WONG SHUI KEE ROGER t/a ROGER S.K. WONG & CO v. VICTOR CHU & CO

HCSD 4/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 4 OF 2004

____________

____________

______________

D E C I S I O N

______________

Background

1.  This is the Applicant’s application to set aside a statutory demand served on him by the Respondent on 7 January 2004.  The Applicant and Respondent are practising solicitors.  In High Court Action No HCA 5590 of 2000, the Applicant sued the Respondent in libel in respect of certain words used in an inter-solicitor correspondence in the course of a previous litigation five and half years ago.  The Respondent’s defence was conducted by Mr Thomas of Messrs Herbert Smith (“Herbert Smith”).  On 19 September 2001, Hartmann J struck out the Applicant’s statement of claim and dismissed his action with costs to the Respondent.  The Applicant’s appeal to the Court of Appeal was also dismissed with costs.  The debt which formed the subject matter of the statutory demand is the taxed costs in High Court Action No HCA 5590 of 2000, certified in an Allocatur dated 27 December 2003.

2.  Herbert Smith made a number of errors in the bill of costs presented for taxation.  Both the Applicant and the Respondent sought a review of the taxation.  At the taxation review hearing before Master Au Yeung on 10 June 2003, the Applicant alleged that the errors must have been fraudulent attempts to inflate costs and hence argued that the Respondent should be deprived of part of its costs.  Master Au Yeung found that the errors were careless mistakes but not dishonestly made and dismissed the Applicant’s allegations of fraud.  Then, instead of seeking a review of Master Au Yeung’s taxation order by a judge of the High Court in accordance with Order 62 rule 35 of the Rules of the High Court, the Applicant issued proceedings against Mr Thomas and Herbert Smith under High Court Action No HCA 2207 of 2003, alleging fraud which had been fully canvassed before Master Au Yeung and claiming as damages the higher costs he was ordered to pay and the extra costs he incurred.  On 17 September 2003, Reyes J struck out the Applicant’s statement of claim as a collateral attack against the previous judicial decision of Master Au Yeung and dismissed his action with indemnity costs.  The taxation proceedings before Master Au Yeung resumed.  An Allocatur in respect of the taxed costs was sealed on 27 December 2003 and served on the Applicant on 29 December 2003.

3.  On 30 and 31 December 2003, Herbert Smith attempted to serve a statutory demand in respect of the certified costs on the Applicant, but was unsuccessful.  On 6 January 2004, the Applicant issued High Court Action No HCA 27 of 2004 against Mr Thomas and Herbert Smith repeating essentially the same allegations of fraud but claiming substantially high damages for insomnia, depression and loss of business. On 7 January 2004, the Respondent successfully served the statutory demand in respect of the costs certified in the Allocatur on the Applicant.  On 7 February 2004, the Respondent applied to strike out the Applicant’s statement of claim.  Both the setting aside application and the striking out application were fixed before me for hearing.  I have struck out the Applicant’s statement of claim and dismissed his action with indemnity costs as frivolous and vexatious or otherwise an abuse of the process of the Court.  I now turn to consider the Applicant’s application to set aside the statutory demand.

Taxation is subject to review

4.  The Applicant’s first ground for setting aside the statutory demand is that the taxation order of Master Au Yeung is being reviewed by a judge of the High Court.  After his second attempt of collateral attack on Master Au Yeung’s decision, the Applicant eventually adopted the proper procedure of seeking to review Master Au Yeung’s taxation order before a judge of the High Court and was granted leave to review out of time.  The review will be heard before Deputy High Court Judge Saunders in about six weeks on 13 May 2004.  The Applicant argues that he has a right to have the master’s taxation reviewed by a judge of the High Court and that if the quantum is reduced after the review and if he would be willing to pay, then the procedure by statutory demand would be unnecessary. 

5.  In essence, the Applicant is relying on rule 48(5)(b) of the Bankruptcy Rules, i.e. that the debt is disputed on substantial grounds.  The mechanism of setting aside a statutory demand is intended to be a filtering process to protect a debtor against a petition from being presented based on a statutory demand which is demonstrably unjustified.  However, where the debt which is the subject matter of the statutory demand is a judgment debt, it is difficult to say that the statutory demand is demonstrably unjustified.  In the United Kingdom, Paragraph 3 of the Practice Note (Bankruptcy: Statutory Demand: Setting Aside) (No.1 of 87) [1987] 1 WLR 119 provides:

“Where the statutory demand is based on a judgment or order, the court will not at this stage go behind the judgment or order and inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment or order.”

Though this Practice Note is not applicable to Hong Kong and does not have the force of law in this jurisdiction, it has been consistently followed by the courts in Hong Kong: see Wah Tat Foundation & Engineering Ltd and Kam Kin Bun HCSD 5 of 2003 and HCSD 6 of 2003, 7 May 2003; Choy Wai Bor, exparte S Y Chan Ltd HCB 8565 of 2001, 28 May 2002 and Re Malcolm Maydwell, exparte WFM Motors Pty Ltd HCSD 5 and 13 of 1998 and HCB 964 of 1998, 15 January 1999.

6.  In Choy Wai Bor, exparte S Y Chan Ltd, Kwan J endorsed the Practice Note as a good practice with a sound basis in law on two grounds.  Firstly, rule 48(4) of the Bankruptcy Rules gives the court a wide discretion on the hearing of an application to set aside a statutory demand and to dismiss the application on the basis of the incomplete evidence then available to the court without adjourning it for full evidence.  Secondly, as the mechanism to set aside a statutory demand is intended to be a filtering process, the need for speedy disposal of such an application requires that a creditor should be allowed to proceed with the presentation of a petition without having to adjourn the application to set aside the statutory demand pending the outcome of such other proceedings and leaves it to the debtor to challenge the judgment debt at the stage of the hearing of the petition.  I agree with her views.  I would only add that where a judgment debt which formed the subject matter of a statutory demand is being disputed, the general rule is that the court shall not go behind the judgment and inquire into the validity of the debt or adjourn the application to await the result of an application to set aside the judgment or order.  The only exception is where the applicant is able to satisfy the court by cogent argument that were the application to set aside the statutory demand an application for leave to appeal on point of law such leave would have been granted.  The burden of proof is on the applicant.  Even if the applicant is able to discharge that burden, that is only one of the factors to be considered by the court in the exercise of its discretion whether to set aside the statutory demand on other grounds under rule 48(5)(d) of the Bankruptcy Rules.

7.  On the facts of the present case, Master Au Yeung gave full and careful consideration to the Applicant’s allegations of fraud and dishonesty.  In her oral reasons given on 10 June 2003 and her detailed and well-reasoned written Reasons for Decision dated 30 January 2004, she dismissed the Applicant’s allegations of fraud and certified the costs awarded in the Allocatur.  I cannot see any real difference between an Allocatur and a judgment for this purpose.  In the circumstances, the fact that a review hearing of the master’s taxation order is imminent as such is not a valid ground for setting aside the statutory demand or for adjourning the hearing of the application pending the outcome of the taxation review hearing.

Cause of action against a third party

8.  The second ground advanced by the Applicant is that he has instituted proceedings for professional negligence against Messrs Gary K.W. Tam & Co (“Gary Tam”), who represented him in High Court Action No HCA 5590 of 2000.  He says the action will be defended by the insurer and will be concluded in three to six months.  He says he has a good case against Gary Tam and will obtain an indemnity from Gary Tam or the insurers which will cover the costs which formed the subject matter of the statutory demand.  He submits, hence, the debt is fully secured under rule 44(5) of the Bankruptcy Rules.

9.  The claim against Gary Tam is a claim against a third party.  As such it is neither a defence nor a counterclaim nor a cross claim against the Respondent which I should take into account in the application to set aside the statutory demand.  The action against Gary Tam is defended.  His chance of success remains an uncertainty.  With respect to the Applicant, his argument that the debt is fully secured is erroneous in law in that the security he relied on is a contingency and not a valuable property furnished by himself as a security for the debt.  Hence, I dismiss this ground for setting aside the statutory demand.

Fraud on the part of Herbert Smith in misleading the Court

10.  Under this ground, the Applicant repeats his allegations of fraud on the part of Herbert Smith in misleading Master Au Yeung at the taxation review.  He submits that it would be oppressive and unjust to allow the Respondent to proceed on the statutory demand based on an Allocatur which was obtained by fraud or deceit.  He repeats paragraph 15 of his statement of claim in High Court Action No HCA 27 of 2004 which I have just struck out and dismissed as frivolous or vexatious or otherwise an abuse of the process of the Court.  For completeness, I shall repeat my reasons given in the striking out application.

11.  In paragraph 15 of the Applicant’s statement of claim in HCA 27 of 2004, the Applicant pleaded:

“At the end of the Review of taxation hearing before Master Au-Yeung, the Learned Master made the finding that both Defendants have misled the Court and the Plaintiff twice and the Plaintiff has every reasons to lose confidence in their Bill of Costs of High Court Action No. 5590/2000.”

In striking out this paragraph of the Applicant’s statement of claim, I held that this paragraph is a very much distorted view of Master Au Yeung’s decision.  The master did criticise Herbert Smith of its mistakes which misled the Court but nevertheless she was satisfied that there was no fraud on their part.   She attached no dishonesty to the word “misled” used in her reasons for decision.  This is what she held in the concluding paragraph of her reasons for decision:

“Though the bill was chaotic and inconsistent, Mr Thomas and the [law costs draughtsman] had demonstrated to me their full preparation and sincerity in putting right what were once mistakes that had misled the Court.  The correlation between the computer print-outs, documents and bills rendered and the bill before me was tedious and time consuming but Mr. Thomas and the [law costs draughtsman] spared themselves no such trouble.  They were best endeavours to come clean with what had been wrongly done.  It was a genuine attempt to put the Court into the true picture of what had happened and I was satisfied as to the explanation for the mistakes made.  Further, Messrs. Herbert Smith had, in writing, informed their client of the mistake and notified their clients of the consequences and the procedure to rectify them.  That was a clear reflection that Messrs. Herbert Smith was not deliberately trying to deceive anyone and had come clean as best they could.  Although I had made a ruling on dishonesty at an early stage of the Reviews, the issue was still in the forefront of my mind thereafter in case new materials might surface to justify re-opening the issue. At the end of the Reviews, I confirmed my ruling that there had been no dishonesty on the part of Mr. Thomas and I did not see the need to reflect my disapproval by deducting globally Mr. Thomas’s costs.”

Thus, there is no substance in the allegations of fraud contained in this paragraph of the Applicant’s statement of claim.

12.  Furthermore, quite apart from the fact that the Applicant’s action based on fraud in HCA 2207 of 2003 and HCA 27 of 2004 have been dismissed, the allegations of fraud therein were against Mr Thomas and Herbert Smith and not against the Respondent.  Whatever damages he may recover from Mr Thomas or Herbert Smith is not a counterclaim or cross claim against the Respondent and is irrelevant in the present application.  This could not be a ground for setting aside the statutory demand.  The Applicant is faced with a debt certified in the Allocatur, which has the effect of a valid order of the Court.  On the principles which I have referred to earlier, it is not permissible in an application to set aside the statutory demand for this Court to go behind the judgment or order of the master and inquire into the validity of the debt.  This ground for setting aside the statutory demand must also be dismissed.

Setting aside on “other grounds” under rule 48(5)(d) of the Bankruptcy Rules

13.  I now turn to the consider whether the statutory demand should be set aside in the exercise of my residual discretion.  Being a residual discretion, it may only be exercised in circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case and the discretion is only to be exercised to prevent that injustice: see Re A Debtor (No 1 of 1987, Lancaster) [1989]2 All ER 46, per Nicholls LJ (as he then was).

14.  The “other grounds” referred to in this rule has to be a ground supported by substantial reason comparable to the sort of reason one sees in paragraph (a), (b) and (c) of rule 48(5): see Budge v A F Budge (Contractors) Limited (in Receivership and Liquidation) [1997] BPIR 366, at 371, per Gibson LJ, applied in Wah Tat Foundation & Engineering Ltd and Kam Kin Bun.  The likelihood of a successful challenge against the debt in question could constitute such “other ground”.  However, apart from repeating his allegations of fraud, the Applicant has utterly failed to advance any substantial argument why he is likely to succeed in the review before Deputy High Court Judge Saunders.  The Applicant’s liability to costs could not be reviewed.  Thus, even if he is successful in reducing the quantum of costs, he remains liable to substantial costs.  In view of the history of this case, the frivolous and vexatious and inappropriate proceedings instituted by the Applicant in delaying payment of the taxed costs and in delaying the review, greater injustice would be caused by adjourning the setting aside application than by dismissing it provided that no bankruptcy petition may be presented until the conclusion of the review hearing before Deputy High Court Judge Saunders. I therefore consider it just and appropriate to dismiss the application to set aside the statutory demand and to leave the dispute as to quantum of costs to resolve by itself in due course in or after the review before Deputy High Court Judge Saunders.  If the Applicant should resist paying the costs as determined at the review, the Respondent should not suffer any delay by my allowing or adjourning the application to set aside the statutory demand at this stage.

Conclusion

15.  Accordingly, I dismiss the Applicant’s application to set aside the statutory demand with costs to the Respondent.  I also authorise the Respondent to present a bankruptcy petition against the Applicant on or after 13 May 2004 or until the conclusion of the hearing of the review of Master Au Yeung’s taxation order before a judge of the High Court.