Chu Wai Tung v. Wong Ka Sek and Another

HCB 4839/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4839 OF 2016

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Re: CHU WAI TUNG, a bankrupt

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D E C I S I O N

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Introduction

1.On 9 March 2017, the Bankrupt filed a summons against the joint and several trustees of the property of the Bankrupt (“TiB”) for “a court determination to validate a Living Trust Agreement, the effectiveness, the existence, and enforceable by law” and for “a court order to reverse a decision by the TiB from holding the Living Trust Agreement in HCB4839/2016 (Bankrupt) and HCB4840/2016 (Wong Ha Wai Savoy)” (“Summons”). The hearing of the Summons came before this court on 16 August 2017 (“Hearing”).

2.On 24 August 2017, I handed down my Decision to dismiss the Summons with a costs order nisi that half of the costs of the Summons (including all costs reserved if any) be paid by the Bankrupt personally to the TiB to be taxed if not agreed (“Decision”). For convenience, I shall adopt the abbreviations in the Decision herein.

3.On 7 September 2017, the Bankrupt filed a summons to seek leave to appeal against the Decision (“Leave Summons”), and also filed his affirmation (“2^nd Aff”) and skeleton statement (“Statement”) in support. The hearing of the Leave Summons came before me on 30 November 2017 (“Leave Hearing”).

Legal principles

4.Under section 14AA(4) of the High Court Ordinance Cap 4, leave to appeal shall not be granted unless the court is satisfied that the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard.  In SMSE v KL,[1] Le Pichon JA pointed out that such leave to appeal is not lightly granted.  Reasonable prospect of success involves the notion that the prospect of succeeding must be “reasonable” and therefore more than “fanciful”, without having to be “probable” (p 129). Furthermore, it is pertinent to bear in mind that even if there is a reasonable prospect of success on appeal, the court still retains a discretion whether to grant leave to appeal, although the fact that there is, ex hypothesi, a reasonable prospect of success would heavily influence the court’s exercise of discretion.[2]

New evidence

5.The Bankrupt introduced a new document by exhibiting it to the 2^nd Aff. It appeared that 2 days after the Hearing and 6 days before the Decision was handed down, the Couple and Son as Trustees of the Living Trust Agreement passed a resolution on 18 August 2017 (“Resolution”) agreeing as follows:

“DISTRIBUTION ADVANCEMENT. Upon approval by all trustees “Unanimously” with signatures on this Resolution, the sole Beneficiary of the Trust, [Son], shall be entitled to the “Distribution” effective immediately, and extending, throughout the lifetime of the Grantors, for, [Son], the Beneficiary’s Maintenance, Education, Wellbeing, Comfort, Advancement or Benefit. Beneficiary shall be able to continue enjoyment and benefit from all Trust assets at their original form per the commencement of the Living Trust Agreement dated June 9^th, 2010.

For clarification, Beneficiary, [Son], shall be entitled for Distribution in FIRST position, overriding position of Grantor, or any, and all, other parties. Advancement of five percent or more of the total Trust asset value shall require approval from all trustees “Uanimously”, and it is at the discretion of the trustee to approve and distribute. Further, creditors of Trustee and Grantor shall have no recourse against Trust asset whatsoever.

Due to the uncertainty, under special circumstances, for the Best Interests of the Beneficiary, [Son], Trustee has been drawn up this Resolution to exercise the power of Trustee under the provision, Trustee Powers, of the Trust Agreement”.

6.The Bankrupt claimed that circumstances had changed since by virtue of the Resolution the Son as the sole beneficiary under the Living Trust Agreement was entitled to “the utilization of the Trust property, advancement, operation, occupancy and active involvement to the appreciation and depreciation of the Trust asset value, and have full right of benefit at its original form since the commencement and execution of the Living Trust Agreement June 2010. A present Beneficiary, not a future one”.

7.However, the Resolution was made after the Hearing when the Decision was reserved, and this court never considered the Resolution for the purpose of the determination of the Summons. Hence, the Decision did not deal with the Resolution at all.

8.Order 59 rule 10(2) of the Rules of the High Court (“RHC”) provides that “[no] such further evidence (other than evidence as to matters which have occurred after the date of the trial or hearing) shall be admitted except on special grounds”.  The phrase “special grounds” requires the conditions laid down in Ladd v Marshall[3] to be satisfied.[4]  The Ladd v Marshall conditions are: (a) the evidence could not have been obtained with reasonable due diligence for use at the hearing below, (b) the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive, and (c) the evidence must be such as is presumably to be believed.[5] 

9.Mr Chan, counsel for the TiB, complained that the Bankrupt had not explained why the Resolution came within the Ladd v Marshall criteria such that the court should take the same into consideration in the present application.[6]

10.It has been said that the 1^st Ladd v Marshall condition is not satisfied if the party himself failed to exercise reasonable diligence, and “…… evidence not called at the trial is necessarily regarded with caution. It may be prompted or coloured by a knowledge of what happened in the court below; and in any case it is the duty of the party “to bring forward his whole case at once and not to bring it forward piecemeal as he found out the objections in his way” ……”[7] Mr Chan did have a point in his concern since the Resolution was a document self-created by the Couple and Son after the Hearing, and I am not persuaded there was any reasonable prospect the 1^st Ladd v Marshall condition can be satisfied.

11.As regards the 2^nd Ladd v Marshall condition, in order to be received, the new evidence must be relevant and of such character that it would, so far as can be foreseen, have formed a determining factor in the result. Here, it must be noted that the Resolution expressly provides that upon approval by all trustees under the Living Trust Agreement “with signatures on this Resolution”, the Son being the sole beneficiary shall be entitled to the “Distribution” “effective immediately, and extending, throughout the lifetime of the Grantors”. It therefore appeared on the express terms of the Resolution that the “Distribution” was to take effect upon the Trustees signing the Resolution and extending thereafter during the lifetime of the Grantors, rather than from the commencement and execution of the Living Trust Agreement as suggested by the Bankrupt (see paragraph 6 above).

12.I note that on 16 August 2016 the Bankrupt was made bankrupt on his own application, and the OR thereby became the provisional trustee of the estate of the Bankrupt. On 26 October 2016, it was resolved that Wong Ka Sek and Wong be appointed as the TiB with immediate effect. It is difficult to see how the Resolution made a year later on 18 August 2017 would have any relevance to the Estate.

13.The BO provides as follows:

“On the making of a bankruptcy order, the [OR] shall thereby become the provisional trustee of the property of the bankrupt, and thereafter, except as directed by this Ordinance, no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt ……” (section 12(1))

“(1) On the making of a bankruptcy order, the property of the bankrupt shall vest in the [OR].

(1B) …… the provisional trustee shall, unless the context otherwise requires, be regarded as the trustee for the purposes of this Ordinance.

(2) On the appointment of a trustee the property shall forthwith pass to and vest in the trustee appointed.” (section 58)

14.“On a bankruptcy, [section 58 of the BO] operates to vest the bankrupt’s property in his trustee in bankruptcy. Put colloquially, the trustee stepped into the bankrupt’s shoes ……”[8] As explained in Butterworths Hong Kong Bankruptcy Law Handbook, “…… the effect of this is that the bankrupt ceases to have an interest in either his assets or his liabilities except in so far as there may be a surplus to be returned to him upon his discharge. ……”[9] Thus, whether any interest in the remaining equity of the Property (other than the interest of the mortgagee as secured creditor) was the Bankrupt’s property such that it fell within his Estate and was therefore vested in the OR (and TiB) depended on the status of such interest at the time of the making of the Bankruptcy Order and not at any later date. On such basis, I am not convinced there is any reasonable prospect the 2^nd Ladd v Marshall condition can be satisfied.

15.In dealing with the Leave Summons, I am not persuaded the Resolution would assist.

Potential grounds of appeal

16.Save for matters relating to the Resolution which I have discussed above, I shall not regard the 2^nd Aff as new evidence placed before the court for the purpose of the Leave Summons, but shall treat the other allegations therein as the Bankrupt’s potential grounds of appeal and/or arguments in support thereof.

17.The Bankrupt made the following points:

(a)   Because of the need to secure a mortgage for acquisition of the Property, the Son who was then a minor could not be named as a co-owner of the Property, but the Property being trust assets were held in the name of the Trustees for the Son as the sole beneficiary.

(b)   In relation to paragraph 52 of the Decision (which discussed that the RTO concerned international conflict of laws), the Grantors’ intention was “to select a governing law where Ordinances or applicable laws are in place. However, Grantors were not aware that Hong Kong does not have a domestic Ordinance for Trusts ……” It was said that articles 6-7 of the Convention may be applicable. “Since Trust holds asset for Beneficiary, Grantor views might be best for the status of the Beneficiary to dictate the governing law or in combination with Hong Kong law such as case law, whichever to be impartial. Hence, in question, we shall revisit the rules, which believe well fit for our situation, (see Johnston, The Conflict of Laws in Hong Kong, 3^rd ed (2017) para 8.130, 8.131, 8.132 at p 558)”.

(c)   In relation to paragraph 53 of the Decision (which discussed the Living Trust Agreement to be construed according to Hong Kong domestic law), the Living Trust Agreement was created/executed before a notary public in the United States.[10] The Son as the sole beneficiary of the Living Trust Agreement was a natural born United States citizen and is currently living in the United States, so the Living Trust Agreement was not a true domestic creature, and it would be appropriate to apply the RTO “or in combination of applicable law in this appeal for review” (see (a) above).

(d)   In relation to paragraph 54 of the Decision (which referred to section 43(3) of the BO), the court should at the Hearing ask the Trustees (who are still living) to confirm whether they were/are holding the trust assets for “any other person”, but it was usual for trust assets to stand in the name of the trustee (see article 2 of the Convention, discussion by Professor Lusina Ho, Trust Law in Hong Kong, para.2.1, and Estate of Heggstad 116 Cal App 4^th 943 (1993), a decision of the Court of Appeal of California).

(e)   In relation to paragraph 55 of the Decision (which referred to provisions of the Living Trust Agreement), it was said the Couple did not have legal representation, so some of the language adopted in the Living Trust Agreement might not fully reflect their intention of making the Son a present not a future beneficiary of the Living Trust Agreement. If the Living Trust Agreement was interpreted otherwise, it would have an adverse effect on the Son as the beneficiary thereunder as it would take away his entitlements under the trust.

(f)   The Bankrupt as a party without legal representation was not aware of case law relating to the operation of the Trustee Ordinance Cap 29 in contra-distinction to the RTO in Hong Kong, and was unable to submit relevant case law on the intention of the grantor/trustee in respect of the self-declared trust in time prior to the Hearing. The Bankrupt was learning and applying the law as the case progressed, which was quite challenging, and he urged the court to consider the merits of resorting to the RTO to help validate the Living Trust Agreement “with identifiable rules and guidelines for interpretation”, and even if the court did not consider it appropriate to rely entirely on the RTO, to consider the merits of resorting to the RTO with case law to interpret the discretionary power of the Trustees in this situation.

Discussion

18.As regards the RTO, I have explained in paragraph 52 and footnote 2 of the Decision that the purpose of the Convention was to deal with choice of law and recognition of foreign trust. But here the Living Trust Agreement was governed by domestic law, ie Hong Kong law. At the material time when the trust was created in 2010, it was a domestic creature for the reasons set out in paragraph 53 of the Decision. But even if the Living Trust Agreement was a foreign trust and recognised as such under the RTO, its choice of law was Hong Kong law, and hence its interpretation and effect would be governed by Hong Kong law. Further, the interpretation and effect of the Living Trust Agreement did not and would not depend on the subjective intention of the Grantors/Trustees, and would depend on the objective reading of its terms. I am not persuaded that the arguments in paragraph 17(b)-(c) above took the matter any further.

19.As explained above, even if the Living Trust Agreement is valid and/or recognised, it still begged the question what the express terms of this particular trust actually provided. I have referred to section 43(3) of the BO in paragraph 54 of the Decision which provides that a bankrupt’s estate “does not apply to property held by the bankrupt on trust for any other person” (my emphasis). When this provision is read together with sections 12 and 58 of BO (see paragraph 13 above), the key question was whether the Bankrupt, even if he was a trustee holding trust property, was at the time of the Bankruptcy Order holding such trust property “for any other person”.

20.I have set out in paragraph 55 of the Decision various express provisions of the Living Trust Agreement which pointed to the conclusion that it did not create any present trust in favour of the Son. Although the Bankrupt referred me to general concepts/principles in article 2 of the Convention and the learned article of Professor Ho, it must be remembered that each trust is drafted differently, and it is the express terms of the trust in question that are pertinent. For the same reason and also because the Living Trust Agreement was governed by Hong Kong law, I am unable to draw much assistance from the United States authority cited by the Bankrupt.

21.Save for the discussion in paragraphs 22-23 below, the Bankrupt in the 2^nd Aff and Statement did not address the particular terms of the Living Trust Agreement except to say that as the Couple were not legally represented some of the language adopted in the Living Trust Agreement might not fully reflect their intention of making the Son a present and not future beneficiary. However, as explained above, objective rather than subjective reading of the terms of the Living Trust Agreement would guide proper interpretation of the trust document.

22.At the Leave Hearing, the Bankrupt submitted that Clause 3 of the Living Trust Agreement showed the Son as the “Grantor’s successor” was the beneficiary and had interest in the Property being the trust asset at the time of the creation of the Living Trust Agreement (ie space at the Property was assigned for his occupation).

23.Clause 3 of the Living Trust Agreement expressly provided as follows:

“MANAGEMENT OF TRUST ASSETS. Trustee shall manage and distribute Trust assets for the benefit of Grantor and Grantor’s successor(s) in interest in accordance with the terms of this Agreement.” (my emphasis)

Clause 3 made clear that the Trustees could distribute the trust assets for the benefit of the Couple (ie the Grantors) and not merely for the Son as the Grantor’s successor. Such provision also made clear the distribution was to be in accordance with the terms of the Living Trust Agreement, and clauses 4-5 expressly provided that during the lifetime of the Couple (who were both Grantors and Trustees of the living trust) they were the ones who would enjoy the trust asset (in particular the Property) and the beneficial interest in the Property had not been vested in the Son despite his being named as the beneficiary. This sat well with the Bankrupt’s submissions at the Hearing set out in paragraph 57 of the Decision, but not with the suggestion made at the Leave Hearing (see paragraph 22 above).

24.Further, as I have explained above, the effect of the Living Trust Agreement was governed by the objective interpretation of its terms, and not by subjective intent or motive. On such basis, I have set out the objective interpretation of the Living Trust Agreement in paragraph 56 of the Decision. This is sufficient to address the point made by the Bankrupt in paragraph 22 above. But I shall go further to say that the fact the Couple allowed their minor son to live with them at the Property did not give rise to beneficial interest in the Property on the part of the Son. In light of the Grantors’ interest in the Property under clauses 3-5 of the Living Trust Agreement, permitted occupation of the minor Son did not create any beneficial interest (and similarly a licensee or tenant also does not acquire beneficial interest by mere occupation of the licensed or tenanted premises).

25.In all the circumstances, I am not persuaded the Bankrupt raised any contention that had reasonable prospects of success that the beneficial interest of the Property was with the Son “since June 2010” or at least at the time of the Bankruptcy Order. Even if I were to consider the Resolution (which I have found I should not), its terms showed the “DISTRIBUTION ADVANCEMENT” allegedly took effect on 18 August 2017, which was far too late to have any legal effect. The relevant time for consideration was the date of the Bankruptcy Order (ie 16 August 2016). It would not be possible to make distribution in relation to the Grantors’ interest in the Property after 16 August 2016.

26.I am not persuaded the proposed grounds of appeal had any reasonable prospects of success, and the Leave Summons is dismissed. There shall be a costs order nisi that costs of the Leave Summons be paid by the Bankrupt personally to the TiB to be taxed if not agreed.

Postscript

27.At the Leave Hearing, the Bankrupt expressed his frustration that it appeared from information provided by the TiB that the TiB’s income, costs and dividend exceeded $1.8 million, which translated into nil distribution to the creditors. However, this complaint is not relevant to the subject matter of the Summons and/or Leave Summons, and might well have to be addressed separately.

The bankrupt Mr Chu Wai Tung, acting in person and present

Mr Sunny Chan, instructed by Jimmie K S Wong & Partners, for the respondent

The attendance of the Official Solicitor excused