RE HO YING PAT BOBBY

CACV 1/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1 OF 2010

(ON APPEAL FROM HCB NO. 1946 OF 2009)

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REASONS FOR DECISION

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1.  This was an application by the petitioning creditor (“the applicant”) for security for costs in an appeal by the judgment debtor (“the appellant”) from a decision dated 28 December 2009 of Harris J. At the conclusion of the hearing, the application was refused. These are the reasons.

2.  The appeal relates to the judge’s refusal to stay the bankruptcy petition against the appellant. The application for security for costs was made on the basis that the appellant is impecunious and that the appeal is unmeritorious.

3.  The applicable legal principles are well-settled. Impecuniosity does not lead automatically to an order for security for costs but once impecuniosity has been demonstrated, it is for the appellant to demonstrate countervailing factors militating against an order, such as the merits of the appeal. The court has to form some sort of preliminary view of the merits: where they appear to go strongly one way or the other, this might by itself be a decisive factor; but where it appeared they could go either way, the court will generally look to the existence of other factors to tilt the balance, in the absence of which security should be ordered. See Chung Kau v Hong Kong Housing Authority & Others [2004] HKLRD 650 at 656B-H.

4.  It is common ground that the appellant is impecunious. But before turning to the merits of the appeal, it is necessary to state, by way of background, how the debt upon which the bankruptcy petition was founded, arose.

Background

5.  The appellant in a solicitor and used to be a partner in a firm of solicitors called Ho & Chan (“the firm”) which ceased business in late 1998. The firm had two equity partners, namely, Chan Kwok Yim (“Mr Chan”) and the appellant. It also had a salaried partner, a Mr Emerson.

6.  Mr Chan wrongfully misappropriated and dissipated monies paid to and received by the firm in the course of its business in connection with a property investment project. It is common ground that the appellant and Mr Emerson were not involved in any of Mr Chan’s wrongdoing.

7.  The applicant was one of the plaintiffs in proceedings brought against a number of defendants including the partners of the firm (namely, the appellant, Mr Chan and Mr Emerson) sued in the name the firm (the third defendant) in respect of the balance of monies paid over for the project (HCA 20094/1998). Prior to those proceedings, part of the monies paid to the first and third defendants had been repaid, leaving outstanding a sum of $36.6 million.

8.  The fourth defendant was absent at the trial. By then, he was serving his sentence, having been convicted of various offences involving deception and theft in October 2000. The appellant and Mr Emerson were left to defend the claim against them as partners of the firm.

9.  Messrs Richards Butler were the panel solicitors appointed by the Solicitors Indemnity Fund (“the Fund”) to represent them but apparently on an “ex gratia basis” (whatever that meant) up to $10 million less the deductible of $200,000 as the claim was still being investigated by the Fund. It seems that the Fund was reserving its position as to the appellant’s entitlement to an indemnity because of Mr Chan’s fraud although it seems that there was an arbitration award in June 2004 in the appellant’s favour in a similar matter involving the appellant and the Fund.

10.  The trial began in May 2004 and, with a few interruptions, concluded in January 2005. On day 66 of the trial (14 October 2004) the plaintiffs settled their claim against Mr Emerson. At that point, the firm effectively meant the appellant.

11.  In November 2004, there were serious settlement discussions between the solicitors for the various parties to settle not only HCA 20094/02 but also another set of proceedings brought by the other plaintiffs in HCA 20094 against, inter alia, the firm (HCA 2967/02). Richards Butler’s handling of those discussions on behalf of the appellant is the subject matter of an action (HCA 1103/09) brought by the appellant against Richards Butler on 29 April 2009 for professional negligence. That claim (described in § 15below) became the central feature of the appellant’s application to stay the bankruptcy petition.

12.  The judge found in favour of the applicant and entered judgment against the appellant in the sum of $36.6 million plus interest and costs in November 2005. Appeals to this court and subsequently to the Court of Final Appeal proved unsuccessful. The amount owing is substantial, said to be in the region of $100 million.

13.  Against that background, I turn to the merits of the appeal.

Merits of the appeal

14.  Underpinning the appellant’s case for a stay of the bankruptcy petition before the judge was his claim in HCA 1103 (which was said to be strong) against Richards Butler. Plainly, any recovery would improve his financial situation and would either enable him to repay or come to an accommodation with the applicant or augment the assets available to meet creditors’ claims. To date, the applicant appears to be the only creditor. As matters stood at the time of the stay application and now stand, realistically, the most the applicant can expect to recoup if the appellant were made a bankrupt is less than 1% of the amount owing.

15.  HCA 1103 is a claim for professional negligence and raises the issue as to the role and duties of a panel solicitor appointed to represent a solicitor subject to a claim such as the appellant and the extent (if at all) to which it may properly advise the Fund and take into account its interests when, under the Scheme established under Cap. 159M, the Fund is a “mere indemnifier” and not an insurer. For present purposes, it suffices to state that the gist of the complaint is that an advantageous settlement of both actions could have been achieved following an offer made by the solicitors for the applicant by letter of 18 November 2004 had Richards Butler properly advised the appellant and when Richards Butler knew that the appellant, facing a claim of $36.6 million, had no defence and no means with which to meet any judgment. As at the beginning of October 2004, some $4 million of the ex gratia amount remained available in circumstances where the applicant was willing to settle for approximately $2.5 million.

16.  While the judge accepted that as a general proposition a court could properly exercise its inherent jurisdiction to stay a bankruptcy petition if there was evidence to show that a stay would manifestly be in the best interests of the creditors, he was not satisfied that staying the petition was the only rational choice. The judge took the view that the information provided was far from sufficient for determining whether HCA 1103 had any substance. He was also not convinced that Richards Butler should have known that the appellant was bound to lose, noting (in § 17 of the Decision) that the appellant had received advice that his appeal to the Court of Final Appeal had a “fair chance” of success. He also considered that if the appellant’s claim was worth pursuing, it would be open to the Official Receiver to discuss funding arrangements to allow it to be pursued.

17.  In opposing the application for security for costs, the appellant filed evidence and exhibited a number of documents pertaining to the settlement discussions that were not before the judge. At the hearing itself, it transpired that some crucial documents (including the applicant’s offer of 18 November 2004) had been overlooked and not exhibited to the appellant’s affidavit. The applicant’s counsel not objecting, those documents were allowed to be used at the hearing.

18.  Given the materials now before the court, I consider that the appellant has shown HCA 1103 to be a viable claim. While it would neither be desirable nor appropriate to go into further detail at this stage,this scenario, being significantly different from that before the judge, might well of itself produce a different outcome.

19.  There are other matters that should be mentioned on the question of merits. As to whether, to Richards Butler’s knowledge, the appellant’s defence was hopeless at the material time i.e. November 2004, the only written advice available to Richards Butler was that obtained from leading counsel in London in April 2000 which made it clear that there was no defence. No other written advice appears to have been obtained at any time prior to or during the trial, whether from counsel who represented the appellant at trial or other counsel. The advice referred to in § 17 of the Decision was given by counsel (who was not the trial counsel) subsequently at the appeal stage and, thus, must be irrelevant. Finally, another aspect of the judgment the appellant seeks to challenge relates to the judge’s observations relating to the course open to the Official Receiver’s which were said to be misconceived. It is the appellant’s stance that HCA 1103 is a claim that is available personally to the appellant and not “property” within section 2 of the Bankruptcy Ordinance which is plainly arguable.

20.  As earlier noted, the court has to form some kind of preliminary view at this stage. Looking at the matter overall, I consider that the appellant has more than reasonable prospects of succeeding in the appeal. Accordingly, I do not consider this to be an appropriate case for security to be ordered.