Re solicitor

CACV 117/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 117 OF 2000

(ON APPEAL FROM THE SOLICITORS DISCIPLINARY TRIBUNAL)

______________

_______________

J U D G M E N T

_______________

Keith JA (giving the judgment of the Court):

Introduction

1. The Appellant is a solicitor. He was admitted in 1991. At a hearing before the Solicitors Disciplinary Tribunal ("the Tribunal"), he faced three disciplinary complaints of professional misconduct. Two of those complaints were dismissed. The first was found proved. On that complaint, he was censured and ordered to pay the sum of $50,000.00. He now appeals against the finding of guilt on the first complaint, and the order for costs which the Tribunal made. At the conclusion of the hearing of the appeal, we dismissed the appeal, but said that we would hand down our reasons in writing. That we now do.

The facts

2. Although a bundle of documents was prepared for use by the Tribunal, the hearing proceeded on the basis of a statement of agreed facts. In 1987, a flat had been purchased from the Housing Authority. The assignment by which the purchase was effected was subject to certain restrictions on the alienation of the flat for ten years, i.e. until 1997. In October 1994, the flat was charged by the purchaser. The Appellant acted for both the purchaser and the chargee in the preparation and execution of this charge, which was a legal charge and was subsequently registered in the Land Registry. The prior approval of the Housing Authority for the execution of the charge had neither been sought nor obtained.

3. The Appellant did not know either the purchaser or the chargee before preparing the charge, nor did he know what the statement of agreed facts described as "the transactions between them", which we take to mean the commercial reasons which underlay the legal charge. As for the Appellant's knowledge of the law when he prepared the charge, the statement of admitted facts reads:

".... the [Appellant] understood that [a Housing Authority] unit owner was prohibited from selling his .... unit within the 10 years restriction period from the date of the Assignment but that a Legal Charge was not prohibited."

The first complaint

4. Principle 12.02 of the English Guide to the Professional Conduct of Solicitors (6th ed., 1993, i.e. the edition in force at the time of the alleged misconduct) reads:

"A solicitor must not act, or where relevant, must cease acting further where the instructions would involve the solicitor in a breach of the law or a breach of the principles of professional conduct, unless the client is prepared to change his or her instructions appropriately."

This principle identifies two separate circumstances in which a solicitor should not carry out his instructions:

(a) where the carrying out of his instructions would involve the solicitor in a breach of the law, and

(b) where the carrying out of his instructions would involve the solicitor in a breach of the principles of professional conduct.

5. The complaint which was eventually found proved was framed as follows:

"In October 1994, the [Appellant] acted so as to involve himself in a breach of Principle 12.02 of the English Guide which amounts to professional misconduct

Particulars

On 3 October 1994, the [Appellant] acted for both [the] borrower and [the] lender in the preparation and execution of the Charge when the creation of such a mortgage constituted an offence contrary to section 27A Housing Ordinance (Cap. 283)."

These particulars show that it was not being alleged that the carrying out of his instructions by the Appellant involved him in a breach of the principles of professional conduct. What was being alleged was that the carrying out of his instructions involved him in a breach of the law, namely section 27A of the Housing Ordinance.

What had to be proved

6. In these circumstances, there were at least two things which had to be proved to the Tribunal's satisfaction if the first complaint was to be found proved:

(i) The execution of the legal charge had to amount to the offence created by section 27A of the Housing Ordinance.

(ii) The execution of the charge had to involve the Appellant, as well as the purchaser, in a breach of section 27A of the Housing Ordinance.

The Tribunal's answer to issue (i) was that the execution of the legal charge had amounted to the offence created by section 27A of the Housing Ordinance, but the Tribunal does not appear to have addressed issue (ii). There was a third matter which Mr E. C. Mumford SC for the Appellant contended that the Tribunal had to be satisfied about on the first complaint, namely that the Appellant knew that it would be a criminal offence for the legal charge to be executed in the circumstances in which it was. Since the agreed facts accepted that the Appellant had been unaware that a Housing Authority flat could not be made the subject of a legal charge, the Tribunal must be taken to have decided that proof of knowledge that a criminal offence would have been committed in those circumstances was not necessary.

Breach of section 27A of the Housing Ordinance

7. Section 27A of the Housing Ordinance, in the form in which it existed in 1994, provided:

"Any person, other than a mortgagee under a mortgage guaranteed either wholly or in part by the Crown, who, in the circumstances mentioned in section 17B, alienates or conveys, purports to alienate or convey, parts with possession or enters into an agreement to alienate, convey or part with possession, of the land mentioned in that section commits an offence ...."

Thus, in addressing the issue whether the execution of the legal charge amounted to the offence created by section 27A, the Tribunal considered whether the legal charge constituted the alienation, conveyance or parting with possession of the flat. The Tribunal held that it did.

8. A question has arisen as to whether it was necessary for the Tribunal to address that issue at all. Section 27A referred to an alienation, conveyance or parting with possession of the land "in the circumstances mentioned in section 17B". Section 17B, in the form in which it existed in 1994, provided:

"Where -

(a) any land in any estate is sold under section 17A to any person; or

(b) any land in respect of which the [Housing] Authority is authorized to nominate purchasers is sold to a person nominated by the [Housing] Authority,

any alienation or conveyance or purported alienation or conveyance or any agreement to alienate or convey such land -

(i) by that person in breach of any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to such land; and

(ii) by a mortgagee of such land in breach of any of the terms on which the mortgage was authorized by the Secretary for Housing,

shall be void."

Thus, the circumstances in section 17B included the alienation, conveyance or parting with possession of the land "in breach of any .... covenant in the deed of assignment" relating to the flat. Clause 3 of the 1987 assignment under which the purchaser purchased the flat from the Housing Authority provided:

"This Assignment is subject to the terms covenants and conditions ... mentioned in the Schedule to the Housing Ordinance (Cap. 283) and any amendments thereto."

In 1987, the Schedule to the Housing Ordinance provided, so far as is material, that the purchaser should not

".... at any time alienate or convey, purport to alienate or convey, part with possession or enter into any agreement to alienate, convey or part with possession of, the land sold other than to the [Housing] Authority, or such person as the [Housing] Authority may nominate, unless .... a period of 10 years has elapsed from the date of the assignment to the purchaser ...."

Thus, if the Schedule had remained in that form in 1994 when the legal charge was executed, the issue for the Tribunal would undoubtedly have been the issue which the Tribunal addressed.

9. However, what the Tribunal was not told was that in 1992 the Schedule was amended to provide that the purchaser should not

".... at any time alienate, convey, charge or part with possession or purport to alienate, convey, charge or part with possession or enter into any agreement to alienate, convey, charge or part with possession of the land sold other than to the [Housing] Authority, or such person as the [Housing] Authority may nominate, unless ... a period of 10 years has elapsed from the date of the assignment to the purchaser ..." (Emphasis supplied)

Does that mean that the Tribunal did not have to decide whether the legal charge amounted to an alienation, conveyance or parting with possession of the flat, because the charging of the flat by the purchaser was itself a breach of clause 3 of the assignment?

10. We do not think that the 1992 amendment had that effect. As a result of the 1992 amendment, the charging of the flat by the purchaser may have been a breach of clause 3 of the assignment, but section 27A was not amended at the same time as the Schedule was. That still required the purchaser to have alienated, conveyed or parted with possession of the flat for the offence to have been committed. That still raised the question as to whether the legal charge amounted to an alienation, conveyance or parting with possession of the flat.

Alienation

11. It is not contended that the execution of the legal charge was a conveyance of the flat or amounted to the parting with possession of the flat. What is contended by Mr Alfred Chan for the Law Society is that the execution of the legal charge was an alienation of the flat.

12. The meaning of the word "alienation" depends on the context in which it was used and on the purpose which the legislation in which it appears was intended to serve. The purpose of the provisions of the Housing Ordinance in which the word "alienation" (or "alienates") appears was to ensure that subsidised housing remains in the ownership and occupation of the persons who were intended to benefit from it. Thus, it was intended to impose restrictions on (a) the purchaser's ability to generate a quick profit by selling the flat, and (b) the purchaser giving up possession of the flat by granting an exclusive licence or a tenancy of the flat. The restriction on (b) was achieved by the prohibition on the purchaser parting with possession of the flat. The restriction on (a) was achieved by the prohibition on the purchaser conveying the flat.

13. However, the question is whether it was the intention of the relevant provisions of the Housing Ordinance to ensure that Housing Authority flats would not be the subject of legal charges. In our view, the intention was to ensure that Housing Authority flats would not be the subject of legal charges. We say that for two reasons:

(i) If a legal charge was not prohibited, it would have been easy to frustrate the legislative intention that Housing Authority properties should not be sold before the ten-year time limit had expired. Since the enactment of the Conveyancing and Property Ordinance (Cap. 219) in 1984, a purchaser could avoid the restrictions on selling the property off, as Mr Chan pointed out, by creating a "loan" in the amount of the new purchase price and a mortgage of the property by legal charge, and by then "failing" to meet the repayments on the loan, thereby giving the "lender" (but in truth the new purchaser) the right to enter into possession.

(ii) Para. 4 of the Schedule to the Housing Ordinance, in the form in which it existed in 1987, provided:

"Notwithstanding that the purchaser has not paid the amount mentioned in paragraph 1 [i.e. the purchase price], he may, for the purpose of raising purchase money for the purchase of the land, mortgage the land to such persons, and on such terms, as are authorized by the Secretary for Housing."

The Schedule including this provision was added to the Housing Ordinance in 1982 when the only remedy available to a chargee was that of judicial sale, and when legal charges were for that reason not as attractive to lenders. But the point is that this provision would have been unnecessary if the legislature had thought that Housing Authority flats could be mortgaged (or charged) to lenders. What para. 4 provided for was an exception to the general rule that Housing Authority flats could not be mortgaged (or charged) since it was recognised that those who purchased flats from the Housing Authority would themselves need to raise finance for the purchase, and lenders would require the flats to be mortgaged (or charged) to them as security for the loans.

For these reasons, the word "alienation" should be construed in such a way as reflects the legislative intention to ensure that Housing Authority flats would not be subject to legal charges.

14. The fact that the word "alienation" is grouped together with the words "conveyance" and "parting with possession" is also an indication of what it was intended to cover. The sale of a Housing Authority flat would amount to its conveyance. The grant of a tenancy or an exclusive licence in respect of such a flat would amount to parting with possession of the flat. The word "alienation" must have been included for a reason, and it must therefore have been intended to cover something other than the sale of the flat or the grant of a tenancy or exclusive licence in respect of the flat. That "something" must have related to the creation and grant of rights over the flat, which did not involve either its sale or the grant of a tenancy or exclusive licence in respect of it, but which impinged upon the most important features of ownership.

15. It is here necessary to consider the effect of a legal charge. Where the owner of property charges it to a lender, he retains his ownership of the property and continues to enjoy the benefits of occupation. Since the enactment of the Conveyancing and Property Ordinance, the effect of charging the property is to confer on the chargee two of the incidents of ownership, namely the power (a) to sell the property and recover the chargor's debt from the proceeds of sale, or (b) to let the property and recover the chargor's debt from the rent, albeit that these incidents of ownership are only exercisable by the chargee in the event of default by the chargor in the repayment of the loan. But the grant to the chargee of these incidents of ownership by the chargor represents a disposal of rights over the property which, so long as they subsist, substantially impair the exercise by the grantor of his rights of ownership.

16. Thus, we conclude that since

(a) the legislative intention was to restrict the use of legal charges over Housing Authority properties,

(b) the word "alienation" in section 27A covers the disposal of such rights over Housing Authority properties, and

(c) a legal charge amounts to the disposal of such rights over property,

the word "alienation" in section 27A should be construed as covering a legal charge over Housing Authority properties. In these circumstances it is unnecessary to concentrate, as the Tribunal did, on the actual terms of the legal charge, which unusually purported to assign the flat to the chargee, i.e. to dispose of all rights of ownership in the flat to him, subject to the equity of redemption.

17. Nor is it necessary to consider the impact of the amendments made in 1995 to sections 17B and 27A of the Housing Ordinance, i.e. after the execution of the legal charge in favour of the chargee, by adding mortgages and charges. For the reasons we have given, the previous legislation had intended to cover them anyhow, and it is likely therefore that the 1995 amendments were included to explain the previous legislation or to avoid any doubts about its effect.

18. If, as we conclude, the execution of the legal charge amounted to the offence created by section 27A of the Housing Ordinance, the next question is whether the execution of the legal charge involved the Appellant, as well as the chargor, in a breach of it. In our view, it did. By preparing the legal charge for its execution by the chargor, the Appellant was aiding and abetting the chargor's execution of it. Mr Mumford did not suggest otherwise.

Ignorance of the law

19. That leaves only the issue whether the Tribunal had to be satisfied that the Appellant knew that the execution of the legal charge would have amounted to a criminal offence. Mr Mumford conceded that if the Appellant had been charged with the criminal offence of aiding and abetting the commission by the chargor of the offence created by section 27A of the Housing Ordinance, the Appellant could not have argued that his lack of knowledge that the execution of the legal charge amounted in law to the alienation of Housing Authority property amounted to a defence. Ignorance of the law is no defence. It would therefore be odd if ignorance of the law would be a defence to a disciplinary complaint based on the same facts.

20. Moreover, if ignorance of the law could be a defence to a disciplinary complaint based on the first part of principle 12.02, ignorance of the principles of professional conduct would presumably be a defence to a disciplinary complaint based on the second part of principle 12.02. We would not be prepared to sanction that view of the law unless we were forced to do so.

21. We do not think that we are forced to do so. We appreciate that there are grey areas of the law in which the law is uncertain. But that is precisely where solicitors must be particularly circumspect. If in good faith a solicitor advises a client that a particular course of action which the client proposes to take would not be unlawful, and if the solicitor then puts the client's instructions into effect on that basis, we do not see why, as a matter of policy, the solicitor should not be saddled with a finding of professional misconduct if the advice turns out to be incorrect. It may be that, if the Law Society is satisfied that his view of the law was one which could reasonably have been held, or if he had himself obtained expert advice from counsel, say, or the Law Society itself, the Law Society would not think of lodging a disciplinary complaint against the solicitor for contravening principle 12.02. But it may be entirely appropriate for the solicitor to be charged with professional misconduct if he carried out his instructions recklessly or imprudently, i.e. without giving any thought to whether they might involve a breach of the law or without bothering to take advice on a course of action which he ought to have appreciated was of uncertain legality. If a disciplinary complaint is lodged against a solicitor for contravening principle 12.02, and the complaint is found proved, these considerations all go to what the appropriate disciplinary sanction should be.

22. For these reasons, we conclude that the Tribunal did not have to be satisfied that the Appellant knew that the execution of the legal charge would have amounted to a criminal offence. The finding of guilt was justified on the basis that it did amount to a criminal offence, and that the Appellant was involved in this breach of the law.

The costs of the proceedings before the Tribunal

23. Although two of the disciplinary complaints were dismissed, and only one was found proved, the Tribunal ordered the Appellant to pay half of the Law Society's costs of and incidental to the proceedings. Mr Mumford contended that the Appellant should have been ordered to pay only one-third of the Law Society's costs. That argument presupposed that the time spent on preparing the case and at the hearing was divided equally between the three complaints, and Mr Mumford was unable to demonstrate that that had indeed been the case. The question of costs was very much in the discretion of the Tribunal, and we suspect that it made the order which it did to reflect the fact that the most significant debate related to the first complaint. We do not think that in the circumstances we should interfere with the exercise of the Tribunal's discretion on the issue of costs.

Conclusion

24. It was for these reasons that we dismissed the appeal. At present, we see no reason why the costs of the appeal should not follow the event, and accordingly the order nisi which we make is that the Appellant must pay to the Law Society its costs of the appeal, to be taxed if not agreed.