BAKER & MCKENZIE (A FIRM) v. THE GRANDE HOLDINGS LTD AND OTHERS

CACV 102 & 103/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS.102 AND 103 OF 2011

(ON APPEAL FROM HCMP NO. 1971 OF 2010)

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JUDGMENT

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Hon Yeung JA:

1. I agree with the judgment of Yuen JA and would make the order as set out in para 48 hereof.

Hon Yuen JA:

2. CACV 102/2011 is an appeal by the 2^nd - 11^th defendants and CACV103/2011 is an appeal by the 1^st defendant Christopher Ho Wing-on from a judgment of Deputy High Court Judge Auyeung (as she then was) in HCMP 1971/2010.  The learned judge gave summary judgment in favour of the plaintiff (“BM”), a firm of solicitors, against its former clients the 1^st - 11^th defendants, in proceedings in respect offees.  The judge ordered that BM’s bills be taxed by a taxing master on a solicitor-client basis, and that there be interim payment of all disbursements (primarily counsel’s fees) and of 50% of BM’s profit costs.  The judge ordered that pending taxation, BM should not commence any action against the defendants.  The defendants’ summons that the proceedings continue as if begun by writ was dismissed.  The judge also ordered that the defendants should pay the costs of the proceedings to BM.

3. On appeal, a number of arguments were raised by Mr Warren Chan SC for the 2^nd - 11^th defendants and Mr Hingorani for the 1^st defendant.  It would be convenient to deal with one discrete point first.

The Legal Practitioners Ordinance argument

4. The defendants argued that the judge had no power to order interim payment under s 67(2) Legal Practitioners Ordinance Cap 159.

5. Sections 67(1) and (2) provide, where material, as follows:

“(1) On the application, made within 1 month of the delivery of a solicitor’s bill ..., of the party chargeable therewiththe Court shall, without requiring any sum to be paid into court, order that the bill shall be taxed and that no action shall be commenced thereon until the taxation is completed.

(2) If no such application is made within the period specified in subsection (1), then, on the application of the solicitor ... or of the party chargeable with the bill, the Court may, upon such terms, if any, as it thinks fit (not being terms as to the costs of the taxation), order –

(a) that the bill shall be taxed;

(b) that, until the taxation is completed, no action shall be commenced on the bill, and any action already commenced be stayed; ...”.

(Emphasis added).

6. Mr Chan SC argued that it is “implicit” in s 67(2) that terms (including interim payment into court) can only be imposed against the party seeking taxation (the solicitor), and not against the party resisting taxation (the client).

7. With respect, I do not agree.  First it should be noted that whereas s 67(1) gives a client an unconditional right to tax a solicitor’s bill so long as he acts within the time limit, s 67(2) gives the court a discretion whether or not to order taxation on the application of either the solicitor or the client.  Even if the party applying for taxation is the solicitor, the court may decide that taxation is not required at all, in which event the solicitor may proceed directly to sue the client on the bill.  The section gives the court an unfettered discretion to order taxation or not, whoever was applying for it. Secondly if the court does decide to order taxation, it has an unfettered discretion under s 67(2) to impose terms on making the order (eg ordering interim payment into court). It is clear from the language of the subsection that the terms attach to the court’s order for taxation; contrary to Mr Chan SC’s submission, the terms are not attached to the application for taxation. I can see no reason why an applicant solicitor, whose client has failed to exercise his right to taxation under s 67(1), should himself have to make an interim payment into court in order to have his fees taxed.  Nor has Mr Chan SC been able to suggest what sum an applicant solicitor should be ordered to pay, as the “terms” referred to in s 67(2) expressly do not include the costs of the taxation exercise.  Accordingly, in my view, the ground of appeal based on s 67(2) should be rejected.

8. I turn now to the other arguments. The defendants’ case (for which they sought to deploy some 20 bundles of documents) was that they have a set-off against BM for negligence,essentially in failing to advise Mr Ho about the nature of his interest in the shares of The Grande Holdings Ltd (“GHL”).  The defendants said that that led to judgment being given against them (amongst others) in Mareva and asset disclosure proceedings in HCCL37/2005 and HCCL40/2005 before Stone J which took place in December 2008 and January 2009.

9. In my view, at the end of the day the defendants’ arguments can be resolved simply, although the background to the arguments requires some elaboration. 

Background

10. Mr Ho was an experienced chartered accountant and a partner with Ernst and Young before going into business.

Ho Family Trust

11. In 1993 when Hong Kong still had an estate duty regime (which was abolished in February 2006), Mr Ho was the settlor of a discretionary trust called “the Ho Family Trust”.  (BM did not have anything to do with the setting up or the running of the trust).

12. The trustee of the Ho Family Trust was Accolade Inc, a BVI company.  The shareholders of Accolade were Mr Ho’s sisters.  The directors were Mr Ho’s brother-in-law, one of his sisters and his long-time employee.

13. As settlor, Mr Ho provided a memorandum of wishes containing recommendations to the trustee Accolade.  The recommendations (which are not binding on Accolade) stated:

“during my [Mr Ho’s] lifetime, the Trustee [Accolade] should hold the whole of the capital and income of the Trust Fund for me [Mr Ho] absolutely and should in the exercise of all its powers and duties and also with regard to the management and administration of the Trust Fund and the distribution of income and capital consult with me [Mr Ho]”.

This is important to the issue of control of shares said to be owned by the trust which I will discuss later in this judgment.

14. The specified beneficiaries of the Ho Family Trust were Mr Ho himself, his wife and their daughter.

15. Mr Ho’s case was that the Ho Family Trust held a number of BVI companies through which it held Barrican Investments Corporation, a BVI company which was the majority shareholder of GHL.

GHL

16. GHL was incorporated in theBVI, then redomiciled in Bermuda.  It was listed on the Hong Kong Stock Exchange.  It was the main company in the Grande group of companies which included Lafe Corporation Ltd (a Bermudan company listed in Singapore) and Emerson Radio Corp (which was listed in Delaware, USA).  In November 1999, GHL took over the Akai group of companies. 

17. From 1991 to 1993, Mr Ho was Deputy Chairman and Group Chief Executive Officer of GHL.  From 1994 to 2001, he was President and Group Chief Executive Officer.  From 2002 onwards, he was Chairman and Executive Director.  

18. Public documents filed in relation to the Grande group of companies in Hong Kong, Singapore and the United States stated clearly that Mr Ho controlled the largest stake in GHL and through it, the Grande group of companies.  The following were particular instances. 

18.1    In Hong Kong, the report of the directors of GHL for 2007 stated that “Mr Christopher W. Ho has a 100% deemed beneficial interest in The Grande International Holdings Limited (“GIHL”) which owned [67.36%] ordinary shares in the Company through its wholly owned subsidiary Barrican Investments Corporation”. Further in a Shareholding Disclosure filed on 3 November 2008 with the Hong Kong Exchanges and Clearing Ltd, Mr Ho did not provide any information as a “trustee, or beneficiary of a trust, or a person who has set up a Discretionary Trust”, but disclosed that he was interested in 69.22% of GHL through his 100% control of a BVI company called Airwave Capital Ltd which in turn held 100% of Barrican (transferred on 18 September 2008 for nil consideration from GIHL).  In contrast, the Ho Family Trust and Accolade had never disclosed any interest in GHL in any filings. 

18.2    In the United States, a public statement made by Emerson Radio Corp in 2007 to the Securities and Exchange Commission stated that GIHL was solely owned by the Ho Family Trust, but that Mr Ho was “the sole beneficiary” of that trust.

18.3    In Singapore, a public announcement by Lafe in June 2008 stated that “[Mr Ho] ... controlling shareholder of [Lafe] is a director of HFL [Ho Family Trust Ltd]. HFL’s sole shareholder is Accolade Inc which holds the shares of HFT on trust for [Mr Ho] as beneficiary”.  HFL was a BVI company which held GIHL, which in turn held Barrican (until the nil consideration transfer referred to in para 18.1 above).  The relevance of Mr Ho’s association with Lafe will be seen later in this judgment. 

19. There was no evidence that BM were retained by Mr Ho or GHL in connection with any filings in Hong Kong (at least prior to Stone J’s judgment in the Mareva and disclosure proceedings which will be referred to below). BM certainly were not retained for filings overseas.  But significantly, the filings overseas as well as in Hong Kong indicated that Mr Ho controlled GHL through Barrican.  Nor (subject to an allegation by Mr Ho regarding an event in 2007 to which I will return) was there any evidence that BM were given relevant information at the time of these filings about the discretionary nature of the Ho Family Trust, its assets, administration or distributions. 

The Akai Litigation (HCCL 37/2005 and 40/2005)

20. Meanwhile in 2005, Akai Holdings Ltd (having gone into liquidation) and some other companies commenced proceedings in Hong Kong against Mr Ho, GHL and other companies and individuals, essentially for breach of fiduciary duty.

21. BM were instructed on 10 November 2008 to take over the defence.

22. It is pertinent to note that in para 53.9 of the Points of Claim, the liquidators had asserted that –

“At all material times Barrican ... was the majority and controlling shareholder of [GHL], holding 62.68% of the share capital as at 31 December 1999 and 67.26 per cent as at 31 December 2006. Barrican was a wholly owned subsidiary of [GIHL]. Ho held and continues to hold a 100 per cent beneficial and controlling interest in GIHL”. (Emphasis added).

23. Instructions were given by GHL’s in-house legal counsel to counsel instructed by BM’s predecessors to admit that paragraph (the only qualification being that as at 31 December 1999 Mr Ho in fact held a further tranche of shares in GHL through another company).

Akai liquidators’ application for Mareva injunction and asset disclosure orders

24. The day after BM took over, Akai’s liquidators applied for Mareva injunctions against Mr Ho and GHL, and for disclosure orders against some of the other defendants ancillary to the injunctive relief.  The ex parte application in November 2008 was dismissed but the inter partes application was heard by Stone J over the course of 5 days: 22-23 December 2008 and 19-21 January 2009.  Mr Ho, GHL and some other defendants were represented by leading counsel from London and experienced junior counsel in Hong Kong on BM’s instructions. 

25. As part of the liquidators’ case that there was a risk that Mr Ho and GHL would dissipate their assets, the liquidators referred (amongst other things) to the fact that GHL had sold to its subsidiary Lafe certain property-owning companies at an undervalue, and that after Lafe acquired those assets, GHL then disposed of its entire shareholding in Lafe by way of a distribution of dividend in specie, the principal beneficiary of which distribution was Mr Ho. 

26. The liquidators accepted that a Mareva injunction against a listed company was “unusual” but argued that GHL was “not a normal public company” but “substantively a private company” controlled by Mr Ho.  In Cosimo Borelli’s 7^th and 9^th affidavits filed on 12 November 2008 and 21 December 2008 on behalf of the liquidators in support of the application, he asserted that Mr Ho currently owned almost 70% of GHL’s shares.  He asserted that consequently “the interests of Grande’s shareholders are therefore largely to be equated with Mr Ho’s personal interests”.  As at the end of the month immediately before the hearing (November 2008), Barrican held about 67.5% of GHL’s shares. 

27. It is important to note what were Mr Ho’s instructions to BM on this matter. 

27.1    These instructions came via Felicity Porter (GHL’s in-house lawyer) who Mr Ho accepted

“was GHL’s contact person/coordinator for liaising with and giving instructions to [BM] on behalf of [Mr Ho and the present defendants] in [HCCL37/2005 and HCCL40/2005]”

(para. 56, Ho, 2 December 2010). 

27.2    That this was Miss Porter’s role was confirmed in a contemporaneous e-mail from GHL’s other in-house counsel Ruby Lee on 20 November 2008, soon after BM took over from Mr Ho and GHL’s former solicitors. 

27.3    In an e-mail from Miss Porter to Emma Pelka-Craven of BM on 22 December 2008 (the day after Mr Borelli’s 9^th affidavit was filed), the express instructions given to BM were as follows:

“I can tell you that Mr Ho is the ultimate beneficial owner of the Barrican shares”.

27.4    These instructions came after BM had received Mr Borelli’s draft 9^th affidavit and after they had specifically sought instructions on 20 December 2008 from the defendants on his assertion (set out in para 26 above).  It is important to note that Mr Ho himself was directly alerted to this request for instructions from BM as he was e-mailed personally.

27.5    After the instructions in para.27.3 above were received via Miss Porter’s e-mail, the focus of the defence was on the ownership of the remaining 30%, the defence argument being that a Mareva injunction would be detrimental to the interests of those shareholders who were not associated with Mr Ho. 

28. Pausing here, it would be noted that although the liquidators advanced their application based on Mr Ho’s holding of the majority of GHL shares, obviously what mattered in the application for a Mareva injunctionwas Mr Ho’s control over GHL, rather than the specific channels through which he exercised that control.

29. On 23 December 2008 Stone J made an interim injunction against Mr Ho.  During the adjournment between the December and the January hearing dates, BM was supplied with a copy of the trust deed and memorandum of wishes.  On 15 January 2009 a BM associate Pierre Chan wrote an internal memorandum to Anthony Poon the partner handling the Mareva and disclosure proceedings, summarizing the only two documents made available.  Mr Chan noted that there was “other information which we do not have”, such as whether any distributions had been made, whether the trustee owed Mr Ho any money, and whether the trustee was independent from Mr Ho (“e.g. whether he or his relatives are directors or shareholders of the trustee company” - which in fact they were).

30. Put briefly, no change was effected to the defence strategy in the Mareva proceedings subsequent to the internal memorandum.  

31. In his judgment handed down on 9 February 2009, Stone J noted that “it is common ground that Mr Ho is the beneficial owner of 69/70% of [GHL]” (para 72) and that through various “private BVI companies, Mr Ho, as controller and major shareholder, must be regarded effectively as the ‘puppet master’, and that he remains responsible for the conduct of [GHL] and its subsidiaries” (para 85) (emphasis added).

32. Stone J ordered a Mareva injunction and disclosure order against Mr Ho.  As against GHL, the learned judge gave a disclosure order but did not grant a Mareva injunction.  The judge considered it sufficient to enjoin Mr Ho “from utilizing his beneficial interest in [GHL] to force disposal of any of [GHL] assets outwith the normal course of [GHL] business” (para 117).

33. An appeal by Mr Ho was withdrawn after new solicitors were retained.

Subsequent events- Mr Ho’s change of position

34. New solicitors were retained in place of BM in June 2009.  In answer to a discovery application by Akai’s liquidators, Mr Ho made affirmations asserting that he was only one of three beneficiaries under the Ho Family Trust, a discretionary trust over which he said he had no leverage, and whose trustee he said he did not influence, that the previous public filings were incorrect, that his previous legal advisers had misunderstood his position and had misrepresented it to the court, and that perhaps that misunderstanding could be explained by a deeming provision which was intended for statutory disclosure obligations only.  There was also an affirmation by a director of GHL to similar effect.  In a judgment given on 23 July 2009, Stone J rejected those assertions.

- Receivership order

35. The liquidators then proceeded with an application for a receivership order over Mr Ho’s assets.  In August 2009, Accolade intervened as an additional party.  However Stone J proceeded to grant a receivership order against Mr Ho. 

36. Importantly the judge found that even though the trust was discretionary, on the facts of this case no independence of action could be attributed to Accolade, and the reality was that Mr Ho controlled its assets.  Applying the analysis of “substantive reality of control, not a strict trust law analysis” set out in Dadourian Group v Azuri Ltd [2005] EWHC 1768, the judge held (paras 29-37):

“... the present case is ... a ‘paradigm case’ of good reason to believe that Mr Ho controls the assets in that trust, and the dispersion of those assets” (Emphasis added).

- Appeal from Receivership order

37. Mr Ho and Accolade applied for leave to appeal from the receivership order, but leave was refused by this court (Tang VP, now PJ, and A Cheung J, now CJHC) on 24 September 2009.

Mr Ho’s claim of negligent advice

38. It was in the context of this background that Mr Ho alleged in November 2010 that BM had been negligent in failing to advise him in the Mareva and disclosure proceedings on the effect of the nature of his interest in GHL under the discretionary trust.

39. It was Mr Ho’s case first, that BM was aware of the discretionary trust in 2007 (before BM were instructed to represent him in the Akai proceedings) when they were asked to advise GHL on its redomicile proposal; or at the latest by 14 January 2009, in the middle of the Mareva application proceedings before Stone J, when Mr Chan reviewed the trust deed and memorandum of wishes.  Mr Ho said that nonetheless, BM failed to advise him to defend the Mareva application on the ground that it was the trust, and not he personally, who controlled GHL.  He argued that if BM had advised him properly, Stone J would not have granted the Mareva injunction, and his defence to BM’s claim for fees was that he is entitled to set-off his claim in damages for negligence.

40. The learned deputy judge (as she then was) rejected the defence and awarded summary judgment to BM.  I respectfully agree.

Discussion

41. First, the issue before Stone J in the Mareva proceedings was whether Mr Ho controlled GHL at the time, not whether Mr Ho had title in the shares in the strict proprietary sense, nor even whether Mr Ho had a strict legal right to control the shares.  Of course Mr Ho’s memorandum of wishes was not binding on Accolade, but it would be unrealistic to suggest that he was not in a position to influence the trustee, comprised of his family members and trusted long-term employee, as Stone J found in the receivership proceedings, which decision was upheld by the Court of Appeal. 

42. Secondly, Mr Ho’s control of GHL was the subject of clear instructions given to BM via Miss Porter’s e-mail of 22 December 2008.  Miss Porter was the “contact person/ coordinator” for giving instructions to BM on behalf of Mr Ho and the GHL companies.  Those instructions were given after BM’s specific request for instructions in which they directly alerted Mr Ho that “one of the important issues that has arisen is an allegation that Mr Ho is the largest shareholder of [GHL]”.  These instructions were also supported by public filings.  There was no reason for BM to doubt those clear instructions from the defendants’ designated contact person.

43. As to Mr Ho’s bare allegation that the trust deed had been supplied to BM “well before” a meeting in May 2007 in connection with advice sought from BM on redomicile of GHL, it is important to note the request made by Christina Lee of BM to Bianca Leung of GHL by e-mail on 9 May 2007 for “relevant information regarding the trust entity ... its nature, the holding structure and details of the beneficiaries ... etc” (emphasis added).  The fact that such a request was made showed that BM did not have the documents.  The reply e-mail from GHL did not refer to the supply of that information (whether previously or contemporaneously).  These contemporaneous documents showed that the trust deed had not been supplied, contrary to what Mr Ho alleged.  Of course in any event the focus of the redomiciling exercise was corporate restructuring, not Mr Ho’s private interests.  In the event BM received no further instructions and was not retained to deal with the filing of any disclosures of interest to the Hong Kong Stock Exchange.   

44. Nor did it matter that by 14 January 2009, the nature of the trust was made known to BM who were given the trust deed and memorandum of wishes.  As Mr Chan pointed out in the BM internal memorandum, there was other information which they did not have from Mr Ho (such as whether there had been distributions).  The fact that the Ho Family Trust was a discretionary trust was not inconsistent with the instructions (via Miss Porter’s e-mail) that Mr Ho owned the Barrican shares.  It was only after Stone J’s judgment that an exercise in attempted damage containment for Mr Ho was done by amendments being made in public documents to indicate that he was only a potential beneficiary under a discretionary trust which owned the Barrican shares. 

45. As for the assertion by Lawrence Lee of BM that he had a meeting in January 2009 with Mr Ho and Herbert Tsoi (a solicitor who had attested Accolade’s execution of the trust deed and who was also an independent non-executive director of GHL) at which Mr Tsoi indicated that it would be left to the trust to consider whether it should intervene, Mr Ho has simply said that he did “not recall that there was such a meeting in January 2009”.  Mr Tsoi also said in an affidavit made in March 2011 that he did “not recall” that he attended any meeting with Mr Ho and Mr Lee in January 2009, and his electronic diary did not show he had any meeting with them “in January 2009”.  The caution with which those statements was made was self-evident.  Obviously they were only prepared to comment on the date of the meeting and not the contents of the meeting as asserted in Mr Lee’s affirmation, including reasons given by Mr Ho and Mr Tsoi for the trust’s difficulties in evidencing independent administration. 

46. In any event, whether the meeting took place, and if so, when, and what was said or not, did not really matter.  Even if the discretionary trust argument had been deployed in the Mareva proceedings, it would not have assisted Mr Ho.  In August 2009 Accolade applied to join the proceedings as intervener and its directors made affirmations in support of its contention that Mr Ho did not own the Barrican shares and had no “control or influence over the Family Trust” (Sabrina Ho, second affirmation para 7). However Stone J found in his judgment given on 1 September 2009, “ … in the case of Accolade, whose directors are said to be Mr Ho’s sister Dr Sabrina Ho, his long-time employee Ms Eleanor Crosthwaite and his brother-in-law Mr Alistair Asprey, manifestly there is no cogent evidence of independence.  And that any suggestion of true independence, or of Accolade constituting an independent arm’s length trustee, in my judgment is risible”.  The judge declined to order an inquiry into the ownership of assets, and made it clear that his order was intended to “catch assets owned and controlled by Mr Ho” (para 40) (Emphasis added).

47. To this, the Court of Appeal added (para 48):

“… it is sufficient if there is good reason to suppose that Mr Ho has substantive control over the Ho Family Trust Assets. … It is sufficient for the present purpose that for all intents and purposes, Mr Ho has represented to the whole world that he was the beneficial owner of the trust. Also notwithstanding the assertion that Accolade and its directors actually managed and controlled the trust, there has been no explanation how it was that the trust was silent all these years about Mr Ho’s representation that he was the beneficial owner of the trust”.

(Emphasis added).

The reference to Accolade remaining silent was significant as Mr Ho’s sister Mrs Asprey was director of both Accolade and GHL.  The Court of Appeal therefore held that on an interlocutory basis, there was “ample reason to suppose that the trust assets were at least in the control of Mr Ho” (para 56) (Emphasis added).   

Order

48. For the reasons set out above, I take the view that Deputy Judge Auyeung was perfectly entitled to make the orders she did.  I do not see any grounds in these appeals and I would dismiss them with costs (all counsel having agreed that costs should follow the event and that there should be certificate for two counsel).

Hon Lunn JA:

49. I too agree with the judgment of Yuen JA and would dismiss the appeals and make the order in respect of costs set out in paragraph 48.