28 May, 2015
The Hong Kong High Court has been strict in its application of the rule that a trustee cannot benefit through the use of trust property or by virtue of his trusteeship, unless he is explicitly permitted to do so. This case involved properties which formed part of the residuary estate of the deceased. The estate was administered by the deceased’s brother, who was co-owner of the properties. A company owned by the administrator occupied the properties. The beneficiaries of the estate argued that the administrator was acting in breach of trust by allowing the company to occupy the estate’s share of the properties for nominal rather than market rent. The court held that the administrator was accountable to the estate for the market rent in relation to the estate’s share of the properties.
The plaintiffs were the grandchildren of Kong Wing Hong (“Wing Hong“), and were the residuary beneficiaries under his Will. They brought the claim against their great uncle, Kong Wing On (“Wing On“). Wing On was Wing Hong’s brother, and was appointed the executor and trustee of Wing Hong’s estate. The plaintiffs’ claims related to two properties in Hong Kong, from which the brothers had operated the On Hong Ning Drug Company Limited. The brothers were tenants in common of both properties and for most of Wing Hong’s life there was no lease agreement. The company did not pay rent prior to Wing Hong’s death.
However, in 1996, the brothers, as landlords, and the company, as tenant, entered into tenancy agreements in respect of the properties. The lease agreements purported to be for a five-year term, but the commencement date was left blank. The lease agreements specified that the companies would pay nominal rent of HKD 3 a month.
Wing Hong died in 2003. His Will left his shares in the company to Wing On. Under Wing Hong’s Will, a portion of the estate’s share of any rental income from the properties was to pass to Wing Hong’s grandchildren (on conditions).
At various times after Wing Hong’s death, the plaintiffs requested information about the estate and accounts from Wing On. In September 2012, after not receiving satisfactory answers from Wing On, the plaintiffs issued an originating summons for Wing On’s removal as executor.
After being served with the originating summons, Wing On filled in the commencement dates for the tenancies and executed them.
On 13 November 2012, the court removed Wing On as the executor and trustee of the estate.
Claim And Defences
The plaintiffs relied on the basic principle of trust law that a trustee (including an executor) cannot enter into any arrangement in which he has or may have a personal interest that may conflict with the interests of the estate. This rule is only negated when the terms of the trust expressly provide that the trustee can act in the face of a conflict. Wing Hong’s Will had not permitted such a conflict. The plaintiffs claimed that Wing On had effectively, as executor, allowed himself, as sole shareholder of the company and co-owner of the properties, to use the properties rent-free. This had disadvantaged the estate and consequently the plaintiffs. The plaintiffs claimed the estate should have received 50% of the market rent from the company. They sought an order requiring Wing On to pay the estate the value of the unpaid rent.
Wing On argued that he had the right to occupy the whole of the properties, as one of two tenants in common, without making any rental payments. However, the Court was not persuaded by this argument. The Court found also that Wing On had a double role, being both a co-owner and the representative of the other co-owner. In such a situation, he had a duty to look after the interests of the estate. The Court found that “without relinquishing his fiduciary role, it was not permissible for him to make decisions or act in relation to his own share that would have the effect of impinging on, or adversely affecting, the interests of his co-owner, ie the estate“.
Wing On also argued that there was a common assumption between the brothers that, on the death of either, the other would be entitled to continue to use the properties to operate the business. He claimed that for that reason the estate should be estopped from challenging his occupation of the properties. The court dismissed this argument, on the grounds that the assumption was not sufficiently certain because there was no evidence (other than Wing On’s testimony) to this effect.
Section 60 of the Trustee Ordinance gives the Court the power to relieve an otherwise liable executor from personal liability. The Court may only exercise this power if it is satisfied that the executor acted honestly, reasonably and ought fairly to be excused. The Court will only rarely use this power. Wing On argued that the Court should use this power to excuse his actions, but the Court did not accept this argument either. It held that Wing On had had a number of alternatives available to him, including paying market rent and/or renouncing probate of the estate so that another administrator of the estate could have been appointed from the outset. The Court held that the rule that a trustee must not profit from a trust was an “inflexible” one, and allowing relief in these circumstances would be “tantamount to (1) allowing a trustee to retain profits that resulted from a breach of trust, leaving the beneficiaries who are entirely blameless to shoulder the loss to the estate; and (2) excusing the trustee from not seeking directions from the court. Such an outcome would not appear to be either desirable or fair.” Wing On’s advanced age was also not considered to be a legitimate reason for varying the usual standard.
The Court thus held that the Wing On had to account to the estate for 50% of the market rental of the properties occupied by the company from the date of Wing Hong’s death.
It is important for advisers to ensure that they consider who should be the executors of their clients’ Wills. In most cases, it is best not to have a family member who will likely be in a position of conflict, as Wing On was in this case. It is also important to properly document arrangements that will have the effect of depleting an estate to make clear to the executor, beneficiaries and the court that the deceased intended the arrangement to continue in force after his death.
For further information, please contact:
Richard Norridge, Partner, Herbert Smith Freehills
Gareth Thomas, Partner, Herbert Smith Freehills