THE LAW SOCIETY OF HONG KONG v. A SOLICITOR

CACV 213/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 213 OF 2003

(ON APPEAL FROM THE SOLICITORS DISCIPLINARY TRIBUNAL)

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REASONS FOR JUDGMENT

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Hon Ma CJHC:

1. After hearing counsel for the respondent, we dismissed his appeal with costs. I have read in draft the judgment of Rogers V-P and I agree with the reasons he gives for dismissing the appeal. I wish only to add a few words. As will be clear from the reasons of the Vice-President, the circumstances of the 2 charges of which the respondent was found guilty by the Solicitors Disciplinary Tribunal reflect poorly on the solicitor involved. The conduct for which the respondent was charged is exactly the type of conduct that gives solicitors, and indeed the legal profession as a whole, a bad name. Blatant disregard for terms of contracts (and their spirit) with which the solicitors profession as a whole is familiar (the stakeholder provision on agreements for sale and purchase) and misleading the court of which solicitors are officers, represent conduct that is nothing short of deplorable. Although I accept the principle that generally it should be left to the Tribunal to assess the suitability of any sanctions to be imposed for misconduct, the respondent can count himself quite fortunate in the present instance.

Hon Rogers VP:

2. This was an appeal by the respondent solicitor from an order of the Solicitors Disciplinary Tribunal dated 9 July 2003 made pursuant to section 13 of the Legal Practitioners Ordinance, Cap. 159. The applicant was the Law Society. There were two charges. The respondent was censured in respect of both charges. The Tribunal ordered that in respect of the first charge the respondent should be suspended from practice as a solicitor for a period of three months and in relation to the second charge that he should be fined $50,000. The respondent was ordered to pay the costs of the proceedings including the applicant's costs of the investigation and its clerk's costs on a full indemnity basis. At the conclusion of the hearing of this appeal, this court dismissed the respondent's appeal with reasons to be given in writing and made an order for costs in favour of the applicant.

The background

3. The respondent was a solicitor in private practice and the sole partner of his firm, although at the relevant time it appears that he had 2 assistants. The events that gave rise to the complaints in this matter took place in 1999. At that stage the respondent and his wife were the shareholders and directors of a company, Hauxton Enterprises Limited ("Hauxton") that owned their former matrimonial home ("the property"). On 18 June 1999, Hauxton, agreed to sell the property to a couple at a price of HK$7,550,000. This couple were the eventual complainants to the applicant against the respondent. There was a provisional sale and purchase agreement dated 18 June 1999 that provided for the payment of deposits. The initial deposit was for a sum of HK$230,000 and was to be payable on the signing of that agreement. A further deposit of $525,000 was payable on 2 July 1999. A clause in that agreement, written at the side of the first page provided that the various deposits would be paid to the vendor's (Hauxton's) solicitors "as stakeholders who may release the same to the Vendor provided that the balance of the purchase price is sufficient to discharge the existing legal charge/mortgage." This is a standard term to deal with properties which are still under mortgage, as was the case with the property in the present case. The property was at this time mortgaged to a bank.

4. The respondent signed the provisional sale and purchase agreement on behalf of Hauxton and at the time of doing so informed the estate agent that his firm would be acting as solicitors in the transaction. The estate agent then gave the respondent a cheque in favour of his firm for the initial deposit of HK$230,000. He took the cheque to his firm and arranged for it to be paid into a bank account of the firm. The firm issued its receipt that stated that the money was the "initial deposit herein". A week later, on 25 June 1999, the respondent arranged for the firm to release that sum to Hauxton. At that time, the respondent did not inform the purchasers or their solicitors about the release of the money. The respondent's firm prepared the formal sale and purchase agreement.

5. The second schedule of what appears to have been the final draft of the formal sale and purchase agreement contained the provisions as to payment of the purchase price. The price of the property was to be HK$7,550,000. Paragraph 2 of the second schedule read as follows:

"2. Deposit:

(a) HK$230,000 being initial deposit has been paid by the Purchaser to the Vendor's Solicitors, ... prior to the signing herof.

(b) HK$525,000 being further deposit to be paid by the Purchaser to the Vendor's Solicitors, ... upon the signing herof.

(c) The said initial deposit and further deposit are paid to the Vendor's Solicitors, ... as stakeholders who shall pay over the same to the Vendor provided that the amount of principal and interest payable on discharge of the said Mortgage described on or before completion would not exceed the balance of purchase price payable on completion."

6. There then followed provisions as to the remainder of the purchase price. As recorded by the Tribunal there was a draft receipt that read as follows:

"RECEIVED on or before the day and year first above written from the Purchaser the above mentioned initial deposit of HK$230,000

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... the Vendor's Solicitors as stakeholder

RECEIVED on or before the day and year first above written from the Purchaser the above mentioned further deposit of HK$525,000

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... the Vendor's Solicitors as stakeholder"

7. The purchasers, through their solicitors, delivered the formal sale and purchase agreement on 2 July 1999 together with a cheque in favour of the respondent's firm for the further deposit of HK $525,000. Apparently the sale and purchase agreement was not executed by Hauxton. Nevertheless the respondent's firm paid the purchasers' cheque into the bank. Due to an oversight in relation to the transfer of funds to the account, that cheque was dishonoured when it was presented for payment. On 3 July 1999 sufficient funds were transferred into the account so that the cheque for HK $525,000 could be cashed.

8. By a letter dated 7 July 1999 the respondent's firm informed the solicitors acting for the purchasers that because the cheque for HK$525,000 had been dishonoured, Hauxton had exercised its rights under clause 6 of the provisional sale and purchase agreement (the standard forfeiture clause) to forfeit the initial deposit and resell the property. The purchasers' solicitors immediately asked that the cheque for HK$525,000 should be presented again so that the transaction could proceed. That request was refused. In the light of that, the purchasers arranged for the provisional sale and purchase agreement to be registered at the Land Registry on 16 July 1999.

9. Shortly thereafter on 22 July 1999 the purchasers commenced proceedings in the High Court, HCA 11803/1999, against Hauxton for, amongst other things, specific performance of the provisional sale and purchase agreement. Hauxton filed a defence and counterclaim on 2 September 1999. However, in early October 1999 Hauxton changed its stance towards the claim. On 5 October 1999, it withdrew its defence and counterclaim. Not surprisingly, a summons was then issued on behalf of the purchasers for judgment. That was returnable on 27 October 1999. The draft minutes of order, which were annexed to the summons, contained the relief sought of specific performance. The following day, the respondent's firm filed notice of Hauxton's intention to apply at the hearing on 27 October for judgment also for an order for specific performance in favour of the purchasers. Although both parties were applying for specific performance there was a difference between them as to the terms of the order and as to the question of costs. For that reason the master adjourned the hearing on 27 October.

10. In the meantime the mortgagee bank (to which the property was mortgaged) had been pressing Hauxton for repayment of the mortgage. As a result, Hauxton delivered vacant possession of the property to the mortgagee bank on 9 November 1999. When it did so, Hauxton gave the mortgagee bank a note entitled "Warranty" that contained the following terms:

"In CONSIDERATION of your demand for full payment of the loan monies secured by the Mortgage and your foregoing Order 88 action against us and the Guarantors.

We, the Registered Owner and Mortgagor of the above-mentioned property hereby surrender the keys to the above-mentioned property and deliver up vacant possession thereof to you, First Pacific Bank Limited, as well as waive our right of redemption.

We jointly warrant that there is no occupier, tenant or any person having and/or claiming any right to the property and will indemnify First Pacific Bank Limited for all damages in event of our breach of warranty.

Dated the 8th day of November, 1999." (emphasis added)

11. On about 19 November 1999 the purchasers apparently became aware that the mortgagee bank was marketing the property for sale. The purchasers then had discussions with the mortgagee bank in relation to the property because they were determined to buy it.

12. On 25 November 1999 the two applications for specific performance were heard before Master Cannon. The respondent appeared for his firm. The solicitor who appeared on behalf of the purchasers informed the master that instead of seeking an order in the terms of his summons he would, with one exception, be happy to adopt the terms of specific performance set out in Hauxton's notice of application for specific performance dated 22 October 1999. The only exception was that the solicitor objected to the order of costs proposed on behalf of Hauxton. Although the solicitor acting on behalf of the purchaser sought costs against the respondent's firm on an indemnity basis, the master ordered that costs should be awarded on a party and party basis against Hauxton. An order for specific performance was made.

13. Despite the fact that the purchasers had obtained an order for specific performance, on the same day (25 November), they entered into an agreement with the mortgagee bank to purchase the property at a price of HK$7,700,000. That price was HK$150,000 more than had been agreed with Hauxton.

14. The purchasers were not content with the costs order which had been made before the master and appealed to a judge in chambers. That appeal was heard before Yam J on 10 May 2000. In a judgment handed down on 10 July 2000 the judge held in favour of the purchasers. He considered that the respondent had wrongfully withheld material information before Master Cannon, namely, that there had in fact been delivery of vacant possession of the property to the mortgagee bank on 9 November 1999. As a result, the firm was ordered to pay the costs of the purchasers' original action and appeal on a full indemnity basis. In the course of his judgment, Yam J expressed severe disapproval in respect of the respondent's conduct in consenting to judgment on behalf of his client for specific performance when he knew that there was no way in which the sale could have been completed because Hauxton had already waived its right to redeem the mortgage. It might be mentioned at this stage that it was only when an affirmation was filed by the respondent that the purchasers first appreciated that the initial deposit had been released.

The Charges

15. The respondent was charged with the following disciplinary offences:

PARTICULARS

(a)	You and your wife at the material times had control of one Hauxton Enterprises Limited ('Hauxton'), the registered owner of a property known as Unit C on the 6th Floor, Block 1 and Car Parking Space No.B9 on the 1st Lower Ground Floor of Flora Garden, 7 Chun Fai Road, Hong Kong ('the Property');
(b)	By a provisional sale and purchase agreement dated 18th June 1999 ('the Provisional Agreement'), Hauxton agreed to sell to the Complainants the Property;
(c)	By Clause 2 of the Provisional Agreement, the Complainants were required to pay to the solicitors acting for Hauxton an initial deposit in the sum of HK$230,000.00 ('the Initial Deposit') which was to be held by them as stakeholders pending the completion of the sale and purchase provided that if the balance of the consideration of the sale and purchase was sufficient to discharge the existing legal charge or mortgage on the Property, the Initial Deposit could be released to Hauxton; and
(d)	Your solicitors' firm, ... ('Your Firm'), had received the Initial Deposit from the Complainants but failed to inform the Complainants that Your Firm would not act as stakeholders for Hauxton after Your Firm had received the same.

2. That you, ..., breached Rule 2(c), 2(d) and 2(f) of the Solicitors' Practice Rules in that you brought your client, Hauxton, into litigation, namely, High Court Action No. 11803 of 1999 ('the Action'), and had impaired the reputation of the legal professional and impaired your duty to the Court in respect of the Action.

PARTICULARS

(a)	On 22nd July 1999, the Complainants commenced the Action against Hauxton seeking inter alia an Order for Specific Performance of the Provisional Agreement;
(b)	On 22nd October 1999, Your Firm as solicitors of Hauxton filed in court a notice in connection with the Complainants' application for default judgment stating that Hauxton would consent to an Order for specific performance of the Provisional Agreement;
(c)	On 25th November 1999, at the hearing of the Complainant's application before Master Cannon, you failed to disclose to the Master or the solicitor appearing for the Complainants that possession of the Property had on 8th November 1999 been surrendered to the mortgagee bank by Hauxton and accordingly, an Order for specific performance would be incapable of being complied with by Hauxton;
(d)	Lacking such information and through consent of Hauxton, Master Cannon made an Order for specific performance of the Provisional Agreement against Hauxton; and
(e)	Hauxton failed to prove good title to the Property in accordance with the Order of Master Cannon and the Complainants had to purchase the Property from the Mortgagee Bank."

16. The nub of the first charge was thus that the respondent had acted in a fraudulent or deceitful manner towards the purchasers because whilst he, as the sole proprietor of the solicitor's firm, was under an obligation to act as a stakeholder in respect of the initial deposit of HK$230,000, he caused that sum to be paid to Hauxton in circumstances where the stakeholder was not permitted to do so because the balance of the purchase price was not sufficient to pay off the mortgage. The nub of the second charge was that the respondent, acting as a solicitor, had permitted an order for specific performance of the contract to be made in circumstances where he was well aware that the specific performance simply could not take place. This had two possible effects. In the first place, the court which granted the order for specific performance was not made aware of this fact and, if it had been, would almost certainly not have made such an order, perhaps ordering damages in lieu. In the second place, it might also have had a considerable impact on the order for costs which the court was prepared to make.

17. Regarding the first charge, this involved allegations of deceit and dishonesty on the respondent's part. The charge itself makes this clear. Before this court, Mr Sussex argued that for the Tribunal to find that the respondent had been fraudulent and deceitful it was necessary that there should not only be proof dishonesty on part of the respondent, as distinguished from gross and culpable negligence, but, in addition, proof of the realisation by the respondent that what he was doing would be regarded as dishonest by honest people. This was a combination of both an objective and subjective test, reflecting the decision of the House of Lords in Twinsectra Ltd. v Yardley [2002] 2 AC 164. Before the Tribunal, it was accepted that the requisite standard of proof for the applicant was effectively beyond a reasonable doubt.

18. In respect of the first charge, at the hearing before the Disciplinary Tribunal, the Tribunal understood the respondent to be relying on two defences. The first was that he had not intended to assume, and had not appreciated that his firm had assumed, the role of stakeholder. The second line of defence in respect of the first charge was that the respondent considered at the relevant time that there was sufficient money outstanding in respect of the purchase price to discharge the mortgage loan.

19. The first part of the defence, namely that the respondent did not consider that his firm had undertaken the role of stakeholder was said, in the course of the hearing in the Tribunal, to be based on the fact that the respondent's firm had no contractual relationship with the purchasers. This argument can only be said to be extraordinary. The Tribunal described it as "appalling". As a solicitor's firm, the respondent's firm must have known that in acting for the vendor under the provisional sale and purchase agreement what the terms of that agreement were. Those terms were clear: the solicitor for the vendor would receive the initial deposit as a stakeholder. The terms of the draft receipt, which have been repeated above, are clear. The firm was receiving the initial deposit as a stakeholder. Since the respondent was the sole proprietor of the firm and was also the person who had control of the vendor any denial of knowledge by the respondent is at best futile and at worst dishonest.

20. In the course of argument in this court, Mr Sussex SC, on behalf of the respondent, sought to argue that this first point was no more than a matter of ex post facto analysis on the part of the respondent, and did not represent any indication of what he was saying was his actual state of mind at the time his firm had received the initial deposit and subsequently paid it into Hauxton's account. It is clear why this submission was made: this first point had no validity whatsoever and would reflect badly on the respondent's credibility if this was indeed what he was trying to suggest was his state of mind at the relevant time. The worst that could be said about the respondent's thinking was, according to Mr Sussex, that he was muddled. However, Mr Sussex was unable to point to any passage in the transcript, or anything else by way of evidence or otherwise, which justified this submission. The Tribunal was fully entitled to treat this point made by the respondent as an attempt on his part to explain his state of mind that he was not aware of his firm having assumed the duties of a stakeholder. That, as has already been said, is palpably unacceptable and the Tribunal was entitled to refer to it as an appalling proposition. It was fully justified in rejecting it and making the adverse remarks it did on the respondent's credibility.

21. Turning to the question as to whether the respondent believed, at the time, that the amount outstanding on the purchase price would be sufficient to discharge the mortgage, his evidence, reference need only be made to paragraph 59 of the Tribunal's Findings, demonstrates the extent to which the respondent appeared to be prevaricating. That paragraph is illuminating and I set it out below:

"59. The Respondent explained that he released the Initial Deposit to Hauxton because the balance of the Consideration was more than enough to pay off the money necessary to redeem the mortgage. When asked how he find out about the redemption figure and exactly how much was it, he promised to tell the Tribunal before his was to close his case. In the event, he said that he could not find anything in his files which showed either issues. Indeed he said he assumed because Hauxton had arranged Messrs. Lo, Wong and Tsui to liaise with the Mortgagee Bank on the redemption of the mortgage no one from the Firm had written to the Mortgagee Bank for the redemption figure at all. He also explained that although he was still one of the two shareholders of Hauxton, he was unable to get those managing Hauxton to produce records of the mortgage loan in order to prove the redemption figure at the time. While insisting on his recollection that as at 25 June 1999 (the day when the Firm released the initial deposit to Hauxton), the redemption figure was less than the balance (HK$7,320,000) of the Consideration, he could not say how much was the redemption figure."

22. The Tribunal found as a fact that at the time when the initial deposit was released to Hauxton on 25 June 1999, the balance of the purchase price was less than the mortgage redemption figure.

23. In my view the Tribunal was amply justified in reaching the conclusion which it did. The respondent must have known that he could not have legitimately used the initial deposit unless the amount outstanding on the purchase price was sufficient to discharge the mortgage. In the light of the events which were taking place at the time, culminating in the surrender of the property to the bank, it is clear that the respondent must have known the amount outstanding on the mortgage. In view of the fact that that amount was well in excess of the amount outstanding on the purchase price the matter must be conclusive. The respondent's prevarication before the Tribunal when he was asked to produce figures demonstrates, not ignorance on his part, but a willingness to try and conceal the true facts from the Tribunal. The fact the respondent no doubt thought at the time that the money was transferred to Hauxton, that nobody would find out what had happened because the sale would go through and the purchasers would lose nothing is not to the point. The stakeholder provision is there to protect the purchasers in case things go wrong. The respondent deliberately took a short cut and then came to grief.

24. Turning to the second charge, Mr Sussex's point was that the purchasers and their solicitors were also, on 25 November 1999, well aware of the fact that the mortgagee bank was selling the property. The argument appeared to be along the lines that the purchasers and their solicitors were just as much at fault as the respondent in not informing the master of this. There appears to me to be one important distinction and that is that when the respondent gave the bank the warranty on behalf of Hauxton, it was on the basis that Hauxton had waived its right of redemption. Quite apart from that, it must also be said that even if there were fault on any other party, the respondent cannot absolve himself from the responsibility and the duty owed to the court. The court was nothing short of having been deceived.

25. In those circumstances this appeal fell to be dismissed.

Hon Le Pichon JA:

26. I agree with the judgments of the Chief Judge and the Vice-President.