MART TREASURE INVESTMENT LTD v. DAI SHU SING AND OTHERS

HCA905/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.905 OF 2001

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J U D G M E N T

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1. This is an appeal by the plaintiff from the order of Master Cheung made on 23 May 2003 when she dismissed the plaintiff's application under Order 81 rule 5(4) of the Rules of the High Court for leave to issue execution against the respondent, Chiu Kwok Wing Benedict ("Mr Chiu"), a member of the 3rd defendant firm.

2. On 12 December 2002 the plaintiff obtained judgment against the 2nd and 3rd defendants for $4,100,000.00, with interest on different sums from different dates, and costs on the indemnity basis. Judgment in default was earlier obtained against the 1st defendant who has apparently emigrated from Hong Kong. His whereabouts are not known.

3. Deputy Judge Wright found that the 2nd and 3rd defendants, respectively a solicitor and a firm in which he was a partner, were in breach of their professional duties to the plaintiff. The action arose out of the sale of property in September to November 1997. It was found that the defendants had acted negligently in failing to disclose to the plaintiff's shareholders the sale of the property at an increased price, and in wrongfully making disbursements from monies belonging to the plaintiff and held in the 3rd defendant's client account.

4. When the cause of action arose, Mr Chiu was a partner in the 3rd defendant. It is not in dispute that he and the 2nd defendant had a complete division of functions and indeed practised from different offices. He resigned from the partnership on 31 October 2000. The Writ herein was issued on 26 February 2001. It was served on the 3rd defendant and the 2nd defendant filed an acknowledgment of service in the name of the firm by "Peter Chan, a partner in the firm of Chan & Chiu (a firm)". However the Writ was not served on Mr Chiu. He took no part in the trial and says that he knew nothing of the proceedings, though he learnt of the issue of the Writ in March 2001 from a newspaper report and notified his professional indemnity insurers accordingly.

5. Mr Chiu argued before the Master that he did not come within the scope of Order 85 rule 5(2); that to the plaintiff's knowledge the partnership had been dissolved before the action against the firm had begun, and therefore pursuant to Order 81 rule 3(3) the plaintiff had to serve the writ on him in order to make him liable; and that in any event the court should exercise its discretion against making an order against him.

6. This appeal is of course by way of re-trial, but as I understand the Master's oral reasons, they were :

(a) the plaintiff had knowledge of the change of partnership through the wife of the 2nd defendant, who was a director, even though Mr Wong, the solicitor who conducted the litigation on behalf of the plaintiff, did not have such knowledge;

(b) there is no time limit under Order 81 rule 3(3) and the plaintiff in any event had such knowledge from the service of a witness statement on 11 September 2001, at which time the plaintiff could still have effected service on Mr Chiu; and

(c) Mr Wong's deliberate failure to conduct a business registration search before issuing the Writ meant that he had assumed the risk that the constitution of the partnership had changed, and he may not be able to execute against a partner on whom the Writ had not been served. He intended the full consequence of his not conducting a search. By contrast Mr Chiu's was blameless; he did all he need do, by advising his insurers; therefore discretion should be exercised in his favour under Order 81 rule 5(5).

7. The relevant provisions of the Partnership Ordinance are :

"Section 1 :

Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied but subject to the prior payment of his separate debts.

Section 12 :

Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.

Section 13 :

In the following cases, namely -

(a) where one partner, acting within the scope of his apparent authority, receives the money or property of a third person and misapplies it; and

(b) where a firm in the course of its business receives the money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm,

the firm is liable to make good the loss.

Section 14 :

Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under section 12 or 13."

8. Order 81 rule 1 of the Rules of the High Court provides :

"Subject to the provisions of any written law, any 2 or more persons claiming to be entitled, or alleged to be liable, as partners in respect of a cause of action and carrying on business within the jurisdiction may sue, or be sued, in the name of the firm (if any) of which they were partners at the time when the cause of action accrued."

9. Order 85 rule 2 provides :

"(2) Where a judgment is given or order made against a firm, execution to enforce the judgment or order may, subject to rule 6 and to the next following paragraph, issue against any person who -

(a) acknowledged service of the writ in the action as a partner, or

(b) having been served as a partner with the writ of summons, failed to acknowledge service of it in the action, or

(c) admitted in his pleading that he is a partner, or

(d) was adjudged to be a partner."

10. There seems to be no dispute that Mr Chiu does not come within any of these categories. However the plaintiff relies on Order 85 rule 4 which provides :

"(4) Where a party who has obtained a judgment or order against a firm claims that a person is liable to satisfy the judgment or order as being a member of the firm, and the foregoing provisions of this rule do not apply in relation to that person, that party may apply to the Court for leave to issue execution against that person, the application to be made by summons which must be served personally on that person."

11. Order 81 rule 3(3) provides:

"(3) Where a partnership has, to the knowledge of the plaintiff, been dissolved before an action against the firm is begun, the writ by which the action is begun must be served on every person within the jurisdiction sought to be made liable in the action."

12. The corresponding rule was considered in Wigram v. Cox (1894) 1 QB 792. Cave J held that where there has been a dissolution to the knowledge of the plaintiff, he cannot make an outgoing partner liable, unless he serves the Writ of on him.

13. The primary issue before me is whether the plaintiff knew that Mr Chiu had already retired from the partnership before the writ was issued. It is not in dispute that if it did, then notwithstanding Mr Chiu's statutory liability under the Partnership Ordinance, it was necessary for the Writ to be served on him, in order to fix him with that liability.

14. Mr Wong, the solicitor acting for the plaintiff, did not have any actual knowledge of Mr Chiu's retirement from the partnership. According to his affirmation, he relied on the current Law List, which showed Mr Chiu to be a partner. He did not, because he did not think it necessary, carry out a business registration search. Nor did he consult the Law Society's publication, Hong Kong Lawyer, or the Law Society's website, both of which give more up-to-date information than does the Law List, which is issued once a year although with two updates in the course of the year.

15. It appears that if Mr Wong had carried out a business registration search, he would have discovered the registration of Mr Chiu's new partnership, which was registered on 6 November 2000.

16. Mr Bell for the plaintiff argues that that knowledge must be actual and not constructive. Wigram was a case of actual knowledge; there is no authority that constructive knowledge is sufficient; if it were this would negative the purpose of Order 81 rule 1.

17. He further argues that Mr Chiu has not established knowledge on the part of the plaintiff's solicitors, i.e. Messrs Tang, Wong & Cheung. Insofar as Mr Chiu seeks to show that the plaintiff had knowledge because the wife of the 2nd defendant was a director and shareholder, there is no evidence as to her actual knowledge, and no evidence of her relationship with her husband from which it could be inferred that she must have obtained the knowledge from him. In any event, she would not have acquired such knowledge as a director and as such an agent of the plaintiff, but only in her capacity as a wife, so the knowledge could not be imputed to the company. Further, there is no evidence that she was the directing mind and will of the plaintiff so knowledge, if she had it, could not be imputed to the plaintiff in that way.

18. As to discretion, Mr Bell argues that there is no basis for saying that the court has a discretion to refuse execution where the plaintiff is within the terms of the Order. That would be contrary to the terms of the Partnership Ordinance. If there is a discretion it would be wrong, for various reasons, to exercise it in favour of Mr Chiu.

19. Mr Grossman for the 3rd defendant argues that the plaintiff, being a company, and as such only a piece of paper can only act through individuals and in general the rules of agency enable a company to be held liable and to acquire knowledge where this is appropriate. The knowledge that Mr Chiu was no longer a partner when the Writ was issued must be imputed to the plaintiff for four reasons, as follows :

(1) The 2nd defendant was the plaintiff's legal advisor and took part in its administration. For the purposes of taking legal action he was part of the directing mind or will of the company;

(2) His wife was a shareholder and director and knowledge which she possessed must be imputed to the plaintiff because she was its agent;

(3) Messrs Tang Wong & Cheung must have known of the change of partnership in the 3rd defendant, because someone in that firm had looked at the Law List and crossed out the entry which showed that the 3rd defendant had premises on the 25th floor, which was where Mr Chiu had his office; and

(4) Mr Wong, the handling solicitor for the plaintiff when the Writ was issued, had constructive knowledge in that if he had done what a reasonably prudent and conscientious solicitor should do, he would have found out that Mr Chiu was no longer a partner.

20. So far as discretion is concerned it is argued that it would be inequitable to allow execution because Mr Chiu has had no opportunity to defend himself or challenge the judgment. The principle of "audi alteram partem" has not been applied to him. Therefore it would be contrary to natural justice to allow execution against him.

21. I raised the question of who bears the onus of proof of lack of knowledge for the purposes of Order 81 rule 3(3). Mr Bell says that it must be Mr Chiu, for he is the one who relies on it. Mr Grossman says that it is the plaintiff, or at any rate the evidential onus shifts to the plaintiff, because in fact Mr Chiu was not a partner, and in fact the Writ was not served on him.

22. The point of rule 3(3) is that if the plaintiff knows that the partnership was dissolved before the action is begun, the Writ must be served on the outgoing partner in order to fix liability on him. It seems to me that where, as here, the partner has retired before the date of the Writ, and it is not served on him, then it should be for the plaintiff to show that he did not know of the retirement.

23. I do not see that the 2nd defendant can be regarded as forming part of the directing mind of the plaintiff. By the time the Writ was issued he was not directing anything on the plaintiff's side, even if he did before. Nor does there seem to be any evidence that his wife took part in the direction of the plaintiff. So there does not seem to be any way of imputing knowledge by that route. It is therefore unnecessary to consider the lengthy legal submission. However if the onus is on the plaintiff to show that he did not know of Mr Chiu's retirement, there is no evidence of it from the directing mind, whoever that may have been.

24. It is quite clear, from his own affirmation, that Mr Wong, the handling solicitor, did not know of the retirement. It is equally clear that if he had carried out a business registration search, which it seems that he regarded as "requisite" if he had not had the out-of-date Law List to rely on, he would have known of it.

25. It seems to me that, given the provisions of rule 3(3), it cannot be enough for a solicitor simply to sue a partnership in the partnership name, without checking that the partners are in fact who they appear to be. Of course this is permissible and judgment can be obtained against the partnership, as here. But a judgment is no use unless it can be executed, and it seems to me that a prudent solicitor should make sure that he will be able to execute any judgment he obtains against all who were partners at the time when the cause of action arose. I do not think it is sufficient to take no steps to find out whether such persons are still in the partnership and then attempt to rely on that inaction.

26. It seems to me that there is nothing in Wigram to say that knowledge must be actual and not constructive. Indeed there is, in the final paragraph of the judgment of Cave J, some support for my position. His Lordship said :

"Here the plaintiff, although he knew when he commenced his action that the appellant was no longer a member of the firm, chose, as he had a right to do, to issue his writ against the firm in their firm name, and chose also not to serve the appellant who had gone out. Therefore, as there has been no service, either actual or constructive, upon the appellant, the plaintiff cannot proceed against him under rule 8. I am of opinion that this appeal must be allowed."

27. The point is that the plaintiff chose a particular method of service, notwithstanding his knowledge that the partner had left the firm. The consequences depend on his choice. It seems to me that if a plaintiff (or his solicitor) makes that choice without satisfying himself of the true position when he could have done so, then he assumes the risk that the partner is no longer a partner, and the consequences follow.

28. There is another point raised by Mr Grossman, namely that the plaintiff must have known, from the 2nd defendant's witness statements which were served within 12 months after the issue of the Writ, at least that the 2nd defendant was describing himself as "sole proprietor" or "former sole proprietor". It was then in a position to serve the Writ on Mr Chiu. Mr Bell however says that only knowledge at the time of the commencement of the action is relevant.

29. No authority was cited on this point but I note a that in by Evans LJ in Chohan Clothing Co. (Manchester) Ltd v. Fox Brooks Marshall (a firm), CA, The Times 9 December 1997 the parties and the judges accepted for the purposes of the appeal that rule 3(3) applies :

"... whenever the dissolution has in fact occurred before the writ was issued and with effect from such time thereafter or earlier as the plaintiff has knowledge of that fact. In other words, Miss Anderson does not submit that the rule is not capable of applying in the circumstances of the present case where the knowledge of the plaintiff came after the date of the issue of the writ."

30. It seems to me that this must be right, because rule 3(3) refers to the knowledge of the plaintiff that the partnership has been dissolved before the Writ is issued. It does not specify when the plaintiff must have obtained that knowledge. If the 2nd defendant was calling himself a sole partner it would serve to put the plaintiff or Mr Wong on inquiry as to when the two other partners, who appeared in the 2000 Law List, had left the firm.

31. I would therefore hold that Mr Wong had constructive knowledge of the retirement of Mr Chiu from the 3rd defendant. He was the plaintiff's agent for the purpose of raising the action and pursuing it to execution against the 3rd defendant and its partners, so such knowledge must be imputed to the plaintiff. It follows that the plaintiff by reason of the provisions of rule 3(3) cannot fix liability on Mr Chiu.

32. I turn to the question of discretion. I do not see how there can be a general discretion to allow execution or not. Either the partner is liable under the Partnership Ordinance or he is not. If he is liable, then there must be execution unless rule 3(3) applies. The only discretion can be that under Order 81 rule 5(5), to order a trial of the liability of the partner where he disputes it.

33. Here Mr Chiu disputes liability. The court could order a trial of that liability. However as Mr Bell points out, the misappropriated moneys went through the firm's client account. Section 13(b) of the Ordinance would apply and there seems to be no defence. In any event Mr Grossman does not seek an order for a trial. So the question of discretion does not arise.

34. The plaintiff's appeal is accordingly dismissed with costs to the respondent to be taxed if not agreed.