bearing in mind the inherently imprecise and subjective nature of the valuation exercise undertaken by the experts, I consider their differences in the valuation of the Side Shop and Upper Floors to be insignificant. 

15.  In my view, it would be meaningless to further analyse the valuation of the Side Shop and the Upper Floors carried out by the two experts with a view to assessing their “true” market values.  Any result derived from such analysis would give an appearance of precision which cannot be justified.  I consider that the court should, in the present circumstances, adopt the practical approach of taking the average of the figures produced by the two experts in so far as the valuation of the Side Shop and Upper Floors is concerned.

(b)   The Main Shop

16.  The difference in the valuation of the Main Shop is, however, more substantial.  As can be seen from Annex 4 to the Joint Statement, the two experts differ on the following issues in relation to the valuation of the Main Shop:-

(1)  Choice of comparables: both Mr Siu and Ms Sat rely on 5 common comparables in the vicinity of the Property along Castle Peak Road.  In addition, Mr Siu relies on a comparable (namely, Shop 7 on G/F, Yuen Long Trade Centre, 99-109 Castle Peak Road, Yuen Long, referred to as “ER2”) which Ms Sat considers should not be used because it fronts onto Fook Hong Street (instead of Castle Peak Road) and it has a much smaller size (effective area of 27.9 sq m compared to the Property with an effective area of 134.8 sq m).

(2)  Location adjustment: Mr Siu considers that a downward adjustment should be made for two comparables (“ER3” and “ER5”) because they are located near several major bus stops and a Hong Kong Jockey Club Off Course Betting Centre and therefore are superior when compared to the Property, whereas Ms Sat considers that an upward adjustment should be made for those comparables because they are situated further away from the busiest part of Castle Peak Road which is at the junction with Kuk Ting Street/Tai Tong Road.

(3)  Frontage adjustment for comparable “ER2”: both Mr Siu and Ms Sat adopt a frontage adjustment of 4% per m for a comparable fronting onto Castle Peak Road.  In relation to “ER2”, Mr Siu adopts the same 4% per m for frontage adjustment even though it fronts onto Fook Hong Street, whereas Ms Sat considers that a lower frontage adjustment of 2% per m should be applied for “ER2” because Fook Hong Street is a side street and has a lower pedestrian flow when compared to Castle Peak Road.

(4)  Return frontage adjustment for the Property (on account of an additional frontage onto Tung Lok Street): Mr Siu and Ms Sat adopt different return frontage adjustments of 40.1% and 30% (or 2.5% per m) respectively.

(5)  Layout/depth adjustment: Ms Siu makes adjustment by reference to the depth to frontage ratio, whereas Ms Sat makes adjustment by reference only to the depth of the Property (namely, 1% for every 1m increase in the depth of the shop).

(6)  Size/quantum adjustment: Mr Siu and Ms Sat adopt different size/quantum adjustments of 1% per 500 sq f (approximately 46.5 sq m) and 1.5% per 10 sq m respectively.

(7)  Weighting of comparables: Mr Siu arrives at the unit rate for the Property by taking a simple arithmetic average of the adjusted unit rates of the comparables, whereas Ms Sat adopts a weighted average approach, giving less weight to comparables “ER4” and “ER6” on the ground that they require higher location adjustment (namely, -35%) when compared to the other 3 comparables.

17.  At the conclusion of the evidence and prior to adjourning the inquiry for final submissions, I indicated to the parties certain provisional findings on the above issues and invited the parties’ experts to produce revised valuations on the basis of those provisional findings, as follows[1]:-

(1)  disregard comparable “ER2”;

(2)  adopt Ms Sat’s location adjustment for all 5 remaining comparables;

(3)  adopt Ms Sat’s return frontage adjustment of 30% for the Property;

(4)  for layout/depth adjustment, do two calculations, one based on Mr Siu’s approach and one based on Ms Sat’s approach;

(5)  for size/quantum adjustment, adopt a mid-way position between Mr Siu’s formula (1% per 46.5 sq m) and Ms Sat’s formula (1.5% per 10 sq m); and

(6)  adopt Mr Siu’s simple arithmetic average approach to derive the unit rate for the Property.

18.  In his final submissions, Mr Chain informed the court that he did not intend to make further submissions in respect of the issues mentioned in paragraph 16(1), (2), (3), (6) and (7) above, but maintained that the court should adopt Mr Siu’s approaches regarding (i) return frontage adjustment, and (ii) size/quantum adjustment.  On the other hand, Mr Mok contended that the court should accept Ms Sat’s evidence in respect of all disputed issues.  My views are as follows.

19.  In respect of the choice of comparables (relevant to the issues mentioned in paragraph 16(1) and (3) above), I accept Ms Sat’s view that “ER2” is not an appropriate comparable because (i) it fronts onto Fook Hong Street, and (ii) it is much smaller in size when compared to the Property (with effective areas of 27.9 sq m and 134.8 sq m respectively).

20.  In respect of location adjustment (relevant to the issue mentioned in paragraph 16(2) above), I also accept Ms Sat’s view that an upward (instead of downward) adjustment should be made for “ER3” and “ER5” because they are situated further away from the busiest part of Castle Peak Road at the junction with Kuk Ting Street/Tai Tong Road.

21.  In respect of the return frontage adjustment for the Property (relevant to the issue mentioned in paragraph 16(4) above), the approach adopted by Mr Siu is a complicated one.  In simple terms, he envisages the two frontages of the Main Shop, being a corner shop, as the two sides of a right-angled triangle. He first calculates, using the well known mathematical “Pythagoras’ theorem”, the length of the hypotenuse of a right-angled isosceles triangle with a length of 1 unit for the two equal sides.  From the length of 1.414 units for the hypotenuse as so calculated, he derives the factor of 41.4%.  He next adjusts the actual lengths of the two frontages of the Main Shop (8.9 m for the main frontage and 12.3 m for the return frontage) by reference to what he considers to be the relative pedestrian flows of 1 and 0.7 respectively. Lastly, he applies the factor of 41.4% to the adjusted lengths of the two frontages and comes up with the final figure of 40.1% as the return frontage adjustment for the Property.  Ms Siu frankly admitted in cross examination that his approach was an unorthodox one in the sense that he had not seen it in any standard textbook or literature on valuation or being applied by other valuers.  I do not accept Mr Siu’s approach for determining the return frontage adjustment for the Property, which does not seem to me to be based on either principle or logic.  I prefer Ms Sat’s approach, ie applying a fixed percentage for each metre in length of the return frontage, which I accept is a common or usual approach adopted by other valuers.  I also accept her adjustment of 30% as being appropriate for the return frontage adjustment for the Property.

22.  In respect of layout/depth adjustment (relevant to the issue mentioned in paragraph 16(5) above), while Mr Siu’s approach of using the depth to frontage ratio is sometimes employed by valuers to determine the unit rate for different “zones” of a shop using the Reduced Zoning Method, the particular formula used by him (namely, 10% per increase of ratio of 1) to directly calculate the magnitude of adjustment for the whole shop is something which, as accepted by Mr Siu, does not come from any standard textbook or literature on valuation and has not been used by other valuers in Hong Kong.  Mr Siu accepted that he had not done any research or verification to support or substantiate his formula.  Mr Siu also accepted that Ms Sat’s approach of making adjustment by reference only to the depth of the Property was a method used by at least some valuers to account for the difference in shape or depth of an ordinary rectangular shop. Again, I prefer the approach of Ms Sat.  I accept her formula of 1% for every 1 m increase in the depth of the shop as being appropriate in the present case for depth adjustment.

23.  In respect of size/quantum adjustment (relevant to the issue mentioned in paragraph 16(6) above), neither of the formulae applied by the two experts (namely, 1% per 46.5 sq m and 1.5% per 10 sq m respectively) is supported by any objective justification or valuation practice.  Their formulae are, I understand, based on their professional (in other words, subjective) judgment. There is not much to choose between the two formulae.  I would adopt a mid-way position between the two formulae for size/quantum adjustment in the present case.

24.  In respect of weighting of comparables (relevant to the issue mentioned in paragraph 16(7) above), while I accept that in some circumstances, it may be justifiable to give different weights to different comparables, in the present case all 5 comparables seem to me to be reasonably good ones with some adjustments being required to be made on account of various characteristics mentioned above.  I do not consider that it is right to single out “ER4” and “ER6” and give them half weight merely because they require higher location adjustment to be made. As a matter of fact, if one considers the net adjustment required to be made to the 5 common comparables, “ER4” and “ER6” would require the lowest adjustment to be made (namely, 10.6% and 9.5% respectively).  I appreciate that individual items of adjustment may operate in opposite directions, and thus a small net adjustment may be the result of a number of large adjustments operating in different directions.  Nevertheless, valuation by using the comparative approach is inherently an imprecise exercise.  One should adopt a global view and should not be bogged down by fine details.  Both experts consider the 5 comparables to be appropriate comparables in the present case.  They should, prima facie, be given equal weight in the absence of some strong justification to the contrary.  On the whole, I would accept Mr Siu’s approach of giving equal weight to each of the 5 comparables and reject Ms Sat’s weighting approach.

25.  In passing, I should mention that Mr Mok has raised quite a number of criticisms against the evidence of Mr Siu in his final submissions.  I have considered them but do not consider it necessary to deal with them separately in this judgment.  I acknowledge the force of some of Mr Mok’s criticisms, but do not consider that they are sufficient to cause me to reject, or totally reject, his opinions on (i) size/quantum adjustment, and (ii) weighting.

(c)    Time Adjustment

26.  Lastly, on the issue of time adjustment, by the time of the final submissions, the latest published RVD Retail Indices for December 2015 and January 2016 were 540.3 and 528.9 respectively, both being provisional figures only.  Those figures should be used.  For February 2016, I would adopt a further downward adjustment of 2% for the Main Shop, taking into account the observed trend in the few preceding months.  These figures for time adjustment should also be used for the valuation of the Side Shop as at 29 February 2016.

27.  In so far as time adjustment for the Upper Floors is concerned, the latest “Private Offices – Price Indices by Grade (All Districts)” published by the Rating and Valuation Department (“the RVD Offices Indices”) available at the time of the final submissions on 22 March 2016 (including provisional figures for December 2015 and January 2016) should be used. For February 2016, I would adopt a further downward adjustment of 1%, taking into account the observed trend in the few preceding months.

28.  After the conclusion of the inquiry, the plaintiff applied to adduce further evidence and make further submissions on time adjustment.  In summary, the plaintiff argued that more updated RVD Retail Indices and RVD Offices Indices had been published by the Rating and Valuation Department in April 2016.  The updated RVD Retail Indices and RVD Offices Indices provided not only provisional figures for February 2016, but also revised the previous provisional figures for December 2015 and January 2016.  The plaintiff submitted that the court should have regard to the updated RVD Retail Indices and RVD Offices Indices when making time adjustment.  The 1^st and 3^rd defendants objected to the plaintiffs’ attempt to adduce the updated RVD Retail Indices and RVD Offices Indices as evidence for the purpose of this inquiry.  I directed the parties to file and serve written submissions on this issue, which they did.  I have considered their submissions.  I agree with the 1^st and 3^rd defendants that there ought to be finality in the evidence for the purpose of the inquiry.  Further, it should be noted that the figures for the last six months in the updated RVD Retail Indices and RVD Offices Indices are, in any event, provisional only.  I consider that the time adjustment ought to be made by reference to the RVD Retail Indices and RVD Offices Indices published by the Rating and Valuation Department in March 2016 (which contained provisional figures up to January 2016 and were available by the time of the final submissions), and that the time adjustment for the Main Shop/Side Shop and Upper Floors for February 2016 should be as indicated in paragraphs 26 and 27 above.

RENTAL INCOME RECEIVED BY THE 1^st or 3^rd DEFENDANTS

29.  The actual rents received by the 1^st or 3^rd defendants from letting out the Property are not in dispute.  The total amount, calculated up to 29 February 2016, comes to HK$60,538,310.50: see Annex 5 to the Closing Submissions for the 1^st and 3^rd defendants dated 21 March 2016 (“Ds’ Closing Submissions”).

30.  The plaintiff has, however, raised two complaints regarding the rental income received by the 1^st or 3^rd defendants.  First, the plaintiff says that:-

(1)  the 2^nd Floor of Longfield Centre has been let to the 1^st and 3^rd defendants’ solicitors at below market rent; and

(2)  the 3^rd Floor of Longfield Centre has been let to various companies owned by a “friend” (Mr Man Tat Shing) of the 1^st defendant at much below market rent (in the words of the 1^st defendant, he gave the companies “a good deal” as a favour to Mr Man based on their long term friendship).

31.  Second, the plaintiff complains that the 4^th Floor and a portion of the 5^th Floor of about 624 sq ft (“the 5^th Floor Portion”) have been used by the 1^st defendant or his companies, but no rent has been paid or received for his use of those premises.

32.  In relation to the first complaint, it is important to bear in mind that under the Liability Judgment, the 1^st defendants is only required to account to the Estate for the profit which he has made from the acquisition and holding of the Property.  There is no finding that the 1^st or 3^rd defendants hold the Property on trust on behalf, or for the benefit, of the Estate, nor is there any order made requiring the 1^st defendant to compensate the Estate for loss(es) for failing to let the Property at market rent.  There is also no evidence that the 1^st or 3^rd defendants have derived any pecuniary or material benefit from letting the 2^nd and 3^rd Floors of the building at below market rent.  I do not therefore consider that the 1^st defendant should be required to account to the Estate for any notional market rent in respect of the 2^nd and 3^rd Floors of the building.

33.  The second complaint stands, however, on a different footing.  The 1^st defendant has derived material benefit from occupying the 4^th Floor and the 5^th Floor Portion free of charge.  Such free occupation should properly be regarded as a form of “profit” which the 1^st defendant has derived from the acquisition and holding of the Property.  He should therefore account to the Estate for such profit.  The 1^st defendant says that he rarely uses those promises and they have been left idle most of the time.  It is not disputed, however, that those premises have been reserved for his use.  In my view, it is a matter entirely of the 1^st defendant’s choice whether and how often he makes use of those premises.  The “profit” that the 1^st defendant has derived from his free occupation of the 4^th Floor and the 5^th Floor Portion should, I consider, be quantified by reference to the market rent of those premises.

34.  Mr Siu has produced valuation evidence regarding the market rent of the 4^th Floor and the 5^th Floor Portion, while Ms Sat has not produced evidence on this issue.  Mr Siu refers to a total of 7 comparables and opines that an adjusted effective unit rent of HK$11 per sq ft (as at 2003) should be used.  Apart from his criticisms on various other aspects of Mr Siu’s evidence, Mr Mok argues that Mr Siu should not have relied on a particular comparable (referred to as “TO7”) because it was a tenancy which had been concluded before SARS had hit Hong Kong in mid-March to April 2003.  It may be noted, however, that Mr Siu has made time adjustment for “TO7”.  This having been said, even if one were to take into account “TO7”, there are other comparables referred to by Mr Siu which would support an adjusted effective unit rent of lower than HK$11 per sq ft (as at 2003).  I note that Mr Siu has disregarded comparables “TO1” and “TO3” on the basis that they are “below market range after analysis”.  However, in the absence of evidence that those transactions were not arms-length market transactions, I do not consider that they should be disregarded altogether.  In all the circumstances, I would adopt a simple arithmetic average in respect of all 7 comparables listed by Mr Siu to derive the adjusted effective unit rent of HK$9.7 per sq ft (as at 2003)

35.  As envisaged in paragraph 78.4 of Ds’ Closing Submissions, I shall leave to it the parties to agree on the calculation of the market rental of the 4^th Floor and the 5^th Floor Portion for the period from the date of acquisition of the Property in 2003 to 29 February 2016.

EXPENSES NOT IN DISPUTE

36.  The following expenses paid or incurred by the 1^st or 3^rd defendants, totalling HK$10,055,711.20, are agreed:-

(1)  re-construction and renovation expenses (HK$5,607,597);

(2)  rates and government rent (HK$1,623,353);

(3)  repairs and maintenance expenses (HK$218,814);

(4)  security service expenses (HK$1,525,722.70);

(5)  fire alarm expenses (HK$57,326);

(6)  insurance (fire and liability) expenses (HK$123,999);

(7)  elevators maintenance expenses (HK$298,912)

(8)  staff salary, including Ms Wan Lin Heung (HK$481,481.50); and

(9)  professional fee and commission (HK$118,506).

37.  Accordingly, credit should be given to the 1^st defendant for the sum of HK$10,055,711.20 in ascertaining the profit for which he is liable to account to the Estate.

MANAGEMENT FEES PAID TO WELSEN LIMITED

38.  Welsen is 50% owned by the 1^st defendant, the other 50% registered shareholder being Tang Ying Sau (deceased).  The directors of Welsen are the 1^st defendant and his wife. The 1^st defendant’s wife is also the secretary of Welsen.

39.  The management fees paid to Welsen did not feature much in the course of the hearing.  In the Plaintiff’s Skeleton Submissions dated 18 March 2016 (“P’s Skeleton Submissions”), it is said that “even on the documents the services provided were not so much ‘property’ related”.  There is also a complaint that the management fees paid to Welsen increased substantially from HK$13,000 to HK$60,000 per month from 2009 to 2016, with the latest increase at 50%.  The “documents” referred to are, I understand, the management agreements entered into between the 3^rd defendant and Welsen.  It appears from those management agreements that Welsen provides two types of services to the 3^rd defendant, namely: (i) management, and (ii) secretarial.  Clause 2 of the management agreements further specifies the services to be rendered by Welsen, as follows:-

(1)  company management relating to administration, correspondence, accounting, banking, filing, public relations and individual matters; and

(2)  receipt and delivery services.

40.  Apart from the management agreements, there is little evidence regarding the actual services rendered by Welsen to the 3^rd defendant which (according to the 1^st defendant) was acquired solely for the purpose of holding the Property.

41.  As pointed out by the plaintiff, no claim was made in respect of the management fees paid to Welsen in the initial disclosure by the 1^st defendant in his 3^rd affirmation filed on 4 June 2015: see paragraph 7 of Plaintiff’s Synopsis dated 22 February 2016 (“P’s Synopsis”), and paragraph 40 of P’s Skeleton Submissions.

42.  The burden is on the 1^st defendant to prove that he should be given credit for the management fees paid to Welsen in ascertaining the profit for which he is liable to account to the Estate.  It is wholly unclear, on the existing evidence, as to whether the whole or only a part of the services rendered by Welsen should be treated as relating to the management of Longfield Centre.  In paragraph 81.4 of Ds’ Closing Submissions, the 1^st and 3^rd defendants submit that the 1^st defendant should be given credit for 60% of the payments made to Welsen (and Mr Yick, as to which see further below).  There is, however, no justification given for this apportionment in so far as the managements fees paid to Welsen are concerned.

43.  In all the circumstances, I am not prepared to give credit to the 1^st defendant for any part of the management fees paid to Welsen.

PAYMENTS TO MR YICK CHUN KIN AND MR CHAU WOO LOI

(i)    Mr Yick Chun Kin

44.  Mr Yick is an employee of Welsen.  Welsen makes monthly salary payment to Mr Yick and the 3^rd defendant in turn pays management fees to Welsen. In addition, Mr Yick receives allowances and bonuses from the 3^rd defendant directly.  The total amount received by Mr Yick during the period from 2009 to 2015 comes to HK$2,103,777.

45.  According to Mr Yick, he assists in the maintenance and overall management of the Property, including administration, secretarial, accounting, banking, filing, rent collection, issuing receipts, public relations and other incidental matters.

46.  The 1^st defendant says that Mr Yick also assists him in relation to his personal financial matters and the accounts of the Estate, and estimates that the work that Mr Yick does relating to the Property represents about 60% of his overall workload.

47.  In Ds’ Closing Submissions, it is accepted that the 1^st defendant should be given credit for only 60% of the payments made to Mr Yick.  I am prepared to accept the 1^st defendant’s evidence regarding the apportionment of Mr Yick’s overall workload, and give credit to the 1^st defendant for 60% of the payments made to Mr Yick (ie HK$2,103,777 x 60% = HK$1,262,266) for the purpose of ascertaining the profit for which he is liable to account to the Estate.

(ii)  Mr Chau Woo Loi

48.  The payments to Mr Chau were made over a period of time from 2009 to 2015, in the total sum of HK$970,000. 

49.  According to the 1^st defendant:-

(1)  Mr Chau is the 1^st defendant’s general advisor and advises him on the management of Longfield Centre.

(2)  He attended all meetings with architects and contractors and helped the 1^st defendant supervise work progress in relation to the reconstruction and renovation works carried out after the acquisition of the Property in 2003.

(3)  He also provides technical support (including the use of computer) to the 1^st defendant.

50.  According to Mr Yick, Mr Chau assisted in advising on and monitoring the reconstruction and renovation works of the Property, and the payments made to him by the 3^rd defendant were for the purpose of “retrospectively” remunerating him for such effort and contribution. 

51.  As mentioned by the 1^st defendant, the reconstruction and renovation works were completed in 2006.  There is no evidence of any agreed arrangement regarding the payment of any remuneration to Mr Chau for his services rendered in advising on and monitoring the reconstruction and renovation works of the Property.  There is also little evidence regarding the actual services rendered by Mr Chau.  That Mr Chau was paid during the period from 2009 to 2015 for services allegedly rendered between 2003 and 2006 is, to say the least, unusual.  It is not known how the various payments to Mr Chau (ranging from HK$100,000 to HK$220,000) were arrived at, and whether they related exclusively to the services rendered in connection with the reconstruction and renovation of the Property or to on-going services provided by him to the 1^st defendant or both.  Also, in relation to any on-going services provided by Mr Chau, it is not clear whether they relate to the management of the Property.

52.  I do not accept Mr Yick’s evidence that the payments made to Mr Chau represented retrospective remuneration for his effort and contribution in relation to the reconstruction and renovation of the Property.  I am also not prepared to find, on the existing evidence, that those payments were “expenses incurred for the repair and/or maintenance of the Property” as argued by the 1^st and 3^rd defendants (see paragraphs 82.2 of Ds’ Closing Submissions).  Accordingly, no credit should be given to the 1^st defendant for the payments made to Mr Chau.

DIRECTORS’ REMUNERATION PAID TO THE 1^ST DEFENDANT AND HIS WIFE

53.  In Phipps v Boardman [1964] 1 WLR 993 at 1018, Wilberforce J (as he then was) said, in relation to a claim for an account of profit improperly obtained by a fiduciary, that:-

“Moreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised. But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill? This is a subject on which authority is scanty; but Cohen J. in In re Macadam gave his support to an allowance of this kind to trustees for their services in acting as directors of a company. It seems to me that this transaction, i.e., the acquisition of a controlling interest in the company, was one of a special character calling for the exercise of a particular kind of professional skill. If Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, had they been well advised, have employed) an expert to do it for them. If the trustees had come to the court asking for liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question. It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.”

54.  The plaintiff accepts that, as a matter of principle, the 1^st defendant is entitled to claim an “allowance” for his own time, energy and skill which contribute to the profit for which he is now required to account to the Estate (paragraph 7 of the P’s Skeleton Submissions).

55.  In the present case, the 1^st and 3^rd defendants submit that the director’s remuneration paid to the 1^st defendant and his wife, in the total amount of HK$43,100,000 (HK$32,900,000 to the 1^st defendant and HK$10,200,000 to his wife), during the period from 2003 to 2015 should be regarded as “allowance” to the 1^st defendant for his skill and labour in producing the profit (see paragraph 83 of Ds’ Closing Submissions).

56.  There is no evidence that the 1^st defendant’s wife has done anything which contributes to the “profit” for which the 1^st defendant is liable to account to the Estate.  On any view of the matter, the amount of HK$10,200,000 paid to the 1^st defendant’s wife cannot be regarded as “allowance” to the 1^st defendant for his skill and labour contributing to such profit.

57.  In so far as the 1^st defendant’s own skill and labour is concerned, he says, in paragraph 5 of his 4^th affirmation, as follows:-

“I have spent a lot of time and effort in designing and causing the property to be upgraded and then maintaining it to high standards. Negotiations of leases and tenancies with the tenants are also carried out by me. I believe that my expertise in the property market within Yuen Long is an added asset in this regard. As a result, I truly believe that I am entitled to be properly remunerated for enhancing the marketability of Longfield Centre. Yearly ‘bonus’ in the form of directors’ remuneration is paid to me and my wife in about March each year.”

58.  In paragraphs 85 of Ds’ Closing Submissions, Mr Mok also refers to:-

(1)  the 1^st defendant’s skill and effort in procuring and underwriting the long term investment opportunity provided by the acquisition of the Property during the SARS period in 2003;

(2)  the 1^st defendant’s sourcing and identification of the investment opportunity, application of his market judgment and experience, as well as negotiating the acquisition of and underwriting the risk of the investment in the Property; and

(3)  the 1^st defendant’s contribution of substantial follow-up services including undertaking the renovation, upgrading and ongoing management of the Property.

59.  Mr Chain submits, however, that apart from the initial improvement/renovation, little was required of the 1^st defendant’s time, energy and skill (paragraph 49 of P’s Skeleton Submission).  There is, I consider, considerable force in this submission.  Apart from the bare statement quoted in paragraph 57 above, little (if any) evidence has been adduced by the 1^st and 3^rd defendants regarding the skill, labour or effort allegedly exercised or expended by the 1^st defendant in relation to the matters mentioned in paragraph 5 of his 4^th affirmation. In this regard, it is relevant to note that:-

(1)  The Ground Floor has all along been leased to the same tenant (namely, Crocodile Garment Ltd);

(2)  The Second Floor has for many years been leased to the 1^st and 3^rd defendants’ solicitors; and

(3)  The Third Floor has been leased to companies belonging to a long time friend of the 1^st defendant and the 1^st defendant has said that he gave them “a good deal” as a favour to his friend.

60.  In respect of such leases, the 1^st defendant would not have to look for tenants, but would only need to “negotiate” the rent upon each renewal of the leases.

61.  While I have some reservation on whether allowance should be given for the 1^st defendant’s skill and labour in identifying the investment opportunity and negotiating of the purchase of the Property (because that was the very same transaction complained of by the plaintiff involving the 1^st defendant’s misuse or misapplication of money belong to the Estate), I have nevertheless decided that some allowance should be given to the 1^st defendant for such skill and labour. Taking everything into account, I consider that a sum of HK$5,000,000 would amply compensate the 1^st defendant for his time, energy, skill and labour in producing the profit for which he is now required to account to the Estate.

INTEREST

62.  In what follows, the HSBC best lending rate (from time to time) plus 1% pa shall be referred to as the “Base Rate”.

63.  Mr Chain has not argued that compound interest shall be paid by the 1^st defendant on the amount due found on the inquiry.  Accordingly, all references to interest below shall be to simple interest.

64.  In respect of the profit for which the 1^st defendant is required to account to the Estate, Mr Mok argues that there should be no interest on the rental income during the period from 2003 to 29 February 2016.  He supports his submission by reference to the decision of Stirling J in Silkstone and Haigh Moor Coal Company v Edey [1900] 1 Ch 167 to the effect that, upon the setting aside of a sale by a trustee of trust property to himself and the reconveyance of the property to the beneficiaries, it is not the practice of the court to charge the trustee with interest on the rents and profits received by him since the date of the sale. This practice is also referred to in the current (2013) edition of Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, at paragraph 57-57.

65.  I am not, however, here dealing with the setting aside of any sale of trust property by a trustee to himself.  I am concerned with ascertaining the profit made by the 1^st defendant arising from his use of money belonging to the Estate to purchase the Property.  In determining the profit made by him, I need to have regard to, amongst other things, the rental income which the 1^st or 3^rd defendants have received, as well as the expenses that they have reasonably and properly incurred to enable the profit to be made.  I cannot see any reason in principle why interest should not be allowed on both the rental income and the expenses.

66.  I bear in mind Mr Mok’s submission that there has been an overall increase in rental over the years (paragraph 91 of Ds’ Closing Submissions) and thus it may put the 1^st defendant at a significant disadvantage to adopt the “simplified” formula proposed by Mr Chain, ie at half of the Base Rate from July 2006 (paragraph 53 of P’s Skeleton Submission).

67.  On the other hand, the approach advocated by Mr Mok, namely, calculating interest on all receipt and expense items with reference to the actual times at which the amounts were received or paid (paragraph 92 of Ds’ Closing Submissions), seems to me to be unduly complicated. In making an award of interest, the court is not undertaking a scientific exercise of precision. What the court should seek to achieve is practical justice to both parties.

68.  I also take into account the fact that although there was no rental income received in respect of the Side Shop and the Upper Floors during the period from 2003 to June 2006, the Main Shop started to generate rental income as from 2003.

69.  I consider that practical justice would be achieved in the present case by allowing interest on:-

(1)  the total amount of all rental incomes (including the notional rental income in respect of the 4^th Floor and the 5^th Floor Portion occupied by the 1^st defendant); and

(2)  the total amount of all deductible expenses and allowances,

at 40% of the Base Rate from 1 July 2006 to 29 February 2016.

70.  In respect of the Shortfall, it was first revealed in the PwC Report on 10 October 2005 and was repaid by the 1^st defendant on 17 December 2012.  As mentioned in paragraph 109 of the Liability Judgment, the 1^st defendant says that the Shortfall represented mainly cumulative bad debts arising from unpaid rent receivables for the period from 1983-2004 covering different plots of land of the Estate.

71.  The purpose of an award of interest is to compensate the Estate for its loss of the rental income which ought to have been received during the period from 1983 to 2004.  In the absence of further details regarding the unpaid rent receivables, I consider that the 1^st defendant should be required to pay simple interest on the amount of the Shortfall as follows:-

(1)  for the period from 21 February 1983 to 9 October 2005, at half of the Base Rate; and

(2)  for the period from 10 October 2005 to 17 December 2012, at the Base Rate.

CONCLUSION

72.  I shall leave it to the parties to agree on the exact form of the order to give effect to this judgment, with liberty to the parties to apply in the event of disagreement.

73.  I make an order nisi that the plaintiff shall have the costs of the inquiry, to be taxed if not agreed.

74.  Lastly, it remains for me to thank counsel for their helpful assistance rendered to the court.

HCA 2487/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2487 OF 2009

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DECISION
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1. I have before me an application by the 1^st and 3^rd defendants by summons dated 10 February 2015 seeking a stay of execution of my earlier judgment dated 7 January 2015 (“the Judgment”) and the conduct of the inquiry directed under the Judgment pending the determination of their appeal against the Judgment to the Court of Appeal.

2. The basic facts of this case are set out in my reasoned judgment handed down on 7 January 2015 and I shall not repeat them here.

3. The principles governing an application for a stay of execution of a judgment pending appeal are well established.  The applicant is required to demonstrate a “good reason” for a stay of execution. Generally speaking, the existence of merely an arguable appeal cannot by itself amount to a sufficient reason to justify a stay.  It is the minimum requirement before a court would even begin to consider granting a stay.  In other words, if the court is not convinced that there exist arguable grounds of appeal, no stay will be granted however exceptional the circumstances may otherwise be justifying a stay of execution.  On the other hand, the existence of a strong appeal or a strong likelihood of success will usually by itself enable a stay to be granted because this would constitute a good reason for a stay.  In most cases, where the court is faced with simply the existence of an arguable appeal, it becomes necessary for the applicant to provide additional reasons as to why a stay is justified.  Commonly, this is done by demonstrating that without a stay the appeal would be rendered nugatory, for example, because of an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal against a money judgment, or because the failure to grant a stay would have a serious deleterious effect on the applicant.  In considering an application for a stay pending appeal, it would be impractical and even undesirable for the court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of these aspects.  For the above principles, see the judgment of Ma J (as he then was) in Stay Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84.

4. The 1^st and 3^rd defendants’ grounds of appeal are set out in their notice of appeal dated 4 February 2015.  Mr Mok for the 1^st and 3^rd defendants has developed some of the grounds of appeal in Section E of his skeleton submissions dated 9 April 2015, and supplemented them in his oral submissions this afternoon.  Many of the grounds of appeal were raised at the trial, which the 1^st and 3^rd Defendants are of course entitled to re-run in the Court of Appeal.  Mr Mok has also placed some emphasis on the fact that in the reasoned judgment, I did not consider the issue of whether the account of profits ought to end with the date of the repayment of the Loan on 27 October 2003, when the value of the Property had appreciated by 4% only up to that date.  This issue will no doubt be further explored in the Court of Appeal, having regard to the way in which the 1^st and 3^rd defendants’ case was put at the trial.

5. In any event, Mr Chain accepts that the 1^st and 3^rd defendants’ appeal is arguable (ie not frivolous), but he says that it is not strong.  For the present purpose, I am content to proceed on the basis that the 1^st and 3^rd defendants’ appeal is reasonably arguable.  I am unable to accept, however, that they have a strong appeal or a strong likelihood of success in the appeal.

6. The question is whether there is any “good reason” to order a stay of execution pending appeal.

7. The Judgment does not require the 1^st and 3^rd defendants to pay any money or transfer any property to the plaintiff or to the Estate of Tang Pui King, deceased (“the Estate”), at this stage.  It directs an inquiry to be carried out to ascertain the profits and compensation which the 1^st defendant is liable to account or pay to the Estate.  Before such inquiry can be carried out, some further discovery will have to be made, and expert evidence on valuation of the property known as Nos 129-131 Castle Peak Road, Yuen Long, New Territories, Hong Kong (“the Property”) and evidence regarding the rentals and other income (if any) derived from holding the Property as well as expenses incurred in relation to the Property (including costs of repair and maintenance of the Property) will have to be prepared.  However, there is no question of the 1^st and 3^rd defendants’ appeal being rendered nugatory if a stay is not granted.

8. I am told that the appeal has been fixed to be heard by the Court of Appeal on 15 October 2015, some 6 months from today. The evidence mentioned above has not yet been exchanged.  The parties’ estimate of the length of the hearing of the inquiry is 2 days.  Given the state of the court’s diary, it is unlikely that the hearing of the inquiry will take place before 15 October 2015.  Further, I shall be prepared to direct that the inquiry be heard on a date not before 15 December 2015, ie 2 months after the hearing of the appeal, which would minimise the risk of wasted costs being incurred in relation to the actual hearing of the inquiry.

9. I accept that some costs incurred or to be incurred in preparing for the inquiry may be wasted and be irrecoverable by the 1^st and 3^rd defendants should they succeed in the appeal, but the risk of wasted or irrecoverable costs is inherent in our system of litigation and cannot by itself justify a stay of execution pending appeal: see Strix Ltd v Otter Controls Ltd [1995] RPC 675, at 679 per Laddie J; Magic Score Ltd v HSBC, HCA 11077/1994 (24 February 2006), at paragraph 12 per Lam J (as he then was).

10. This having been said, the complexity and costs of the inquiry are factors which the court can and does put in the scales in the court’s balancing exercise as to whether a stay ought to be granted. The inquiry in the present case is, in my view, relatively straight forward. Thus, I am not prepared to attach much weight on this factor, particularly having regard to the direction mentioned above regarding the fixing of the date for the hearing of the inquiry.

11. Mr Mok also relies on the fact that the plaintiff has put in a respondent’s notice by way of cross appeal which, if successful, would have a substantial impact upon the scope of the inquiry. Again, I am content to proceed on the basis that the plaintiff’s cross appeal is reasonably arguable, but I do not consider that, for the purpose of considering whether there ought to be a stay pending appeal, it has any greater significance than the 1^st and 3^rd defendants’ appeal.

12. I have been reminded by Mr Chain that the plaintiff is now 87 years old, and was only able to pursue the present action as a result of information coming to light after previous protracted litigations commenced by Ying Lam and the plaintiff to compel the 1^st defendant to provide an account concerning the administration of the Estate and the Loan respectively.  Any further delay in the conduct of the inquiry would, in my view, be prejudicial to the plaintiff in view of his advanced age.

13. Overall, I do not consider that a good reason has been shown for a stay of execution.

14. For the above reasons, I dismiss the 1^st and 3^rd defendants’ summons dated 10 February 2015 with costs to the plaintiff.

HCA 2487/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2487 OF 2009

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J U D G M E N T

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INTRODUCTION

1. This is the trial of the plaintiff’s action against the 1^st and 3^rd defendants for relief arising out of the 1^st defendant’s alleged breaches of duties as administrator of the estate (“the Estate”) of Tang Pui King alias Tang Yum (or Yam) Wan alias Tang King Cheung, deceased (“the Deceased”).

2. There are three defendants in this action. Wong, Hui & Co used to act for all three defendants.  However, at the commencement of the trial on 3 November 2014, Mr Benjamin Yu SC (acting for the 1^st to 3^rd defendants) produced a psychiatric report prepared by Dr Chan Chung Mau dated 30 October 2014 which indicated that the 2^nd defendant was suffering from significant cognitive impairment compatible with the diagnosis of senile dementia/Alzheimer’s disease.  Dr Chan further expressed the view that the 2^nd defendant was mentally unfit to give instructions or attend court to give evidence or be cross‑examined.

3. In view of the apparent mental incapacity of the 2^nd defendant and the fact that both Mr Benjamin Chain (acting for the plaintiff) and Mr Yu agreed that the trial could proceed in the absence of the 2^nd defendant and were ready to proceed on that basis, I decided to adjourn the plaintiff’s action against the 2^nd defendant and proceed to hear the plaintiff’s action against the 1^st and 3^rd defendants only.  I also made an order that Wong, Hui & Co be discharged from acting for the 2^nd defendant.

4. As can be seen from the amended statement of claim, the plaintiff has advanced two major complaints in this action, namely:

(1) An unauthorised withdrawal of the sum of HK$11,480,000 by the 1^st defendant from a bank account of the Estate on 2 April 2003 (“the Loan”) which the 1^st defendant utilised for the purpose of paying part of the purchase price of a property known as all that piece or parcel of ground registered in the Yuen Long New Territories Land Registry as Yuen Long Town Lot No 319 together with the messuages erections and buildings thereon known as Nos 129‑131, Castle Peak Road (sometimes referred to as the “Main Road” in the papers before me), Yuen Long, New Territories, Hong Kong (“the Property”).

(2) A shortfall (“the Shortfall”) in the amount of HK$3,650,694 in the cash and bank balances of the Estate.

5. At the trial, the parties’ focus was mainly on the complaint regarding the Loan, in particular on what (if any) relief ought to be granted by the court against the 1^st defendant in respect of the Loan.

6. In so far as the Shortfall is concerned, there is no dispute that the 1^st defendant repaid the sum of HK$3,650,694 to the Estate’s bank account at Hang Seng Bank on 17 December 2012, albeit without interest.  I shall deal with the question of what (if any) relief should be granted against the 1^st defendant in relation to this complaint at the end of this judgment.

BACKGROUND FACTS

7. Save in relation to the true nature or characterisation of the Loan which I shall consider later in this judgment, the relevant background facts are largely not in dispute.

(i)  The parties

8. The Deceased died intestate in Hong Kong on 4 July 1978.

9. The 2^nd defendant (Yeung Fook Mui) is the lawful tin‑fong widow of the Deceased.

10. The Deceased had five sons and a daughter, namely:

(1) the plaintiff, the eldest son;

(2) Tang Ying Lam (“Ying Lam”), the second son;

(3) Tang Ying Ip (or Yip), the third son and the 1^st defendant in this action;

(4) Tang Ying Hei (“Ying Hei”), the fourth son;

(5) Tang Ying Sau, deceased (“Ying Sau”), the fifth son, who passed away in or about 1995; and

(6) Tang Yuen Ha, the daughter.

11. The plaintiff and Ying Lam were born of the Deceased and his kit‑fat wife.  The 1^st defendant, Ying Hei and Ying Sau were born of the Deceased and the 2^nd defendant.

12. Letters of Administration of the Estate were granted to the 1^st and 2^nd defendants on 21 February 1983.

13. The plaintiff is one of the beneficiaries of, and entitled to share in, the Estate of the Deceased.

14. The 3^rd defendant is a company incorporated in Hong Kong.  The 1^st defendant is the owner of 9,999 out of the 10,000 issued shares in the 3^rd defendant. The remaining one share in the 3^rd defendant is held by the 1^st defendant’s wife.  It does not appear to be in dispute that the one share is held by the 1^st defendant’s wife as nominee for the 1^st defendant.  Also, the 1^st defendant and his wife are the only directors of the 3^rd defendant, and the 1^st defendant is the company secretary of the 3^rd defendant. These were also the position at all material times.  Accordingly, it can safely be concluded that the 1^st defendant was at all material times and is in control of all the affairs of the 3^rd defendant, which could be regarded as his corporate vehicle.

15. Although the 1^st and 2^nd defendants are co‑administrators of the Estate, at all material times the administration of the Estate was undertaken mainly by the 1^st defendant.  The 2^nd defendant would basically leave it to the 1^st defendant to administer the Estate and would not interfere with his distribution and use of funds belonging to the Estate.

16. The Estate was a sizable one, consisting primarily of numerous lots of land in the New Territories.  As an indication of the size of the Estate, it is mentioned in the 1^st defendant’s witness statement dated 9 January 2013 that between 1985 and 2012, each of the five sons of the Deceased had received over HK$86 million by way of cash distributions from the Estate.

17. From time to time, the Estate would receive compensation monies from the Government upon resumption of lands in the New Territories vested in the Estate, and distribution of the compensation monies would be made by the 1^st defendant to the beneficiaries of the Estate, including the plaintiff.

(ii)  Compensation moneys received in March 2003

18. As stated in two fee notes No 41382 dated 20 March 2003 and No 41391 dated 28 March 2003 rendered by Wong, Hui & Co to the 1^st and 2^nd defendants, Wong, Hui & Co on behalf of the 1^st and 2^nd defendants wrote to the Lands Department on 28 December 2002 to confirm their acceptance of the offers of compensation for the sums of HK$8,728,733.70 and HK$737,261.25 respectively arising from the resumption of various lots of land in the New Territories vested in the Estate.

19. It would appear, therefore, that the 1^st defendant was aware, no later than 28 December 2002, that substantial sums by way compensation for resumption of lands would soon be received by the Estate.  That this was so was accepted by the 1^st defendant in his cross examination by Mr Chain.

20. As a matter of fact, the two sums of HK$8,728,733.70 and HK$737,261.25 were paid into a bank account in the name of the 1^st and 2^nd defendants as administrators of the Estate at HSBC, No 034‑738146‑001 (“the Estate’s HSBC Current Account”), on 19 March 2003 and 28 March 2003 respectively.

21. On 31 March 2003, the sum of HK$9,420,000 was withdrawn from the Estate’s HSBC Current Account and paid into another bank account in the name of the 1^st and 2^nd defendants as administrators of the Estate at HSBC, No 034‑320366‑001 (“the Estate’s HSBC Premier Current Account”).  It is not in dispute that the sum of HK$9,420,000 withdrawn from the Estate’s HSBC Current Account was funded by the aforesaid compensation monies received from the Government.

(iii)  The purchase of the Property

22. On 12 March 2003, the 1^st defendant entered into a written memorandum of agreement for the purchase of the Property at the price of HK$27,300,000, of which HK$2,000,000 by way of initial deposit and part payment and HK$730,000 by way of further deposit had been paid to the vendor on 5 and 7 March 2003 respectively.

23. On 2 April 2003, the sum of HK$11,480,000 was withdrawn from the Estate’s HSBC Premier Current Account and paid into the 1^st defendant’s personal bank account, No 221‑293723‑888, at Hang Seng Bank (“D1’s Hang Seng Account”).

24. On 7 April 2003, the 1^st defendant completed the purchase of the Property, paid the balance of the purchase price in the sum of HK$24,570,000 to the vendor and obtained an assignment of the Property.  It is not in dispute that the payment of HK$24,570,000 was partly funded by the HK$11,480,000 which the 1^st defendant obtained from the Estate.  As stated in paragraph 12 of the 1^st defendant’s first witness statement dated 9 January 2013, “the sum of HK$11.48 million was a bridging loan to myself, withdrawn from the account of the Estate on 2^nd April 2003 to facilitate completion of the purchase of [the Property].”

25. Also on 7 April 2003, the 1^st defendant executed a declaration of trust stating that the Property was in fact purchased by him as trustee on behalf of the 3^rd defendant and the consideration money for the acquisition of the Property was wholly provided by the 3^rd defendant, and declaring that he held and stood possessed of the Property and the rents and profits and the proceeds of sale thereof in trust for the 3^rd defendant.

26. On 8 November 2004, the 1^st defendant executed a vesting deed whereby the 1^st defendant (as trustee) assigned the Property to the 3^rd defendant (as beneficiary).

27. It appears, from a schedule of rental record in respect of the ground floor and cockloft of the Property, that those parts of the Property have been let to a tenant or tenants since no later than 16 April 2003.

28. The 3^rd defendant is currently still the registered owner of the Property.

(iv)  The purchase of No 140

29. On 26 January 2006, the 3^rd defendant entered into a written memorandum of agreement for the purchase of a property known as all that piece or parcel of ground registered in the Land Registry as Lot No 3720 in Demarcation District No 129 together with the messuages erections and buildings thereon known as No 140 Castle Peak Road, Yuen Long, New Territories, Hong Kong (“No 140”) at the price of HK$52,500,000, of which HK$5,250,000 was paid by way of deposit and part payment to the vendor.

30. By a facility letter dated 28 February 2006 from HSBC to the 3^rd defendant, HSBC agreed to grant a straight line loan of HK$15,000,000 and an overdraft facility of HK$15,000,000 to the 3^rd defendant.

31. On 8 March 2006, the 3^rd defendant executed an “all monies” mortgage of the Property in favour of HSBC.

32. By a facility letter dated 9 March 2006 from Hang Seng Bank Limited to Wong, Hui & Co (acting for the 3^rd defendant), Hang Seng Bank Limited agreed to grant an instalment loan of HK$15,000,000 and an overdraft facility of HK$10,000,000 to the 3^rd defendant.

33. On 15 March 2006, the 3^rd defendant completed the purchase of No 140, paid the balance of the purchase price in the sum of HK$47,250,000 to the vendor and obtained an assignment of that property.  As mentioned in paragraph 3 of the 1^st defendant’s second supplemental statement, part of the purchase price, to the extent of HK$15 million, was funded by the aforesaid straight line loan obtained from HSBC and such loan was secured by a mortgage over the Property in favour of HSBC.

34. Also on 15 March 2006, the 3^rd defendant executed an “all monies” mortgage of No 140 in favour of Hang Seng Bank Limited. 

35. The 3^rd defendant is currently still the registered owner of No 140.

(v)  The 2002 Action

36. On 28 June 2002, Ying Lam commenced an action by way of originating summons in HCMP 2517/2002 (“the 2002 Action”) against the 1^st and 2^nd defendants for (inter alia) an up‑to‑date account concerning their administration of the Estate.

37. On 4 October 2002, Deputy High Court Judge Woolley ordered the 1^st and 2^nd defendants to furnish to Ying Lam, within six weeks, all the up‑to‑date particulars and accounts concerning their administration of the Estate showing with full particularity (inter alia) all amounts paid out by the 1^st and 2^nd defendants as administrators of the Estate.

38. Apparently, Ying Lam was not satisfied with the accounts subsequently rendered by the 1^st and 2^nd defendants pursuant to the aforesaid order of Deputy High Court Judge Woolley and issued a summons on 24 May 2003 for further particulars and copies of various documents.

39. In the second affirmation of the 1^st defendant filed on 8 October 2003, the 1^st defendant stated that “[o]ther than the distributions to myself like Ying Lam as a beneficiary, I have not obtained any payment from the Estate or used any funds belonging to the Estate for my own personal purpose or for any purpose other than distributions to beneficiaries and payments to meet the obligations and expenses of the Estate” (paragraph 12).  He further stated that “… I can say once and for all that I have never obtained any benefit or advantage from the Estate other than as a beneficiary like all my other brothers” (paragraph 15) and “I am positive that I have not mixed any funds belonging to the Estate with my own” (paragraph 16).

40. Pausing here, it seems clear that these statements are inconsistent with the fact that the 1^st defendant did use the sum of HK$11,480,000 belonging to the Estate to facilitate his purchase of the Property in April 2003.  The 1^st defendant has given a convoluted explanation for the apparent inconsistencies in paragraphs 27 to 30 of his second supplemental witness statement dated 10 October 2014, which he amplified in his oral evidence.  I am unable to accept that explanation but, as will be seen below, I do not consider that this matter would have any effect on the outcome of this action or the relief that should be granted.

41. Ying Lam’s summons came before Mr Justice Yam on 10 October 2003, who made an order directing the 1^st and 2^nd defendants to inform the other three beneficiaries of the Estate (ie the plaintiff, Ying Hei and the executors named in the last will of Ying Sau) of the existence and status of 2002 Action, including a recital that the court was considering the appointment of a trust corporation for the administration of the Estate in lieu of the existing administrators (ie the 1^st and 2^nd defendants).

42. In his fourth affirmation filed on 30 October 2003, the 1^st defendant disclosed that there was:

“… a sum of HK$11,680,900.00, being return of a short term investment on the principal sum of HK$11,480,000.00 with interest thereon at 3% per annum in the sum of HK$200,900.00 currently held under time deposit …” (paragraph 3)

43. There was no mention of the nature of the so called “investment”, or the fact that the amount of HK$11,480,000.00 was lent to the 1^st defendant, in that affirmation.

44. At the restored hearing of Ying Lam’s summons on 14 November 2003, Mr Justice Yam made an order removing the 1^st and 2^nd defendants as administrators of the Estate and appointing HSBC Trustee (Hong Kong) Limited in their stead.  It was recited in the order that the appointment was made upon the court’s own motion.

45. Also on 14 November 2003, Mr Justice Yam made a separate order requiring the 1^st and 2^nd defendants to carry into effect Deputy High Court Judge Woolley’s aforesaid order by providing to Ying Lam and HSBC Trustee (Hong Kong) Limited various information and documents as set out in a schedule to that order.

46. On 13 October 2004, the Court of Appeal set aside Mr Justice Yam’s order for the removal of the 1^st and 2^nd defendants as administrators of the Estate and the appointment of HSBC Trustee (Hong Kong) Limited in their stead, and reinstated the 1^st and 2^nd defendants as administrators of the Estate, following an earlier interim order of the Court of Appeal to the same effect made on 14 January 2004 pending appeal.

(vi)  The 2007 Action

47. It is not in dispute that neither the 1^st defendant, nor the 2^nd defendant, ever informed the plaintiff of the Loan prior to the making of the Loan, or sought the plaintiff’s consent of the same.

48. The plaintiff first came to learn about the Loan on or about 9 November 2005 when Wong, Hui & Co on behalf of the 1^st and 2^nd defendants sent to John Ho & Tsui, the plaintiff’s former solicitors, a copy of a report prepared by PricewaterhouseCoopers (“PwC”) dated 10 October 2005 (“the Report”), which provided an account of the 1^st and 2^nd defendants’ administration of the Estate for the period from 21 February 1983 to 30 June 2004.

49. In a letter dated 10 October 2005 from PwC to the 1^st and 2^nd defendants included in the Report, it was stated that the Report was prepared upon the instructions of the 1^st and 2^nd defendants, and was for the purpose of assisting the Administrators (ie the 1^st and 2^nd defendants) to report to the beneficiaries on the state of the Estate’s accounts.

50. It was further stated in the Report, at page 23 thereof, as follows:

“During our review, [the 1^st defendant] advised that he made two withdrawals, by way of borrowings, from the Estate’s bank accounts in the amount of HK$4,680,698.70 and HK$11,480,000 in 2002 and 2003 respectively. Details of these withdrawals which appear to have been repaid with interest, are described below.

…

According to a bank statement of HSBC, HK$11.48m was withdrawn from the Estate’s bank account on 2 April 2003. [The 1^st defendant] was not able to recall where the money was transferred to. He advised that the money was borrowed by him to settle a transaction undertaken by him personally.

Based on the bank statements of HSBC for the Estate’s account and [the 1^st defendant’s] personal account, we note that two deposits in the amount of HK$11.48m and HK$200,900 were deposited from [the 1^st defendant’s] personal account to the Estate’s time deposit account on 27 October 2003. We were advised that the HK$200,900 represents interest paid by [the 1^st defendant] for the HK$11.48m borrowed by him.

[The 1^st defendant] advised that apart from the above, there is no other withdrawal of the Estate’s funds which were used for purposes other than that for the Estate.”

51. Pausing here, it may be noted that the 1^st defendant apparently told PwC that he borrowed the sum of HK$11.48 million from the Estate to settle a transaction (ie the purchase of the Property) undertaken by him “personally”, and not as trustee on behalf of the 3^rd defendant as stated in the declaration of trust mentioned above.

52. By a letter dated 15 August 2006, followed by a chaser dated 14 September 2006, from John Ho & Tsui to Wong, Hui & Co, the plaintiff demanded the 1^st defendant to provide detailed explanations of the following matters:

(1)   The power(s) or authority on which the 1^st defendant based to make the borrowing of (inter alia) HK$11.48 million belonging to the Estate to himself.

(2)   An account of the use to which the 1^st defendant had put the sum of HK$11.48 million after receiving the same from the Estate, with full documentary support.

(3)   How the interest in the amount of HK$200,900 was calculated, including the rate of interest and whether it was calculated on simple or compound interest basis.

53. By a letter in reply dated 11 October 2006 from Wong, Hui & Co to John Ho & Tsui, the 1^st and 2^nd defendants stated that the withdrawal of HK$11.48 million was:

“…. a loan lent by [the 1^st and 2^nd defendants] as administrators to [the 1^st defendant] as a bridging loan for a certain transaction. [The 1^st defendant] agreed to and did pay interest thereon at 0.3% per month. Interest earned on savings account at the material times in 2003 was practically nil. According to information obtained from the savings passbook of the Estate held by [the 1^st and 2^nd defendants], a capital fund of over $3,000,000.00 then yielded only a half yearly interest of $192.00 at the end of June 2003.”

54. It was further stated in that letter that the 1^st and 2^nd defendants saw the “loan” as a perfectly safe and sound short term investment for the Estate, and what the 1^st defendant did in essence was to let the Estate earn a far better rate of interest that the bank would otherwise earn from him.

55. By a further letter dated 13 November 2006 from John Ho & Tsui to Wong, Hui & Co, the plaintiff asked the 1^st and 2^nd defendants to provide “full details of the ‘transaction’ for which the ‘bridging loan’ was required” by the 1^st defendant together with all relevant documents relating thereto, and full answers to the questions raised in their earlier letter of 15 August 2006.

56. Apparently, no further answer was provided by the 1^st and 2^nd defendants in relation to the questions raised in John Ho & Tsui’s letter of 13 November 2006.

57. Accordingly, on 2 February 2007, the plaintiff commenced an action against the 1^st and 2^nd defendants by way of originating summons in HCMP 244/2007 (“the 2007 Action”) seeking (inter alia) an account of the Loan and requiring them to provide “full particulars of all uses such sum [ie HK$11,480,000] has been put to and amounts of interest or other income derived therefrom, together with copies of supporting documents including all relevant bank statements, deposit certificates, passbooks and other relevant vouchers or documentation”.

58. In his affirmation filed on 2 April 2007, the 1^st defendant stated, inter alia, that how he put the “bridging loan”, said to be a favour to the Estate, to use could only be relevant if reasonable grounds existed to suggest that he should somehow be liable to account to the Estate for the profit or benefit he derived from it. However, (according to the 1^st defendant) no such grounds existed.  No information was given by the 1^st defendant on the purpose of the “bridging loan”, or how the money was used by him.

59. On 24 April 2008, Mr Justice Poon ordered the 1^st defendant to provide to the plaintiff, within eight weeks, an account of the sum of HK$11,480,000 withdrawn from the bank account of the Estate, specifying with full particulars of all uses such sum had been put to and amounts of interest or other income derived therefrom, together with copies of supporting documents including all relevant bank statements, deposits certificates, passbooks and other relevant vouchers or documentation.

60. In compliance, or purported compliance, with the said order of Mr Justice Poon, the 1^st defendant filed an affirmation on 20 June 2008 stating, inter alia, as follows:

(1)   The bridging loan was made for the purpose of “maintaining a comfortable level of liquid cash position without the need for any additional bank borrowing or breaking the time deposit or realizing other investments in [the 1^st defendant’s] accounts” (paragraph 3).

(2)   The loan was for the period from 2 April 2003 to 27 October 2003 (208 days), and the 1^st defendant paid an interest in the sum of HK$200,900, which was about 3.0709% per annum (paragraph 8).

(3)   The sum of HK$11,480,000 was paid into D1’s Hang Seng Account.  After the said sum was paid into that account, there was a withdrawal of HK$24,570,000 (mistakenly typed as “$245,700,000.00”) which was used for lending to the 3^rd defendant to “enable it to pay part of the balance purchase price for completing its imminent purchase of [the Property]” (paragraph 10).

61. The plaintiff commenced the action herein on 16 December 2009.

THE 1^ST DEFENDANT’S EVIDENCE REGARDING THE LOAN AND ITS REPAYMENT

62. As earlier mentioned, the 1^st defendant was well aware of the fact, back in December 2002, that the Estate was soon to receive substantial compensation monies from the Government arising from the resumption of lands vested in the Estate.  However, when the Estate eventually received the monies in March 2003, the 1^st defendant decided not to distribute them to the beneficiaries because, according to his evidence:

(1)   he had disputes with his brothers (presumably a reference to the plaintiff and/or Ying Lam) and thus did not wish to distribute the monies to them at that time; and/or

(2)   the person who assisted him in keeping accounts in relation to the administration of the Estate, namely, Ken Yick, was, or might have been, on leave at the relevant time and thus the compensation monies received from the Government could not be distributed to the beneficiaries of the Estate at that time.

63. The 1^st defendant, in his cross examination by Mr Chain, also accepted that the reason why the compensation monies were not distributed to the beneficiaries of the Estate was so that they could be lent to him.

64. The 1^st defendant gave a number of reasons for making the Loan from monies belonging to the Estate to himself, namely:

(1)   Although he could raise HK$11,480,000 from other sources, it was “convenient” to borrow that sum of money from the Estate.

(2)   He wanted to maintain a greater degree of liquidity, and his bank accounts would look better if he did not have to borrow the sum of HK$11,480,000 from a bank or banks.

(3)   He believed that he acted in the best interest of the Estate and thought it would be beneficial to the Estate for him to take a short term loan in the amount of HK$11,480,000 from the Estate, in that at that time the funds held by the Estate on time deposits with banks earned on average interest at the rate of about 0.8% per annum only and he thought it would benefit the Estate for him to pay interest to the Estate at the rate of about 3% per annum on the amount of the Loan.

65. I am unable to accept the suggestion that the 1^st defendant took the Loan with a view to giving the Estate the benefit of enhanced interest.  There was no good reason why the compensation monies received by the Estate from the Government in March 2003 should remain on bank deposits earning low interest.  The obvious thing to do was to distribute the monies to the beneficiaries of the Estate, there being no suggestion of any expected or anticipated expenses of the Estate which had to be discharged in the foreseeable future.  It seems to me clear that the 1^st defendant did not distribute the compensation monies to the beneficiaries of the Estate because he had decided to make use of the monies to finance his acquisition of the Property.  In this connection, I reject his evidence referred to in paragraph 62(1) and (2) above.

66. I accept that the 1^st defendant might have been able to raise the sum of HK$11,480,000 from other sources to finance the acquisition of the Property, but he chose not to draw upon those other sources and decided to use the funds of the Estate because, as he said in his evidence, he thought it was “convenient” to do so, and he wished to maintain a degree of liquidity and generally a more healthy financial position.

67. The 1^st defendant said that he had not spoken to his brothers prior to taking the Loan from the Estate, but he had mentioned or talked to the 2^nd defendant about the Loan on three occasions.  The first conversation took place prior to his taking the Loan from the Estate.  According to the 1^st defendant, there was no discussion about the amount, or repayment, of the intended loan or the question of interest on the intended loan.  The second conversation took place after he had taken the Loan from the Estate.  On that occasion, he told the 2^nd defendant that the amount of the loan was roughly about HK$10 million but he did not mention the exact figure.  He also told the 2^nd defendant that he would repay the loan in about six to seven months’ time, but there was no discussion on the question of interest on the loan.  The third conversation took place after he had repaid the Loan to the Estate.  On that occasion, he told the 2^nd defendant that he had made repayment, and had paid interest on the loan at the interest rate of about 3% per annum.

68. The 1^st defendant also said that he told his brother (Ying Hei) and Dr Tang Siu Tong (one of the three executors named in the last will of Ying Sau) about the Loan within about a month after completion of the purchase of the Property, and both of them indicated that they had no objection to the Estate granting the Loan to him.  In passing, it may be noted that the 1^st defendant and Ying Hei are the other two executors named in the last will of Ying Sau.

69. It is not in dispute that on 27 October 2003, the 1^st defendant repaid the sum of HK$11,680,900 to the Estate.  The 1^st defendant gave an explanation of why he made the repayment on 27 October 2003 in paragraphs 34 and 35 of his second supplemental witness statement.  There, the 1^st defendant said that on 24 October 2003, for the purpose of the 2002 Action, arrangements were made with Anthony Ko & Co (solicitors for Ying Lam) to inspect certain documents of the Estate, including the up to date statements and passbooks of the Estate’s bank accounts, at Wong, Hui & Co’s Yuen Long office.  He bought the relevant documents to Wong, Hui & Co’s Mongkok office.  Mr Wong (of Wong, Hui & Co) read the documents and came to notice the withdrawal of the HK$11,480,000 from the Estate’s bank account and asked the 1^st defendant what it was about.  Upon being explained the circumstances of the Loan by the 1^st defendant, Mr Wong advised the 1^st defendant that it would be prudent for him to repay the Loan as soon as possible.  The 1^st defendant followed Mr Wong’s advice and repaid the Loan with interest on the following Monday (27 October 2003).

70. In his oral evidence, the 1^st defendant said that he repaid the Loan on 27 October 2003 not because he had been advised by Mr Wong to do so but because he had received legal advice from some other person that as administrator he should not use the Estate’s money to finance his acquisition of the Property.  The 1^st defendant also said that even before Mr Wong advised him to repay the Loan as soon as possible, he had already intended to make repayment in October 2003.

71. I should add that it is the 1^st defendant’s evidence, which was not challenged by Mr Chain, that he had always intended to repay the Loan to the Estate.  Mr Chain did, however, challenge the 1^st defendant’s evidence regarding the timing of the repayment.  It was put to the 1^st defendant in cross examination that he repaid the Loan together with interest on 27 October 2003 because he was aware that Mr Justice Yam was considering the appointment of a trust corporation as administrator of the Estate in lieu of the 1^st and 2^nd defendants (as recorded in Mr Justice Yam’s order dated 10 October 2003 in the 2002 Action).  This suggestion was denied by the 1^st defendant.

72. For the purpose of the present action, it does not seem to me to matter much whether the 1^st defendant made the repayment on 27 October 2003 because of some legal advice that he had received from Mr Wong or another source or because he thought that the repayment might persuade Mr Justice Yam not to appoint a trust corporation as administrator of the Estate in lieu of the 1^st and 2^nd defendants.  Had it been necessary for me to make a finding on this issue, I would have been inclined to accept the 1^st defendant’s version in his second supplemental witness statement.  By late October, the 1^st defendant must have realised that the Loan would or might soon be discovered by Ying Lam after his solicitors’ inspection of documents including the up to date statements and passbooks of the Estate’s bank accounts which was scheduled to take place on 24 October 2003 (and which eventually took place at Wong, Hui & Co’s Yuen Long office on 28 October 2003).  In those circumstances, it is hardly surprising that Mr Wong would advise the 1^st defendant to repay the Loan with interest as soon as possible and the 1^st defendant would follow Mr Wong’s advice.

73. For the sake of completeness, I should mention that the 2^nd defendant made a short witness statement dated 10 June 2013 and an affirmation on 10 June 2013.  In the 1^st defendant’s hearsay notice dated 11 July 2013, the 1^st defendant gave notice that he intended to rely on the 2^nd defendant’s witness statement as evidence in this action.  In view of her apparent mental incapacity, it is readily understandable why she was not called to give oral evidence at the trial.  However, her version of events as set out in paragraph 6 of her witness statement regarding what the 1^st defendant told her about the Loan at about the end of March 2003 is not entirely consistent with the 1^st defendant’s oral evidence given at the trial.  Taking into account also the fact that the 2^nd defendant’s evidence has not been tested by cross examination, I am not prepared to attach any weight on the 2^nd defendant’s witness statement or affirmation.

THE TRUE NATURE OF THE PAYMENT OF HK$11.48 MILLION

74. Mr Yu argues that the payment should properly be characterised as a loan.  He says that there is no allegation of theft or dishonesty against the 1^st defendant, and that a breach of the “no conflict” rule does not make the payment a “misappropriation”.  Mr Yu also says that Mr Chain put his case only on the basis that the 1^st defendant did not intend to pay interest, but it was never put to the 1^st defendant in cross examination that the payment was not a loan, and thus it is not open to the plaintiff now to suggest that it was not a loan.  Lastly, Mr Yu submits that the 2^nd defendant’s consent to the loan was obtained and in any event she has ratified it, and further the 1^st defendant’s act is binding on the Estate.

75. On the other hand, Mr Chain contends that the evidence shows that the 1^st defendant simply took or helped himself to the money, and the payment could not be a loan because there was no “transaction”.  He says that the 1^st defendant had at most “informed” the 2^nd defendant of the payment, whom he knew would just go along with the proposed use of the money, and nothing was agreed before the 1^st defendant took the money.  Mr Chain argues that the present situation is the clearest case of “misappropriation”, though not theft.

76. What seems to me to be significant is the fact that Mr Chain did not challenge the 1^st defendant’s evidence that he had always intended to repay the money.  In opening his case for the plaintiff, Mr Chain made it clear that he was not saying that the 1^st defendant intended to steal the money in the sense that he was not going to repay it to the Estate.  He maintained nevertheless that it was a case of misappropriation and an abuse of position by the 1^st defendant.

77. As a matter of principle, it is legally possible for a personal representative of the estate of a deceased person to make a contract with himself in his individual capacity or another representative capacity: see Rowley Holmes & Co v Barber [1977] 1 WLR 371. Whether the making of such contract would constitute a breach of fiduciary duties on the part of the personal representative is another matter.

78. In my view, once it is accepted that the 1^st defendant had always intended to repay the money to the Estate, it would be difficult to characterise the payment as anything other than a “loan” as a matter of law. It was plainly not a “gift”, and it is not suggested that it was a “theft” of the money.  Whether it should be described as a “misappropriation” would depend on how one defines that expression.

79. This having been said, there is no doubt that the 1^st defendant’s use of the money belonging to the Estate to finance his acquisition of the Property in the circumstances of the present case amounted to an abuse of his position as administrator of the Estate and a mis‑use of the Estate’s funds in breach of his fiduciaries duties owed to the Estate. What is important is not the label that should be given to this payment, but the legal consequences flowing from it.  This is the matter that I shall next turn to in this judgment.

THE 1^ST DEFENDANT’S LIABILITY TO ACCOUNT FOR PROFITS

80. That equity takes a strict position against a fiduciary making a profit in breach of his fiduciary duty is well established. In Snell’s Equity, 13^th Edn, paragraph 7‑054, it is stated that “[a] fiduciary is bound to account for any profit that he or she has received in breach of fiduciary duty.  The principal’s entitlement to an account of profits which have been made in breach of fiduciary duty is virtually as of right.”

81. At paragraph 7‑055, the learned editors of Snell’s Equity continue as follows:

“‘The obligation [to account] extends to the actual or net profit,’ which can include both revenue and capital profits… The profits for which the fiduciary must account must bear some reasonable relationship to the breach of fiduciary duty. The obligation is to account for profits which have been made in breach of fiduciary duty, not simply to account for profits in the abstract.

Like all equitable remedies, the account of profits is discretionary… The governing principles are that the fiduciary must account for all of the profit which he made in breach of fiduciary duty, but this accounting must not be allowed to operate so as to unjustly enrich the claimant…

A fiduciary does not automatically avoid the obligation to account entirely for a profit made in breach of fiduciary duty by arranging for the profit to be earned through a separate corporate entity.  The corporate veil will be pierced where a fiduciary has used a corporate vehicle as a device or façade to conceal the true facts, and where the company is a mere cloak, or alter ego, for the fiduciary, but not merely because the fiduciary has a substantial interest in a company.”

82. The strictness of the equitable principle regarding the liability of a fiduciary to account to the beneficiary for a profit obtained in breach of fiduciary duty was clearly stated by Lord Russell of Killowen in Regal (Hastings) Ltd v Gulliver (Note) [1967] 2 AC 134 at 144‑145 as follows:

“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or on such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profits for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefitted by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”

83. The same emphasis on the strictness of this equitable principle was made by Ma J (as he then was) in Kao Lee & Yip v Koo Hoi Yan and Others [2003] 3 HKLRD 296 at paragraphs 134 to 136. The following principles also emerge from that judgment of Ma J:

(1)   The essence of equitable relief is that it is primarily restorative and restitutionary rather than compensatory (paragraph 131).

(2)   A fiduciary is liable to account for a profit or benefit if it was obtained (i) in circumstances where there was a conflict, or possible conflict of interest and duty, or (ii) by reason of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position (quoting the statement of general principle by Mason J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 107) (paragraph 132).

(3)   In order to be able to claim an account of profits, there must be shown a causal link between the breach of fiduciary duty and the profits made (paragraphs 133 and 142).

(4)   It is irrelevant that the profit made by the fiduciary was one that the beneficiary could not have made anyway or that the profit was not made at the expense of the beneficiary.  Gains made by a defaulting fiduciary are to be disgorged irrespective of whether the beneficiary had suffered any financially measurable loss; in short, the remedy of an account of profits does not have to bear any resemblance (and often does not) to the disadvantage suffered by the beneficiary (paragraph 134).

(5)   The liability to account does not depend on the existence of fraud, absence of bona fides (the fiduciary may even have intended to act for the benefit of the beneficiary) and in the same way that it is unnecessary to demonstrate loss to the beneficiary, the fact that the beneficiary may also have profited is not relevant either (paragraph 135).

(6)   Where a fiduciary has obtained an unauthorised profit for himself, equity will insist on treating him as having obtained it for his beneficiary (paragraph 137).

(7)   The object in ordering an account of profits is to ascertain as accurately as possible the true measure of the profit or gain made by the defaulting fiduciary as a consequence of his breach of fiduciary duty (paragraph 141).

(8)   It may not be possible to adopt an approach that borders on any mathematical exactness and the court may have to work on “a reasonable approximation”.  An important guide for the court here is “flexibility” (paragraph 143).

(9)   In taking an account of profits, in most cases it will be right to make allowances for expenses, overheads and financial contribution (sometimes even a reasonable salary for the wrongdoer) so as to reflect the “cost” of the profit.  This is consistent with the overall object of the remedy of an account of profits, namely, to give to the beneficiary the true extent of the profits made by the fiduciary, not to punish him (paragraph 143(3)).

(10)  There is a need to focus on causation and remoteness when examining the link between the breach of duty and the gain.  It is in considering the terms of the order for an account of profits that the Court will ensure that the fiduciary is not punished and that his liability is “not transformed into a vehicle for the unjust enrichment of the plaintiff” (paragraph 144).

(11)  It makes no difference to the ordering of an account that the wrongdoer has transferred the benefit of the business opportunity to another vehicle or to a partnership, in which he has an interest.  In those circumstances, the fiduciary in breach will still be liable for the whole of the profits even though within the company or the partnership, he may only share in a part of the profits (paragraph 145).

84. When considering the above principles, one must of course bear in mind that some of them were stated in the context of a claim for diversion of business opportunity.  Nevertheless, subject to such modifications as may be necessary having regard to the relevant context, the above principles seem to me to be of general application when considering any claim against a fiduciary for an account of profits that he or she has obtained in breach of fiduciary duty. 

85. In the present case, it seems to me clear that the 1^st defendant acted in circumstances where there was a conflict, or possible conflict of interest and duty, and furthermore made use of an opportunity available to him only by reason of his position as administrator of the Estate, when he obtained the Loan from the Estate and used it to finance his acquisition of the Property.  His liability to account for the profit that he has made is not negated by the following matters or any combination of the following matters:

(1)   That he could have financed the acquisition of the Property from other sources (which he chose not to draw upon).  

(2)   That the interest which the Estate could have earned, had the funds remained on bank deposits, would have been less, or even much less, than what he eventually paid to the Estate for the short term loan. 

(3)   That the Property was acquired by the 1^st defendant as trustee on behalf of the 3^rd defendant (I should mention that on the evidence before the court it is not clear as to when it was that the 1^st defendant decided to assume the role of a “trustee” in the acquisition of the Property).  

(4)   That the 2^nd defendant and two other beneficiaries gave previous or subsequent consent to the Estate making the Loan to the 1^st defendant.  

(5)   That the opportunity to acquire the Property did not come to the 1^st defendant by reason of his position as administrator of the Estate.

86. Mr Yu submits that, when considering the question of an account of profits, it is in every case a question of fact as to what is the profit that has been derived from a breach of trust.  In principle, this must be correct.

87. In paragraphs 29 to 31 of his closing submissions, Mr Yu says that the 1^st defendant’s reasons for purchasing the Property (namely, that he felt he was able to shoulder the investment at the time, he considered the Property to be in a prime area, and the neighbouring properties were also managed by him) had nothing to do with the Estate or the possibility of obtaining a loan from the Estate, and it was not the case that he came by the opportunity to purchase the Property because of his position as trustee.

88. Mr Yu goes on to submit, in paragraph 34 of his closing submissions, that on the facts of the present case, it was the benefit of the Loan, not the purchase of the Property, which represented the profit made by the 1^st defendant as a result of his breach of fiduciary duty as administrator of the Estate.  I am unable to accept this submission.  Granted that the opportunity to acquire the Property did not come to the 1^st defendant by reason of his position as administrator of the Estate and was not the result of any breach of fiduciary duty on his part, it remains the fact that the 1^st defendant made use of funds belonging to the Estate, in clear breach of fiduciary duty owed by him to the Estate, to finance the acquisition of the Property (whether in his own name or on behalf of his corporate vehicle, ie the 3^rd defendant). There was a direct causal link between the profit obtained by the 1^st or 3^rd defendants, namely, the Property and benefits derived from holding the Property, and the breach of fiduciary duty, namely, the mis‑use of funds belonging to the Estate, which was an opportunity available to the 1^st defendant only because of his position as administrator of the Estate.

89. In Scott v Scott and Others (1963) 109 CLR 649, a trustee of a deceased estate in breach of trust applied trust moneys together with his own in the purchase of a property in which he lived till his death.  Shortly prior to his death he repaid to the estate the amount of trust moneys used by him in its purchase.  After its purchase the property had increased substantially in value.  One of the issues which arose for decision was whether the estate was entitled to share in the increase in value of the property in the same proportion to the total increase as the amount of trust moneys employed in the purchase bore to the total purchase price.  The High Court of Australia (McTiernan, Taylor and Owen JJ) held that the estate was so entitled.  The following observations of the High Court of Australia at 658‑663 are relevant to the present case:

“But if all that the remainderman were entitled to was repayment to the estate of the amount misapplied then the effect of the remedy that would have been available against W. H. Scott in his lifetime would have been merely to confirm the misapplication of that sum and to condone the breach of trust. This would mean, in effect, that the trustee was, in 1942, at liberty to use trust moneys in conjunction with moneys of his own in purchasing the property subject only to a liability to account for the trust moneys so used and to keep for himself the whole of the profit made upon any resale of the property. The proposition has only to be stated not only to realize its injustice but also to show that it is completely inconsistent with the proposition that has been consistently stated on so many occasions over the last two centuries … (658)

There is, of course, abundant authority for the proposition that if trust moneys have been exclusively used in the purchase of property the beneficiary may elect to take the property itself. There is also authority for the proposition that if trust funds from two different estates are exclusively used by a common trustee in the purchase of land in his name which has increased in value each estate will be held entitled to a proportionate part of the increase: The Lord Provost etc. of Edinburgh v Lord Advocate. In such a case it would be unthinkable that each estate should be entitled merely to a charge for the amount misapplied with, perhaps, some allowance for interest, and the trustee left with a residual profit. Why, then, should a trustee who has mixed moneys of his own with trust moneys for the purpose of purchasing lands which have greatly increased in value be held entitled, upon repayment of the trust moneys misapplied, to retain the whole of any profit which has resulted, at least in part, from the misuse of the trust money?... (660)

No doubt it is true to say that in this case the estate was entitled to assert a lien upon the property purchased with the mixed fund to secure the amount misapplied. But it is erroneous to say that in the circumstances of this case this was the full measure of the relief to which the estate was entitled… In its final analysis the appellant’s argument on this branch of the case seems to rest upon the assertion that it cannot be said that there was any liability to account for any part of the profit which accrued to the trustee or, ultimately, to his estate, unless it can be established that the estate of the testatrix became entitled to a beneficial interest in the property which W. H. Scott purchased. This, it was said, could not upon the authorities be established. Upon this latter proposition we will make some observations presently. But for the moment we are content to assume that this could not be established for the basic contention finds no support in the innumerable and varied cased in which trustees have been held liable to account for profits arising from the misapplication of trust moneys… (661‑662)

Clearly enough the estate was entitled as against W. H. Scott to seek an order for sale to enforce its lien and upon any such sale the profit would have been realised… he could not be allowed to escape his liability to account merely by repayment of the amount of trust moneys misapplied.  Accordingly, we take the view that repayment of the sum of £1,014 in 1959 did not operate to defeat the beneficiaries’ right to a sale; this, we think, could have been defeated only by an accounting for profits as on a notional sale. (662‑663)”

90. In all, I consider that the profit that the 1^st defendant is liable to account to the Estate should not be limited to the “benefit of the loan” as contended by Mr Yu, but should extend to a proportionate share of the increase in value of the Property acquired with the assistance of the Loan and the benefits derived from holding the Property.

91. I would direct an inquiry of the profit that the 1^st defendant is liable to account to the Estate.  On the facts of the present case, such profit should be ascertained by reference to:

(1)   The increase in the value of the Property, ie the difference between the open market value of the Property as at the date of the inquiry and the purchase price (HK$25,700,000)[1].

(2)   The rentals and other income (if any) derived from holding the Property between the date of acquisition (7 April 2003) and the date of the inquiry.

92. Credit should, however, be given to the 1^st defendant for:

(1)   stamp duty (HK$1,023,750) and solicitors’ costs and disbursement (HK$89,300) incurred in the acquisition of the Property;

(2)   the amount of HK$209,000, being interest paid to the Estate on 27 October 2003;

(3)   all government rents and rates if paid by the 1^st or the 3^rd defendants in respect of the Property between the date of acquisition and the date of the inquiry; and

(4)   all proper costs of repair and maintenance of the Property incurred by the 1^st or 3^rd defendants during the period from the date of acquisition to the date of the inquiry.

93. The could be legitimate arguments as to whether interest on some of the amounts referred to in paragraphs 91 and 92 above should be provided for, and if so what would be the appropriate period(s) for which such interest should run, the appropriate interest rate(s) that should be applied, and whether interest should be calculated on simple or compound basis.  All such questions are to be dealt with in the inquiry.

94. The total acquisition costs of the Property, including stamp duty and solicitors’ costs and disbursement, came to HK$28,413,050.  Accordingly, the proportionate share of the profit that the 1^st defendant should account to the Estate should be 11,480,000/28,413,050 x 100% (= 40.40%).

TRACING, CONSTRUCTIVE TRUST AND EQUITABLE LIEN

95. At the trial, there was much debate on whether the Estate is entitled to “trace” the sum of HK$11,480,000 which the 1^st defendant had used to pay part of the purchase price of the Property into a proportionate share of the Property.

96. To answer this question, it is, in my view, important to understand the true legal nature or meaning of “tracing”.  In Foskett v McKeown [2001] 1 AC 102 at 109D, Lord Browne‑Wilkinson said that “it is a process whereby assets are identified”.  In the same case, Lord Millet stated at 128C as follows:

“Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset.”

97. It will be appreciated from the above statements of principle that for a claimant to be able to trace his original asset into the traceable proceeds thereof or substituted asset, he must first show his ownership of, or a proprietary interest in, the original asset.

98. In the present case, the credit balance of HK$11,480,000 in the Estate’s HSBC Premier Current Account prior to its withdrawal and payment into D1’s Hang Seng Account on 2 April 2003 no doubt represented an asset (ie a chose in action) owned by the Estate. However, as earlier mentioned, I consider the transaction represented by the withdrawal and payment to be a “loan” by the Estate to the 1^st defendant. It follows from that characterisation of the transaction that the property in the money passed to the 1^st defendant: see Ciro Citterio Menswear plc v Thakrar and Others [2002] 1 WLR 2217, paragraph 33 per Deputy High Court Judge Anthony Mann QC.  The consequence is, in my view, that there is no asset of the Estate which can be traced into the Property.

99. There are, however, two other possible routes by which the Estate may be able to claim an interest in the Property.  First, as can be seen from the judgment of the High Court of Australia in Scott v Scott and Others mentioned above, where a trustee has misapplied trust moneys and mixed them with his own to purchase a property which has increased in value, the beneficiary may be granted an equitable lien upon the property to secure his claim against the trustee for an account of profits.  I see no reason why, on the facts of this case, the Estate should not be entitled to an equitable lien upon the Property to secure the claim against the 1^st defendant for an account of profits.  However, Mr Chain did not, either in his opening or closing submissions, seek any such remedy.  I shall not therefore consider the question of equitable lien any further in this judgment.

100. Second, as a matter of principle, the court may impose a constructive trust on the property which the trustee has acquired through the misapplication of trust moneys or on the benefit improperly obtained by a trustee in breach of fiduciary duty.  See:

(1)   Kao Lee & Yip v Koo Hoi Yan and Others [2003] 3 HKLRD 296, paragraph 137, per Ma J:

“Conceptually, where a fiduciary has obtained an unauthorised profit for himself, equity will insist on treating him as having obtained it for his beneficiary”.

(2)   Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, paragraph 83, per Ribeiro PJ:

“The foregoing discussion involves loss caused to the trust estate. The breach may of course result in no loss to the trust estate but in the fiduciary making a profit. The present case has not been conducted on that basis and it suffices to note that equity will not allow such a fiduciary to retain such profit but will require him to account for it, imposing a constructive trust.”

(3)   FHR European Ventures LLP and Others v Cedar Capital Partners LLC [2014] 3 WLR 535, paragraph 7 per Lord Neuberger of Abbotsbury PSC (delivering the judgment of the Supreme Court):

“… at least in some cases where an agent acquires a benefit which came to his notice as a result of his fiduciary position, the equitable rule (‘the rule’) is that he is to be treated as having acquired the benefit on behalf of the principal, so that it is beneficially owned by the principal. In such cases, the principal has a proprietary remedy in addition to his personal remedy against the agent, and the principal can elect between the two remedies.”

It may be noted that the specific question which the Supreme Court had to decide was whether the rule applied where the benefit was a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal.  It was held that the rule applied to that situation.  Importantly for the present purpose, this judgment shows that a constructive trust may be imposed even though the benefit (i) does not flow from an asset which was (a) beneficially owned by the principal, or (b) intended for the principal, or (ii) was not derived from an activity of the agent which, if he chose to undertake it, he was under an equitable duty to undertake for the principal.

(4)   Lewin on Trusts, 18^th Edn, paragraph 41‑108, in the context of a discussion where tracing is not or may not be permissible because trust money has gone into an overdraft bank account:

“But if tracing is not permissible, in a case where the purchase is made by a trustee, the profit rule prima facie should apply because the trustee has been enabled to make the acquisition by his use of trust money. Therefore the beneficiaries can claim that the asset acquired is held on a constructive trust for them.”

101. These having been said, there is, on the facts of the present case, a difficulty in granting in favour of the Estate a constructive trust on a proportionate share of the Property.  It will be recalled that the 1^st defendant in fact repaid the Loan (with interest) to the Estate on 27 October 2003.  It will obviously not be fair to the 1^st and/or 3^rd defendants to impose a constructive trust unless the Estate reimburses the 1^st defendant for a proportionate part of the purchase price (ie HK$11,480,000).  There is, however, no evidence that the Estate has the means to pay the sum of HK$11,480,000 to the 1^st defendant, and the plaintiff has not offered to pay that sum on behalf of the Estate.  There are other beneficiaries of the Estate who are not before the court, and they may not be willing or able to contribute their appropriate shares to enable the Estate to make payment to the 1^st defendant.  Also, they may have legitimate reasons to think that the remedy of an account of profits against the 1^st defendant would be sufficient in so far as the Estate is concerned.

102. Further, it seems to me clear the Estate cannot have both a constructive trust on a proportionate share of the Property and an account of profits in so far as such profits relate to the increase in value of the Property.

103. In all the circumstances, I do not consider that I ought to find that the Estate is entitled to a constructive trust on a proportionate share of the Property.

NO 140

104. The plaintiff does not claim that the Estate is entitled to any proprietary interest in No 140, but claims that the Estate is entitled, as against the 1^st defendant, to an account of the profits obtained from the use of the Property as security for the straight line loan of HK$15,000,000 and the overdraft facility of HK$15,000,000 granted by HSBC to the 3^rd defendant, including but not limited to a proportionate share in the profits and income derived from the 3^rd defendant’s acquisition of No 140 which was partially financed by the straight line loan of HK$15,000,000.

105. Even if one proceeds on the basis that the 1^st defendant acted in breach of fiduciary duty by using the Property as security for the banking facilities granted by HSBC and is, in principle, liable to account to the Estate for any profit which he has obtained from the use of such banking facilities, the following considerations seem to me to be significant:

(1)   The 1^st defendant did not, as a matter of fact, use funds belonging to the Estate to finance the acquisition of No 140 by the 3^rd defendant.  No part of the purchase price for No 140 can be said to represent money belonging to the Estate.

(2)   While the 1^st defendant has had the benefit of the availability of banking facilities granted by HSBC to the 3^rd defendant upon the security of the Property, the profits and income which the 3^rd defendant has derived from holding No 140 seems to me to be too “remote” and should not be treated as causally “linked” to the relevant breach of fiduciary duty: see Kao Lee & Yip v Koo Hoi Yan and Others [2003] 3 HKLRD 296, paragraphs 133 and 144.

(3)   The 1^st defendant has given evidence, which I accept, that at the time of the purchase of No 140, he was fully capable of financing the 3^rd defendant’s purchase of that property from other sources.  In particular, he had other real properties which were free from mortgage which he could have offered as security to HSBC for the banking facilities.  There is no suggestion that the interest rate which might be charged by HSBC would be higher had the 1^st defendant used those other properties instead of the Property as security for the banking facilities.

(4)   No evidence has been adduced regarding the use of the overdraft facilities granted by HSBC to the 3^rd defendant.

(5)   The 3^rd defendant remains primarily liable to HSBC for repayment of the banking facilities.  There is no suggestion that the 3^rd defendant is not able, or does not intend, to repay the banking facilities, or that any cause has arisen for HSBC to sell or foreclose the Property to discharge the 3^rd defendant’s liability in respect of the banking facilities.  There is also no suggestion that the Estate has suffered any loss as a result of the mortgage of the Property. In any event, the plaintiff is not making any claim for equable compensation, but is seeking an account of profits on behalf of the Estate against the 1^st defendant.

106. I accept that the 1^st defendant may in fact have obtained some profit or benefit from being able to use the Property as security for the banking facilities to the total extent of HK$30,000,000 granted by HSBC to the 3^rd defendant.  The plaintiff’s difficultly, as I see it, is that he has failed to adduce any evidence of such profit, nor has he put forward any reasonable basis for the quantification of such profit.  It does not seem to me right for the court to direct a general inquiry on the profit which the 1^st defendant may possibly have obtained where the plaintiff has failed to lay a sufficient foundation for the inquiry.  I therefore decline to make the order sought by the plaintiff against the 1^st defendant for an account to the Estate of the profits and income which the 1^st defendant may have obtained from mortgaging the Property to HSBC as security for banking facilities to the total extent of HK$30,000,000 granted by HSBC to the 3^rd defendant.

THE SHORTFALL

107. There is no dispute that there was a shortfall in the sum of HK$3,650,694 in the cash and bank balances of the Estate.

108. At page 24 of the Report, the following was stated:

“… we have attempted to perform a reconciliation of cash and bank balances for the Relevant Period [21 February 1983 to 30 June 2004] based on the Statement of Receipts and Payments and the known cash balances.

The reconciliation indicates there is a short‑fall of HK$3,650,694.

If bank interest income was recorded and reflected in the Statement of Receipts and Payments, the short‑fall would be even greater.

The Administrators are unable to provide specific reasons for the short‑fall but advised that it could be related to rental income recorded in the Statement of Receipts and Payments but not received. As further explained in later section of this report, rental income is recorded in the Statement of Receipts and Payments based on the ‘expected’ rental income up to 30 June 2004 according to lease agreements and rental booklets. However, there is no cash book maintained to keep track of actual rentals received. As such, the Administrators are unable to quantify the rentals not received, if any, over the years.

Due to the limited information available to us, we are not in a position to comment whether the estimated short‑fall in cash and bank balances are due to the reasons given by the Administrators or other reasons.”

109. A similar explanation regarding the Shortfall was given by the 1^st defendant in his evidence at the trial. In paragraph 10 of his first witness statement, the 1^st defendant stated that he had no doubt that the Shortfall represented mainly cumulative bad debts arising from rent receivables but unpaid for the period from 1983‑2004 covering different plots of land of the Estate.  In his oral evidence, the 1^st defendant added that some tenants paid rents by direct deposit into the Estate’s bank accounts.  However, if any tenant failed or neglected to make payment in any month or for any period, this might gone unnoticed by the 1^st defendant. This is not surprising, having regard to the fact, as mentioned in the Report, that there was no cash book maintained to keep track of actual rentals received.

110. In his opening submissions for the 1^st and 3^rd defendants, Mr Yu stated that the 1^st and 2^nd defendants acknowledged that they were unable to produce a proper account for the Shortfall, and explained that it had resulted from the accumulation of bad debts arising from rent receivables but unpaid from 1983 to 2004 in respect of lands owned by the Estate.

111. As administrator of the Estate, the 1^st defendant was under a duty to keep proper accounts of the income received and expenses incurred by the Estate.  Had proper accounts been kept, the 1^st defendant ought to be in a position to keep track of any non‑payment or under‑payment of rents by tenants and, if necessary, take action to seek to recover the outstanding rents.

112. In these circumstances, it seems to me clear that the 1^st defendant failed to discharge his duty to keep proper accounts and is liable to pay compensation for any loss suffered by the Estate arising out of the Shortfall.  Indeed, the 1^st defendant paid back the sum of HK$3,650,694, being the full amount of the Shortfall, to the Estate’s Hang Seng Bank account on 17 December 2012.  This is, I believe, an implicit recognition by the 1^st defendant of his liability to pay compensation to the Estate.

113. The outstanding issue is whether the 1^st defendant ought to pay interest on the amount of the Shortfall to the Estate.  In paragraph 16 of the Re‑Amended Defence, the 1^st and 2^nd defendants admit that “they are liable to compensate the Estate and/or the Beneficiaries to the extent of such part or parts of the Shortfall as they may be unable to account for with interest at such rate as the Estate may earn on bank deposits from time to time”.  Mr Chain argues that the 1^st defendant ought to pay compound interest on the amount of the Shortfall to the Estate.

114. I consider that, by way of compensation to the Estate, the 1^st defendant ought to pay interest, and I reserve the question of the interest rate, the interest period and whether interest ought to be calculated on simple or compound basis to be dealt with at the same time as the inquiry mentioned in paragraphs 91 to 93 above.

CONCLUSION

115. I find in favour of the plaintiff to the extent mentioned in the preceding paragraphs, and shall:

(1)   Direct an inquiry on the profits which the 1^st defendant is liable to account to the Estate derived from the 1^st and/or 3^rd defendants’ acquisition and holding of the Property, and order payment of the amount found due upon the inquiry.  

(2)   Order the 1^st defendant to compensate the Estate by paying interest on the Shortfall, the amount of which shall be determined at the same time as the inquiry mentioned above.

116. I shall leave it to the parties to agree on the exact form of the order to give effect to this judgment, with liberty to the parties to apply in the event of disagreement.  I also give liberty to the plaintiff to apply for further directions regarding the conduct of the inquiry mentioned above.

117. I make an order nisi that the plaintiff shall have the cost of this action to be taxed if not agreed.

118. Lastly, it remains for me to thank counsel for their helpful assistance rendered to the court.

HCA 2487/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2487 OF 2009

____________________

____________________

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R U L I N G

_____________

1.  At this late stage of the proceedings my primary concern is to ensure that the proposed amendments to the amended reply would not cause substantial prejudice to the defendants without being too technical as to whether certain allegations should be in the reply as opposed to in the statement of claim.

2.  Insofar as paragraph 8A of the re-amended reply is concerned, it raises no new factual issue and is a response to paragraph 8A.1 of the re-amended defence and therefore should be permitted.

3.  Insofar as paragraph 6A(d) of the re‑amended reply is concerned, it is not a response to paragraphs 8.3A of the re-amended defence.  Whether the plaintiff will be entitled to cross-examine the defendants on the withdrawal or transfer of HK$2.365 million-odd in June 2002, referred to in paragraph 6A(d) of the re-amended reply, is a matter which will have to be considered in the context of the cross-examination, if any, at the time.  That is a matter which I am not going to rule at this stage.

4.  Paragraph 6B(i) of the re-amended reply can be regarded as a proper response to paragraphs 8A.4 and 9.2 of the re-amended defence.  While some of the information in paragraph 9.2 may have been disclosed previously in evidence, as a matter of pleadings they are new allegations.  I consider that the plaintiff is entitled to raise the point in paragraph 6B(i) of the proposed re-amended reply.

5.  Lastly, the plaintiff is entitled to raise, and has in fact raised, the allegation in paragraph 6C of the re-amended reply, but the two distributions referred to in paragraph 6D are new allegations.  They have no direct bearing on the use of the HK$11 million as a loan or alleged loan to the 1st defendant.  Hence I will allow paragraph 6C, but not the words in square brackets, and I will not allow paragraph 6D.

(Discussion between court and counsel)

6.  I shall grant leave to the 1st to 3rd defendants to file and serve the rejoinder on or before 31 October 2014. 

(Discussion between court and counsel)

7.  I make an order that the costs be in the cause.

Mr Benjamin Chain, instructed by Pansy Leung Tang & Chua, for the plaintiff

Ms Janet Ho, instructed by Wong, Hui & Co, for the 1st to 3rd defendants

HCA 2487/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2487 OF 2009

____________

________________________

________________________

1.  I have before me an application by the plaintiff for leave (i) to amend the Statement of Claim, (ii) to re-amend the Reply, and (iii) to file a short witness statement in support of the proposed amendments.

2.  I have also before me an application by the defendants for leave to re-amend the Defence.  Mr Chain for the plaintiff has indicated that his client has no objection to the amendments sought by the defendants.

3.  In relation to the proposed amendments of the Statement of Claim and re-amendments of the Reply, Ms Ho has raised objections to various of those proposed amendments and I shall deal with them briefly, in view of the fact that the trial of this action has been fixed to commence on 3 November 2014, and if I shall allow the proposed amendments or some of them further steps have to be taken by the parties prior to the commencement of the trial.

4.  I shall deal with the objections in groups in the same order as they appear in Ms Ho’s submissions.  I bear in mind Ms Ho’s general complaints about the lateness of the proposed amendments and the unfairness to the defendants of having to deal with new allegations at this late stage.  I shall consider these complaints at the end of this ruling.

5.  In respect of paragraph 15(aa) of the draft Amended Statement of Claim, it raises the point that the 10% deposit of HK$2.73 million was less than the amount of the Shortfall in the sum of HK$3,650,694.  Ms Ho says that this plea is not a proper one because there is no proper allegation raised, and that the proposed amendment is in any event unnecessary.  The fact alleged here is indisputable.  The only issue is the relevance of the plea.  As I understand it, by raising this plea, the plaintiff will invite the court to draw an inference that the Shortfall, or part of it, was used to pay for the 10% deposit.  Whether this inference can properly be drawn is not a matter to be determined today.  The purpose of the plea is, it seems to me, clear, and in any event has been made clear by Mr Chain.  I do not see that the proposed amendment is objectionable in principle.

6.  In respect of paragraphs 15A to 15D of the draft Amended Statement of Claim, they relate to the Mortgage of the Property executed on 8 March 2006, and how the money raised from the Mortgage was used.  Ms Ho’s objection is also that the proposed amendments do not raise any proper allegation. Again, as I understand it, the plaintiff will invite the court to draw the inference that the money raised from the Mortgage was used to fund the purchase of No 140, and the plaintiff relies (amongst other things) on the proximity in time between the date of the Mortgage and the date of the purchase of No 140.  As in relation to paragraph 15(aa), I consider the amendments to be unobjectionable in principle.

7.  In respect of paragraphs 15E to 15R of the draft Amended Statement of Claim, they relate to the fund flow in respect of the so called “Unauthorized Withdrawal” of HK$11.48 million.  The proposed amendments are introduced by the plaintiff to show that there was no genuine loan from the Estate to the 1^st defendant and the defendants allowed the 1^st defendant to treat the moneys belonging to the Estate as his own and to use it as he wishes.  Ms Ho’s objection is mainly about the lateness of the proposed amendments and the unfairness to the defendants of having to deal with new allegations at this late stage.

8.  In respect of the extent of the plaintiff’s claim in relation to the Property, originally the plaintiff claims that it is entitled to 11,480,000/27,300,000^th parts or shares of or in the Property.  In various paragraphs of the draft Amended Statement of Claim, the plaintiff now claims, by way of alternative, to be entitled to “such other percentage(s) as this Honourable Court shall determine”.  The precise extent of the plaintiff’s claim is a matter for argument or submission, depending on the court’s finding of the primary facts.  It is not necessary for the plaintiff to set out the precise arguments in the pleadings in support of the claimed extent, provided that all the materials facts are set out.  I consider the proposed amendments to be unobjectionable in principle.

9.  In respect of paragraphs 4(d) and (e) of the draft Re-Amended Reply, they are raised to counter the defendants’ allegation that the alleged Loan had received the retrospective consent of some of the beneficiaries.  Apart from the lateness of the proposed amendments, there does not seem to me to be any valid objection in principle to the proposed amendments.

10.  In respect of paragraphs 7A to 7J of the draft Re-Amended Reply, the crux of Ms Ho’s objection is that they refer to various new transactions completely unrelated to the two heads of complaints in the Statement of Claim, namely, the Shortfall and the Unauthorized Withdrawal.  Mr Chain says that those transactions are relevant to the issues of whether the defendants were acting in good faith or in the best interests of the Estate, and whether there was any good reason for the defendants to hold any surplus or idle funds in the Estate.  I consider that these other transactions are not directly relevant to the claims, or at best their relevance are so remote, that it would not be justifiable for them to be raised, particularly at this late stage when allowing them would pose a serious risk of the defendants not being given adequate time to respond to them thereby jeopardizing the trial dates.

11.  On the other hand, in respect of the rest of the proposed amendments, they are directly connected with the principal heads of complaints in the Statement of Claim which the defendants will have to answer in any event at the trial.  I consider that the defendants will still have sufficient time to deal with them prior to the commencement of the trial.  Ms Ho has indicated to the court that the defendants will need six weeks to deal with them, including the filing of amended pleadings and new or supplemental statements.  That would still allow the trial to commence on 3 November 2014, albeit that the time frame is undoubtedly tight.

12.  I also have to bear in mind that, under Order 1A, rule 2(2) of the Rules of the High Court, in giving effect to the underlying objectives of the rules, the court shall always recognize that the primary aim in exercising the powers of the court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.

13.  In all the circumstances, I shall grant leave to the plaintiff to amend the Statement of Claim as per the draft attached to the summons, save that paragraphs 15B, 15J and 15O shall be further amended as indicated by Mr Chain in his submissions.  I shall also grant leave to the plaintiff to re-amend the Reply as per the draft in the pre-trial review bundle, save and except paragraphs 7E to 7J, the reference to HK$4,667,535.60 on the second line of paragraph 7K and in sub‑paragraph (g) of that paragraph, and sub‑paragraphs (h) and (i) of paragraph 7K.

14.  I also grant leave to the plaintiff to file his 2^nd supplemental witness statement, and the defendants to re-amend the Defence.

15.  I shall hear the parties on the question of costs and the precise form of the order to be made.

Mr Benjamin Chain, instructed by Pansy Leung Tang & Chua, for the plaintiff

Ms Janet Ho, instructed by Wong, Hui & Co, for the defendants