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Hong Kong – Court Of Appeal Gives Important Guidance On Beddoe Applications.

18 January, 2013

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

  

The Court of Appeal in Hong Kong has recently provided important guidance both on the Beddoe procedure and the substance of a Beddoe order in its decision in Mong Man Wai William [2012] (unrep, CACV 34/2012, [2012] HKEC 1785). It is very seldom that a higher instance court considers a Beddoe application which is why this case is of particular significance, and will be of keen interest to trustees and executors.

 

The Court of Appeal in this case has signalled that Beddoecourts should take a robust approach when considering whether or not to allow a party to the main action to make submissions on the merits of that action and has made aBeddoe order requiring that the executors take a neutral stance rather than allowing them to vigorously defend the main action. This reflects a common position which courts can take requiring trustees (and executives) to take a less partisan approach when defending or bringing proceedings where the dispute is in effect a dispute between beneficiaries rather than one involving an external third party.

 

Beddoe orders – a quick summary

Where a trustee or executor engages in litigation in the course of administering the trust or the estate he is usually entitled to an indemnity out of the trust or estate funds for all charges and expenses properly incurred by him in the course of such litigation. However, there is always a risk that the beneficiaries may argue that it was not proper or reasonable for the trustee or executor to pursue the litigation (whether as a plaintiff or a defendant) and that the trustee should be deprived of his indemnity on the basis that he should not have pursued the litigation at all or in the manner in which it was pursued. To avoid this risk of not being indemnified a trustee (or executor) may apply to the court for a Beddoe order (which is heard by a different judge to the one hearing the main action) authorising the trustee to proceed with a litigation in a certain way, in which case the trustee will be assured of his indemnity. The trustee is the plaintiff and the beneficiaries (including any beneficiary bringing or defending the proceedings which the trustee wishes to take part in) are the defendants in the Beddoe application.

The case – some background facts

In Mong Man Wai William the Court of Appeal had to consider whether the executors should be entitled to resist a disclosure application brought by the residual beneficiary. The residual beneficiary was trying to show that she and her daughter were entitled to a percentage of a trust fund and, in order to do this, wanted to be able to rely upon certain documents that had been disclosed in the course of ancillary relief proceedings following the divorce of the deceased and his first wife (to which the residual beneficiary had been joined at the time). The residual beneficiary wanted to be able to disclose the documents in BVI and possibly Hong Kong proceedings regarding the administration of the trust (which was governed by BVI law). The documents related to the setting-up of the trust and were subject to the usual implied undertakings that parties would not use the documents for any purpose other than the ancillary relief proceedings in which they were disclosed. The executors considered that they were duty bound to protect the deceased’s privacy and should therefore oppose the disclosure application and successfully sought a Beddoe order to that effect from the Court of First Instance. The Court of First Instance also ordered the residual beneficiary to bear the costs of the Beddoe hearing on the basis that the hearing would not have been required, but for the residual beneficiary’s opposition. The residual beneficiary appealed both the Beddoe order and the costs order.

The Court of Appeal’s decision

The Court of Appeal had to consider whether the implied undertaking restricting the use of the documents survived the death of the deceased and whether the right to enforce the undertaking had passed to the executors. In light of the adverse costs order, the Court of Appeal also had an opportunity to clarify the procedure to be followed in the case of a Beddoe application. The Court of Appeal made the following findings:

a.    The Beddoe procedure

  • There are two well established rules to be followed in relation to aBeddoe application:

    • i.    any beneficiary bringing or defending the main action (the “Opponent Beneficiary”) involving the trust or estate is not entitled to be heard when the merits of the main action are discussed before the Beddoe court (“the 1st Rule”); and

    • ii.    the Opponent Beneficiary is normally not entitled to access the evidence adduced by the trustee or executor in support of theBeddoe application (“the 2nd Rule”).

  • Although the Beddoe court may adapt the 2nd Rule in order to do justice to the particular case (ie, there may be a limited disclosure of evidence – possibly redacted), the circumstances in which such (limited) disclosure will be allowed are likely to be very rare.

     

  • On the other hand, the 1st Rule is immutable which means that the Opponent Beneficiary may under no circumstances be present when the merits of the main action are discussed.

     

  • Although it is generally acknowledged that an Opponent Beneficiary may make submissions in the Beddoe proceedings, the Beddoe court should be slow to receive submissions from the Opponent Beneficiary on the merits of the main action unless it can be readily shown that, “as a simple knock-out point, the Trustee’s proposed course is wholly devoid of merits”. TheBeddoe hearing should not be turned into a mini-trial of the main action and should be conducted in an inexpensive and expeditious manner.

     

  • In persuading the court to make a Beddoe order, the trustee only needs to show that there is a reasonably arguable case on the merits and if the trustee passes that test, any submissions by the Opponent Beneficiary on lack of merits are likely to fail and should therefore not to be entertained any further by the Beddoe court.

     

  • The mere fact that a Beddoe application has become necessary due to the Opponent Beneficiary’s position in the main action does not mean that the Opponent Beneficiary will need to bear the costs of the application or the hearing. However, the Opponent Beneficiary will be at risk as to costs if he adopts an “excessive role” in the Beddoe application and seeks to use it as a platform to promote his claim in the main action.

     

b.    The Beddoe Order

  • The Court of Appeal pointed out that there was no direct authority on point, but that it was reasonably arguable (the test to be met by the trustee) that the implied undertaking relating to the use of the documents and the corresponding right to enforce that undertaking continued beyond the death of the deceased.

     

  • Embedded in the right to enforce the implied undertaking is the right to bring contempt proceedings against the recipient of the documents where documents are disclosed in breach of the undertaking. This means that the right to enforce the undertaking can be characterised as a “cause of action” in the sense of section 20 of the Law Amendment and Reform (Consolidation) Ordinance which passes to the estate upon the death of the document provider and may therefore be enforced by the executors.

     

  • As there was no clear cut case that the estate would not be prejudiced by releasing the residual beneficiary from her undertaking the executors should be allowed to take part in the disclosure application. However, the Court of Appeal held that the executors should take a neutral stance; that is they should set out the relevant circumstances and make submissions on the law and provide any assistance required by the court, but they should not actively oppose the application.

This is an important decision and it is clear that the Court of Appeal has taken the opportunity offered by what is an unusual case of an appeal against a Beddoe order to set out some very clear and robust guidance for Beddoe courts and parties on how to deal with Beddoeproceedings.

 

 

For further information, please contact:

 
Gavin Lewis, Partner, Herbert Smith Freehills
gavin.lewis@hsf.com
 
Robert Hunter, Partner, Herbert Smith Freehills
robert.hunter@hsf.com
 
Richard Norridge, Herbert Smith
richard.norridge@herbertsmith.com

 

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