HCMP1850/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1850 OF 2009 ------------------------------ IN THE MATTER of the Estate of GERARD JOHN GALLAGHER, Deceased and IN THE MATTER of sections 3 and 4 of The Inheritance (Provision for Family and Dependants) Ordinance, Cap. 481 of the Laws of Hong Kong ---------------------- BETWEEN CLEMENCIA MANANSALA GALLAGHER and MARK EDWARD KIRKHAM, the Executor of the Estate of the abovenamed Deceased AZURE TRUSTEES LIMITED ---------------------- Plaintiff 1 st Defendant 2 nd Defendant Before : Hon Yam J in Court Date of Hearing : 9 July 2010 Date of Judgment : 9 July 2010 Date of Handing Down Reasons for Judgment : 19 August 2010 --------------------------------------------------------- REASONS FOR JUDGMENT ------------------------------------------------------ Introduction
1. The protection of the law extends beyond death. A person can make arrangement for his own affairs after his death knowing his wishes will be continued to be respected by law and his dignity protected. 2. This case concerns the late Mr Gerard John Gallagher ( Mr Gallagher ) who passed away on 29 September 2008 in Malaysia. The plaintiff in this case is the widow, Mrs Clemencia Manansala Gallagher ( Mrs Gallagher ). They married on 2 June 1994 in Hong Kong. The two had no children. 3. Mr Gallagher was living in Hong Kong since 1985 and was a senior solicitor employed by the Hong Kong Government. The two lived in Government quarters and enjoyed a reasonably high standard of living. The establishment of the Minotaur Trust 4. According to a memo from the 2 nd defendant, Azure Trustees Limited ( Azure ), Mr Gallagher wanted to hold an insurance policy with a trust so that the policy proceeds upon his death would escape taxes in the United Kingdom. On 22 March 2007 Mr Gallagher and Azure executed a deed and established the Minotaur Trust ( the Trust ). At that time the only property in the Trust was GBP 10 given by Mr Gallagher and it remained the sole property until Mr Gallagher s death on 29 September 2008 in Kuala Lumper. Mrs Gallagher did not know of the Trust until Mr Gallagher s death. 5. On 17 March 2008 Mr Gallagher executed a will. The effect of the will is such that the majority of his estate would be transferred to the Trust. The 1 st defendant, Mr Kirkham, together with Mr Michael Harris and Ms Nora Monica Gallagher (Mr Gallagher s sister) were named as executors and trustees of the will. The 2 nd defendant, Azure was named as a backup executor and trustee of the will in the event that the aforementioned persons become unavailable for those roles. The dispute 6. The primary dispute in this case is whether the plaintiff, Mrs Gallagher is entitled to have an absolute interest in the properties of the Trust ( the Trust Fund ) or only a life interest in them. 7. Both the plaintiff and the 2 nd defendant had the opportunity to speak with Mr Gallagher concerning his estate. The plaintiff said in her first affidavit that Mr Gallagher told her : he was leaving all his estate to me, with the exception of certain items. Ms Deborah Annells, the managing director of Azure in her first affidavit said Mr Gallagher did not like his wife s relatives and that he was concerned that she could be a target for friends and relatives if they had a perception that she was wealthy, and that if she had too much capital in her own right she could end up with very little. More importantly, Ms Annells said Mr Gallagher considered that it might be necessary to purchase a property for Mrs Gallagher to live in, but that such property should be owned or rented by the trust for use by Mrs Gallagher, during her lifetime. 8. The dispute is primarily concerned with Article 3.0 of the deed establishing the Minotaur Trust ( the Deed ). Article 3.0 reads : Persons Entitled to Capital and Income. After the Donor s lifetime, the Trustee shall distribute the Trust Fund at such time or times indicated below ( Distribution Date ) :
The Trust Fund shall be resettled by the Trustee into an irrevocable discretionary trust for the surviving Primary Beneficiary, or failing her for the surviving Secondary Beneficiary, or failing her the Contingent Secondary Beneficiary. 9. Apparently there is a drafting error in the Deed, Article 3.0 refers to Contingent Secondary Beneficiary while Article 3.12 refers to Secondary Contingent Beneficiary. 10. The plaintiff, represented by Mr John Brewer, avers that as she is the Primary Beneficiary under the Trust, she is entitled to have an absolute interest in the irrevocable discretionary trust above. The plaintiff also accuses the 2 nd defendant of misinterpreting the Trust in order to continue managing the Trust and receiving annual fee. Ms Annells of the 2 nd defendant, however retorted this accusation by saying that the annual fee is well below her usual charge, i.e. a sort-of friendly charge. 11. In any event, Ms Annells in her second affidavit avers that the effect of the Trust is that [if Mrs Gallagher] lived a normal lifespan, [Azure] would expect the majority of the trust fund to be spent on her, the balance if any to go to Red Cross. Ms Annells also clearly admits the possibility of depleting the Trust Fund. 12. Mr Nicholas Pirie, for the 2 nd defendant submitted quite a different story in that the effect of Article 3.0 is to create a Minotaur Trust No. 2 for the plaintiff, so that she may enjoy the Trust Fund in her lifetime. After she passes away the remainder of the Trust Fund is resettled into another irrevocable discretionary trust (Minotaur Trust No. 3) for the benefit of the Secondary Beneficiary (Ms Nora Monica Gallagher), the Contingent Secondary Beneficiary (Mr John Hand), or the Final Contingent Beneficiary (The International Red Cross). Most importantly he submitted that the Primary Beneficiary, the Secondary Beneficiary and the Contingent Secondary Beneficiary are only entitled to income of the Trust Fund and that when all three have passed away the capital and income would be passed to the International Red Cross, Geneva. In his submission in reply to Mr Brewer, he described the Trust as primarily an income only trust meaning that the beneficiary is only entitled to income. In the same submission, he referred to Articles 3.11 3.12 and said this was [sic] inserted to prevent the Trust [from] offending the Perpetuity Rule and to ensure the primary beneficiaries [sic] did not enjoy the capital. Mr Pirie did not consider it possible that the Trust Fund would be depleted by the beneficiaries because they are only entitled to income, but not capital of the Trust Fund. 13. At the hearing on 9 July 2010, Mr Pirie submitted that so it [is] quite clear that any undistributed capital or income which the widow may be entitled to during her life time is then resettled into a new trust or go back to the Minotaur Trust. Surprisingly, Mr Pirie contradicted himself by saying that Mrs Gallagher may be entitled to some capital. 14. Therefore it seems that for the 2 nd defendant there are at least 3 versions of Mr Gallagher s arrangement (1 from Ms Annells and 2 from Mr Pirie). If Mr Gallagher s dying wishes vary with whoever from the 2 nd defendant relaying it, the 2 nd defendant hardly seems to get them right in the first place. 15. The 1 st defendant remains neutral on this issue and is represented by Mr Eric John Davison, a solicitor. 16. Ms Gallagher and Mr Hand executed a Deed of Renunciation disclaiming any entitlement to the Trust Fund. Ms Gallagher passed away after executing the said deed and before the commencement of these proceedings.
17. On 9 July 2010, I held that the effect of the Trust is to allow Mrs Gallagher to have an absolute interest in the Trust Fund after the death of Mr Gallagher. I now give my reasons for judgment. Rule of construction employed in this case 18. Despite being prepared by a professional trustee (Azure), the Deed was very poorly drafted. Particularly, the Distribution Date is not well defined. Article 3.0 only provides that the Distribute Date(s) are the time or times indicated in the second paragraph. The second paragraph only directs Azure to set up an irrevocable discretionary trust for Mrs Gallagher, Ms Gallagher, or Mr Hand as the case may be. In the second paragraph, there is no mention of any date or any event that may trigger the distribution of the Trust Fund. Also, the mechanisms of the irrevocable discretionary trust have not been spelt out in the Deed. 19. For the aforesaid reasons, in constructing Article 3.0 I would consider the Deed as a whole and take a purposive approach. After careful consideration, I have found 5 indicators for construction that support the plaintiff s contention. Five Indicators for construction 20. The first indicator is that there is no mention of holding the Trust Fund for any of the beneficiaries named above in Article III Dispositive Provisions After the Donor s Lifetime (i.e. : Articles 3.0 to 3.90). However, Article 2.00 under Article II Dispositive Provisions During the Donor s Lifetime provides that : During the Donor s lifetime, the Trustee shall hold the income and capital of the Trust Fund for the benefit of such persons (including the Donor) as the Donor appoints on such terms as the Donor thinks fit. 21. If the contention of the 2 nd defendant was true and Mr Gallagher intended to give a life interest to Mrs Gallagher then one would expect Article 3.0 to be drafted in similar fashion as Article 2.00, i.e.: it would require it to hold the Trust Fund under Minotaur Trust No. 2 and apply the Trust Fund on Mrs Gallagher. This Mr Gallagher did not do, instead he directed Azure to distribute the Trust Fund and one can infer that distribute in Article 3.0 is different from apply in Article 2.00. 22. The second indicator is that Article 3.0 clearly provides that Azure should distribute the Trust Fund, which means all the properties in the Trust and not just income to Mrs Gallagher. Mr Pirie, at paragraph 13II of his submission in reply to Mr Brewer sought to establish that Mrs Gallagher, Ms Gallagher and Mr Hand only had interest in the income generated from the Trust Fund. He submitted that this is because Mr Gallagher wanted to preserve the income-generating capital for the successive beneficiary who is still alive and when all the beneficiaries have perished the income and capital were to be transferred to the International Red Cross. 23. In my judgment, this argument is plainly wrong. Despite the poor drafting, the Deed was clear in its use of the terms such as income and capital of the Trust Fund, income of the Trust Fund and Trust Fund. In Article 2.00 it requires Azure to hold the income and capital of the Trust Fund while in Article 2.10 it requires Azure to apply the income of the Trust Fund. In Article 3.0 there is no distinction between income and capital and Azure was simply directed to distribute the Trust Fund. I find it very difficult to read with the additional words income only in Articles 3.0, 3.10, 3.11 and 3.12 when similar words had been used in Article 2.10 but was decidedly not used in Articles 3.0, 3.10, 3.11 and 3.12.
24. If Mr Gallagher, a very experienced lawyer himself, intended to allow the beneficiaries to enjoy income only, he would and could have evidenced this intention by using unambiguous words to that effect in the Deed. 25. The third indicator is that the Deed does not envisage a resettlement other than the one provided in Article 3.0. Mr Pirie submitted that the effect of the Deed is to create a trust each time a beneficiary passes away so that the next surviving beneficiary can enjoy the income from the Trust Fund. However, the Deed plainly does not provide a second resettlement. Article 3.0 only provides the resettlement of the Trust Fund into an irrevocable discretionary trust for the surviving Primary Beneficiary or failing her for the surviving Secondary Beneficiary or failing her the Contingent Secondary Beneficiary. Failing her is not defined in the Deed. 26. It should be noted that the Article 3.0 provides for the creation of an irrevocable discretionary trust for one of the three beneficiaries in sequence. The Trust used the words or so the three beneficiaries are named in the alternative and one trust is to be created for one of the three beneficiaries. Mr Pirie s contention is only possible if, at the very least, the words or are substituted by and. 27. The fourth indicator is the use of the word distribute in Article 14.10 of the Deed. Article 14.10 reads :... if immediately prior to the termination date any beneficiary is living and then entitled to income but not capital, then the Trustee, in its absolute discretion, may prior to the end of the perpetuity period, distribute such part of the Trust Fund as it shall in its absolute discretion think fit to any such beneficiary. 28. Article 14.10 clearly draws a distinction between income, capital, and Trust Fund. The word distribute is used in relation to Trust Fund while another word entitle is used in relation to income and capital. Distribute in Article 3.0 should be construed in similar fashion such that Azure should distribute to Mrs Gallagher the Trust Fund, defined as all properties in the Trust in Article 1.10(h), and not just income as the 2 nd defendant avers. 29. The fifth indicator is Article 3.60, which suggests that a single beneficiary is to take all the Trust Fund to the exclusion of other beneficiaries. Article 3.60 reads : Death of a Beneficiary Before Receipt. If any beneficiary dies after the relevant Distribution Date but before receiving his or her entitlement, then the Trustee shall pay such beneficiary s entitlement without apportionment to the person next entitled to it under the terms of this Trust as if such beneficiary had predeceased the Donor. The Trustee may certify the date on which each beneficiary receives his or her entitlement in such manner as the Trustee thinks fit, which certificate shall be conclusively binding on any person claiming under this Trust. Without prejudice to the generality of the provisions excusing the Trustee from liability, the Trustee shall not be liable to any persons for any delay in effecting a distribution. 30. The meaning of the words as if such beneficiary had predeceased the Donor in Article 3.60 is unclear. Under ordinary usage, such beneficiary here refers to the last beneficiary mentioned and in this instance, it refers to the person next entitled to it. Also, as a beneficiary is not entitled to anything if he predeceases the Donor (Articles 3.10, 3.11, 3.12 and 3.13), the words such beneficiary can only sensibly refer to the person next entitled to it, who receives no apportionment, but not the beneficiary who dies after the relevant Distribution Date. Therefore the effect of Article 3.6 is to give the beneficiary who dies after the relevant Distribution Date his
entitlement without any apportionment to the person next entitled to it (i.e. the next surviving beneficiary). More importantly, the next surviving beneficiary in such instance is to be treated as if he/she has predeceased the Donor and is not entitled to anything. This is clearly incompatible with Mr Pirie s submission, which suggests that the next surviving beneficiary can receive something (i.e. : the income from the Trust Fund) after the death of the previous beneficiary. 31. It is true that Article 3.6 is only related to a beneficiary who dies after Mr Gallagher but before the Distribution Date. But a beneficiary who is still alive on the Distribution Date, i.e. Mrs Gallagher, should, as provided therein, be entitled to 100% of the Trust Fund, to the exclusion of the next beneficiary. 32. For the aforesaid reasons I find it difficult to accept Mr Pirie s submissions that the accumulations in Articles 3.11 and 3.12 can only be referred to income but that in relation to The International Red Cross, Article 3.13 bespeaks of the person entitled to Capital at the Final Distribution Date. However I cannot even find the word income, capital or Capital in anyone of the aforementioned Articles 3.11, 3.12 or 3.13, so it is difficult to see how these articles can bespeak either of them. His submission is therefore incomprehensible to me. 33. Mr Pirie also submitted that If Mr Gallagher, had wished to vest the entire capital and income of his estate and give to his widow, he could have done so by vesting the residuary estate in his wife in his Will. The simple answer to this submission is that under the current arrangement Mrs Gallagher can only receive the residuary estate if she does not predecease Mr Gallagher. If Mr Gallagher had simply vested his residuary estate in Mrs Gallagher and if Mrs Gallagher predeceased Mr Gallagher, then Mr Gallagher s residuary estate would become part of Mrs Gallagher s estate. In other words, by utilising the Minotaur Trust, Mr Gallagher increased the chance that his residuary estate would be enjoyed by Mrs Gallagher, Ms Gallagher or Mr Hand instead of those who claim through them. 34. Mr Pirie also appears to take issue with the use of the word may in the Deed. It is uncertain whether he takes issue with every use of may in the deed or only with the one used in Article 3.10. Article 3.10 reads : Persons Eligible after the Distribution Date: Primary Beneficiaries. At the Distribution Date the Trustees shall calculate the shares of the Trust Fund and any undistributed income as indicated below. The Trustee may allocate the share to the trust fund resettled as per Clause 3.0 above for the benefit of the person named below ( Primary Beneficiary ) as follows : Primary Beneficiary Fraction Clemencia Manansala 100% Gallagher 35. It is very difficult to ascertain the meaning of The Trustee may allocate the share to the trust fund resettled for [Mrs Gallagher]. I think to should mean of and may should mean shall in this context. The first change in meaning is grammatical only while the second change in meaning is caused by Article 3.0. Article 3.0 specifically directed the Trustee (Azure) to distribute the Trust Fund to Mrs Gallagher with the words shall distribute the Trust Fund. Therefore Azure has no discretion in whether to distribute the Trust Fund or not. By virtue of the first paragraph of
Article 3.10, Azure shall calculate and give 100% of the share of the resettled trust to Mrs Gallagher. It would be very strange if Azure is allowed to have discretion in whether to allocate the share of the resettled trust fund, which is a necessary step to execute the distribution envisaged in Article 3.0. This discretion is plainly incompatible with Article 3.0 and if allowed to subsist will undermine Article 3.0, or indeed the whole objective of the Trust. 36. Mr Pirie tried to categorise this trust as an income only trust and he submitted that [t]ypically 50% of the assets of this type of trust are invested in long term bonds or securities which may have maturity dates beyond the lifespan of the successive beneficiaries [sic] :. With all due respect, I find it difficult to find anything in the Deed that requires or directs Azure to make such an investment. Conclusion 37. The deed that established the Minotaur Trust provides a definition of Trust Fund in Article 1.10(h) and that is all accumulated income, added property, and the property from time to time representing the same and the GBP 10 from Mr Gallagher. Trust Fund in Article 3.0 should be construed in the same manner and Mrs Gallagher should have the Trust Fund distributed to her. That should be the end of matter. 38. The poor drafting of the Deed had certainly given room for creative construction of the Deed. The mechanisms of the irrevocable discretionary trust and the definition of Distribution Date had never been provided. Mr Pirie submitted that the Minotaur Trust is in common standard form and that this type of trust is commonly drafted for expatriates who are for [sic] foreign domiciled settlors. One certainly hopes that this common standard form will never be used again as it is bound to stir up more troubles than it resolves. 39. The contention of the 2 nd defendant appears to originate from its own understanding of what this kind of trust ought to do but not how the Trust actually works. Mr Pirie s submission that Articles 3.11 and 3.12 refers to income and Article 3.13 refers to Capital is unfounded and the Deed clearly draws the distinction between income, capital and Trust Fund such that the three cannot be used interchangeably. 40. The conclusion of this judgment is simply that the plaintiff is entitled to the whole estate of her husband. Mr Brewer has carefully drafted a form of Order which faithfully follows the mechanism of the Deed in the creation of an irrevocable trust to receive the estate from the executor (i.e. the 1 st defendant herein) and direct the Trustee to distribute the estate to the plaintiff. There is also a direction that this irrevocable trust shall cease to exist after the said distribution. I indicated at the hearing that equity looks at the substance rather than the form. In light of this maxim in equity, I query why this Court of competent jurisdiction cannot just direct the 1 st defendant to gather all the estate and transfer them directly to the plaintiff. This will save up a lot of fees and charges. But of course, I have not been informed as to whether the aforesaid convoluted mechanism of establishing an irrevocable discretionary trust can avoid certain estate duties in other jurisdictions. I therefore await Mr Brewer s draft of the Order and Judgment for my approval, or his further submission on the form of the Order, if any. Costs 41. I have directed the parties to file and serve their written submissions on costs on/before 20 August 2010. However Mr Pirie already objected to certain material included in Mr Brewer s submissions. I have directed the 2 nd defendant to apply properly before me for the hearing of the
2 nd defendant s objection after this Reasons for Judgment is handed down. Thus the question of costs shall be decided after hearing such an objection. (D. Yam) Judge of the Court of First Instance, High Court Mr John Brewer, instructed by Messrs Fairbairn Catley Low & Kong, for the Plaintiff Mr Eric John Davison, of Messrs Kao, Lee & Yip, for the 1 st Defendant Mr Nicholas Pirie, instructed by Messrs Philip W.I. Li & Co, for the 2 nd Defendant http://legalref.judiciary.gov.hk/lrs/common/search/search_result_detail_frame.jsp?dis=72745&qs =%2B&TP=JU