CHEUNG MAN KOK v. FENN KAR BAK LILY

HCSD25/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND
NO.25 OF 2003

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J U D G M E N T

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Application

1. By a notice dated 23 July 2003, Ms Cheung Man Kok ("CMK") applied to set aside a statutory demand issued by Ms Lily Fenn Kar Bak ("LF") and served on her on 7 July 2003 in respect of a debt of HK$83,787.43 which, LF alleged, CMK had "converted and misappropriated to her own use" on or about 28 April 2003.

The partnership

2. Both CMK and LF are solicitors by profession. They were equity partners of the Messrs Christine M. Koo & Co ("the Firm") between 1 April 2000 and 28 March 2002 ("the Relevant Period"). Within the Firm, CMK and LF each had her own team of lawyers and supporting staff and practice ("the CMK Practice" and "the LF Practice" respectively). They also shared a common team of lawyers and supporting staff and the common practice run by them ("the Common Practice"). The disputes between the parties concerned two sets of bank accounts opened in the name of the Firm during Relevant Period with HSBC, namely, Accounts Nos. 004-007-262223-838 and 004-007-262223-001 at the Lai Chi Kok branch ("the 007 Accounts"), and Accounts Nos. 004-485-318083-838 and 004-485-318083-001 at the Admiralty branch ("the 485 Accounts").

3. By a mediation deed dated 28 March 2002, the partnership was dissolved. Thereafter, CMK and three other solicitors formed a new partnership, running the practice under the same name of the Firm, which has since July 2002 been changed to Messrs Christine M. Koo & Ip ("the New Firm").

HCA4082/2002

4. Pursuant to the Deed, CMK was to provide monthly statements of the 007 and 485 Accounts to LF for inspection. On or about 4 October 2002, LF received the statement from CMK through the New Firm for the month of September 2002. Upon perusal, she discovered that a sum of HK$130,900.00 had been deducted from the 485 Accounts purportedly under the heading "Professional Indemnity". She considered the deduction wrongful. She also took the view that there were other irregularities in CMK's handling of the accounts. Accordingly, on 28 October 2002, she commenced HCA4082/2002 against the New Firm and CMK.

5. In their affidavit evidence, both LF and CMK referred to and adopted the matters pleaded in the pleadings filed thus far in the said High Court Action as their evidence. It is therefore useful for present purposes to summarise the parties' case as disclosed in those pleadings.

6. LF's claim related to monies in the 007 Accounts and 485 Accounts. She alleged that the funds in these accounts were not assets of the partnership. Monies in the 007 Accounts which consisted of the profit costs generated by the LF Practice belonged to her beneficially, whereas monies in the 485 Accounts which consisted of the profit costs generated the Common Practice belonged to LF and CMK beneficially in equal shares. Although the Accounts were in the name of the Firm, monies in these accounts were held by the partnership on trust for herself (in the case of the 007 Accounts) and herself and the 2nd defendant in equal shares (in the case of the 485 Accounts). Shortly before the dissolution, LF and CMK agreed that profit costs from work done prior to dissolution should, after dissolution, be paid into the 007 Accounts where such profit costs were generated by the LF Practice, and into the 485 Accounts where they were generated by work done by the Common Practice. Monies were paid into the Accounts in accordance with this agreement some time after the dissolution. Following the dissolution, the New Firm continued to maintain the 007 and 485 Accounts, but did so on trust for LF (in the case of the 007 Accounts) and on trust for LF and the CMK (in the case of the 485 Accounts). LF claimed that although initially, after the dissolution, the 007 Accounts were operated on her instructions and the 485 Accounts were operated on the instructions of herself and the CMK jointly. Since late October 2002, this has ceased to happen. Thereafter, the New Firm has, in breach of trust, converted the monies in both the 007 and 485 Accounts to its own use, and has misapplied some of the monies in such accounts. LF also alleged that CMK, in her personal capacity, is liable to her in respect of alleged breaches of the Deed, which was to regulate their rights and obligations upon the dissolution of the partnership between them.

7. Accordingly, LF claimed, as against the New Firm, declarations as to the beneficial ownership of the monies in the 007 and 485 Accounts, orders for payment to her to be made out of the funds in both sets of Accounts, injunctions to restrain dealings with Accounts, and various enquiries and other orders. She also claimed against CMK damages for breach of the Deed and other related relief.

8. The defence raised by the New Firm and CMK, in brief, is this. LF's claim is misconceived, as the 007 and 485 Accounts (along with other bank accounts held by the partnership in which LF and CMK were partners) were assets of the partnership, and were not held in trust for the partners, having been opened simply with a view to administrative convenience, so as to enable the partnership to monitor the contributions made by the various teams of lawyers operating under the partnership, and so as to assist in the working out of accounts between LF and CMK in connection with their respective shares of profit and liability. On dissolution, it was agreed by the Deed that the receipts and payments of liabilities in respect of partnership should continue through the operation of these Accounts, and that for a period of two years after the dissolution, monthly statements in respect of the Accounts would be prepared for inspection by the Plaintiff, with a final accounting at the end of the two years. The Accounts have been operated in accordance with this agreement, and that they have throughout been operated by CMK alone, and that the New Firm has had nothing to do with the operation of the Accounts.

Issue of the statutory demand

9. On or about 6 June 2003, LF received account statements for the 007 and 485 Accounts from the New Firm for the month of May 2003. She noticed that there was another withdrawal purportedly under the heading "Professional Indemnity" in the sum of HK$167,574.86. LF immediately instructed her solicitors to write to the CMK's solicitors for explanation. To that, CMK's solicitors stated that the information requested was irrelevant to the said High Court Action and that they had no instruction to reply. LF's solicitors were asked to write to CMK directly, which they did by letter dated 19 June 2003. By letter dated 24 June 2003, the New Firm confirmed that the said withdrawal was made pursuant to the Deed as professional indemnity contribution and that LF was liable for half of it, namely, HK$83,787.43. Dissatisfied, LC issued the statutory demand, the subject matter of the present application.

10. On 9 July 2003, LF received from the New Firm a letter dated 5 July 2030 enclosing the statements for the 007 and 485 Accounts of June 2003. According to the statements, there was a credit entry of HK$130,900 in the 485 Accounts. Clarification sought by LF's solicitors was not met with any response by correspondence. In her second affidavit filed on 7 October 2003 herein, CMK said that the credit entry was made to adjust the position.

11. This completes the main events leading to the present proceedings.

The test

12. The test that the court applies in applications of this sort is whether the debt is bona fide disputed on substantial grounds : Re ICS Computer Distribution Ltd [1996] 3 HKC 440 at p.442G. It is incumbent on the applicant to adduce sufficiently precise evidence to satisfy the court that he has a bona fide dispute on substantial grounds and not just that his defence is believable : Re ICS Computer Distribution Ltd, ibid, at p.444C-D, Koo Hon Ming v. Bank of Communications, HSCD2/2001, unreported, 19 October 2001, at para.7. Once the court is so satisfied, it will not inquire into the validity or enforceability of the debt, let alone embarking on a trial to determine the debt. The statutory demand is simply set aside without ado.

13. However, the debt that the creditor seeks to rely on must be a genuinely liquidated sum in order to sustain the statutory demand. In this connection, the following passages in Muir Hunter on Personal Insolvency are pertinent :

"Petition debt must be a genuinely liquidated sum

It is, and always has been, essential (see, e.g., ex parte Charles (1811) 14 East. 197) for the petitioning creditor's claim of indebtedness against the debtor to be 'liquidated' in order to sustain, under the old law, a bankruptcy notice or petition, and now, under the new law, a statutory demand or a petition. There are categories of debts, which have not been, and are not, accepted as liquidated for this purpose. Any debt, or claim of indebtedness, which requires or awaits some further act or proceeding, or the passage of a further period of time, in order to mature, or in order to reach a certain and fixed value, will be categorised as unliquidated, and as incapable of supporting a petition. ... In Hope v. Premierpace (Europe) Ltd [1999] B.P.I.R. 695 Rimer J. held that the petitioning creditor's claim that the debtor (its employee) had stolen ￡24,369.72 was either a claim for damages or a claim for an account, even if the taking of the account so ordered could be dealt with in a summary way, and, accordingly, he ruled that the court had no jurisdiction to make a bankruptcy order. ... (para.3-308)

...

Sums, the liability to pay which depends on accounting

Where liability for the sum sought to be claimed is dependent on the taking of an account, or the doing of some administrative act, it will not qualify as liquidated until that has been done. Where a covenant with the incoming partner in a firm, that the debts did not exceed a certain sum, provided that the convenantor should pay any excess found to exist, the excess which was found to exist was held to be dependent on the accounting within the firm, amounting in principle to unliquidated damages for breach of covenant, and accordingly not to be a good petition debt at the suit of the convenantee : see Ex parte Broadhurst (1952) 22 L.J.Bank. 21, and Walker v. Broadhurst (1853) 23 L.J. Ex.71. (para.3-313)"

Is the alleged debt a genuinely liquidated sum?

14. It was the withdrawal of HK$167,574.86 from the 485 Accounts that triggered the present proceedings. Naturally, the parties dwelled in detail in their affidavit evidence on the question whether the withdrawal was permissible under the Deed. A more fundamental question is, however, whether LF's claim of the alleged indebtedness against CMK is liquidated in order to sustain the statutory demand and a bankrupty petition.

15. It is common ground that despite the dissolution, steps as provided by the Deed (Clause 5 in particular) have to be taken to wind up the business and the affairs of the partnership between CMK and LF. But as at now, it has yet to be completed. In fact, CMK complains that the accounts could not be finalised because of LF's defaults. Subject to any agreement to the contrary, the rights, liabilities, entitlements and obligations of each partners upon dissolution cannot be properly determined without first completing the partnership accounts : see Lindley & Banks on Partnership, 18th edn, para.25-42 at p.735. If a partnership has been dissolved but no account has been taken, the proper remedy of a partner in respect of an asset received by another partner is to have an account taken. There was no separate right to sue for the recovery of the asset or a share of it : Gopala Chetty v. Vijayaraghavachariar [1922] 1 AC 488.

16. In short, according to the general principles, subject to any agreement to the contrary, while LF is entitled to ask for an account to be taken in respect of the 485 Accounts, she has no specific right to sue for the recovery for the monies held in those accounts. See also Lindley & Banks on Partnership, 18th edn, at para.25-58 at pp.741-2.

17. Mr Ng, counsel for LF, submitted that as a matter of law, LF may claim for the monies in CMK's hands as she is entitled to it although that money is an asset of the partnership. It must follows that, if she is solely entitled to the partnership assets, she ought to recover the assets in the hands of her former partner. He sought reliance on Brown v. Rivlin, an unreported decision of the English Court of Appeal (1 February 1983). The facts in that case are distinguishable. There, by virtue of the partnership agreement, the defendant had no share in the partnership assets. His share was vested in the plaintiff. No account was required to determine the plaintiff's share in the assets. The defendant accordingly could not pray in aid the general principle that an account must be first taken in order to defeat the plaintiff's claim for recovery of his wrongful conversion of the funds in the account in question. Here, on the evidence before me, nothing suggests that the general principles identified above are excluded by virtue of any agreement. I can see none in the Deed. There is no evidence to show that the partnership agreement between LF and CMK did contain any such provisions either.

18. LF relies on her alleged beneficial interest in the 485 Accounts to justify her claim. This is, however, a matter to be decided at the said High Court Action. On the materials before me, apart from her bare allegation, there is no evidence to support LF's case, which is prima facie contrary to authority. There is accordingly considerable doubt in LF's allegation that CMK had converted and misappropriated to her own use the said sum of HK$83,787.43.

19. For the above reasons, even assuming that the withdrawal was not permissible under the Deed, I am satisfied that there is no genuinely liquidated sum in the form of the alleged debt that LF can rely on to sustain the statutory demand. Alternatively, there is a bona fide dispute on substantial grounds that pending a final account, no liquidated sum in the form of the alleged debt had arisen as between CMK and her.

20. My conclusion above is sufficient to dispose of the present application. I do not consider it desirable to express any view on the question whether the withdrawal of HK$167,574.86 was permissible under the Deed. If need be, this should be best answered at another set of proceedings.

Conclusion

21. I will accordingly allow the application to set aside the statutory demand.

22. I see no reason why costs should not follow the events. Mr Chong, counsel for CMK, submitted that costs should be awarded on an indemnity basis. He argued that the statutory demand was issued with an ulterior motive and in an oppressive manner.

23. The statutory demand is premised on LF's entitlement to the 485 Accounts as alleged, which, as she is fully aware, remains a hotly disputed matter pending resolution in the said High Court Action. She nevertheless issued the statutory demand with full knowledge but complete disregard of those matters that would defeat her claim that an alleged debt had arisen or alternatively support a bone fide dispute on substantive grounds. The issue of the statutory demand is in these circumstances wholly unreasonable and unjustified. In my view, it is an abuse of process. She should be visited with indemnity costs to mark the court's disapproval of her conduct. I will therefore order the costs of the application be to CMK against LF, to be taxed on an indemnity basis if not agreed.