CHEUNG TAK MAN DESMOND AND ANOTHER v. LAM SIU SUN DENNIS AND ANOTHER

HCA 262/2019

[2020] HKCFI 2763

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 262 OF 2019

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DECISION

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1.  This matter arises in connection with the dissolution of the partnership of a firm of solicitors, Li, Wong, Lam & W.I. Cheung (“LWLWIC”), and in part out of an order made by Deputy High Court Judge Bruce SC on 22 February 2019 (“the Bruce Order”). It came before the Court on 29 April 2020 by way of applications made by the plaintiffs by summons dated 24 April 2020 for an injunction against the defendants and their Cessation Agent, seeking to enforce certain undertakings given by the defendants which had been set out in a Schedule to the Bruce Order.

2.  The defendants cross applied by summons dated 28 April 2020 seeking leave to be released from the undertakings contained in the Schedule to the Bruce Order; offering alternative undertakings to be given by the defendants, and seeking an order that all further proceedings in this action be stayed save for the purpose of enforcing the order to be made.

3.  At the hearing, the parties agreed certain interim relief, as encapsulated in the Order dated 29 April 2020.  That Order included directions for the filing of evidence and submissions by the parties in contemplation of a determination on the papers of the two matters remaining in issue.

4.  Those matters have been “defined” by counsel for the Defendants as being:

(a)  Whether Messrs. Lee, Wong & Lam (“LW&L”) is suitable to act as cessation agent for the Defendants’ files at the dissolved LWLWIC, or if not, who should be appointed as such (“Cessation Agent Issue”).

(b)  There is also a corollary issue of who is to hold the sum of HK$1,851,048.50 (“the Sum”) following disposal of the two sets of summonses.

5.  To provide an understanding of those issues, I set out a synopsis of the background.

Background

6.  The parties are all former partners of LWLWIC, which has now ceased business.  To give effect to that cessation of business, the plaintiffs and the defendants signed a Notice of Cessation of Practice (“the Cessation Notice”) late in 2018.  The decision to dissolve the partnership followed a breakdown of mutual trust amongst the partners and has involved various serious allegations of breaches of the duties owed to one another, and which have given rise to other litigation among the two ‘camps’ of partners.

7.  The Cessation Notice sought dissolution of the partnership to take effect on 14 December 2018 but by then certain (mandatory) notices required by the Law Society had not been given, so immediately prior to the dissolution taking effect the defendants obtained an order to restrain the plaintiffs from taking further steps in the dissolution until such time as those notices had been given.

8.  Among the various steps that were to be undertaken to give effect to the cessation were the transfer of clients’ monies, storage of case files and assets, compilation of accounts, and other incidental matters concerning the interests of clients.  These functions are ordinarily to be performed by an agent on behalf of the former partners known as “the Cessation Agent”.  Consistent with the breakdown in trust between the former partners, they were unable to agree on the identity of such an agent to undertake the administration of the separation of the business.  Ultimately however, the partners were able to agree that the practice of LWLWIC was to cease on 15 February 2019, and that Messrs. Herbert Tsoi & Partners (“HTP”) and Hobson & Ma (“H&M”) should both be appointed as Cessation Agents, the former acting, in effect for the plaintiffs’ camp, and the latter for the defendants’ camp. 

9.  HTP and H&M also signed the Cessation Notice, agreeing to deal with consequential matters arising from the cessation of practice of LWLWIC such that the work involved in administering the dissolution of the firm was indeed divided between the two Cessation Agents.

10.  Given that the partners are all senior legal practitioners, their inability to agree on a single Cessation Agent is both surprising and unfortunate.  That apparent lack of trust seems to have bedevilled the entirety of what should have been a straightforward administrative process.  Undoubtedly it has given rise to delay and to significant additional costs.

11.  The inability (or disinclination) of the parties to co-operate in the cessation of the business of the partnership, and the recourse they have had to the courts in proceedings related to the cessation of business, is also highly regrettable, and is recounted in the Decision of Deputy Judge Leung dated 2 April 2020.  No repetition of that history is required here.

12.  It suffices to note that there were a number of matters still unresolved relating to the dissolution of LWLWIC after 15 February 2019, and on 19 February 2019 the plaintiffs commenced this action, and took out an inter partes summons for interlocutory injunctive relief against the Defendants, with the stated intention of ensuring compliance with the partners’ obligations incidental to the cessation of practice under the Cessation Notice.

13.  After the summons was taken out, on 20 February 2019 the Defendants’ solicitors proposed by letter that the summons be disposed of by way of undertakings to be given by the defendants.  A few days later, the summons came before DHCJ Bruce SC on 22 February 2019, and the parties were able to agree (largely in line with the defendants’ proposals) the terms of what I have referred to as the Bruce Order and were thus able to agree to dispose of the summons, and the action, by way of the undertakings given by the defendants. 

14.  The plaintiffs’ position is, therefore, that the action was compromised on terms set out in the Schedule to the Bruce Order this constituting a “Tomlin Order”.  The defendants do not agree that the Bruce Order is to be so categorized however.

15.  The parties continue to be locked in disputes over matters supposedly “compromised” but which have now found their way to the applications before this Court.

The Present Applications

16.  During its time as a Cessation Agent H&M had taken charge of certain files, and also certain client funds (i.e. the Sum) which were to be held on trust pending final accounting and bank reconciliations.  The plaintiffs say that two matters in particular have given rise to the need to come back to court, one being the need to protect the funds held on behalf of the clients of LWLWIC and one being the “refusal” by H&M to sign forms to allow the retrieval of record documents from storage.

17.  To an extent both of these matters relate to the role played by H&M whose appointment as Cessation Agent acting on behalf of the Defendants was included in the Schedule to the Bruce Order.  As set out in the affidavit of Mr Ma Wah Yan, Billy, dated 28 April 2020, H&M seems to have taken on the role of Cessation Agent “in respect of the defendants’ files” in about November 2018.  Mr. Ma says that due to the heavy workload and time involvement however, H&M later agreed with the defendants (but not the plaintiffs) in December 2019 that H&M would cease to be a Cessation Agent with effect from 1 January 2020.

18.  Following the agreement to allow H&M to resign as Cessation Agent the defendants have sought to appoint a replacement. No other firm has agreed to take on that role however and the defendants have therefore, proposed that their new firm, LW&L, take on the duties of the Cessation Agent.  This is opposed by the plaintiffs.

The Schedule to the Bruce Order

19.  In broad terms, and so far as relevant, there were three areas encompassed in the Schedule to the Bruce Order, namely:

(a)  undertakings given by the defendants to facilitate the storage and retrieval of partnership assets and case files at certain storage facilities;

(b)  undertakings to allow the Cessation Agents to have access to the case files; and 

(c)  undertakings to take steps to procure the transfer of the funds in the client's accounts to the Cessation Agents, with provision for client money attributable to clients under the supervision of the defendants, and money not presently attributed to clients of the plaintiffs or defendants to be transferred to H&M, and to be held on trust for the Cessation Agents jointly.

The Approach to the Bruce Order

20.  There is a distinction between the existence of a jurisdiction to release a party from an undertaking (ordinarily, upon offering a further, but different one) and the exercise of that jurisdiction. Colloquially, an application in relation to an undertaking may be described as being to “vary” the undertaking. But the jurisdiction is only to release, or not release, the original undertaking.  Since an undertaking is a promise volunteered to the court, it is for the court to decide whether to release the litigant from that undertaking and accept any further undertaking in light of the prevailing relevant circumstances. 

The Defendants’ Position

21.  The defendants have, they say, sought to implement the terms scheduled to the Bruce Order. Difficulties have only arisen because of the refusal by H&M to continue to act as Cessation Agent, meaning that some replacement must be identified.  As expressed by the defendants in submissions, the only proposed “material variation” to the undertakings in the Bruce Order is the appointment of “LW&L and/or any other firm of solicitors with at least two partners” as the replacement Cessation Agent.  The defendants seek to be released from their original undertakings and to substitute a different set of undertakings. 

22.  This is clearly permissible as a matter of law, and the principle is that undertakings can be uplifted or released including where there has been a material change of circumstance which was not foreseeable, and which makes compliance not feasible: Hong Kong Civil Procedure 29/1/36.  In Cutler v Wandsworth Stadium Ltd [1945] 1 All ER 103 Morton LJ said at 105D-E:

“… the court does not vary an undertaking given by a litigant. If the litigant has given an undertaking and desires to be released from that undertaking, the application should be an application for release … Litigants are not ordered to give these undertakings; they choose to give them, and an application to have an undertaking already given varied is wholly wrong in form.”

23.  In seeking release from their undertakings, the position of the defendants, in summary, is that they have made a reasonable proposal for the appointment of a replacement Cessation Agent; specifically LW&L. The defendants have made “extensive efforts” to seek an alternative candidate as replacement for H&M, and have approached 16 firms, but without success.

24.  The defendants are in a situation in which there has been a change of circumstances beyond their control. They have been unable to give instructions to H&M since the contractual relationship was terminated.  An impasse has arisen because the plaintiffs have refused to sign the Notice of Change of Cessation Agents.

25.  There is no evidence to suggest that LW&L would be unsuited to the role, and the plaintiff’s objections are non-specific. There is no “conflict of interest”, and nor can there be any proper objection relating to the handling of client money (“the Sum”) because it has always been open to the plaintiffs to have their own Cessation Agent (HTP) take up control of this money.

26.  The arrangement proposed is in line with that agreed between the former partners of having two Cessation agents to handle the files of the respective camps of ex-partners.  Moreover, the Law Society Guidelines require only that the cessation agent be a firm of solicitors with at least two partners.  There have been precedent cases in which the partners of one of the cessation agents were previously partners of the dissolved firm.

27.  The defendants note that LW&L are a practising law firm, and able to safeguard money in client’s accounts.  The work of the cessation agents would be “accounted for”, and, it is submitted, any Cessation Agent “would be” under the supervision of the Law Society.

The Plaintiffs’ Position

28.  Starting with the jurisdiction to intervene in the Bruce Order (more properly, the schedule to that Order), the plaintiffs submit that this was a Tomlin Order, and as such there is no jurisdiction in the court to set aside vary or substitute the terms of that Order.  The terms of the Schedule to a Tomlin Order amount to a contract between the parties.  As such, the terms of that contract are a matter for the parties and are not part of the order or direction of the court.

29.  The plaintiffs have stated in correspondence that they are agreeable to the appointment of any law firm other than LW&L as cessation agent in place of H&M.

30.  However, allowing the defendants’ summons would place the defendants in sole control of approximately HK$8.4 million in funds comprising approximately HK$6.6 million of clients’ money attributable to former clients of the defendants, and HK$1.8 million as the remaining balance of the client accounts, the latter being the sum that was to be transferred to H&M to be held on trust for the Cessation Agents jointly pending final adjustment.

31.  H&M initially “refused” to sign forms to enable case files to be retrieved from the warehouses on the basis that they had already terminated their engagement as Cessation Agent.  However, after the issue of the plaintiffs’ summons H&M changed its stance, by stating that it was both willing to sign the file retrieval forms, and agreeable to hold the balance of HK$1.8 million on trust.

32.  In any event the defendants’ application should not be acceded to, because:

(a)  The defendants’ stance is contrary to their obligations under rule 8 (2) of the Solicitors Accounts Rules[1] which require the defendants to obtain a direction from the Law Society before appointment of cessation agents;

(b)  there is an inconsistency between the proposition that the defendants have already been appointed as substitute cessation agents and the application in the summons seeking a variation to the terms of the previous order;

(c)  making the defendants the substitute cessation agents would leave the defendants in control of money “belonging” to the plaintiff’s clients.

The Risk of Misappropriation

33.  Furthermore, the plaintiffs contend that the defendants have, in the past, misappropriated unidentified or unclaimed clients’ money. It is submitted that “Although this matter is no longer a criminal investigation against the defendants, the Law Society disciplinary investigation is still ongoing”.

34.  It follows, say the plaintiffs that the “past conduct of the defendants in misappropriating client’s money and misuse of the client account means that they cannot be trusted to safeguard the client’s interests”.  Moreover, any such misapplication of client’s money by the defendants would leave the plaintiffs’ liable.

35.  This is disputed by the defendants who note that the plaintiffs’ allegations of past misappropriation of client monies are sweeping and unsubstantiated.  No enforcement/disciplinary action has been taken.

36.  In considering whether the defendants should be released from their earlier undertaking I have had regard to the allegations of commercial impropriety that are made.  These are very serious allegations, and I have presumed, because they are made by solicitors, that they are genuinely made.  I have, however, also had regard to the fact that the allegations are, at present, largely unsubstantiated.

37.  I have also taken note of the fact that there are allegations of impropriety made by the defendants against the 1^st plaintiff.

A Tomlin Order?

38.  The defendants accept the proposition that the schedule to a Tomlin Order constitutes an agreement between the parties, binding them contractually to the terms which they have agreed by way of a settlement of disputes between them.

39.  However, the present circumstances are different.  The schedule to the Bruce Order does not contain the terms of a compromise of disputes.  It contains, primarily, undertakings given to the Court in consideration of which the proceedings commenced by the plaintiffs seeking to enforce compliance with obligations in relation to the cessation of the practice were stayed.

40.  I agree with the defendants’ analysis as to the nature of these undertakings.  The court retains jurisdiction to oversee the implementation of undertakings given by a party to the court, and that must be the case whether such undertakings are embodied in an order itself, in a schedule, or indeed in any other form.

41.  It follows that, if the circumstances are appropriate, a party (the defendants in this case) may be released from such undertakings. The change of circumstances in fact make this necessary.

Who is to hold “the Sum”?

42.  The plaintiffs make no application other than that in their summons, that H&M continue to act.  In his affidavit of 28 April 2020 Mr. Billy Ma has offered either to transfer the Sum to HTP to be held on trust, or for H&M to continue to hold that money, on trust for HTP and the defendants replacement cessation agent.

43.  It is clear that this second option would be an unusual arrangement, but given the allegations and counter allegations made between the former partners, this approach would serve to lessen the scope for dispute between the partners.

44.  Accordingly I propose take the second course, and to order that the Sum (HK$1,851,048.50) presently held by H&M continue to be held by H&M  on trust for HTP and the defendants’ replacement Cessation Agent.

LW&L as cessation agent for the Defendants’ files

45.  The fundamental premise underpinning the defendants’ undertakings, that H&M would act as Cessation Agents, was undermined in December 2019 when H&M resigned from that position.

46.  The defendants are not to be faulted for the fact that some difficulty has been experienced in obtaining the services of a replacement Cessation Agent (except, I surmise, to the extent that they have contributed to the fractured and contentious relationship between the former partners which may have discouraged other candidates).  Nor are they to be faulted for seeking to agree alternative arrangements with the plaintiffs. 

47.  So far as the defendants’ application to be released from the undertakings set out in the Bruce Order is concerned, this is conditioned upon the replacement undertaking to appoint LW&L as replacement Cessation Agents.  Having considered the surrounding circumstances, I accept that this is the appropriate course of action, albeit one which is less than optimal given the disagreements between the former partners.  No viable alternative candidate has emerged, but it is clear that H&M are no longer willing to act.

48.  Given the circumstances therefore, and in the exercise of my discretion, I accept the defendants’ proposed course of action and, accordingly, make an order in terms of the summons dated 28 April 2020, subject to amendment to reflect H&M’s continued role as trustee of the Sum.  No further order in respect of the plaintiffs’ summons of 24 April 2020 is required.

Costs

49.  As may be apparent from the above, significant elements of the plaintiffs’ summons have been resolved between the parties, as embodied in the relevant consent order.  The defendants have largely succeeded in their summons, which has been opposed by the plaintiffs, but which was made necessary largely by the resignation of H&M.  In my view both sides have increased the costs of the cessation of the practice by their apparent general unco-operativeness. It seems to me to be appropriate that I make no order as to costs of either summons.