RE TAM MEI KAM

CACV 87/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 87 OF 2012

(ON APPEAL FROM HCB NO. 3777 OF 2011)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

1. This is an appeal from a judgment of Barma J (now Barma JA) given on 25 April 2012 making a bankruptcy order against Madam Tam Mei Kam.

Background

2. 1  The petition for bankruptcy is based on a judgment debt in HCA2239/2009. 

2.2  The plaintiffs in that action were a firm of solicitors (“the solicitors”) who Madam Tam had instructed in a probate action (HCAP2/2004) to contest the Will of her daughter (“the Will”). 

2.3  Put briefly, the Will provided that HSBC International Trustee Ltd was to be appointed the sole executor, and a discretionary trust settled by the deceased called the Karen Trust was the sole beneficiary of the estate. The deceased was assisted by her godmother Mrs Sheila Ho and a trust officer Mrs Doris Lau in the preparation of the Trust and the Will over a period of slightly over a month before she died in December 2003.

2.4  Madam Tam started the probate action in 2004.  She instructed a series of legal representatives.  The action had been under way for quite some time before the solicitors took over some 2-3 months before the trial.  Senior and junior counsel were instructed. 

Probate action (HCAP2/2004)

3. 1  Essentially Madam Tam’s position at the trial of the probate action was to put the defendants to strict proof of the Will and the Trust. 

3.2  It is relevant to the present appeal to note that there was no specific allegation of collusion or conspiracy against Mrs Ho or Mrs Lau, and at the trial a plea of undue influence against Mrs Ho was expressly abandoned by senior counsel. 

3.3  Nevertheless the trial took 18 days (15 April - 16 May 2008). By the end of the trial, the fees of senior counsel alone had exceeded $1.4m.

3.4  In a judgment handed down on 16 June 2008, Andrew Cheung J (now Cheung CJHC) dismissed Madam Tam’s action.

3.5  The judge made an order nisi that Madam Tam be responsible for her own costs.  Madam Tam’s application to vary that order was dismissed by the judge for reasons given in a judgment dated 20 November 2008. 

Solicitors’ bills and Madam Tam’s responses

4. 1  On 12 September 2008 the solicitors sent a bill for their fees in the probate action to Madam Tam.  The bill was revised on 20 October 2008. 

4.2  In February 2009 the solicitors wrote to Madam Tam demanding payment of $2,243,938 in fees.

4.3  By a letter dated 24 March 2009, Madam Tam asked the solicitors for time to pay.

4.4  By a further letter dated 19 April 2009, Madam Tam asked if she could delay payment of the fees until after her appeal against the judgment. 

4.5  By a further letter dated 19 June 2009, Madam Tam proposed that she pay the fees by monthly instalments of $5,000.  This proposal was not accepted by the solicitors.

Solicitors’ action (HCA2239/2009)

5. On 4 November 2009, the solicitors issued the writ in HCA2239 demanding payment from Madam Tam. 

Madam Tam’s Defence

6. In her Defence filed on 1 December 2009, Madam Tam alleged that:

6.1  between November 2007 and February 2008 the solicitors had promised that if they were to take over the conduct of the probate action:

-  they would accept a lump sum of $1,400,000 cash (which would include fees for instructing senior counsel);

-  additional fees would be contingent upon the result, i.e. no-win-no-pay;

-  even if they did charge additional fees, they would be at favourable nominal rates;

-  if she were to succeed in the action, they would charge their normal fees;

6.2  on that basis, she paid a total of $1,400,000 in fees; since she lost the action, she was not liable to pay any additional fees;

6.3  the solicitors had finalized the appeal bundle for her appeal (CACV200/2008) and had agreed that the arrangement for the trial would apply also to the appeal, i.e. payment of fees would be on a contingency basis.

7. That defence (of a collateral agreement) was the only one proffered by Madam Tam.

8. On 1 February 2010 a master gave summary judgment to the solicitors.  Madam Tam appealed. 

Chung J’s judgment

9. 1  On appeal Chung J observed that on Madam Tam’s case, the documents regarding the solicitors’ demands for fees (including various documents she signed asking for time to pay) were false, but she had failed to explain why if so the parties produced those documents at all. 

9.2  Further the judge found it incredible that the solicitors would have made the arrangement alleged by Madam Tam when senior counsel’s fees on their own exceeded $1.4m.

9.3  Accordingly the judge rejected Madam Tam’s defence of a collateral agreement. 

10. Chung J upheld summary judgment for the solicitors in the sum of $2,243,938 and also awarded costs to the solicitors which he assessed on a gross sum basis at $20,500.  These sums formed the judgment debt on which the solicitors subsequently issued a bankruptcy petition against Madam Tam.

11. Madam Tam did not appeal Chung J’s judgment which was given on 6 May 2010. 

Probate appeal (CACV200/2008)

12. On 25 May 2010, Madam Tam’s appeal from the probate action was heard.  She acted in person.  On 2 July 2010 the appeal was dismissed.  She obtained leave to appeal to the Court of Final Appeal. 

Appeal to CFA (FACV11/2010)

13. On 9 May 2011, the Court of Final Appeal heard Madam Tam’s appeal.  She was represented by a new team of solicitors and counsel.  On 26 May 2011, the court dismissed her appeal for reasons set out in a 22-page judgment. 

14. Put briefly, Chan PJ held (amongst other things) that:

14.1  Madam Tam’s position at the trial was only to “put the defendants to proof of the validity of [the Will and the Trust]” (para.3);

14.2  Madam Tam’s allegations of collusion and conspiracy on the part of Mrs Ho and Mrs Lau had not been put to them at trial, in any event neither person had anything to gain from a collusion or conspiracy, and “it was unfair for [Madam Tam] to put the blame (as she did) on her senior counsel for not taking this point at the trial: in one of her written cases, she admitted that she was ‘convinced’ by counsel that this was the ‘wisest course’ to take” (para. 32).

Bankruptcy petition (HCB3777/2011)

15. Coming back to the present proceedings, as noted earlier Madam Tam did not appeal Chung J’s order for summary judgment given on 6 May 2010.

16. On 17 June 2011 the solicitors issued a bankruptcy petition against Madam Tam.  She opposed the petition on the grounds that:

(1)  the statutory procedural requirements had not been complied with;

(2)  there were “elements of fraud and dishonesty engineered by the [solicitors] both in incurring the purported judgment debt and in the proceedings in relation thereto”;

(3)  (i)  there had been a collateral agreement in relation to the fees payable;

     (ii)  the solicitors had been “professionally incompetent, negligent or reckless” and she has a viable claim in tort against them;

     (iii)  the solicitors had “concealed material facts” from Chung J.

17. The petition was heard before Barma J on 15 February 2012. 

18. 1  Madam Tam’s position was that because Mrs Ho and Mrs Lau had been involved in fraud and collusion, and these allegations had not been raised by her legal representatives at the probate trial, the solicitors had “caused, aided and abetted” the alleged fraud, or at least they had been professionally negligent. 

18.2  These were also the “material facts” Madam Tam said the solicitors had concealed from Chung J. 

Barma J’s judgment

19. In his judgment given on 25 April 2012 Barma J held that:

19.1  as far as the collateral agreement argument was concerned, it had been rejected by Chung J and there was no basis for reopening it (para. 11);

19.2  there was no reason to think that Chung J’s judgment had been obtained by fraud or deception on the part of the solicitors.  Up to that time (29 April 2010), Madam Tam’s only defence to the claim for fees was that there was a collateral agreement.  She had not suggested that her legal representatives at the probate trial had been negligent (para. 8);

19.3  in any event, there was no evidence to suggest that the advice given to Madam Tam as to the way her case should be put at the probate trial was negligent.  As the Court of Final Appeal had held, Madam Tam’s allegations against Mrs Ho and Mrs Lau were vague and unparticularised, and were inherently improbable.  There was therefore no reason to think that her legal representatives had acted other than properly and appropriately (para. 10). 

20. Accordingly Barma J found that Madam Tam fell far short of demonstrating, by sufficiently precise evidence, that there was a bona fide dispute in relation to the judgment debt (para. 7).  A bankruptcy order was duly made.

Appeal from bankruptcy order

21. The grounds of appeal in Madam Tam’s notice of appeal may be summarized as follows:

(1)  Barma J had disregarded “the crucial historical factual matrix”.  According to Madam Tam,

-  a handwritten note of Mrs Lau dated 31 October 2003 (“the note”) showed that the deceased’s true instructions were to make a will “distributing part of her assets, such as houses, cash, companies and personalties; the remainder after such distribution would either be (i) to redistribute again or (ii) to establish a Trust”;

-  however Mrs Ho and Mrs Lau had given false evidence at the probate trial that the deceased had intended to establish only a trust during her lifetime, but because of the concern that the deceased might not be able to transfer all her assets into the trust during her lifetime, as “insurance or contingency” Mrs Lau asked the deceased to execute a will passing all her assets to HSBC upon her death. 

(2)  Barma J had erred in holding that the only relevant judgment was Chung J’s judgment, when he should also have considered whether the probate action judgments had been obtained by fraud and perjury.

(3)  Barma J had erred in referring to the judgment of Chan PJ in the Court of Final Appeal, as Madam Tam had alleged that he as well as the vice-president of the Court of Appeal had been dishonest in ignoring the note in their respective judgments dismissing Madam Tam’s appeal.

(4)  Barma J should have found that as a lay person, Madam Tam relied on her legal representatives, and that they were at least professionally negligent in failing to pay regard to the note and in exploring the relationship between Mrs Ho, Mrs Lau and Mr Alan Lin who was connected to the final repository, a religious association.

Approach adopted by the bankruptcy court where debtor challenges judgment debt

22. Where a petition is presented based on a judgment debt, the court sitting in its bankruptcy jurisdiction is guided by the following principles.

22.1  The bankruptcy court will treat a judgment for a sum of money as prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum.

22.2  As prima facie evidence of indebtedness, it may be rebutted and that is what is meant by “going behind” the judgment.  It is important to understand the rationale for this approach.  First, bankruptcy affects an individual’s legal status.  Secondly and importantly in this context, the bankruptcy court’s exercise of the power and/or duty to inquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgments entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors. 

22.3  In Ex parte Kibble In re Onslow [1874-75] LR 10 Ch App 373 it was held:

“It is the settled rule of the Court of Bankruptcy, on which we have always acted, that the Court of Bankruptcy can inquire into the consideration for a judgment debt. There are obviously strong reasons for this, because the object of the bankruptcy laws is to procure the distribution of a debtor’s goods among his just creditors. If a judgment were conclusive, a man might allow any number of judgments to be obtained by default against him by his friends or relations without any debt being due on them at all; it is therefore necessary that the consideration of the judgment should be liable to investigation” (per James, LJ at 376-7).

“It is quite clear that in the Court of Bankruptcy the consideration for a judgment may be investigated, particularly when a judgment has gone by default. I do not mean to say that this rule applies to such an extent that in every case in which a defendant has a good defence to an action and does not plead it, … the Court of Bankruptcy would allow the creditors to go behind the judgment. The real question must always be whether there was a good consideration for the debt …” (per Mellish LJ at 378).

22.4  See also Williams and Muir Hunter on Bankruptcy, 19^th ed. p.57:

“The court has a very wide power, and in many cases, a duty, to inquire into the consideration even of a judgment debt, whether upon hearing a petition or adjudicating upon a proof … ; for otherwise a debtor might by default suffer judgment without consideration, and deprive his just creditors of their rights”.

23. In other words, the reason why a bankruptcy court is not conclusively bound by a judgment debt is so that (in appropriate circumstances) it can inquire whether there was actually bona fide consideration for it.  Of course apart from opposing creditors at the petition seeking to impugn the judgment debt, the judgment debtor himself can also seek to do so, especially if the judgment had been obtained by default.  See Fletcher, The Law of Insolvency, 4^th ed. p.163 para.6-116: 

“One justification for the existence of this power is that a debtor might connive with others to allow a number of bogus default judgments to be entered against himself by his ‘allies’, who could rescue some of his estate on his behalf by later proving for the debts in the bankruptcy. But the far more usual occasion for invoking this doctrine is when it is the debtor who will otherwise suffer injustice, and this is particularly capable of occurring when the judgment was obtained by a compromise of action or by default. A default judgment, by its very nature, involves a one-sided presentation of the facts which may lack objectivity and may even be inaccurate or unfair …”.

However that is not to say that in every case the bankruptcy court should exercise its powers of inquiry simply for a judgment debtor to get a second bite of the cherry and conduct parallel proceedings to review a judgment which he has lost or to avoid its execution. 

24. The rationale discussed above should guide the approach to be taken by the bankruptcy court when a judgment debtor opposes a petition on the ground that he challenges the judgment debt. 

25. 1  If the judgment debtor has lodged either an application to set aside the judgment (in a case where the judgment did not require a decision on the merits) or an appeal, the bankruptcy court maystay the hearing of the petition to await the result of the application or appeal.

25.2  However, the bankruptcy court need not do so in every case.  It may refuse to stay the petition and may proceed to make a bankruptcy order if the judgment debtor fails to satisfy the court that he has a reasonable prospect of succeeding in the application to set aside or the appeal (Watts v London Borough of Newham [2009] EWHC 377 at [53]).  Put another way, an application to set aside or an appeal falling short of that standard would not be a viable or bona fide one, and the judgment debtor would have failed to rebut the prima facie evidence of indebtedness.  As noted by the learned editor of the Law of Insolvency, at p.162 para.6-114: 

“It is important to note that the power to stay proceedings is once again a discretionary one, and that the mere fact that a debtor has lodged appeal against a judgment does not confer upon him the right to insist upon a stay of any bankruptcy proceedings founded upon that judgment. If the law were otherwise it would, as was observed by Lord Esher MR in Flatau, Re furnish an intolerable means whereby the debtor might delay the hearing of the petition, perhaps for months or even years, by embarking upon purely frivolous appeals. As it is, if the bankruptcy court forms the opinion that the appeal is without merit it may make a bankruptcy order without more ado”.

26. 1  Where the judgment debtor has not lodged an application to set aside or an appeal by the time of the petition hearing but intends to do so (probably out of time), he must, in addition to satisfying the bankruptcy court of the reasonable prospects of success in his application or appeal, also provide a reasonable explanation why he has failed to act in time.  If he can do so, the bankruptcy court may adjourn the hearing of the petition to enable him to commence an application to set aside or appeal, giving appropriate directions to ensure that it is conducted expeditiously, with liberty to apply so that either party may apply to restore or dismiss the petition as appropriate. 

26.2  Where the judgment debtor is unlikely to be able to pursue an application to set aside or an appeal for procedural reasons eg where there has been gross and inexcusable delay, the bankruptcy court may consider his case to see if he can rebut the prima facie evidence of indebtedness. Before arriving at a decision, the bankruptcy court will consider the circumstances in which the judgment was obtained.  At one end of the spectrum, the court may decide to dismiss the petition even if a regular judgment had been obtained in default, e.g. if service of a writ had been effected on the judgment debtor’s previous address and he can clearly establish a substantial defence. At the other side of the spectrum is a petition based on a judgment obtained after a full trial on the merits. In the latter situation, the general principle is that the bankruptcy court would inquire into such a judgment only if the judgment debtor can show fraud, collusion or miscarriage of justice, the latter term having been described as “something from which [the court] can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant” (Dawodu v American Express [2001] BPIR 983 quoted in Watts at [48]).  

27. Where the judgment debtor has already failed in his application to set aside the judgment or his appeal on substantive grounds at the time of the petition hearing, it would be most unlikely in that situation that the bankruptcy court would find that the judgment debtor could nevertheless rebut the prima facie evidence of indebtedness, unless he could satisfy the court that he could impugn the judgment of the court deciding the setting aside or appeal on the grounds discussed in the paragraph above. 

Discussion

28. Coming back to the present matter, the underlying debt here is the solicitors’ fees for providing its services at the probate trial.  That the solicitors did act for Madam Tam in the action is common ground.  There was no challenge to the quantum of the bills.  The collateral agreement argument had been rejected by Chung J and there was no appeal from that decision.  Indeed that argument no longer features in Madam Tam’s grounds of appeal. 

29. Her position now is that the solicitors had been incompetent or negligent in the conduct of the probate action and thus were not entitled to their fees and/or are liable to her for damages, because if she had succeeded in the probate action, the Trust and Will would have been set aside, and she would have been entitled to the deceased’s entire estate on an intestacy. 

30. However Madam Tam did not advance a case of professional negligence until the bankruptcy proceedings were commenced.  The note of 31 October 2003 was disclosed before the trial and available to her when she instructed other lawyers, including leading counsel from England. 

31. 1  In any event Barma J did not stop at Chung J’s judgment.  He had also considered Madam Tam’s allegations regarding her legal representatives’ conduct of the probate trial and found no evidence to suggest that the advice given to her as to the way her case should be put at the probate trial was negligent. 

31.2  We respectfully agree. Madam Tam has in her written and oral submissions relied essentially on Mrs Lau’s note.  However we would observe first, that the note is not self-explanatory or conclusive.  It consists only of a few lines of scribbled writing setting out what would appear to be different options available to the deceased when considering how to distribute her assets. 

31.3  Secondly, even if it is assumed that the note shows a different intention than that shown in the Trust and the Will as finally executed, it was written on 31 October, more than one month before the Trust and Will were executed (3 December), during which period there were more discussions with and instructions from the deceased.

31.4  In these circumstances the note is not the “smoking gun” that Madam Tam seems to think it is, and she has not shown any other evidence that the solicitors had been negligent in failing to advance the note at trial as evidence that Mrs Ho and Mrs Lau were perjuring themselves, or in any other respects.

32. In light of the above, in the exercise of his discretion Barma J was entitled to hold that Madam Tam had failed to rebut the prima facie case of indebtedness under the judgment and to make a bankruptcy order. 

Order

33. We would dismiss the appeal.  The parties having agreed that the costs should follow the event, we would order that the respondents (the petitioners) be paid the costs of the appeal, to be taxed if not agreed.  We decline Madam Tam’s proposal that the costs be paid from the estate of the deceased as we see no reason to make such an order.