LO SHING KIN v. SY CHIN MONG STEPHEN

FACV No 16 of 2013

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO 16 OF 2013 (CIVIL)

(ON APPEAL FROM CACV NO 148 OF 2012)

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D E C I S I O N

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Mr Justice Tang PJ:

1.  The plaintiff (respondent), who was successful before Deputy Judge Seagroatt and the Court of Appeal, was respondent to the defendant’s (appellant) appeal to this court.  The appellant who was entitled to appeal as of right, was required to provide security in the sum of $400,000 “as security for the due prosecution of the appeal and the payment of all such costs as may become payable to (the respondent)[1].” The security for cost was paid into court on 22 July 2013 and on 31 July 2013, Kwan JA granted the appellant final leave to appeal.   These orders were set aside and superseded by an order dated 27 August 2013 made by 3 members of the Court of Appeal[2], whereby the appellant was “granted final leave to appeal … , having regard to the payment into court on 22 July 2013.”

2.  In the course of the appeal to this court, the appellant was adjudicated bankrupt on 9 May 2014[3], as a result the hearing of the appeal was adjourned.  After the appellant’s appeal against his Bankruptcy Order was dismissed by consent, a consent order was made by Tang PJ dismissing the appeal with costs to the respondent to be taxed unless agreed.

3.  The trustee and the respondent could not agree on the disposition of the security paid into court.  The trustee contended that the appellant was not a secured creditor and the security formed part of the estate of the bankrupt and should be paid out to them.  The respondent took the view that he was a secured creditor.  Moreover, if the security was insufficient to cover his taxed costs, the respondent was entitled to prove for the balance.

4.  The dispute turns on the definition of secured creditor, who is “a person holding a mortgage, charge or lien on the property of the debtor or any part thereof, as a security for a debt due to him from the debtor”.[4]  In particular, the words “debt due to”.

5.  Debt in the context is straightforward.  I believe any provable debt should suffice.  Provable debts are described in s 34 of the Ordinance, which includes:

“(3) … all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the date of the bankruptcy order, or to which he may become subject before his discharge by reason of any obligation incurred before the date of the bankruptcy order, ...”

6.  If the appellant’s liability for costs in the aborted appeal was the result of any liability to which he became subject by reason of any obligation incurred before the date of the bankrupt, the amount of such costs could be proved in bankruptcy.  

7.  The leading authority is In Re Nortel GmbH [2014] AC 209.  Nortel was concerned with rule 13.12(1)(b) of the Insolvency Rules 1986.  Under which a provable debt included:

“(b) any debt or liability to which the company may become subject after (the date on which the company went into liquidation) by reason of any obligation incurred before that date;”

8.  Rule 13.12(1)(b) was applicable to both individual bankruptcy as well as corporate insolvency.[5]  Lord Neuberger[6] overruled certain earlier authorities[7] which did not regard orders for costs made after the commencement of insolvency process to have arisen from an obligation which had arisen before the issue of the bankruptcy proceedings, even though the costs order was made in proceedings which had been started before the insolvency process had begun. Lord Neuberger held that the liability for such costs arose out of an obligation which arose prior to the commencement of the insolvency process.  Lord Neuberger explained:

“89 … by becoming a party to legal proceedings … , a person is brought within a system governed by rules of court, which carry with them the potential for being rendered legally liable for costs, subject of course to the discretion of the court.”

9.  Lord Sumption[8] also regarded those cases to have been wrongly decided.  He said:

“136 … In the costs cases, I consider that those who engage in litigation whether as claimant or defendant, submit themselves to a statutory scheme which gives rise to a relationship between them governed by rules of court. They are liable under those rules to be made to pay costs contingently on the outcome and on the exercise of the court's discretion.”

10.  In other words, by engaging in litigation, a litigant incurred an obligation to pay costs shouldthe court make an adverse costs order against him.  This is so plainly right I would not go on to consider the overruled decisions on which Mr Leon Ho, counsel for the trustee, relied.  Like their lordships I have no doubt that they should no longer be followed.

11.  If the liability to pay costs could give rise to a provable debt, Mr Ho argued that in so far as no order was made before the commencement of the bankruptcy proceedings, they were not due at the relevant time.  He submitted “the debt due” in the definition of “secured creditor” requires the debt to be a liquidated sum and presently payable.  If that is right, a mortgagee under a mortgage to secure a payment due the day after the commencement of the bankruptcy proceedings would not be a secured creditor whereas he would be if the payment fell due the day before.  With respect, it is difficult to see why that should be so.   

12.  There is a long line of English decisions which support the respondent’s contention that he is a secured creditor.  Mr David L K Chan, for the respondent has helpfully drawn my attention to some of them in his written submissions.  The definition of secured creditor in the Ordinance is identical to the definition in s 168 of the Bankruptcy Act 1883 and s 167 in the Bankruptcy Act 1914 under which the relevant English cases were decided.  I begin with In Re Gordon [1897] 2 QB 516. There, Vaughan Williams J was concerned with two sums.  One paid in as security for costs and one paid in together with a plea denying liability.  The latter was of course a voluntary payment.  Not surprisingly, it was not seriously contended that the plaintiff was not entitled to the sum paid in as security for costs as secured creditor.  Be that as it may, the learned judge said he had no doubt that the plaintiff was a secured creditor.  In regard to the voluntary payment in, the learned judge was “clearly of opinion that if the proof is admitted, or to the extent to which it is admitted, the plaintiff is a secured creditor by reason of the payment into court. … (the payment in) is in effect a conditional payment to the plaintiff. …”

13.  In Re Ford [1900] 2 QB 211 was concerned with payment into court under O14 as a condition of leave to defend.  Wright J said at 213:

“… and it is settled that where money is ordered to be paid into court to abide the event it must be treated as a security that the plaintiff shall not lose the benefit of the decision of the Court in his favour: … The very object of such an order is that the plaintiff shall be in as good a position, … against contingencies such as bankruptcy as if he had got an immediate judgment …”

14.  A more recent decision and a decision of a strong court of appeal[9] is W A Sherratt Ltd v Jonh Bromley (Church Stretton) Ltd [1985] QB 1038.  It was concerned with a voluntary payment into court under O 22 by the defendant.  After the defendant was put into liquidation, it applied to withdraw the money into court under O 22 r 1(3).  It was argued that because O 22 r 1(3) had been amended the discretion of the court to permit the payer to apply to withdraw the payment in had been enlarged.[10]

15.  The issue which engaged the attention of the Court of Appeal was Peal Furniture Co Ltd v Adrian Share (Interiors) Ltd [1977] 1 WLR 464 which was also a decision of the Court of Appeal.  In Peal Furniture, the defendants were permitted to withdraw the money in court and one of the reasons for permitting to do so was that otherwise “if it turned out that the defendants were insolvent the plaintiffs would, by obtaining judgment and taking the money out of court, be in a better position than the general body of creditors.”

16.  Oliver LJ (as he then was) who gave the lead judgment said in respect of this reason:

“… If the effect of the payment in is that the plaintiff becomes a secured creditor, that effect cannot in itself and at the same time be a good ground for depriving him of his security whether it has or has not matured. So far, therefore, as the Peal Furniture case … decides that this is a ground – even if not a universal ground – for ordering payment out to the defendant, it cannot stand alongside the previous authorities.”[11]

17.  After concluding that Peal Furniture was not binding.[12] Oliver LJ went on to say   :

“… I am unable to see why it should be suggested that the introduction of this rule[13] should, by a side wind, hence destroy the authority of the In Re Gordon line of cases which has stood unchallenged for over 80 years.

……

In my judgment the principles emerging from the In Re Gordon line of cases are still applicable to money paid in under the current rules. …”

18.  Robert Goff  LJ (as he then was) said:

“It is plain that there is an established line of authority, stemming from In re Gordon ... , that a plaintiff is treated as a secured creditor to the extent of money paid into court, whether that money has been paid in involuntarily, i.e. as a condition of defending the action, or voluntarily. ... Ever since In re Gordon ... , this has been regarded as established law; and, so far as I am aware, it has never been questioned. It has been treated as such in successive editions of the Annual Practice, and is still treated as such in, for example, Halsbury’s Laws of England, … and Williams and Muir Hunter on Bankruptcy…”

19.  In Modern Fashion Limited v Hong Kong Prudential Knitting Factory Limited (Unreported) HCA 115/1995, 18 January 1996, Le Pichon J (as she then was) said, had it been necessary to do so, she would have followed the In re Gordon line of cases.

20.  Mr Ho relied on Tradmor Investments Ltd v Valdi Foods (1987) Inc 1995 CanLII 7377 (ON SC), which was concerned with a payment into court as a condition to leave to defend.  There, Carruthers J declined to follow Ford and after noting the definition of secured creditor in the Canadian Bankruptcy Act, which was not materially different from the English definition said:

“20. In my opinion when paid into court pursuant to Matlow J’s order, the money was the property of the bankrupt and has remained to be such. At the time of the claim of the trustee in bankruptcy to that money, it cannot be said that the plaintiff was a secured creditor within the meaning of the Bankruptcy Act.”

21.  However, why that should be so was not explained.  His decision was affirmed on appeal by the Court of Appeal of Ontario but without elaboration.  I am not persuaded that Tradmor has provided a satisfactory basis for me to depart from the In Re Gordon line of cases.  Nor can I accept Mr Ho’s suggestion[14] that the English courts did not have their attention drawn to the definition of secured creditor.[15] 

22.  Mr Ho also relied on s 6(2)(b) in support of his submission that “debt” in the definition of “secured creditor” requires a debt for a liquidated sum.  I fail to see how s 6(2)(b) can help.  It provides one of the bases upon which a person could base a bankruptcy, namely a “debt … , for a liquidated sum payable to the petitioning creditor … either immediately or at some certain, future time, and is unsecured”.

23.  Mr Ho also relied on Re NK Ponnampalam(1938) 7 MLJ 13, which was concerned with the construction of s 20 of the Co-operative Societies Enactment Cap 97 under which:

“A registered society shall have a lien upon the share … in respect of any debt due from such member …”

24.  Whitley Ag CJ held that the expression “any debt due”:

“cannot go so far as to include a contingent liability, which may in fact never materialize into a debt at all.”

25.  Mr Ho also relied on other authorities on the meaning of the word debt in different legislations.  With respect, none of them help. I will give two examples.   Taylor v Tukuvaine Fruit Company(1910) 29 NZLR 1155 which held that an action for damages for breach of contract is not an action for a debt within the meaning of “The Private Debts Act, 1900”, which made debt incurred by any Maori after a certain date irrecoverable.  But as the judgment tells us, the Act was enacted because “… the Maori inhabitants … have been the victims of reckless trading and have been allowed to incur debts that will take years to liquidate”.  The court held the Act provided no defence to a claim for damages for breach of contract for the sale of certain bananas.

26.  Marren v Ingles [1979] 1 WLR 1131, in which a dictum of Templeman LJ (as he then was) was cited by Mr Ho as authority that debt cannot include a “possible liability to pay an unidentifiable sum at an unascertainable date”. 

27.  Marren was concerned with capital gains tax.  The taxpayer sold shares on terms that in the event of subsequent flotation he would be entitled to payment of a deferred consideration.  That came to pass and the deferred payment was made and the question was whether he was liable to pay capital gains tax in respect of such deferred payment.  One argument advanced on behalf of the taxpayer was that the deferred payment was a debt owed to him. It was in this context that Templeman LJ (as he then was) said:

“Mr Price[16] cited to Slade J and reiterated to this court that the meaning of the word ‘debt’ depends on its context. With that I am in full agreement. In the present case, the object of excluding as a chargeable gain a debt in the hands of the original creditor can only be to ensure that the ordinary simple debt on which a holder cannot make a gain but may make a loss shall not be brought within the ambit of the capital gains tax legislation, the object of which is to set off chargeable losses against chargeable gains to produce a liability to tax. Moreover, whatever the context in which “debt” is to be construed, I cannot believe that it applies to the present case to what was, as I have said, a possible liability to pay an unidentifiable sum at an unascertainable date….”

28.  Put in context, the dictum does not help the trustee at all.  Indeed, the meaning of the word “debt” depends on its context.  In the context of the definition, I believe, a provable debt should suffice.  As for the word “due”, its common everyday meaning includes owing or payable.  I see no reason why it should not be given its ordinary meaning [17].

29.  For the above reasons, I am of the view that the respondent is a secured creditor to the extent of the costs payable to him in the appeal[18].

30.  As for the costs of and incidental to the argument over whether the respondent is a secured creditor,   such costs should be borne by the trustee, who in this respect is an unsuccessful litigant.  I so order.  However, I believe the trustee should be indemnified by the estate in respect of such costs.