RE TAM MEI KAM

CACV 39/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 39 OF 2014

(ON APPEAL FROM HCB NO. 3777 OF 2011)

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1.  This is an application for security for costs on appeal taken out by the trustees in bankruptcy (“the Trustees”) of the estate of Madam Tam Mei Kam, who was adjudged bankrupt on 25 April 2012.

2.  The judgment being the subject of Madam Tam’s appeal was given by L Chan J on 21 February 2014, in which the judge dealt with inter alia the Trustees’ application for an income payments order (“IPO”) under section 43E of the Bankruptcy Ordinance, Cap 6 in respect of accrued maintenance and future monthly maintenance payable to Madam Tam, and Madam Tam’s application to strike out the Trustees’ said application, to remove the Trustees from their office and for payment to her of the accrued maintenance.

3.  The maintenance payable to Madam Tam was payable from the estate of her deceased daughter Madam Mui Yim Fong by HSBC International Trustee Limited (“HSBC”).  By her will, Madam Mui left her entire estate (“the Mui estate”) to an offshore discretionary trust known as the Karen Trust and appointed HSBC the trustee of the Karen Trust and the sole executor of her will.  By an order made in HCMP 2981/2004 on 20 November 2007, HSBC was directed to pay out of the Mui estate a monthly sum as specified for the maintenance of Madam Tam.  The monthly payment was suspended by an order of 26 June 2012 due to insufficient liquid assets in the Mui estate.  HSBC was in a position to resume payment when the liquidity of the Mui estate improved significantly in August 2013.  Hence, there was accrued maintenance payable to Madam Tam of about $2 million.

4.  By his judgment, the judge dismissed Madam Tam’s application to strike out the Trustees’ application and to remove them from their office.  He made an IPO and directed HSBC (a) to take $104,000 per month out of Madam Tam’s income (being the monthly interim maintenance payable from the Mui estate to Madam Tam) for the period from 21 March 2014 until the date of discharge of the bankruptcy order or further order; (b) to deduct $2,063,899 out of the accrued interim maintenance, being income of Madam Tam payable from the Mui estate to her for the period prior to 21 March 2014; and (c) to pay the sums deducted in (a) and (b) to the Trustees.

5.  The effect of the IPO made by the judge is that Madam Tam would receive from the Mui estate (a) part of the accrued maintenance at $157,276; and (b) $48,000 a month, being the balance of the monthly interim maintenance currently assessed at $152,000, to satisfy her reasonable domestic needs as assessed by the judge.

6.  Madam Tam issued a Notice of Appeal on 27 February 2014 against the decision of L Chan J.  She sought to set aside the dismissal of her application to strike out the Trustees’ application for an IPO and to remove them from their office, the IPO and the costs order in the Trustees’ favour.  Madam Tam has not sought to set a date for the hearing of her appeal.

7.  The Trustees issued their summons for security for costs of this appeal on 5 May 2014, having sought security from Madam Tam by letter dated 1 April 2014 to no avail.  According to the initial skeleton bill of costs, the Trustees’ solicitors estimated their costs of the appeal at $227,433 and the costs of the application for security for costs at $158,905, making a total of $386,338.  The costs of the application for security for costs have been revised on the day before the hearing to $239,771, making a total of $467,204.  They issued this application on the grounds that the appeal is lacking in merits, that Madam Tam is impecunious and it is likely they would encounter difficulty, undue expense and delay in enforcing a costs order against her, and that there are no or no sufficient countervailing factors which would militate against an order for security for costs.

8.  At the conclusion of the hearing, I have made an order for security for costs on appeal and these are the reasons of my decision.

Impecuniosity of Madam Tam

9.  Madam Tam is an undischarged bankrupt.  Her bankruptcy arose out of her liability to pay the solicitors who acted for her in the litigation she brought to challenge the validity of her daughter’s will and the Karen Trust.  As at 2 May 2014, the balance of the outstanding debt owed to her creditors from seven quantified proofs of debt received by the Trustees amounted to $9.3 million odd, not taking into account another creditor who has claimed an unspecified amount in respect of various unpaid costs orders.  At the moment, the likelihood of a dividend being paid to the creditors depends entirely on the Trustees’ ability to continue to receive the income payments pursuant to the IPO.  Other than the accrued and ongoing maintenance payments Madam Tam received from HSBC, it is not known that she has any source of income or any significant assets in her name.

10.  The surplus in her bankruptcy estate is $2,030,376.60, made up of the credit balance in her bank accounts of $41,482.30 and maintenance payments from the Mui estate.  If the Trustees should continue to receive $104,000 a month under the IPO until April 2016, when in the normal course of events the bankruptcy order would be discharged, the estimated surplus in the bankruptcy estate would amount to approximately $4.5 million.  This has not taken into account the statutory fees payable out of the estate to the Official Receiver, the fees and disbursements of the Trustees for administering the estate, and the fees of the Trustees’ solicitors including the costs which were ordered by L Chan J to be paid out of the bankruptcy estate in respect of the Trustees’ application for an IPO and Madam Tam’s unsuccessful application.  As mentioned earlier, the minimum outstanding debt owed to Madam Tam’s creditors amounted to $9.3 million odd.

11.  If Madam Tam is to proceed with the appeal, in the event her appeal is dismissed, an adverse costs order would be made against her.  If there are no funds from an independent source to meet her costs liability, it is inevitable that an order would be made for the costs of the Trustees in the appeal to be paid out of the bankruptcy estate.  This would further deplete the assets of the estate to the prejudice of her creditors.

12.  Mr Hew, the Trustees’ counsel, cited two authorities of the Federal Court of Australia (Moore v Macks [2007] FCA 509 at §§15 to 24; Dubow v Official Receiver & Anr [2013] FCA 709 at §§32 to 46) in which security for costs on appeal was ordered against an appellant who was bankrupt on the application of the trustee in bankruptcy who was the respondent in the appeal.  In the latter case at §41, Collier J, after referring to section 19(1)(j) of the Bankruptcy Act 1966 (Cth) which requires the trustee to administer the estate as efficiently as possible by avoiding unnecessary expense, stressed that it is well settled that the trustee should administer the estate in such a manner as to maximise the return from estate assets and thereby to maximise satisfaction of creditors’ claims and any possible surplus for the bankrupt.  He said “it is perfectly reasonable for the trustee to seek an order of security for costs in respect of litigation, where there is a real risk that an order for costs against the other party may not be enforceable, rather than first exhaust the assets of the estate”.

13.  The same considerations should apply to a similar situation in Hong Kong.  In administering the bankrupt’s estate, a trustee in bankruptcy is under similar obligations as section 84 of the Bankruptcy Ordinance provides that trustees are to deal with property under their control honestly, in good faith, with proper skill and competence and in a reasonable manner.

14.  Subject to the discussion below on Madam Tam’s contentions about her apparent impecuniosity, it seems to me special circumstances are made out for security for costs to be provided under Order 59 rule 10(5) of the Rules of the High Court, in the absence of any sufficient countervailing factor.

15.  Madam Tam raised the following contentions.

16.  First, she asserted that the accrued maintenance of $2 million should have been paid to her but was not paid due to the error in the judgment of L Chan J and this judgment is the subject of her appeal.  The impecuniosity alleged by the Trustees was not of her making.  If she had not been wrongly deprived of $2 million, there would be no question of her not being able to meet any liability for costs in the appeal.  This was the central theme of her oral submissions before this court.

17.  This is just a circular argument, based on the contention that Madam Tam’s arguments before L Chan J should have been accepted instead of rejected, see Sunchase International Group (China) Ltd & Ors v Vincor Group of Companies (Investment) Ltd & Ors [2004] 1 HKLRD 731 at §6.  I reject this argument.  She cannot pray in aid the accrued maintenance for the purpose of providing security, as the bulk of the accrued maintenance was held by the judge to have constituted her income for which an IPO was made.  She has challenged the correctness of the judge’s decision in the appeal.  An order for security for costs is to provide protection to the Trustees in the event that her appeal is dismissed and she is ordered to pay the Trustees’ costs.  If her appeal is dismissed and the judge’s decision upheld, she would have no right to use the accrued maintenance to meet her costs liability in the appeal.

18.  Second, she alleged that the Trustees have never been genuinely worried about her being impecunious.  She pointed to the inquiries made by L Chan J with the respective solicitors for HSBC and for the Trustees on 7 February 2014, before the hearing on 11 February, in which the judge asked HSBC and the Trustees to advise the court on the value of the Mui estate and the claims of all beneficiaries, dependents and creditors of the Mui estate in rough terms, and the total amount of the outstanding debt, legal costs and other amounts due from Madam Tam’s estate to her creditors and the Trustees.  The Trustees however only made “vague and unclear” replies to the court.  At the hearing on 11 February 2014, the judge told her in the presence of HSBC and the Trustees that since she is the biggest beneficiary of the Mui estate, he would suggest to her to ask HSBC to pay off her bankruptcy.  Hence, the Trustees could never have any genuine worry about her impecuniosity.

19.  I have read the Trustees’ replies to the inquiries of the judge.  I do not think the replies were in any way vague or unclear.  The fact that the judge had made a suggestion that Madam Tam could ask HSBC to pay off her debt to obtain a discharge of her bankruptcy does not mean the Trustees should not be concerned there may be a real risk that an adverse costs order against Madam Tam would further deplete the assets of the bankruptcy estate.

20.  Third, Madam Tam made yet another challenge to the Karen Trust, contending this time that she could validly terminate the trust and has done so by serving a notice to this effect on HSBC dated 16 May 2014.  She asserted that she and her four grandchildren are absolutely entitled to the full benefits of the trust as the originally named beneficiaries of the trust, that the addition by HSBC of two beneficiaries – Lau Kai Eddie (“Eddie Lau”) on 20 June 2005 and New Horizon Buddhist Association Limited (“the Buddhist Association”) on 2 November 2005 – was defective due to the non-compliance of HSBC with formalities to make valid appointments by deed, and that in any event the appointment of the Buddhist Association as an additional beneficiary was in contravention of clause 31 of the trust deed.  Hence, she and the four grandchildren are the only beneficiaries entitled absolutely to the benefits of the trust and as such they can validly terminate the trust and have done so by the notice of termination on 16 May 2012 signed by Madam Tam on her own behalf and on behalf of each of the grandchildren who are alleged to be of full age.  She asserted that HSBC is obliged to wind up the Karen Trust and as the net cash position of the trust is very substantial, her bankruptcy will be discharged from the assets of the trust and there is no question of her being impecunious.

21.  The Trustees have made inquiries with the solicitors of HSBC on 18 June 2014 about Madam Tam’s purported termination of the Karen Trust, which they learned for the first time when the notice of termination was exhibited to Madam Tam’s affirmation to oppose this application filed on 3 June 2014.  HSBC’s solicitors replied on 20 June 2014 stating that HSBC does not consider there is any basis on which Madam Tam is entitled to terminate the trust as asserted and HSBC is in the course of preparing a reply to her directly.  At the time of the hearing, it is not known if Madam Tam has received a substantive reply from HSBC.

22.  The Trustees submitted there are a number of difficulties about the alleged entitlement to terminate the Karen Trust.  They envisage that the purported termination would be resisted by HSBC, Eddie Lau and the Buddhist Association and legal proceedings to resolve this dispute may be long drawn out and an expensive process.

23.  Madam Tam had challenged the validity of the will of her daughter and of the Karen Trust in HCAP 2/2004 which was heard and decided against her in June 2008.  She appealed this judgment taking her appeal all the way to the Court of Final Appeal and this resulted in the final dismissal of her appeal in May 2011.  Eddie Lau and the Buddhist Association were joined by Madam Tam as defendants in those proceedings.  She did not raise the argument in those earlier proceedings that their deeds of appointment as additional beneficiaries were invalid for non-compliance with formalities (contending that the execution of the deeds of appointment was not witnessed, the two persons who signed as “authorised signatory” were not identified and the source of their authorisation was not made known) or in contravention of clause 31 of the trust deed.  If Madam Tam were to advance this new argument in subsequent legal proceedings involving HSBC, Eddie Lau and/or the Buddhist Association, she would need to overcome the hurdle that this is not an abuse of process as this is an argument she could and should have raised in the earlier probate proceedings.

24.  Furthermore, under the trust deed of the Karen Trust, which is established under the laws of the Cayman Islands, it is provided that the initial law of the trust shall be the laws of the Cayman Islands and that the Courts of the Cayman Islands shall be the initial forum for the administration of the trust, although the trustee may at any time declare by deed that from the date of such declaration the forum for the administration of the trust shall be the courts of any specified country, state or territory.  Mr Hew submitted there is apparently a case that any dispute relating to Madam Tam’s purported entitlement to terminate the Karen Trust should be decided by the Courts of the Cayman Islands applying the laws of the Cayman Islands.

25.  Mr Hew also cast doubt on the merits of the new argument of Madam Tam relating to the non-compliance with formalities and the contravention with clause 31 of the trust deed.  He submitted that it is unlikely that HSBC would have failed to comply with the formalities on the execution of a deed of appointment laid down in its articles of association.  And the reading of Madam Tam of clause 31 is not a reasonable construction of that provision or of the trust deed as a whole.

26.  Madam Tam asserted that the Karen Trust can be validly terminated on the new argument advanced by her.  She contended that HSBC should adopt a neutral stance on this, otherwise it would run the risk of being made personally liable for her costs.  Further, Eddie Lau and the Buddhist Association may want to settle the dispute with her amicably and as quickly as possible in an economic way.  She submitted that the proper forum to hear the dispute on her entitlement to terminate the Karen Trust should be the Courts of Hong Kong, on the proper construction of the relevant provision in the trust deed and applying the principles on the conflict of laws.  As for the merits of her new argument, she submitted that the formal requirements on the execution of a deed could be overlooked easily, particularly by a big organisation like HSBC.  She reiterated her interpretation of clause 31 of the trust deed that no beneficial interest was intended to be given to the Buddhist Association.  She claimed there is no abuse of process, notwithstanding that she did not raise the new argument in the earlier probate proceedings.

27.  It is not necessary for me to reach a definite view on the above rival contentions or to mention the many authorities cited by Mr Hew in this respect.  Suffice it to say it is clearly not a straightforward matter for Madam Tam to successfully assert her claim that the Karen Trust has been validly terminated by the notice she served on HSBC dated 16 May 2014.  Legal proceedings will most likely have to be instituted, if Madam Tam should persist in pursuing her new argument.  And it would take time for this new dispute to be resolved.

28.  As matters now stand, it simply cannot be said that there will be an early discharge of her bankruptcy order.  Nor do I accept her contention there is possibility of funds forthcoming (whether by successful assertion that the Karen Trust is validly terminated, or by successful negotiation with HSBC, Eddie Lau and the Buddhist Association) within a relatively short time.  I am satisfied she is impecunious, that there is a real risk any costs liability imposed on her in this appeal would further deplete the bankruptcy estate, and that special circumstances are made out for security for costs to be provided on appeal.

Merits of the appeal

29.  If there are very strong merits in the grounds of appeal, that may constitute a sufficient countervailing factor for the court to exercise discretion not to order security for costs.  However if the appeal could go either way, the appellant would need to show other countervailing factor to tilt the balance in his favour.

30.  Madam Tam contended that her appeal would raise questions of great importance that are not easy to resolve and the Trustees’ application for security for costs is a trick to deny justice to her.  In short, her grounds of appeal are that the judge had erred in construing section 43E(1) of the Bankruptcy Ordinance in that he had ignored the Chinese version of this provision.  She complained that the judge had failed to take material facts into account in assessing her reasonable needs in making the IPO, and that the judge had failed to make findings on her complaints regarding the “abusive” conduct of the Trustees in refusing to remove them from their office.

31.  It is not necessary or desirable to examine in detail her arguments on the appeal and the Trustees’ counter arguments.  A preliminary assessment would suffice for present purpose.

32.  I am satisfied that the grounds of appeal are not strong in merits.  They do not therefore constitute countervailing factors for this court to exercise discretion not to order Madam Tam to provide security for costs on appeal.  There are no aspects of public interest that weigh in the balance against granting security.  There is no injustice in requiring her to provide security.  To the contrary, it is entirely just that security should be ordered in this situation.  She had pursued her applications before the judge and failed, resulting in a costs order which would be met out of her bankruptcy estate.  She should not be allowed to embark on an appeal without providing security, so as not to further prejudice the interests of her creditors.

The amount of security

33.  In the Trustees’ summons, they seek security for costs on appeal in the sum of $227,433, being the estimated costs of the appeal and the amount does not include the estimated costs of the application for security for costs, which come up to $158,905 according to the initial skeleton bill.

34.  I have drawn the attention of both parties to Koo Shing Sun v Hung Wing San Tony & Anr, CACV 241/2012 & CACV 41/2013, 11 April 2013, at §§44 to 47.  As I have stated in that case, there is no good reason why the costs of an application for security for costs should not be included in the amount to be provided as security, as costs of the appeal should embrace the whole process, including applications in the appeal court incidental to the appeal.  The choice is between ordering costs of the application for security to be paid in any event (in which case these estimated costs would be included in the security to be provided), or ordering such costs to be paid by the paying party forthwith.

35.  In this case, I think it appropriate to order that the estimated costs of the application for security should be included in the security to be provided, rather than ordering Madam Tam to pay such costs forthwith.  In making an order that costs of the present application are to be paid in any event, I do not propose to order further that such costs are to be paid out of the bankruptcy estate of Madam Tam.  If the Trustees should think it appropriate to apply for such an order nearing the time when costs are to be paid, they may then apply to the court.

36.  Mr Hew asked this court to make a gross sum assessment of the costs of the application for security for costs.  I do not think it appropriate to do so, as these costs are to be paid in any event and would form part of the costs of the appeal.  The costs of the appeal should be taxed in one go, in the usual way, rather than on a piecemeal basis.

37.  Madam Tam submitted that the quantum of the estimated costs in the initial skeleton bill should be reduced by half at least.  She asked for three months to pay, claiming that there is possibility she may come into funds by reason of her successful assertion of termination of the Karen Trust or that she may successfully negotiate a settlement with HSBC, Eddie Lau and the Buddhist Association.

38.  I have considered the revised skeleton bill claiming $239,771 in respect of the costs of the present application for security for costs.  In comparison, the original estimate for such costs was $158,905.  This is an increase of just over 50%.  Counsel explained the increase was due to the points taken by Madam Tam in disputing her impecuniosity.  Even if this should be taken into account, it seems to me that the revised estimated amount is excessive, both in terms of work done by solicitors ($130,769) and counsel’s fees ($105,000).  I note that counsel’s fees for this application are even higher than the estimated fees of counsel on appeal.  As for estimated costs of the appeal, I take into account that much work would appear to have been done already by the legal team of the Trustees in the application for security for costs, as confirmed by Mr Hew.

39.  I would estimate reasonable costs for the application for security for costs at $130,000, made up of solicitors’ costs at $70,000 and counsel’s fees at $60,000, and costs of the appeal at $177,500, made up of solicitors’ costs at $100,000 and counsel’s fees at $77,500.  The total amount of security to be provided is $307,500.

40.  The time usually provided for giving security is 28 days.  I see no reason to shorten this to 14 days as sought by the Trustees.  Madam Tam sought three months to pay.  Despite being sceptical if she would be able to successfully assert her entitlement to terminate the Karen Trust within a relatively short time or successfully negotiate a settlement as hoped for, I would allow her 56 days to pay.

Orders

41.  I have made the following orders:

(1) Madam Tam do within 56 days hereof give security for the Trustees’ costs of the appeal in CACV 39/2014 in the sum of $307,500 by making lodgement in court of the said sum by cash or bankers draft, and until such lodgement be made and notice thereof given to the Registrar and to the solicitors for the Trustees (such notice to be given on the same day as the lodgement is made) all proceedings in the said appeal are to be stayed;

(2) in default of Madam Tam making such lodgement as aforesaid within the time specified, or within such further time as the court may for special reasons allow, the said appeal do (upon the solicitors for the Trustees certifying such default to the Registrar) stand dismissed out of this court without further order;

(3) in the event that the appeal is dismissed in the circumstances provided for above, Madam Tam do pay to the Trustees their costs occasioned by the said appeal, such costs to be taxed if not agreed; and

(4) the costs of this application be costs in the appeal.