RE MFY

HCMP 1173/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1173 OF 2004

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RULING  ON  ACCOUNT

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1.  By an order of 20 September 2004, a solicitor and an accountant were appointed as committee under Part II of the Mental Health Ordinance to manage and administer the properties and affairs of MFY after this court having been satisfied that MFY was incapable by reason of mental incapacity of doing so.  The Committee received remuneration at the rate of $6,000 per month as provided for in the order.

2.  MFY is a wealthy man and his assets are substantial.  The order required the Committee to file account every 6 months.

3.  There was a change of the composition of the Committee as the accountant resigned and he was replaced by another accountant.  The change was effected by an order on 31 October 2005.

4.  The Committee has made a number of applications to this court for specific approval regarding the administration of the affairs of MFY.  On each occasion, the Committee applied through the firm in which the solicitor is the sole proprietor.

5.  On 24 April 2006, the Committee filed an account regarding the period from 20 October 2005 to 19 April 2006.  The Registrar examined the account and raised some queries by a letter of 25 April 2006.  One of the queries related to legal expenses.  The Registrar asked whether the expenses had been sanctioned by the court.

6.  The order of 20 September 2004 did not provide for the engagement of solicitor by the Committee.  However, in the subsequent orders relating to the various applications for direction or sanction, there were provisions to the effect that the costs of the application and disbursements be paid out of the estate.  The orders did not deal with the identity of the firm that provided the legal services nor the quantum of the bills involved.

7.  In his report of 23 June 2006, the Registrar expressed some other reservations about the account and referred the matter to this court for direction.  Directions were given after this court had heard submissions from the solicitor on 30 June 2006.  Pursuant to those directions, the defects in the account spotted by the Registrar were explained in a report filed by the Committee on 28 July 2006.

8.  Having read the report and heard further submissions from the solicitor and Mrs Williams from the Official Solicitor’s office on 21 August 2006, it is agreed that subject to what the relatives of MFY may wish to say, this court shall consider the option of replacing the Official Solicitor as Committee in place of the solicitor and the accountant.

9.  I wish to emphasize that there is no suggestion of any bad faith on the part of the existing committee.  On the contrary, I am quite satisfied that they have been acting conscientiously and with the interest of MFY in mind.  As a matter of fact, it is because the committee is very mindful of their duties towards MFY that they were hesitant in taking over the management of the shares and securities under the name of MFY.  This led to a suggestion by the committee to have someone else to act in place of them.

10.  I would not say too much at this juncture about the replacement as this would have to be dealt with after the relatives have an opportunity to address the court on 3 November 2006.

11.  However, there is one specific matter that this court has to deal with at this stage.  This relates to the question of legal expenses.  Two issues were identified in the course of hearing.  First, whether the engagement by the Committee of the solicitor’s own firm is consistent with the fiduciary duty owes by the Committee towards MFY.  Second, the level of fees charged by the firm.

12.  Since the Committee is occupying a fiduciary position, it should not profit from its office without sanction of the court.  I have considered this in the context of the remuneration of a committee in Re M HCMP 25 of 2005, 7 April 2006.  At the same time, a committee should also be mindful of the duty regarding self-dealing when it were about to enter into transactions with one of its members.  The relevant principles of law can be found in Snell’s Equity 31^st Edn. Paras.7-36 to 7-46; Bowstead & Reynolds on Agency 18^th Edn. Paras.6-063.  The underlying objection to self-dealing is potential conflicts of interest.

13.  Informed consent on the part of the principal or beneficiary can provide an answer.  However, in the context of a MIP, such informed consent cannot be obtained.  In my judgment, the proper course that a committee should adopt when it is considering entering into a transaction with one of its members is to seek the sanction of the court.

14.  The engagement of one’s own firm for professional services with professional charges being incurred is a transaction that the rule can apply.  Hence, the Committee should have applied to this court for sanction before using the service of the solicitor’s firm on a professional basis.

15.  Therefore there is a breach of fiduciary duty in the instant case.  However, it is up to this court to decide what steps should be taken, if any, about such breach in the exercise of its jurisdiction under Part II.  The paramount consideration is the requirements of MFY.  At the same time the court shall also have regard to the desirability of making provision for obligations of MFY notwithstanding that those obligations may not be legally enforceable, see Section 10A(2)(d) of the Mental Health Ordinance.

16.  MFY’s estate can afford to pay these legal fees without prejudicing the maintenance of the current standard of living of the family.

17.  Three different bills rendered by the solicitor firm regarding the charges for legal services were included in the account.  The first one is in respect of the application for replacing one accountant with another as a member of the Committee.  A total sum of $30,200 was charged.  I have considered the items set out in the bill.  In my view, bearing in mind the experience and qualification of the members of the Committee and the fact that they were paid for their services as members, it should have been reasonably expected that a lot of works referred to in the bill should have been undertaken by the Committee without the engagement of professional legal services.  Had the Committee applied to this court for sanction before using the services of the firm, this court would have cut down the scope of works to be provided by the firm.  The application could have been handled informally.  I am only prepared to ratify the engagement of the firm in respect of the preparation of the affidavit and the order and I shall allow a sum of $10,000 for the same.

18.  The second bill is for services relating to discharge the mortgage of a property.  A sum of $40,250 was charged.  There was no breakdown as to the time engaged in the matter.  I am of the view that the engagement of the service of the firm is reasonable although the fees charged is on the high side.  I shall ratify the engagement and allow a sum of $30,000 for this bill.

19.  The third bill is for a sum of $2,520 relating to the preparation of the Receipt on Discharge.  I think the engagement and the fees are reasonable. I will allow that in full.

20.  In addition, the firm has prepared a bill in the sum of $32,000 in respect of works stemming from the court’s queries as to the account since April 2006 and the report of 28 July.  I regard those works as falling within the scope of usual duties of a committee and I see no justification for engaging legal services for dealing with such queries.  I said these in view of the fact that the Committee is made up of professional people and they acted on a remunerated basis.  It is due to the inadequacies of the account that such further works have to be undertaken.  I am unable to allow any sum under this bill.

21.  In this instance, since there has not been any decision in Hong Kong on this point and for reasons already canvassed, this court feels able to ratify the engagement of the firm.  I wish to stress that it is important that a committee appointed under Part II should appreciate the fiduciary nature of its office and the duties stemming therefrom.

22.  I propose to publish this judgment for the benefit of those who may act as a committee in future.  Written comments on such proposed publication, if any, shall be filed within 5 days.