RE PEREGRINE INVESTMENTS HOLDINGS LTD. AND OTHERS

HCCW Nos. 20,22 & 32 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 20,22 & 32 OF 1998

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Reasons for Decision on Taxation

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The Background

1. The 3 companies, Peregrine Investments Holdings Limited, Peregrine Fixed Income Limited and Peregrine Derivatives Limited were wound up by the Court on 18 March 1999.

2. The Liquidators have since December 1998 submitted to the court bills of costs prepared by the solicitors engaged by them, namely, Messrs. Clifford Chance ("CC") and Messrs. Deacons, Graham & James ("DGJ"), for taxation under Rule 179 of the Companies (Winding Up) Rules, Cap. 32 ("the Rules"). Both CC and DGJ charged on a time basis. In the course of taxing their bills, I had, among other things, made adjustments to the hourly rates of some of the fee earners. In some instances, the reductions made are quite substantial, a matter which I shall return to deal with later.

3. Both CC and DGJ did not accept the reductions made to the hourly rates and had made written representations, including letters dated 4th and 6th May 1999. I was not persuaded by the representations made and by letters dated 6th and 12th May informed the solicitors of the same. It appears from the correspondence that the Liquidators were and are aware of the solicitors' objection and have supported, or to say the least not disagreed with, it.

4. By letter dated 20 May 1999 from CC (but with input from DGJ), the solicitors made further representations in a renewed attempt to review my ruling on the hourly rates. The solicitors indicated in the letter their intention of taking the matter on appeal in the event that the review is declined. They further observed that the approach to allowable hourly rates may have profound consequences for the legal profession as a whole in respect of services rendered to liquidators in winding up actions.

5. Having regard to the stated intention of the solicitors and their observation on the consequences of my determination, I now reduce into writing my approach in determining the appropriate hourly rates of the solicitors and the reasons for the same.

The Reductions to Hourly Rates

6. In assessing the hourly rates of the fee earners, my starting point is the experience and seniority of the fee earner involved. I drew assistance from the level of hourly rates normally allowed by taxing masters on taxation for fee earners of comparable experience and seniority. The current level of allowable hourly rates had been communicated by the Registrar to the Law Society and is reflected in the Law Society Circular No. 97-234(PA). Another Circular No. 99-76 (PA) has since superseded this Circular, but the allowable hourly rates remain unchanged. Apart from considering the experience of the fee earner, I also took into account the nature of the work undertaken and the time spent on the work by the fee earner involved. These are to be ascertained from the summary of tasks or breakdowns provided by the solicitors and attached to their bills.

7. For the bills of costs that had been taxed so far, the most substantial reductions in hourly rates relate to those claimed by the trainee solicitors and one unqualified fee earner of CC bearing the initial "TGS". The hourly rates claimed by the trainee solicitors in the bills submitted by CC and DGJ for taxation ranged between $1500 and $1850. This is considerably higher than the rate of $1300 allowed by taxing masters on taxation, irrespective of the basis of taxation. From the summary of tasks or the breakdowns supplied, I can see no justification, whether with reference to the nature of the work done or otherwise, for the higher rates claimed. Accordingly, the allowable hourly rates of the trainee solicitors had been reduced to $1300.

8. In the case of TGS, he is a para-legal responsible for document management. His hourly rate was claimed at $1750. According to the Liquidators' notes on CC's bill no. 38564, CC had justified TGS' involvement and work on the basis that "efficient collation and management of incoming and outgoing correspondence in an assignment of this nature and complexity is vital". The Liquidators had accepted the explanation and I do not intend to take exception with that. However, what is apparent is that the work of TGS is to maintain the relevant documentation correspondence and files in orderly manner so as to ensure that CC has a proper record and an intelligent filing system. This will in turn facilitate the other fee earners in the discharge of their work and duties.

9. There is, in my view, no justification for the hourly rate of $1750 claimed for TGS. The hourly rate normally allowed for non-qualified staff of solicitors firm on taxation ranges between $800 and $1000. $1750 is well above the allowable rate of a trainee solicitor and is not far below the rate of $2000 allowed for newly admitted solicitors.

10. It is also to be noted from the bills submitted so far that the amount of time taken up by TGS for document management each month is fairly substantial. There are instances where the time spent is as much as 30 hours and above : see bill nos. 37926, 38825 and 39467 for instance. As mentioned above, the Liquidators had also raised query on this matter, but had not pursued it further upon the explanation given.

11. Considering the nature of the work done by TGS, the amount of time involved and the fact that, to a large extent, the work is to ease the tasks of other fee earners; I had reduced the hourly rate of TGS to $1000.

The Objections of the Solicitors

12. The fundamental objection of the solicitors to my decision to reduce the hourly rates is that these rates had been agreed between them and the Liquidators, who are their clients. As such, the Registrar in taxation under Rule 179 of the Rules should not disturb the agreed rates. The grounds of this objection, as appear from CC's letter dated 20 May 1999, can be summarized as follows :-

(1) The hourly rates agreed had been carefully formulated so as to enable the law firms to make an appropriate return. Further, "competitive pressures" ensure that the hourly rates reflect market conditions as a whole.

(2) The bills are taxed on a solicitor and own client basis. In as much as it is not open to the client to challenge the hourly rate he has agreed to, the Court has no jurisdiction to reduce the rates agreed, notwithstanding that the client is acting in a representative capacity for the benefit of a third party.

(3) The hourly rates set out in the Law Society Circular 97-234(PA) only refers to taxation on party and party basis.

Reasons for Decision on the Hourly Rates

13. It is indeed the case that the bills of CC and DGJ were taxed on a solicitor and own client basis. In this regard, I am guided by the order of Le Pichon J. made herein on 25 November 1998. In ordering that the Official Receiver appointed a law costs draftsman to prepare a report on the costs and disbursements of the Provisional Liquidators' solicitors, her Ladyship directed that the report be prepared on the basis of a solicitor and own client basis.

14. I accept that under O.62 r.29 R.H.C., on the taxation of a solicitor's bill by his client, all costs shall be allowed except those costs, which are of an unreasonable amount or have been unreasonably incurred. The rule also provides that all work and costs approved by the client shall be conclusively presumed to be reasonably incurred or reasonable in amount.

15. Notwithstanding the provisions in O.62 r.29, I do not accept that it follows that the Registrar in taxation under Rule 179 of the Rules has no power to re-open the fees or rates agreed to between a liquidator and his solicitors.

16. It is pertinent to note at the outset that the relationship between a liquidator and his solicitors is different from an ordinary solicitor and client relationship. This is because the liquidator is not paying the solicitors out of his personal resources, but from the funds and assets of the company in liquidation. At the same time, he assumes the role and responsibilities of a trustee and is charged with the duty of protecting both the estate and the interests of the creditors. While he is allowed his remuneration out of the estate of the company, he is obliged to justify his remuneration by reason of his duty to account. The same principle applies to disbursements incurred by him. The fees of his solicitors are paid out of the estate by way of the liquidator's disbursement. As such, the solicitors through the liquidator will have to justify the fees charged before the same can be allowed to come out of the estate. It is in the light of this spirit that disbursements of a liquidator, including his solicitors' fees, are required to be taxed and approved by the Registrar under Rule 179 of the Rules. It follows that the principles set out in O.62 r.29 have to be read and applied subject to the overriding power of the Registrar under Rule 179. Rule 179 will be rendered redundant and the purpose of taxation defeated if it were otherwise construed to be subject to O.62 r.29.

17. Where a liquidator has agreed with his solicitors regarding the fees and rates to be charged, he is contractually bound to honour that agreement. The agreement however does not bind the Court and cannot fetter the Court's power to scrutinize the bills of the solicitors. If the Court considers that the agreement on costs reached between the liquidator and the solicitors is proper and reasonable, the Court will of course sanction it and approve payment of the agreed costs from the estate. But if the liquidator or the solicitors fails to satisfy the Court that the agreed costs and rates are reasonable and justified, the agreed costs will not be allowed to be met by the funds of the company. In short, there are two distinct questions to be asked : (1) what is the proper amount payable by the liquidator as client; and (2) how much of the amount so payable is to be allowed as payment out of the estate : see Peregrine Investments Holdings Limited (No. 1) [1998]1HKC 1 at 13.

18. In the present case, I was told that the Liquidators had agreed with CC and DGJ on the hourly charge out rates of the fee earners. That being the case, the Liquidators, as client, will have to honour the agreement and cannot therefore challenge the rates. The Registrar in taxing the solicitors' bills under Rule 179, however, stands in a different position. There is no question that the Registrar having jurisdiction to review the agreed hourly rates and to make appropriate adjustments, including reductions. Accordingly, when making reductions to the hourly rates, I am not suggesting that the solicitors are not entitled to recover from the Liquidators, who are their clients, the rates or costs as agreed. All that I am deciding is that the estate should only pay, by way of disbursements of the Liquidators, solicitors' fees calculated on the reduced rates, which, in my view, are proper and reasonable.

19. The argument that the hourly rates were formulated to enable the solicitors to make appropriate return is wholly irrelevant. That is not a matter that the Court should afford any weight in taxing the disbursements of the Liquidators.

20. I also entertain reservations about the suggestion that the agreed rates reflect market conditions as a whole. It is true that the Liquidators had indicated in their letter dated 3 May 1999 that they had reviewed DGJ's hourly charge out rates by comparing them to those of other firms in Hong Kong. There is, however, no indication that the Liquidators were aware of or had considered the rates set out in the Law Society Circular No. 97-234(PA). And if their attention had been drawn to the hourly rates normally allowed by taxing masters on taxation, there is no explanation as to why the Liquidators nevertheless consider it appropriate and justified to accept rates which are considerably higher, especially in the case of unqualified staff. It is to be remembered that the rates set out in the Law Society Circular were set in July 1997. That was a time when the market conditions of the legal profession in particular and the economy of Hong Kong as a whole were much better than March 1998 when these companies were wound up, the present Liquidators appointed and the solicitors retained. It is also to be noted that for bills of CC covering work done after March 1999, the hourly rates of the some of the fee earners had been revised upwards. TGS's hourly rate, for instance, was raised from $1750 to $1850. How that can be said to have reflected market conditions is difficult to comprehend.

21. I now turn finally to the argument that the hourly rates set out in the Law Society Circular only relates to party to party taxation. The Circular was issued as a result of a letter written by Mr. Registrar Betts to the Law Society dated 14 July 1997. Since 1985, the Registrar, High Court, would from time to time indicate to the Law Society by correspondence the level of hourly rates which taxing masters would allow to solicitors upon taxation, by reference to the solicitors' experience and seniority. In this letter of 14 July 1997, Mr. Registrar Betts set out the revised level of allowable hourly rates. Nowhere had he indicated that the rates should only apply to party and party taxation. Indeed, there is little justification for adopting different rates simply because the basis of taxation is different.

22. At any rate, it is irrelevant whether the rates set out in the Circular relate to party to party taxation. The fact remains that the Circular reflects the rates which taxing masters generally consider to be appropriate and reasonable for solicitors of comparable experience and for the unqualified fee earners. There has to be good and compelling reason before the Registrar in a Rule 179 taxation will allow a liquidator to recover from the estate his solicitors' fees calculated at higher rates.

Conclusion

23. For the reasons set out above, I see no ground from departing from my previous decision on the hourly rates to be allowed to the fee earners of CC and DGJ. The request for review is accordingly declined.