MA PO CHIM, PERCY AND OTHERS v. LEE TUNG HAI, LEO AND OTHERS

CACV 160/2007 & CACV 161/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 160 AND 161 OF 2007

(ON APPEAL FROM HCMP NO. 3253 OF 2004)

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J U D G M E N T

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Hon Tang VP (giving the judgment of the Court):

Introduction

1.  The Chungshan Commercial Association, Hong Kong (“the Association”), was established in Hong Kong as an unincorporated body in 1911.  It was subsequently incorporated under the Companies Ordinance in 1967.

2.  The 1^st respondent became the chairman of the Association in June 2001, and the 2^nd respondent became the secretary general of the Association in August 2001, a post which according to the petitioners, was not provided for by its Articles of Association.

3.  It was a dispute over the purported adoption of a new Memorandum and Articles of Association of the Association in December 2001, which led to the petition by the petitioners in December 2004 for relief under section 168A of the Companies Ordinance, Cap. 32 (“section 168A”).

4.  The Association was the 3^rd respondent.  By an order dated 17 February 2005, Kwan J dispensed with the appearance and attendance of the Association.

5.  When the petition came up for hearing on 7 November 2005, the petitioners, the 1^st and 2^nd respondents, compromised their differences, and a consent order was made.  It was implicit in the compromise that the new Memorandum and Articles of Association of the Association were invalid.  The consent order provided, inter alia, for an Extraordinary General Meeting (“EGM”) and/or Annual General Meeting (“AGM”) to be held on 18 February 2006 for the purpose of electing and appointing directors of the Association.

6.  Paragraph 3 of the consent order, further provided that for that purpose, a Preparatory Working Committee was appointed to, within 2 months from the date of the order:-

“	(i)	verify the Register of Members of the 3rd Respondent;
	(ii)	prepare a list of candidates in accordance with the provision of the Articles for election of directors; and
	(iii)	convene the said Extraordinary General Meeting and/or Annual General Meeting by giving notice of the Meeting with accompanied voting tickets;”

7.  On 17 February 2006, Horwath Corporate Advisory Services Limited (“Horwath”) was appointed by Kwan J:

“	… to replace the Preparatory Working Committee to carry out the functions as set out in paragraph 3 of the order dated 7 November 2005 and the completion be extended to 30 April 2006”.

8.  The order dated 17 February 2006, appointing Horwath was silent on remuneration.

9.  Horwath’s appointment was made as a result of the application by the 4^th, 5^th and 6^th respondents dated 7 February 2007.  The application was supported by the affirmation of Mo Loong Kwong, the 4^th respondent, filed on 7 February 2006.  According to him, the Preparatory Working Committee had not functioned properly and indeed had fallen apart.  So it was necessary for an independent professional party to be appointed to carry out the functions of the Preparatory Working Committee.

10.  The 4^th, 5^th and 6^th respondents, through their solicitors, Messrs. Johnson, Stokes & Master (“JSM”), had obtained quotations from Horwath and another company.  Horwath’s quotation was the lower of the two.  According to Horwath’s letter of 20 January 2006, addressed to JSM:

“	Scope of our responsibilities
	The scope of our responsibilities are contained in paragraph 3 of the Order granted by Justice Madam Kwan in HCMP3253/2004 dated 7 November 2004 which are:
	(i)	verify the Register of Members of the 3rd Respondent;
	(ii)	prepare a list of candidates in accordance with the provision of the Articles for election of directors; and
	(iii)	convene the said Extraordinary General Meeting and/or Annual General Meeting by giving notice of the Meeting with accompanied voting tickets
	We appreciate the correspondence with the members of the CCA will have to be in Chinese as well as the meeting.
	In relation to (i) above, our work will include a review of register of members of CCA, a review of all membership certificates with a view to ascertaining any irregularities and to determine whether the documentation held in each current members file discloses that the member has complied with the requirements of the Articles of Association for membership. If further procedures are required, this work will be charged on a time costs basis as stated in ‘Other Works’ below.
	Fees and staff arrangements
	I and Mr. Jim Wardell, our Executive Chairman will be the engagement partners and we will be assisted by our staff.  Based on the scope of the above work, our fees will be HK$400,000 up to the conclusion of the meeting as mentioned in (iii) in ‘Scope of our Responsibilities’ above.
	Other Works
	All other works performed in relation to this engagement will be charged on a time costs basis on top of the fees mentioned above.  (Then hourly rates were provided)
	……
	We shall be reimbursed by you for any expenses incurred in connection with this work.  These expenses shall include legal fees, travelling, communication, copying and printing.”

11.  The parties have referred to this letter as the 1^st engagement letter.  The 1^st engagement letter went on to provide that payment on account of 50% was payable on signing of the letter.

12.  But subsequent to the order of 17 February 2006 on 27 March 2006, the Association paid $200,000 to Horwath.  The 1^st engagement letter was never signed.

13.  On 12 April 2006, Horwath issued the 2^nd letter of engagement to the Association which was identical in effect to the 1^st letter of engagement.

14.  On 28 April 2006, Horwath took out a summons which sought, inter alia, for an order:

“

4.

The costs, charges and expenses of Horwath, including those already incurred, for complying with paragraph 2 of the (Order of 17 February 2006) be borne by the 3rd Respondent”.

15.  On 24 May 2006, Kwan J ordered (“the costs order”):

“	10.	The costs, charges and expenses of Horwath for carrying out the functions in paragraph 2 of the Order dated 17th February 2006 and the functions in the aforesaid provisions of this Order, be taxed by a Master of the High Court on a trustee basis and be paid by the Association;
	11.	Pending taxation, the Association do pay Horwath within 14 days hereof a further sum of HK$300,000.00 as interim fees;
	12.	Liberty to Horwath to apply generally on the provisions of this Order; and
	13.	The costs of Horwath, the Petitioners, the 1st Respondent and the 4th to 6th Respondents in this application be taxed on a common fund basis and be paid by the Association.”

16.  CACV 161 of 2007 concerns the correctness of para. 10 of the costs order which provided for remuneration to Horwath to be taxed on a trustee basis.  Leave to appeal out of time was granted by Le Pichon JA on 4 June 2007.

17.  Horwath’s application was supported by two affirmations, namely the 1^st affirmation of Jackson Ip dated 28 April 2006, and the 2^nd Affirmation of Jackson Ip of 18 May 2006.

18.  In Jackson Ip’s 1^st affirmation, he said because of difficulties which Horwath had encountered in obtaining the information required, “Horwath has had to undertake extra work beyond what was originally anticipated in (the 2^nd engagement letter) …”.

19.  He went on to say:

“	32.	In the circumstances, Horwath seeks an order from the Court that the following be paid by the Association to Horwath:
		(1)	The sum of HK$200,000 (being the balance of HK$400,000);
		(2)	The fees and expenses incurred to date for extra work performed on a time cost basis; and
		(3)	Subject to the approval of the Court, further fees and expenses to be incurred by Horwath and charged on a time cost basis.
		I will be filing a further affirmation shortly to set out the details of the fees and expenses incurred to date.
	33.	The amount of further fees and expenses required to be incurred will depend on the Court’s view as to the scope of Horwath’s task remaining to be completed (see below), and the cooperation of the Association and its members.”

20.  He also said:

“

37.

However, it is not entirely clear from the Order what is the scope of Horwath’s responsibilities and powers for the purpose of verifying the Association’s register, and for that reason, Horwath needs further guidance and directions from the Court in this regard.”

21.  In Jackson Ip’s 2^nd affirmation dated 18 May 2006, he provided details of Horwath’s fees and expenses together with a breakdown for the period from 17 February 2006 to 30 April 2006.  According to Mr Jackson Ip:

“	6.	Up to and including 30 April 2006, Horwath has incurred chargeable time costs of HK$1,616,068 and disbursements of HK$237,667.09 respectively.
	7.	The time costs of HK$1,616,068 comprises:
		(1)	HK$1,035,162 for 3 general tasks anticipated in the engagement letter but with a wider scope of work in respect of the task of verifying the register of members of the Association; and
		(2)	HK$580,906 for extra work undertaken.
	8.	Despite the fact that Horwath has undertaken a wider scope of work in verifying the register of members than that originally anticipated in the engagement letter, it is prepared to adhere to the quotation given in the engagement letter and charge the sum of HK$400,000 in respect of the 3 general tasks specified in the letter. In effect, this represents a discount of HK$635,162 against the time costs incurred.
	9.	The disbursements of HK$237,667.09 include HK$181,396.99, being expenses incurred in instructing legal advisors to advise Horwath generally and also in the preparation of the Application. In light of the matters set out in my 1st Affirmation, I am of the view that the Application is necessary.
	10.	In summary, in respect of its fees and expenses incurred up to 30 April 2006, Horwath is seeking the Court’s sanction for the total time costs of HK$980,906 (being HK$400,000 plus HK$580,906) and disbursements in the sum of HK$237,667.09.
	11.	In other words, in respect of paragraph 32(1) and (2) of my 1st Affirmation, Horwath seeks an order from the Court that the Association is to pay Horwath the sum of HK$1,018,573.09 (being HK$980,906 + HK$237,667.09 - HK$200,000) being fees and expenses incurred up to 30 April 2006. The sum of HK$200,000 is money paid by the Association to Horwath, presumably to cover Horwath’s fees, as referred to in paragraph 30 of my 1st Affirmation.
	12.	I confirm that, to date, the Association has failed and/or refused to sign and return the engagement letter dated 12th April 2006 and/or made any payment to Horwath to cover its fees and expenses aside from the cheque payment in the sum of HK$200,000 referred to in paragraph 30 of my 1st Affirmation.”

22.  It was against such background that the costs order was made.  The transcript of the hearing before Kwan J on 24 May 2006 recorded this exchange between Mr Chain, counsel for the 1^st respondent, Mr Alexander Wong, counsel for the petitioners and the court:

“	Mr Chain:	My Lady, on that, I wonder whether your Ladyship will think it appropriate that - - whether it be at least the basis of the order or provided for in the order that - - regard to have - - to the original retainer of $400,000.
	Court:	There is no need for that because when the taxing master is to do his taxation, he would have to have regard to that.
	Mr Chain:	Regard to that.
	Court:	Firstly to the letter, and secondly, to any time costs basis of additional work done.
	Mr Chain:	I’m obliged.  I’m obliged.
	Court:	Why should I tie his hands?
	Mr Chain:	I’m grateful.
	Court:	No.11.  Interim fees, 300,00.
	Mr Wong:	My Lady, while we have no objection at all to the interim payments, I wonder whether it would be advisable to have ceilings for the professional fee inclusive of disbursements, my suggestion is $2 million.  Of course, they can …
	Court:	I’m not going to impose any ceiling.  Again, that would be tying the hands of the master and I just don’t know what further work is going to be done.  This is impossible.  I mean, when the engagement letter was sent out, I’m quite sure that it hasn’t been envisaged by Horwath that they would go to - - they’re going to run up fees of over 1 million.  Not practicable at all.”

23.  At the hearing on 24 May 2006, no submission was made regarding the basis upon which Horwath should be remunerated.

24.  Subsequent to the costs order, there had been taxation of Horwath’s remuneration by the taxing master which resulted in four Allocaturs dated 22 February 2007 for the total sum of $4,108,096.30.

25.  On 18 April 2006, the EGM of the Association was held and concluded on 19 April 2007, and a board of directors was appointed.  It appeared that that the 1^st petitioner was elected a Vice Chairman.  He has made affirmations on behalf of the Association in these appeals.

26.  In the meantime, on Horwath’s application by summons dated 22 March 2007, Reyes J ordered on 4 April 2007:

“	1.	The 3rd Respondent do make full payment of Horwath’s costs as taxed and allowed by the Court pursuant to four Allocaturs dated 22nd February 2007 within 21 days from today;
		……
	5.	The costs of Horwath incidental to this application be taxed on a trustee basis and be paid by the 3rd Respondent in accordance with the provisions in paragraph 10 of the Order dated 24 May 2006; and”

27.  Paragraph 5 of Reyes J’s order is the subject of the petitioners’ appeal in CACV 160 of 2007.  Leave to appeal out of time was also given by Le Pichon JA on 4 June 2007.

The Appeals

28.  At the heart of the appeals is the correctness of para. 10 of the costs order whereby Horwath’s remuneration was ordered to be taxed on a trustee basis.

29.  Mr Kenneth C.L. Chan, appearing for the Association, submitted that Kwan J’s costs order was wrongly made because:

“	(a)	The Court has failed to take into account a binding fee agreement between Horwath and the 3rd Respondent when making the (para. 10 of the costs order);
	(b)	The 3rd Respondent has been deprived of its right to be heard before the Orders were made;
	(c)	It is wrong in principle for the Orders to direct that Horwath’s fees be taxed on a trustee basis.”

30.  Mr Chan accepted, rightly so in our view, that under section 168A, Kwan J could appoint Horwath and order that Horwath’s remuneration be assessed on taxation.  The only issue is the basis on which Horwath’s remuneration should be assessed.

31.  Mr Chan submitted that the criteria and guidelines for the determination of Horwath’s remuneration should be no different from those applicable to, say, a court appointed receiver, and he has referred us to several well-known authorities on the subject.

32.  It is not necessary to look beyond Re Peregrine Investments Holdings Ltd [1998] 2 HKLRD 670, a decision of Le Pichon J (as she then was).  There Le Pichon J held that allowance of remuneration to provisional liquidators as office holders represented an exception to the rule that the trustee must not profit from his trust, such that if a provisional liquidator wished to be remunerated at a particular level, he had to justify his claim.  The gist of her judgment could be gathered from para. 4 of the head notes:

“

(4)

For a provisional liquidator to justify his claim, he had to (a) adduce sufficient evidence to explain the nature of each task undertaken and the considerations which led them to embark upon that task; (b) link the time spent to that explanation; (c) satisfy the court that a reasonably prudent man faced with the same circumstances in relation to his own affairs would have laid out or hazarded his own money in doing what the provisional liquidators had done; (d) normally produce contemporaneous records of what they did and why they did it; (e) normally produce contemporaneous records of all items of expenditure and of services rendered and how they were calculated and how they were justified; (f) indicate the fees for any item of work disallowed as being unnecessarily incurred; (g) indicate the fees for any time of work disallowed as being incurred in breach of duties (Mirror Group Newspapers v Maxwell [1998] BCC 324 applied; Re Kal Assay Southern Cross Pty Ltd (in liq) (1992) 9 ACSR, Re Silver Valley Mines (1882) 21 Ch D 381 followed). (See p.684G-J.)”

33.  Sub-paragraph (c) is particularly pertinent.  The standard of care required is that of a trustee.  Volume 48 Halsbury’s Laws of England 4^th edition para. 948.  The other sub-paragraphs are necessarily involved when deciding whether an item was payable.

34.  Para. 10 of the costs order concerned the remuneration of Horwath.  The learned judge was not there concerned with legal costs which Horwath might have incurred or incur in the proceedings.  Para. 13 of the costs order dealt with Horwath’s legal costs and they were to be taxed on a common fund basis.  Mr Chan does not dispute that Horwath’s legal costs should be taxed on a common fund basis.

35.  Mr Chan submitted, however, that para. 10 of the costs order had not been understood as a compendious expression of the Peregrine formula.  He submitted that in the course of taxation, the taxing master had simply followed O. 62 r. 31(2), so that “no costs shall be disallowed except in so far as those costs or any part of their amount should not, in accordance with the duty of trustee or personal representative as such, have been incurred or paid, and should for that reason be borne by him personally.”

36.  Mr Chan submitted that the order of Kwan J was unclear, and was capable of being misunderstood.  But if there was any ambiguity about the order, the matter should have been clarified with the learned judge who had given liberty to apply.  We see no ambiguity.  When ordering remuneration to be assessed on a trustee basis, Kwan J could not be taken to have given Horwath a cart blanche as Mr Chan seemed to suggest.  If the order had been misunderstood on taxation, the relief would be to challenge the taxation and not by appealing Kwan J’s order.

37.  Mr Chan submitted that there was a binding fee agreement between Horwath and the Association.  It is quite clear that there was no binding agreement.  The order appointing Horwath was preceded by the 1^st and 2^nd engagement letters and its appointment was not opposed but Horwath was not appointed by the parties.  In making the appointment, the learned judge was exercising her jurisdiction under section 168A.  And in so doing, she was entitled to order that the remuneration of Horwath be assessed on taxation.

38.  Mr Chan then submitted that even if Horwath was not contractually bound by the terms of the engagement letters, it was a wrong exercise of discretion by the learned judge in not having regard to the engagement letters or in failing to make express reference to the letters of engagement in the costs order.  But as the transcript shows, the learned judge did say that in taxation the taxing master would have regard to the original quoted fee of $400,000.

39.  Moreover, it is clear from Horwath’s fee schedule to their debit note dated 14 August 2006, that Horwath’s bill was divided into two parts, Part A and Part B, and that they represented:

“	A:	Extra Work – billable on a time costs basis as quoted in Engagement Letter.
	B:	Work anticipated – billable at a fixed fee of HK$400,000 as quoted in Engagement Letter.”

40.  The result of this is that although the total costs for work under Part B amounted to $1,035,162, the 3^rd respondent was only billed the fixed fee of $400,000.  Of course, work performed after 30 April 2006 was charged on a time basis, but under the costs order such fees would only be payable if they were costs which a prudent person would have incurred in the conduct of his own affairs.

41.  Mr Chan also submitted that since the Association had no effective board at the time when the costs order was made, the learned judge should not have made it.  But it is in the nature of the jurisdiction under section 168A, that orders are made although the company concerned was not represented.  That in itself is not a good reason for not making the order.  Had Horwath not been appointed, it is highly probable that there would never be an EGM or an effective board.  This is not a valid ground of appeal.

42.  So far as the order of Reyes J is concerned, the only complaint is that the order for costs in favour of Horwath was ordered on a trustee basis.  Reyes J followed para. 10 of the costs order.  When the learned judge mentioned that costs had been ordered by Kwan J on a trustee basis, Reyes J was not told that although para. 10 of the costs provided for remuneration on a trustee basis, in para. 13, the litigation costs of Horwath had been ordered on a common fund basis.

43.  In the circumstances of this case, we do not believe we should interfere.  We feel sure had the appellants sought leave to appeal solely against this aspect of Reyes J’s order, leave would not be have been granted.  Nor is there any evidence that there is a real or substantial difference between taxation on the common fund basis and the trustee basis which would have been small in any event.

44.  For the above reasons, both appeals are dismissed.

45.  We should also mention that the respondents have applied to the court to rescind the leave granted by Le Pichon JA on 4 June 2007.  Having regard to our determination on the appeals, it is unnecessary for us to deal with these applications save that the costs of such applications should be costs in the appeals.  We make an order nisi that the costs of appeals be paid by the petitioners.  Such costs should be taxed on a party and party basis.