HUI YAT SING AND ANOTHER v. JOHN ROBERT LEES

CACV 277/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 277 OF 2007

(ON APPEAL FROM HCMP NO. 5714 OF 2001)

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JUDGMENT

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Hon Tang VP (giving the judgment of the Court):

Background

1.  Certain realisable property (“the restrained assets”), held in the name of the 8^th and 9^th respondents, were the subject of a restraint order made on 27 October 2001 under section 15 of the Organized and Serious Crimes Ordinance, Cap. 455 (“the Ordinance”).

2.  On 10 December 2001, Mr John Robert Lees and Mr Desmond Chung Seng Chiong were appointed joint and several receivers of the restrained assets pursuant to section 15(7) of the Ordinance.  Subsequently, Mr Lees became the sole receiver.

3.  The 8^th and 9^th respondents, who are husband and wife, were charged with the offence of conspiring between 1 September 1995 and October 2001, to deal with properties knowing or having reasonable grounds to believe that they represented the proceeds of an indictable offence, contrary to section 159A of the Crimes Ordinance, Cap. 200, and section 25 of the Ordinance (“the criminal proceedings”).

4.  On 20 September 2002, Gall J varied the restraint order such that the 8^th and 9^th respondents were, inter alia, permitted to have the legal costs of their defence taxed at regular intervals and, thereafter, released from the restrained assets by the receivers to meet their taxed costs (para. 4 of the order of 20 September 2002).

5.  By a summons dated 13 January 2006, the 8^th and 9^th respondents applied for an order that the restraint order be varied to allow the 8^th and 9^th respondents to be paid out of the restrained assets for, inter alia, their legal expenses in the sums of HK$12,765,500 for the criminal proceedings.

6.  On 23 June 2006, Deputy Judge Longley dismissed the summons of 13 January 2006 with costs in favour of the receiver.  The learned judge was of the view that the 8^th and 9^th respondents had failed to satisfy him that they had any beneficial interest in the restrained assets, and that the 8^th and 9^th respondents had undeclared assets from which they could meet their legal expenses.

7.  By summons dated 15 August 2006, the receiver applied for an order that the orders made by Gall J on 20 September 2002 be discharged.

8.  On 4 September 2006, the 8^th and 9^th respondents applied by summons for an order that the legal costs and expenses of the defence incurred by the 8^th and 9^th respondents, arising out of the criminal proceedings in DCCC 660 of 2005, up to the 23 June 2006, including the costs and expenses incurred by them in connection with the letter of request proceedings, commenced by the Department of Justice and conducted in Macao and Jiangman in 2005 and 2006, be paid out of the restrained assets.

9.  These two summonses were heard by Deputy Judge Longley.  On 8 September 2006, the learned deputy judge discharged the order of 20 September 2002 with costs to the receiver to be taxed if not agreed.  However, the learned judge also:

“	… varied the Order of Mr Justice Gall on 8 September 2006, inter alia, to provide that none of the legal costs of the defence incurred by the 8th and 9th Respondents be recoverable after 23 June 2006”.

10.  The respondents’ costs incurred up to 23 June 2006 have been taxed and allowed in the allocatur dated 20 June 2007 in the sum of HK$1,230,533.30.

11.  By summons dated 4 July 2007, the receiver applied for an order that such costs be set off against the receiver’s taxed costs in relation to the 8^th and 9^th respondents summons of 13 January 2006.

12.  On 7 August 2007, Deputy Judge Longley held that the receiver was entitled to a set-off, and ordered that the execution of the 8^th and 9^th respondents’ allocatur dated 20 June 2007 be stayed until an allocatur is issued after the taxation of the receiver’s costs.

13.  In his ruling the learned deputy judge said:

“	7.	The funds from which the 8th and 9th Respondents seek release of their taxed legal costs are the restrained assets under the control of the receiver. They are the same funds from which the Receiver will have to recover the costs he has been awarded against the 8th and 9th Respondents. It would be wrong, he argues, for the 8th and 9th Respondents to recover the sum of $1.23 million in full from those funds, even though they might be in respect of legal expenses, when those funds will have to meet the costs they owe the Receiver, particularly in circumstances when the 8th and 9th Respondents have failed to show that those funds are funds to which they are beneficially entitled.
	8.	I find considerable force in Mr Hill’s submissions. I am satisfied that in restraint proceedings, where the court is concerned to preserve assets that may be the proceeds of crime, the court is entitled to look at the reality of the situation, in particular from the perspective of the restrained funds.”

14.  The 8^th and 9^th respondents have been convicted after trial in the District Court.  On 19 January 2008, they were both sentenced to 6 years’ imprisonment.  Both the respondents have appealed against the conviction, their appeal will be heard in May 2008.  The Secretary for Justice has indicated that he will apply for a confiscation order against the restrained assets which will be dealt with after disposal of their appeal.

15.  By an order of Deputy Judge L Chan, dated 12 October 2007 in HCA 2841 of 2006, the Bank of China has enjoined the 8^th and 9^th respondents from utilizing any of the restrained assets held by the receiver.

The appeal

16.  This is the 8^th and 9^th respondents’ appeal.

17.  Mr Paul Wu who appeared for the 8^th and 9^th respondents relied on one submission, namely, that there were no mutual debts so there could be no set-off.  He submitted that there was no mutuality between the respondents’ right to be paid out of the restrained assets and the order that they pay the receiver’s costs in respect of their summonses of 13 January 2006.

18.  In para. 90.0733 Halsbury’s Laws of Hong Kong Volume 5(1A), referred to by Mr Paul Wu, it was stated:

“	Where a trustee sues a debtor to the trust estate, the debtor can set off against the trustee’s claim an amount due to him from the beneficiary, and a person who is sued for a debt can set off a sum due from the plaintiff to a trustee for him”.

19.  The footnotes referred to Thornton v Maynard [1875] LR 10 CP 695 at 698 to 699, Bankes v Jarvis [1903] 1 KB 549, and Cochrane v Green [1860] 9 CBNS 448.

20.  In Cochrane at page 467, Williams J said at page 468:

“

As to (the equitable setoff), I apprehend the established rule of equity with reference to set-off, is, to look upon the beneficial owner as the real owner, and by injunction to compel other courts to regard his rights, and to disregard the legal title of the trustee. That being so, it is the same as if the debt due from the plaintiff to Dunlop, the trustee, had been due to the defendant, the cestui que trust, in which case it cannot be doubted that it would constitute a good legal set-off.”

21.  In Thornton, Lord Coleridge CJ said of Cochrane that:

“

It was there held that a judgment debt recovered in the name of a trustee, which, if recovered in the name of the cestui que trust, would have been a good set-off at law against the plaintiff’s claim, may be pleaded as an equitable set-off.  The present is the converse case.  The plaintiffs sue as trustees; the defendant sets off a debt due from the cestui que trust: but the principle which governs is manifestly the same; for, if the action had been brought by the cestuis que trust, i.e. the drawers, against the defendant, their debt to the latter might have been pleaded as a legal set-off.”

22.  In Bankes at 552, Lord Alverston CJ said:

“

If in the present case there had been a claim by the defendant to set off a liquidated sum of £50 due to him from the son, the defendant would clearly have been entitled to rely on that set-off as a defence to the action, and the cases of Jeffs v Day and Agra and Masterman’s Bank v Leighton are, in my opinion, distinct authorities for the proposition that where an action is brought by a plaintiff as trustee for a third person, and by reason of the defendant having a claim against that third person it would be wrong and inequitable for the plaintiff to recover judgment on behalf of that third person, the defendant is entitled to set off his claim as an equitable defence to the action.  A plaintiff suing as trustee cannot be in a better position than an assignee for value suing in his own name, against whom all equitable defences can be relied on.  I think that as the defendant in this case had a good claim against the plaintiff’s son he was entitled to rely on that as an equitable defence to the extent of the plaintiff’s claim.  This principle is one which has long been acted on, though it may be that there is no decision directly in point.”

23.  In Hanak v Green [1958] 2 QB 9, Morris LJ referred to the case of Bankes and said at 24:

“

It was held that the defendant could set up as a defence to the claim against him that the plaintiff’s son (the cestui que trust of the plaintiff) was indebted to the defendant in a sum for unliquidated damages exceeding the amount of the claim.

The conclusion seems to me to be clearly correct and obviously fair.  It would have been manifestly unjust if the defendant had had to pay £50 to the plaintiff (who was an agent or trustee for her son) at a time when the defendant had an unquestioned claim for £51 against the plaintiff’s son, who had left the country.  There was a close relationship between the dealings and transactions which gave rise to the respective claims.”

24.  Here, the receiver is the custodian of the restrained assets.  He is in the position of a fiduciary.  But who is the beneficiary of the trust?  It does not matter that it might not have been established yet that the Bank of China is the beneficiary, whosoever might be the beneficial owner he owns what is now in the hands of the receiver as well as what is recoverable by the receiver as a result of Deputy Judge Longley’s decision of 23 June 2006.  Mr Wu submitted that the order of 23 June 2006 awarded costs in favour of the receiver but that under Gall J’s order of 20 September 2002, the receivers were ordered to “release sums from the (restrained) assets”.  Thus, he submitted there is no mutuality.  With respect, that is an artificial distinction.  The receiver is entitled to be paid out of the restrained assets.    He would be paid whether or not the costs are recovered.  Any costs recovered by him would form part of the restrained assets.

25.  As Buxton LJ said be in Muscat v Smith [2003] 1 WLR 2853 at para. 39:

“

… equity permitted, and actions at law now permit, a defence by way of set-off of an unliquidated claim that impeached the title to the claim; or, in the more modern terminology adopted by this court in National Westminster Bank plc v Skelton (Note) [1993] 1 WLR 72, 76G and in the Federal Commerce case [1978] QB 927, of whether the cross-claim is sufficiently connected with the claim as to make it unfair that the defendant should be obliged to pay the claim without deduction.”

26.  We have no doubt that there is a sufficiently close connection between the two orders to make it unfair that the 8^th and 9^th respondents should be obliged to pay without deduction.

27.  That being our view, it is unnecessary for us to deal with Mr Sheppard’s alternative argument that Deputy Jude Longley’s decision on set-off is an order “relating only to costs which are by law left to the discretion of the court …”  Section 14(3)(e) High Court Ordinance, Cap. 4.

28.  The appeal is dismissed with costs to be taxed if not agreed.