LAM LAI WAH SUSANNA v. PACIFIC CENTURY INSURANCE CO LTD.

CACV 385/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 385 OF 2002

(On Appeal from HCB 2664 of 2002)

--------------------------------

--------------------------------

___________________________

REASONS FOR JUDGMENT

___________________________

Hon Rogers VP:-

1. I agree with the judgment of Madam Justice Yuen JA.

Hon Le Pichon JA:-

2. I agree with the judgment of Madam Justice Yuen JA.

Hon Yuen JA:-

3. This is an appeal from the decision of Deputy Judge Poon of 22 July 2002 who, having on the Applicant's application set aside the Statutory Demand and Petition issued against her by the Respondent and annulled a Bankruptcy Order made against her as a consequence of the petition, made no order as to costs between her and the Respondent.

4. The Applicant sought leave to appeal the order on costs. The deputy judge refused leave, but leave was granted by Mayo V-P on 4 October 2002 on a paper application.

5. At the hearing of the appeal, for the reasons set out in these Reasons for Judgment, the appeal was allowed and it was ordered that the costs here and below (including the application for leave) be paid to the Applicant on an indemnity basis.

The judge's decision

6. The deputy judge refused the Applicant costs after considering the contents of a letter from her solicitors to the Respondent's solicitors. In the letter, the Applicant's solicitors had mentioned that their costs "are paid" by the Applicant's boyfriend and that he "will not demand [the Applicant] to repay him the said costs and disbursements".

7. The deputy judge refused the Applicant's application for leave to adduce evidence to explain the contents of the letter, and considered that he was bound by the "indemnity principle" to refuse the Applicant costs, even though he said he appreciated the grievance that the Applicant might have had over the manner in which the statutory demand and the petition were served, which led to a bankruptcy order being made against her.

Indemnity principle

8. It is well-established that the principle upon which costs as between party and party are allowed is that the costs are awarded to the claiming party as an indemnity. If the claiming party is not liable to solicitors for their costs, then he would not be in a position to claim to be indemnified by the other party.

9. The principle was considered in the context of third party obligations to solicitors in Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495, a case where the plaintiff's trade union engaged solicitors to act for him in circumstances where the solicitors' costs were payable out of the union's funds. The plaintiff succeeded at trial and was awarded costs. The defendant appealed against the costs order on the basis that the solicitors had not been retained by the plaintiff but by his trade union. The Court of Appeal held that even though the solicitors had been appointed for the plaintiff by his trade union, he could nevertheless recover the solicitors' costs from the defendant.

10. In determining whether a claiming party ("the winning party") can recover costs against the other party ("the losing party"), the steps for consideration can be summarized as follows:-

(1) The first question to be asked is:- did the winning party employ the solicitors in the action? In answering this question, it matters not that the solicitors were chosen or appointed for the winning party by a third party on his behalf, so long as they acted for him with his knowledge and assent.

(2) If the answer is "Yes", it is presumed that the winning party had a prime facie obligation to remunerate the solicitors, because that would be the ordinary basis on which a professional person is employed to represent a party.

(3) It is for the losing party to rebut that presumption. The presumption is not rebutted simply by evidence that a third party had also undertaken to pay the solicitors' costs. However, the presumption would be rebutted if there is evidence of an agreement made by the solicitors with the winning party, or with the third party, that under no circumstances would the winning party be liable to them for the costs of the litigation incurred on his behalf.

11. The indemnity principle has been applied in different contexts:- in civil cases, where the winning party had been insured and the insurance company had agreed to pay the solicitors' costs (Davies v Taylor (No.2) [1974] AC 225), and where an organization such as the Automobile Association had instructed and paid the winning party's solicitors (Lewis v Averay (No. 2) [1973] 1 WLR 510); as well as in criminal cases, where the successful defendant's employers had undertaken to pay his costs (R v Miller and another [1983] 1 WLR 1056).

Application of indemnity principle

12. In the present case, it would appear that the deputy judge considered that since the letter from the Applicant's solicitors to the Respondent's solicitors dated 29 June 2002 showed that the Applicant's boyfriend would be paying (or had paid) the costs and would not be demanding that the Applicant repay him, the indemnity principle would be breached if costs were ordered against the Respondent.

13. That letter has, however, to be read in the context of the correspondence between the respective solicitors and the Official Receiver on the question of the Applicant's costs when she commenced the proceedings to annul the bankruptcy order . That line of correspondence commenced with the Respondent's solicitors asking whether the Official Receiver's consent had been obtained for the Applicant to instruct solicitors.

14. The Respondent's solicitors expressed their concern about costs if the Applicant (who had by then been made the subject of a bankruptcy order) were to fail in her application to annul the bankruptcy order.

15. It was in answer to this concern (in the context of an assumption that the application to annul the bankruptcy order would be dismissed) that the Applicant's solicitors wrote to the Respondent's solicitors saying "our costs and disbursements in respect of her annulment application are paid for by Miss Lam's [the Applicant's] boyfriend. Her boyfriend will not demand Miss Lam to repay him the said costs and disbursements".

16. Read in that context (i.e. on the assumption of a failed application), the letter cannot be regarded as evidence of an agreement that if her application were to succeed, the Applicant's solicitors would still not look to her for costs incurred by them in the proceedings on her behalf. It cannot be inferred from the letter that under no circumstances would the solicitors look to her for costs.

17. At the appeal, counsel for the Respondent submitted that it was significant that the solicitors' costs had already been paid by the boyfriend. However it is clear from the authorities that the time of payment is not crucial. Costs are normally paid on account and there is no evidence in the present case that they were not. The fact that a third party had already paid costs on account does not, by itself, preclude recovery by the winning party of the costs from the losing party, short of a binding agreement by the winning party's solicitors referred to in paragraph 10(3) above. An example can be found in Lewis v Averay (No. 2) where the Automobile Association had already paid the appellant's costs to his solicitors. At 513, the court referred to the expectation that where a litigant is helped by an organization (such as the Automobile Association) or even by a friend or relative, that the litigant would reimburse the organization, friend or relative who had helped him. In the present case, there was no evidence that the Applicant would not reimburse her boyfriend even if the application to annul was successful and costs could be sought from the Respondent.

18. Accordingly, the appeal against the deputy judge's order refusing the Applicant her costs was allowed.

Basis of costs

19. At the hearing before the deputy judge, the Applicant's counsel had submitted that she should be awarded costs on the indemnity basis. The deputy judge expressed his sympathy for her grievance but did not deal with the application because of his decision that she was precluded from recovery of any costs. Hence, the application fell to be considered by this court.

20. It was clear from the deputy judge's Reasons for Decision dated 12 July 2002 that there were fatal irregularities in the service of both the statutory demand and the petition. The courts have emphasized time and again the importance of proper service of a statutory demand and a bankruptcy petition.

21. In the present case, the alleged loan was made by the Respondent to the Applicant in May 1994. She left the Respondent's employ sometime that year. The Respondent did not institute proceedings against her until 1998.

22. In September 1999, the Respondent's then solicitor made a visit to an address in Sai Kung that the Applicant had given to the Respondent when she joined it 5 years ago. During the solicitor's visit, the premises were vacant and he was told by a neighbour that the Applicant had moved out 3 years ago (i.e. in 1996).

23. In 2000, the Respondent obtained default judgment (which, after the deputy judge's decision, has been set aside). In January 2001, the Respondent applied ex parte for garnishee orders. In that application, the Respondent's then solicitor made four affirmations deposing that it had instructed him that (i) the Applicant was then working for four other insurance companies in Hong Kong and (ii) that her last known address were that of those companies. That application failed for reasons unconnected with the Applicant's address.

24. The Respondent then commenced bankruptcy proceedings the same year, instructing new solicitors. When the Respondent's new solicitors attempted to serve the Statutory Demand, they simply attempted to serve the Applicant again at the Sai Kung address. Obviously that attempt failed.

25. The Respondent's solicitor deposed in an affirmation that it had instructed him that it was not aware of any other address of the Applicant, and that he had made all reasonable and practicable efforts to serve the statutory demand but had been unable to do so.

26. That was obviously wrong, as no attempt had been made to contact the Applicant at any of the four insurance companies known to the Respondent and referred to in its garnishee application only a few months ago. The statutory demand was advertised in a newspaper for 1 day.

27. Similarly, an attempt was made to serve the Petition at the Sai Kung address, which attempt failed for obvious reasons. The Respondent obtained an order for substituted service on the basis of an affirmation from its solicitor deposing, again, that he did not know of any address of the Applicant other than the Sai Kung address, and that he had made all reasonable and practicable efforts to serve the Applicant. Again, no effort had been made to attempt to contact the Applicant at any of the four insurance companies referred to in the garnishee application. The petition was served by a 1-day advertisement in a newspaper.

28. It was in those circumstances that in May 2002, a bankruptcy order was made against the Applicant in her absence. As the deputy judge noted, Rule 46(2) of the Bankruptcy Rules provides that "the creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor's attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected". Given the Respondent's knowledge of the four insurance companies as disclosed in the garnishee application, it had obviously failed to do all that was reasonable for the purpose of bringing the statutory demand to the Applicant's attention and to cause personal service of the demand to be effected.

29. Similarly, Rule 59 of the Bankruptcy Rules provides that "service of a creditor's petition shall be effected by the creditor or his solicitor ... delivering a sealed copy of the petition to the debtor" and it is only if there is satisfactory evidence that personal service "cannot be effected because the debtor is evading service of the petition or for any other cause" that substituted service may be obtained. The Respondent's evidence fell far short of the standard referred to in that provision. No explanation or excuse for its failure to contact the Applicant at the four insurance companies has been proffered.

30. The result of the Respondent's unexplained failures has led to a bankruptcy order being made in the Applicant's absence, with the stigma and inconveniences attendant upon such an order being made. The alleged debt was incurred nearly 9 years ago. The default judgment in the District Court has now been set aside by consent, and the Respondent has reduced its claim to only $40,000. In these circumstances, the manner in which the bankruptcy proceedings was initiated and carried on constituted an affront to the court. A costs order against the Respondent on the indemnity basis was clearly appropriate.