Hong Kong court rules on estate administrator's breach of fiduciary duties

In Tang Ying Loi v. Tang Ying Ip alias Tang Ying Yip and others (HCA 2487/2009), the Court of First Instance held that the defendants, who were appointed as estate administrators, breached their fiduciary duties by (i) unlawfully withdrawing money from the estate's bank account to purchase property for their own benefit and (ii) failing to collect money due to the estate. The court ruled that the defendants were liable to compensate the estate accordingly.

Background

The first and second defendants were administrators of the estate (the "Estate") of Tang Pui King, the deceased. The third defendant was a Hong Kong incorporated company which was 99% owned by the first defendant. The plaintiff, the eldest son of the deceased, commenced proceedings against the first and the third defendants for relief arising out of the first defendant's alleged breaches of duty as administrator of the Estate.

​Issues

The first alleged breach was the unauthorised withdrawal of a sum by the first defendant from an Estate bank account to buy a property in Yuen Long.

The second alleged breach was a shortfall in cash and bank balances of the Estate as a result of rent due to the Estate going unpaid during the period from 1983-2004 (the "Shortfall").

(i) First alleged breach

The Estate was a sizeable one, consisting primarily of numerous lots of land in the New Territories. Compensation monies were received in March 2003 from the Government upon resumption of these lots. Instead of distributing these monies to the beneficiaries of the Estate, including the plaintiff, in March 2003 the first defendant withdrew a sum of money from the Estate's HSBC current account and deposited it into another account in the name of the first and second defendants as administrators of the Estate.  In April 2003, the first defendant withdrew a second sum of money from the Estate's current account and deposited it into the first defendant's personal account. The first defendant purchased a property (the "First Property") ​in April 2003 which was partly funded by the monies withdrawn from the Estate's current account.

​The First Property was then first held on trust by the first defendant for the third defendant, and subsequently assigned to the third defendant.

Using the First Property as security, the first defendant obtained a loan and an overdraft facility and acquired another property (the "Second Property"). The first defendant claimed that he was only using the monies for short term investment for the Estate and had repaid the second sum of money​ with interest in October 2003.

(ii) Second alleged breach – the Shortfall

As the administrator of the Estate, the first defendant was under a duty to keep proper accounts of the income received and expenses incurred by the Estate. Had proper accounts been kept, it was alleged that the first defendant ought to have been 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. The first defendant paid back the full amount of the Shortfall to the Estate's bank account in December 2012, and therefore the remaining issue was whether the first defendant ought to pay interest on the Shortfall to the Estate.

​Conclusion

​The judge accepted that the first defendant had always intended to repay the money back to the Estate.  However, he found that there was no doubt the first defendant's use of money belonging to the Estate to finance his acquisition of the First Property amounted to an abuse of his position as administrator of the Estate and a misuse of the Estate's funds in breach of his fiduciaries duties to the Estate.

The judge examined the law on the imposition of a constructive trust on (i) the property which the trustee has acquired through the misapplication of trust moneys; and (ii) the benefit improperly obtained by a trustee in breach of fiduciary duty. Based on the particular facts of the case, the judge ruled that the repayment by the first defendant in October 2003 meant that a constructive trust could not be imposed on a proportional share of the First Property. However, the judge directed an inquiry into the profits in relation to which the first defendant was liable to account to the Estate.  These were the profits derived from the first and/or third defendants' acquisition of the First Property, including (but not limited to) the increase in the value of the First Property.  The judge also ordered repayment to the Estate of the amount found due upon the inquiry.​

In relation to the Second Property, the judge declined to direct a general inquiry on the benefit or profit that the first defendant may have obtained from using the First Property as security.  This was because of the plaintiff's failure to adduce any evidence of any such profit or put forward any reasonable basis for the quantification of such profit.

The judge though found in favour of the plaintiff​ o​n the second alleged breach.  The judge ruled that the first defendant failed to discharge his duty to keep proper accounts and was liable to pay compensation for any loss suffered by the ​Estate arising out of the Shortfall​, with interest. The calculation of the interest rate and the interest period was reserved to be dealt with at the same time as the inquiry.

​Take-away points from the case

• If an account for profits for an increase in value of the property is granted, a constructive trust on a proportional share of the property cannot be granted, and vice versa.​ There must be no double recovery of compensation for breach of trust.
• A plaintiff bears the duty to adduce evidence to establish a causal link between the benefit or profit ​derived by the administrator of an estate or a trustee and the relevant breach of fiduciary duty, or to put forward a reasonable basis for the quantification of such benefit or profit.