Natalie W Chen v. Wong Siu Ling and Another
Read the full judgment text of HCMP 3943/1997 on BabelCite. This High Court CFI judgment was delivered on 7 November 2000.
1. These two actions, which were ordered to be heard together, both concern a deed of settlement dated 6 March 1985 by which Wong Wan Chan settled certain properties on trust, naming the defendants, his sister and brother, as trustees. Wong Wan Chan died on 10 June 1985, leaving a will of which the defendants are also the executors. The plaintiff is the niece of Wong Wan Chan, is one of the beneficiaries under the settlement, and, by his will is entitled to a one third share of his residuary est
Cites 1 case
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HCMP003943/1997 HCMP 3943/1997 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 3943 OF 1997 ____________
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____________ HCA 10078/1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 10078 OF 1998 ____________
____________ Coram: Deputy Judge Woolley in Court Dates of Hearing: 9 - 13, 16 - 20 and 23 - 26 October 2000 Date of Handing Down Judgment: 7 November 2000 ______________ J U D G M E N T ______________ 1. These two actions, which were ordered to be heard together, both concern a deed of settlement dated 6 March 1985 by which Wong Wan Chan settled certain properties on trust, naming the defendants, his sister and brother, as trustees. Wong Wan Chan died on 10 June 1985, leaving a will of which the defendants are also the executors. The plaintiff is the niece of Wong Wan Chan, is one of the beneficiaries under the settlement, and, by his will is entitled to a one third share of his residuary estate. 2. In 1985 Wong Wan Chan was the eldest surviving son of the ten children of Dr Haking Wong, a successful businessman who had accumulated considerable wealth during his lifetime, much of which was invested in family companies, and property, in particular number 43 Barker Road, The Peak. The family companies had been used to distribute some of that wealth among his children through their shareholdings in them. The property in Barker Road had, in 1982, been transferred to a trust established by Dr Haking Wong under a deed of settlement dated 5 March 1982 of which his ten children were equal beneficiaries. Background 3. Wong Wan Chan and his wife had no children but he had, in about 1975, informally adopted the plaintiff, the daughter of his brother Ernest, and Christopher, the son of his brother Ignatius, the 2nd defendant. In the three years prior to his death, he had executed a number of wills in all of which, save for the last, he had left to the plaintiff and Christopher his residuary estate in equal shares. In his last will, made on 4 January 1985, he left his personal and household effects and the sum of US$330,000.00 to his wife and the residuary estate was left as to two sixths to the plaintiff, and one sixth each to Christopher, his sister Carolyn, and the two children of his brother Ronald, Adrienne and Andrew. 4. Wong Wan Chan had been under treatment for lung cancer since 1983 in the United States and returned to Hong Kong in December 1994. In the early months of 1985 it became apparent that his condition was deteriorating and that he was probably in the terminal stages of his illness. There was concern in the family that, the greater part of his assets being shares in the family companies, and there being insufficient available money in his estate to pay estate duty without the sale of some of the interests in those companies, arrangements should be made to try to reduce the liability of his estate for duty or avoid it altogether. The 2nd defendant accordingly sought advice from London counsel, and drafted the settlement as a discretionary trust into which Wong Wan Chan placed an initial sum of US$100.00. As I have said, the trustees were the defendants, and the beneficiaries were named as Wong Wan Chan's wife, Chan Wai Chun, his brothers Ernest and Ronald, his sister Wong Siu Kwan, and his seven nephews and nieces. By a series of further transactions which I shall look at in more detail later, he transferred into the settlement all his shares in the family companies and his one tenth share in the Haking Wong Settlement which held the property in Barker Road. He also executed a memorandum of wishes for his trustees which reads as follows:
5. Following Wong Wan Chan's death in June 1985, the defendants paid to the widow the sum of US$330,000.00 by making a transfer of funds held overseas, but did not apply for probate or seek estate duty clearance from the Commissioner of Estate Duty, taking the view then that, all Wong Wan Chan's assets having been transferred to the settlement, there was no need for either. As I shall come to later, there was also possibly some uncertainty as to whether their attempts to legally avoid estate duty had been successful, and a wish not to provoke scrutiny by the Estate Duty Office and expensive legal proceedings to establish the validity of what had been done. They did however administer the trust and receive income from the family companies on its behalf, and when the plaintiff went to study in the United States, and later married there, made frequent and generous payments to her as a beneficiary until early 1996, shortly after the death of Dr Haking Wong, at about the time that the events began which culminated in these proceedings. It is not necessary to go into these events in much detail except to say that what began as a request for a copy of Wong Wan Chan's will, so that the plaintiff could ascertain her entitlements for the purposes of financial and tax planning, having given birth to her first child, rapidly degenerated into ill feeling, as the defendants felt that their integrity was being called into question, and lengthy correspondence between solicitors. The issues 6. The initial complaints made on the plaintiff's behalf were to the effect that the defendants were in breach of their duty to the trust by failing to deal with the question of probate and estate duty, thereby exposing the estate, and consequently the trust, to possible liability for penalties and interest, and failing to act in the best interests of the trust when dealing with the proposed redevelopment of the Barker Road property, and the first proceedings sought their removal and replacement as trustees. However, when the memorandum of wishes was disclosed in the course of those proceedings, those advising the plaintiff took the view that the wording of that document was incompatible with an intention to create a discretionary trust, and by the second action sought a declaration that the assets of the trust were held on the same trusts as those of the will. It is that issue which I will address first. The nature of the settlement 7. If I were to consider the matter in the light of the deed of settlement alone, there is no doubt that I must find that it is a discretionary trust, as it had been considered by the defendants throughout, and as the wording of that document makes clear. The defendants have always been careful to describe it as such, to refer to the beneficiaries as "potential beneficiaries", and to exercising their discretion in making distribution of income. However, I am invited by Mr Smith for the plaintiff to look beyond that document to discover what he contends was the settlor's true intention, namely to establish a fixed settlement in the terms of his will. 8. In support of this, he points first to the series of no less than seven wills since 1982 in which the plaintiff was left half the residuary estate in the first six, and one third in the last. This, he says, clearly indicates the intention of Wong Wan Chan that the plaintiff should be a major beneficiary of his estate after his death. Were this a true discretionary trust, the effect would be to make the plaintiff only a potential beneficiary, who may not benefit at all if the trustees decided not to exercise their discretion in her favour, and this only two months after making his last will with her as a major beneficiary. There is certainly no evidence that he intended, by the settlement, to change those he wished to benefit. Indeed, it is conceded by the 2nd defendant in his evidence that the only purpose of the settlement was to avoid estate duty. He also described Wong Wan Chan as a careful man who read everything drafted for him thoroughly and thought hard about it. Such a man would accordingly have appreciated the reason for the arrangements and the effect of them. It is difficult to see him accepting that his chosen beneficiaries were thereby reduced to being among the list of potential beneficiaries only. 9. It is submitted by Mr Chang for the defendants that there were particular benefits of a discretionary trust which Wong Wan Chan would have appreciated. These included the tax treatment of beneficiaries who might be resident in a less generous tax jurisdiction, who might be taxed on a vested interest in a fixed trust , but could not be as mere potential beneficiaries in a discretionary trust. Secondly, it gave the trustees flexibility so that they could if necessary provide additional support to the widow. However, it is all very well to consider these advantages in hindsight, but quite another when looking at the realities of the situation at the time. In any event, there is no evidence that those who were clearly intended to benefit were then resident anywhere but Hong Kong, including the plaintiff. It is clear from the evidence that the principal concern of the family, and in particular the patriarch and original source of the family wealth, Dr Haking Wong, was that no interests in the family companies should pass outside the family, even to the wife of Wong Wan Chan. Provision for his wife had been addressed in the will, by leaving a monetary legacy, but the prospect of estate duties being payable, with insufficient funds to meet them without selling shares in the family companies, was the principal, and in my view, at that time, the only motive for urgent arrangements to be made. Why it was formulated as a discretionary rather than a fixed trust is not immediately apparent, although if those closely concerned were not overconfident of the scheme finding favour with the Commissioner of Estate Duty as a valid and legal avoidance of tax, I can see that there might be a desire to distance the settlement from the precise terms of the will to make it seem less artificial. 10. Mr Smith relies secondly on the memorandum of wishes. In a true discretionary trust, a memorandum of wishes of the settlor is not binding on the trustees and is usually expressed to be so. Equally it should not give precise instructions, but merely indicate a preference which the settlor can do no more than hope his trustees will give effect to. The memorandum here satisfies neither of these tests. Not only does it not state that it is non-binding on the trustees, but is expressed in language that clearly indicates that the settlor expects the instructions therein to be followed by the trustees. In particular the second two sentences:
can allow of no other interpretation than that Wong Wan Chan intended that the trustees should consider themselves bound by the terms of his will in making distribution under the trust. Equally, the second paragraph of the memorandum clearly instructs the trustees to use money in the trust to make up any shortfall if there is insufficient to pay any legacies, and he obviously, from the example he gave, had his wife in mind. There is little if any discretion to be found in this memorandum, and I have to agree with Mr Smith that it suggests Wong Wan Chan did not intend that there should be any. 11. The timing of the signing the memorandum is also of interest in this regard. After his return from the United States in December 1984, Wong Wan Chan went into hospital for treatment on five occasions, and it was during the fifth that he died. The first occasion was from 26 February 1985, and he was due to have an operation on 2 March, which it was by no means certain he would survive. All the documentation in respect of the trust was accordingly prepared and signed by him on that day, although dated 6 March. Although the 2nd defendant claimed in evidence that the memorandum had been signed much later, it makes little sense for it not to have been included then, Wong Wan Chan himself being, as I have found above, eager for the same persons as under his will to benefit, and being a careful man who would want to see things done properly. Indeed, only a year later, in instructions to counsel, the 2nd defendant said that on 2 March 1985 Wong Wan Chan had executed all documents, which he listed as the deed of settlement, agreements for sales of all his shares, contract notes, transfers of shares, various instructions to the Vila office of the HSBC, and instructions to the trustees. The latter document the 2nd defendant claimed to be a letter to himself and his sister from Wong Wan Chan dated 7 March 1985. However, this is clearly a request for them to confirm that they have accepted additional funds on behalf of the settlement, not instructions, and, indeed, is referred to as such in the 2nd defendant's instructions to counsel to advise of 15 April 1985, where it, and a similar letter in respect of the second sum paid into the settlement, are described as being necessary to dispel contentions that they were loans. It seems clear to me that the instructions were those in the memorandum with the intention that they should be part of the settlement, and that the 2nd defendant's memory is wrong on this point. A memorandum of wishes had certainly been in his mind prior to that date, as a draft had been sent with instructions to counsel to advise in February 1985 on two suggested schemes in which Wong Wan Chan's father might be the settlor. From the wording of the instructions to counsel it is clear that the proposed memorandum envisaged the trustee consulting the defendants, who were obliged to give instructions in terms of Wong Wan Chan's will. 12. The third matter which indicates the intentions of Wong Wan Chan is the behaviour of, and admissions by, the defendants as trustees and other members of the family since 1985. From the beginning of their administration of the trust, the defendants have carefully divided the income into three parts, one of which was set aside into separate accounts for the plaintiff, and the other two thirds for the four other beneficiaries under Wong Wan Chan's will. Indeed, the 2nd defendant in 1995 charged the plaintiff one third of the accountant's fees for preparing the accounts of the trust. There have been no payments to any other beneficiary, and none appears to have been considered. Further, it is now the defendants' stated intention to realize the assets of the trust and divide them between the same beneficiaries in the proportions specified in the will. 13. The rest of the family clearly consider that those are the correct beneficiaries, and are those intended by the settlement. Dr Ronald Wong, who was a witness to the settlement deed, clearly understood that the intention was to benefit the plaintiff, his children and the 2nd defendant's children in the proportions specified by the will. In 1996 he wrote to the plaintiff's solicitors referring to the plaintiff's two shares, and in 1997 in a draft deed, which was never executed, but was drafted by him, listed the beneficiaries under the settlement with the same shares. In December 1997, at a meeting of the beneficiaries of the Haking Wong Settlement in respect of Barker Road, it was noted in the minutes that the one tenth share in that settlement held by the Wong Wan Chan Settlement was represented as to two sixths by the plaintiff and four sixths by the other four beneficiaries. 14. It is clear to me therefore that, in spite of there being a total of eleven beneficiaries listed in the settlement deed, the intention of Wong Wan Chan was such that the instructions set out in the memorandum should form part of that settlement, to the effect that the beneficiaries under his will should be the only ones to benefit, and in the same proportions. To that extent, although a valid trust was created, this was never a discretionary trust but a fixed settlement on the terms in respect of the residuary estate under Wong Wan Chan's will. 15. The next issue is whether the defendants have been in breach of their duties as trustees to a degree which makes them unfit to continue and should be removed and replaced. The plaintiff relies on two grounds in support of her contentions: the first is that the defendants failed to apply for probate of Wong Wan Chan's will and obtain estate duty clearance from the Commissioner of Estate Duty; the second, that they wrongly used trust assets to assist the redevelopment of 43 Barker Road, or otherwise supported that redevelopment on behalf of the trust which held a one tenth beneficial interest in it. Probate and estate duty 16. The plaintiff's contention here is that the matter of liability for estate duty should have been dealt with at an early stage together with an application for probate, rather than leaving the trust and the estate in an uncertain situation with a possible liability for not only estate duty, but interest and penalty payments. Indeed, her solicitors' went further than that in their correspondence, and made it clear that they considered the arrangements surrounding the settlement were not effective for the purposes of tax avoidance on the principles enunciated in WT Ramsay Ltd v. IRC [1982] AC 300 and Furniss v. Dawson [1984] AC 474. The defendants and their legal advisers denied this and expressed surprise and concern that this stand should have been taken. Indeed, while it is understandable for the plaintiff to wish to have the matter of estate duty dealt with once and for all, it is unusual for a beneficiary of a settlement to argue for payment of estate duty which would inevitably reduce her own interest. However, she was no doubt advised that the risk of additional payments was a greater danger and battle was joined on that basis. 17. Throughout the correspondence leading up to these proceedings, it has been the defendants' position that, as there were no assets in Wong Wan Chan's estate in Hong Kong, there was no need to apply for probate, and secondly that their efforts to avoid estate duty by means of the settlement were, or would be held to be, successful and no duty would be payable in any event. 18. The first contention we now know not to have been completely accurate. Although Wong Wan Chan's personal effects in Hong Kong which passed to his widow, and a few shares in a dormant company, might have had only a nominal value, in June 1991 a revaluation by the Inland Revenue Department of some of the shares transferred to the settlement meant that there was technically a sum of about $175,000.00 owing to the estate by the trustees, which would also have to be included in the assets disclosed in any affidavit submitted for the purpose of estate duty clearance. After considerable correspondence between the parties' solicitors concerning the desirability of the question of estate duty being finally determined, the defendants have now made an application to the Estate Duty Office and they are awaiting a reply. 19. Such a reply should also deal with the matter of the determination by the Commissioner of Estate Duty as to whether the arrangements setting up the Wong Wan Chan Settlement were effective in their object of tax avoidance. It is not necessary for me here to reach any conclusion on this, but it is instructive to look at those arrangements to see whether there were genuine grounds for the plaintiff's concerns. 20. The deed of settlement was signed on 2 March 1985 and dated 6 March 1985. Dr Haking Wong on 7 March 1985 made a loan of the sum of US$1,620,000.00 from his account in Chicago, USA to Wong Wan Chan which was transferred to the latter's account in Port Vila, Vanuatu. This sum was then transferred to the defendants as trustees of the settlement into their account in Port Vila. The defendants then purchased from Wong Wan Chan his shares in the family companies, being 1,040 shares in Mon-Kok Investment Co. Ltd (Mon-Kok), 5,990 shares in Tsun Tan Investment Co. Ltd (Tsun Tan), 3,000 shares in Fundamental Establishment (International) Ltd (FEI), 10,942 shares in W. Haking Enterprises Ltd (WHEL), and a further 30,586.50 shares in the same company held by FEI as nominee. The price of these shares was paid to Wong Wan Chan by transfer from the trustees' account in Port Vila to his, and he then repaid Dr Haking Wong by transfer back to the Chicago account. All these transactions occurred on the same day under instructions contained in letters to the HSBC delivered to their North Point office by Dr Haking Wong. By a similar arrangement on 1 April 1985, Wong Wan Chan's one tenth interest in the Haking Wong Settlement, the owner of the Barker Road property, was transferred to the defendants as trustees by way of sale for US$230,000.00. The rationale behind these transactions was that, involving as they did only funds overseas, there was no transfer within Hong Kong which could be liable to tax as a gift inter vivos within three years of the death of Wong Wan Chan. 21. The difficulty that the plaintiff's advisers anticipated was that the transactions, being transparently artificial, and all completed on the same day by a continuous process, were bound to fall foul of the principle in Ramsay. That may briefly be stated as holding that, where a taxpayer entered into a pre-ordained series of transactions consisting of two or more steps and those steps were inserted for no commercial business purpose apart from the avoidance of a liability to tax, the court would determine the tax consequences of the series by looking at the end result and ignoring the intervening steps. In this case, the end result would be the transfer of Wong Wan Chan's assets to the settlement as a gift within three years of his death, and consequent liability to estate duty. 22. However, this arrangement had not been entered into lightly. The 2nd defendant, himself a solicitor, had sought advice twice before March 1985 from leading counsel in London, proposing various schemes which were not proceeded with, and in March 1985, in an exchange of telexes with Robert Walker QC, the latter had suggested the arrangement which was actually put into effect that month. Counsel was clearly not prepared to guarantee that the scheme would be effective and expressed doubts in his advice of 10 June 1985, and his further advice of 21 March 1986, although generally of the view that the approach in Ramsay and Furniss would not affect it as it had not been applied in Hong Kong, and in UK only in respect of capital gains tax. In any event he felt that the circumstances here made it inapplicable, particularly as the terms of the sale of the shares to the trustees were at market value and contained provision for additional payment if the price proved to be too low. 23. There is no doubt that the 2nd defendant, in acting as he did, on the best advice that he felt was available, was doing the best he could to protect the estate within the provisions of the law. There was nothing underhand or mala fides about his actions which he believed had legally achieved their aim. Indeed, it may well be that the recent decision of the Court of Final Appeal in Shiu Wing Ltd & Ors v. Commissioner of Estate Duty [2000] 3 HKC, which appears on the face of it to support the views of counsel in 1985 and 1986, has proved that he was right. As this is not a decision I have to make, I will go no further than that. 24. Be that as it may, it is clear that the 2nd defendant did not at that time wish to create a situation in which the legality of the arrangement would have to be argued, and costs incurred in its defence. To this end he and the 1st defendant therefore also withheld from applying for probate and sought advice from counsel on this matter. Counsel was clearly of the view that the actions taken by the defendants in respect of the estate not only made it impossible for them to renounce probate, which at one time they proposed to do, but made them liable to deliver an account as executors or apply for exemption, even if they did not need to apply for probate. This advice they chose not to take. 25. The plaintiff seeks to ascribe to this reluctance to attract the attention of the Estate Duty Office an ulterior motive of protecting family interests which might suffer if estate duty did become payable, and that the trustees, in their capacity of executors of the estate, had a conflict of interest with their duty as trustees. I do not consider that the evidence supports this contention, and I accept that their motives in so acting were principally in the interests of the settlement and the assets it held. They may well have been overcautious in their lack of action with regard to the estate, until the plaintiff herself took steps to take out letters of administration to clarify the situation, but this excess of caution was not against the interests of the trust. 26. A matter which causes me greater concern is the question of the sum of money, which the defendants admit is part of Wong Wan Chan's estate, held in their name in an offshore account, and which has still, after some 15 years from his death, not been distributed under the terms of his will. The amount of the deposit is now in excess of US$130,000.00, and only came to light after the plaintiff began making enquiries about the will and the estate in 1996. Even then the defendants were only prepared to deal with it subject to the beneficiaries giving indemnities, the nature and form of which was never explained. While this is evidence of the attitude of the defendants to their duties, it concerns the estate rather than the settlement and is not a matter I need take further than to express my disquiet. 27. In respect of both the estate and the settlement, the defendants' approach throughout has been one of marked reluctance to deal frankly and openly with the beneficiaries. While the plaintiff knew that she was a beneficiary under the settlement, until her solicitors demanded, and eventually received, copies of the will and the settlement deed, she clearly did not know the extent of her interest and had never been told by the defendants. Even then it was not until the memorandum of wishes was disclosed after the first proceedings had commenced that the whole picture was clear. In the same way, they chose not to reveal details of the setting up of the trust, refusing to answer questions as to the source, and destination, of the funds used to purchase the assets in the settlement from Wong Wan Chan. Had they been more forthcoming at an early stage, I have no doubt that the later ill-feeling, and probably these proceedings, would not have resulted. The reason for keeping matters so closely to themselves is something I need to consider with the issue of Barker Road. Barker Road 28. Dr Haking Wong was very proud of his property in Barker Road which was in two lots, numbers 43 and 47, which he had owned since the 1950's, and which he was keen to see remain in the family. He clearly wanted it to be considered as a modern ancestral home. At various times plans had been formulated for redevelopment of number 43, there being apparently some difficulties with regard to the other part of the site, with the intention that the two houses on the site should be demolished and a block of 12 flats constructed, for himself during his lifetime, and one for each of his ten children. To this end, by a deed of settlement dated 5 March 1982 (the HW Settlement) he settled the sum of US$5,000,000.00 upon trust for his children, with the Hongkong Bank Trustee Ltd as trustee, and a week later transferred 43 Barker Road to the settlement by way of sale. By a deed dated 16 August 1982, the beneficiaries agreed that the property should be developed into 12 flats, and by a power of attorney in December 1982 appointed FEI to deal with the trustee for the purpose of the redevelopment. In October 1984 FEI was appointed as trustee of the HW Settlement in place of the Hongkong Bank. 29. In early 1985 for a number of reasons it was decided not to proceed with the redevelopment for the time being and a deed of release was signed by the HW Settlement beneficiaries. Wong Wan Chan then assigned his share in the HW Settlement and therefore in Barker Road to his settlement, which now owned a one tenth share. 30. In 1993 the idea of redevelopment of Barker Road was revived, Dr Haking Wong apparently being keen to see it done in his lifetime, and architects were appointed by FEI in January 1994 to prepare plans. At that stage there were no beneficiaries of the HW Settlement opposed to the idea, possibly in deference to the stated views of their father. However, in January 1996 Dr Haking Wong died, the original plans for the property were revised, and two of the beneficiaries, the plaintiff's father Ernest Wong, and her aunt Molly Low Wong Siu Kwan, stated their opposition to it, certainly in so far as using funds of the family companies to finance it. That this was the intention is clear from the minutes of an EGM of FEI and Mon-Kok held on 19 July 1996 when the directors and shareholders voted to sell a number of properties owned by these companies and to use the money raised thereby to fund the redevelopment of Barker Road by way of loans. The only votes against the proposal were those of Ernest Wong and Molly Low, and the only non-family shareholder in Mon-Kok, Dr Pauline Chan, abstained. On the same day at an EGM of Tsun Tan it was decided to sell various properties held by that company, but to distribute the proceeds as dividends, subject to a reserve. The defendants voted in favour, both on their own behalf as shareholders, and on behalf of the Wong Wan Chan settlement. It is noted that that the defendants were not only shareholders of the family companies but also directors. 31. The objections of Ernest Wong and Molly Low having been overruled, and the question of their minority interests in issue, there followed correspondence through solicitors which resulted first in an undertaking by FEI that no funds would be advanced to the HW Settlement without notice to them. No similar undertaking being forthcoming from Mon-Kok, proceedings were commenced and an undertaking finally given that no monies would be advanced to FEI for the purpose of the redevelopment. However, there being no such undertaking in respect of Tsun Tan, payments were made by that company in discharge of liabilities incurred by FEI in the course of the redevelopment, the resolution of the EGM to distribute the funds by way of dividends not being acted upon. This resulted in further proceedings, against Tsun Tan, with an interim injunction being granted in similar terms to the former undertakings. All these proceedings were eventually compromised, in respect of the first two by the purchase of the shares of Ernest Wong and Molly Low in Mon-Kok and FEI, and in the third by an order to wind up Tsun Tan, and by the sale to the 1st defendant herein of their interests in the HW Settlement. 32. Meanwhile the redevelopment had continued, partly by distributing income and assets of the family companies to the shareholders as dividends, and the shareholders then making loans to the HW Settlement. In the course of this, the defendants had made loans totalling the equivalent of US$140,766.00 from the Wong Wan Chan settlement for the same purpose. 33. The plaintiff's complaint about this is that the assets of the family companies in which the trust had a one tenth interest, and from which it received regular income, were being used by the HW Settlement for the redevelopment, and accordingly tied up until such time as the development was completed and the flat which would come to the trust as its share could be sold. The defendants were not only supporting this, but actively lending the trusts' own money, which might otherwise have been distributed to the beneficiaries. It is further contended on her behalf that, while the defendants had a real and valuable interest in the development, in the shape of a flat which could immediately upon completion be for their sole use, and in the 1st defendant's case three flats, the plaintiff would still have only a one third share in one of the flats and the other beneficiaries one sixth each. There was accordingly a conflict of interest which they should have recognized. 34. Apart from maintaining that the redevelopment was carrying out the wishes of the late Dr Haking Wong, which is not relevant to the issue here, they justify their support of the project, and their using the vote of the trust to support it, by saying that the majority of the beneficiaries of the HW Settlement were in favour, and even if they had abstained on behalf of the trust, or voted against, the majority opinion would have prevailed and it would have proceeded anyway. This may be so, once they had embarked on the path they did in 1996, but the point is that they should never have allowed the trust to be a position where they were powerless to stop its assets being used in this way, and tied up in another asset which may or may not have been a benefit to it. At that stage they had no way of knowing whether property values would make the development a good investment for the trust, but made their decision on the basis of the benefit to the rest of the family in seeing the redevelopment completed, including themselves. 35. They say they had no choice but to proceed as the majority demanded and commit the trust, but, if one returns to the situation in 1996, this is clearly not the case. Following the death of Dr Haking Wong in January 1996, and the very strong influence he obviously exerted over the family being at an end, it was recognized by the family as a time to take stock. Both the 2nd defendant and his brother Ronald Wong proposed discussions by the whole family, with one of the items to be discussed the possible sale of their interests by those who were not inclined to proceed with the redevelopment. So sale to other members of the family was certainly considered a possibility. 36. Meanwhile, the youngest of the five beneficiaries under the Wong Wan Chan settlement, Andrew, reached his majority in early 1996, and the defendants considered distributing the assets of the trust to them. There clearly was no reason why they should not do so, the shares in the family companies could either have been sold to other members of the family or distributed in specie, as could the Barker Road interest have been sold, or left to the beneficiaries to decide amongst themselves how to deal with it. As I have found above, there were no other beneficiaries to be considered and consequently no reason for the trust to remain. The defendants have carefully referred throughout to the settlement as a discretionary trust, and may well have considered that they did have a real discretion as to whether or not to continue to administer it, distributing only income, or to name an earlier vesting day, as they had power to do, and make distribution in accordance with the memorandum of wishes, in effect in terms of Wong Wan Chan's will. There is no evidence that they considered that any other beneficiary was entitled under it; no payments had been made to any beneficiary other than these five, it is clear from contemporary documents that they, and the rest of the family, considered these were the only beneficiaries, and they have admitted in evidence that they intend now to distribute the trust assets in accordance with the will, subject to retaining a reserve to cover a possible claim for estate duty, until that matter is settled. They are now, when they finally intend to distribute, in exactly the same position as they were in 1996, when they decided not to. One is bound to ask why they did not. 37. The 1st defendant gives as a reason the legal proceedings by the plaintiff, but the first of these did not commence until 1997, and almost certainly would not have done then if distribution had been made. 38. The answer that appears to me to be the most likely is that it would have made the redevelopment of Barker Road that much more difficult. The plaintiff had already voiced her opposition to it, and would not have permitted her share of the family companies to be used for it. The support of the other beneficiaries, although given hitherto, could not be guaranteed, bearing in mind that their interest would not even be in a flat, but a one sixth share in a flat. If the project was to proceed, how much easier if the share represented by the trust could be voted as one tenth with the others, with, as they have also maintained throughout, no need to consult the beneficiaries. It may well be that the consideration of the development also influenced their reluctance to reveal to the plaintiff the precise contents of the will and deed of settlement, to delay any further difficulties which may affect these plans. 39. There is no doubt that the defendants were very keen to see the redevelopment proceed. Not only had they a considerable personal interest in it, they clearly also had a strong sense of filial duty and a wish to see their father's dream of a family home be completed. It is my view that they allowed their enthusiasm for the project to cloud their judgment of what was then in the best interests of the trust. In saying this I do not mean to imply any dishonesty on their part. They may well have thought that, acting as they did, was in the interest of the trust as well as that of the family, the two being closely linked. But what they failed to do was to look at the interest of the trust in isolation, as they were bound, as trustees, to do. In so doing I am satisfied that they were in breach of their duties as trustees. 40. It is no answer to this criticism to say, as Mr Chang has done, that they did not put themselves in that conflict of interest situation, but it was inevitable as a result of their appointment as trustees by the settlor who knew of that situation, or the likelihood of it. Even if this were a true discretionary trust, it was within their power to avoid that situation, and they failed to do so. Neither is it an argument that what they did was in the reasonable expectation of the settlor. While I accept that everything that has happened is in the context of the family, had Wong Wan Chan wished the trust to concentrate on redevelopment of the Barker Road property, no doubt he would have made that clear in his memorandum of wishes. Not only did he not do so, referring only to the terms of his will, but at the time the settlement was created the Barker Road project was in abeyance, and there was no certainty it would be revived. Conclusion 41. This brings the matter to the present day and what should now be done in respect of the trust and the trustees. I am told that the redevelopment of the Barker Road property is nearing completion and a certificate to that effect is expected by the end of the year, when any of the units could then be made available for sale. An order has already been made by the court providing for allocation of the flats to those still with shares in the HW Settlement, and I am further told that the sale of any one of the flats is expected to raise a sum in the region of $30 million. This is now the main asset of the trust apart from shares in HWEL, which can be distributed in specie at any time, cash on deposit of some $6.6 million, and a balance of about $350,000.00 from the other family companies after settling all accounts with regard to the financing of the redevelopment. 42. The first question then is whether the trustees should be removed and replaced. In respect of this the principle was clearly stated by Lord Blackburn in Letterstedt v. Broers & Anor (1884) 9 App Case 371, where, at p. 386 he says:
and at p. 387:
43. This was followed by Street CJ in Guazzini v. Pateson (1918) 18 SR (NSW) 275, at p. 293 where he said:
44. In this case, neither do I think that they do. As is clear from what I have already said, I do not consider that the trustees have been guilty of any dishonesty or gross misconduct. Nor have they acted maliciously or deliberately against the interests of the trust. I am not satisfied that the evidence shows that the trust has suffered financially from the actions they took. They have been at worst misguided in believing that the interests of the trust were the same as those of the family as a whole, and that they had discretion to use the trust to further those interests. There is, however, no reason to suppose that they will continue to do so. Indeed, they have already expressed their intention of making a distribution of the assets of the trust, subject to a retention against possible estate duty, and subject to the trust's share of the Barker Road property being sold. The trust will therefore come to an end in the not too distant future, and I have no doubt that the present trustees will administer that distribution and the termination of it properly. The alternative proposed by the plaintiff is to appoint HSBC Trustee in their place. The trustees, and indeed, the other beneficiaries' objection to this is principally the cost, which will be a minimum of $500,000.00, as well as the lack of necessity for such a change. 45. I tend to agree. Where, as I have found, there is no reason to believe that the trustees will not act henceforward properly and in accordance with the law, and a change would reduce the funds available by a considerable sum, the trustees giving their services free, removal of the trustees at this stage would be of no benefit to the trust. 46. I will, however, give the plaintiff the declaration she seeks in the second action in terms of the first prayer of her statement of claim, to the effect that the defendants hold the trust property and income on the terms of the settlement deed as modified by the memorandum of wishes. But I make no further order in those proceedings save as to costs, relying on the defendants declared intention as to distribution of the trust on those terms. In particular, I am not satisfied on the evidence that, as matters have transpired, the assets of the trust are less than they would have been in other circumstances. An order for damages is accordingly not appropriate. 47. As to costs, the following orders are made nisi with liberty to either party to make further representations within the time limited under the rules. 48. The plaintiff having been substantially successful in her contentions in both proceedings, albeit not receiving all the relief prayed for, is entitled to her costs of those proceedings to be taxed. The question then remains as to who should pay those costs. The defendants must be responsible for them to a large degree, having, as I have found, wrongly resisted them. Indeed, as I have also found above, had the defendants been more open and forthcoming in the early days of these events which became a dispute, these proceedings may have been avoided altogether. 49. Are they then entitled to look to the trust itself for payment of part or all of those costs, and their own? I do not think they are. In addition to their attitude when the plaintiff first began to make enquiries, I have found that there was a degree of misconduct, albeit not involving dishonesty. Myers CJ, when dealing with the question of whether trustees could look to the trust for payment of costs in the New Zealand case of Hunter and Anor v. Hunter [1938] NZLR 520 had this to say on the point, at p. 538:
50. In that case the plaintiff was deprived of a large amount of her own costs as there were many grounds of her attack upon the trustees which she failed to substantiate. That is not the case here. 51. It would also in my view be wrong to penalize the trust in costs to any degree as this would in effect be penalizing those beneficiaries who have not been parties to these proceedings, and whose interests should not be affected by them. 52. There will accordingly be an order nisi that the plaintiff's costs be paid by the defendants, with no order to the effect that the defendants can look to the trust for their own costs. 53. There will also be liberty to apply generally as to any further orders necessitated by my findings herein or the further execution by the trustees of their duties under the settlement.
Representation: Mr Clifford Smith, instructed by Messrs Barlow Lyde & Gilbert, for the plaintiff Mr Denis Chang SC and Mr Paul Shieh, instructed by Messrs Johnson Stokes & Master, for the defendants |
Cases cited in this judgment
Further hearings and rulings under HCMP 3943/1997