DENIS M.P.C. HO AND ANOTHER v. CHAN KAM TIM AND ANOTHER

HCCW 36/98
HCCW 37/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) ACTIONS NO. 36 AND 37 OF 1998

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DECISION ON COSTS

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1. In November 1998, I heard the submissions of the parties, principally of the 1st and 2nd Respondents, in what has been called the "Title Application", on the issues:-

(i) whether clients of C.A. Pacific Securities ("CAPS") who have paid for the securities from their own resources and upon whose instructions CAPS purchased securities on the Hong Kong Stock Exchange settled through the Central Clearing and Settlement System ("CCASS") operated by the Hong Kong Securities Clearing Co. Ltd may have

(a) acquired

(b) thereafter retained whilst subject to the arrangements for the custody of securities in CCASS and

(c) subsequently upon removal from CCASS acquired or re-acquired a proprietary interest in securities so purchased; and

(ii) if so, what is the nature and basis of such proprietary interest.

2. I delivered judgment on 17 December 1998 and heard the parties' preliminary submissions on costs. These submissions were subsequently supplemented by written submissions lodged in Court in January 1999. I am grateful to counsel for their comprehensive and helpful submissions.

3. Before I go into the issues that arise in relation to the question of costs, it should be understood that the "costs" referred to in this Decision are the costs referable to the Title Application only, and not the costs of the liquidation as a whole.

4. It should also be understood that the Title Application was not ordinary hostile litigation, nor a run-of-the-mill summons issued by liquidators in the course of the administration of a liquidation.

5. The Title Application was initiated by liquidators who were faced with a situation never previously encountered before:- the computerised book-entry settlement system known as CCASS (where unnumbered share certificates are immobilised and deposited with a central securities depositary which recognised only the broker as contracting party) had only been in operation since 1992, and prior to the collapse of CAPS, there had never been a liquidation of a broker's firm, in which the question of beneficial title to securities acquired through CCASS fell to be determined. (Unfortunately, since CAPS' collapse, there has been at least one other broker's firm which has suffered the same fate).

6. The question as to how to deal with the securities could not have been properly and satisfactorily resolved without the Title Application being raised for the Court's determination. There had been conspicuous protests by the more vocal sector of CAPS' clients, arising from the fact that the liquidators had not transferred the securities to them. The inability of the liquidators to do so stemmed from the fact that there was a serious shortfall in the securities that were held by CAPS.

7. The shortfall in securities was bound to give rise to a conflict of interests amongst the clients, which in turn left the liquidators in an invidious position. On the one hand, there were clients in the position of the 1st Respondent, whose choice of securities was not commonplace, with the result that all the securities acquired by CAPS on his behalf remained intact when the curtain fell on CAPS.

8. On the other hand, there were clients like the 2nd Respondent who, through no fault of their own, found the quantity of securities remaining at CAPS inadequate to meet their proprietary demands. These clients might well have great practical difficulty pursuing a tracing claim, and it would be perfectly understandable for them to argue the contrary case to the 1st Respondent, in the hope of increasing the size of the company's free assets for unsecured claims.

9. Neither Respondent's case could have been dismissed out of hand by the liquidators. One only needs to see the number of authorities from other jurisdictions and academic writings that were cited to the Court at the hearing of the Title Application to acknowledge the difficulty of the title issue. The situation required a comprehensive legal analysis in a context in which all parties would have the opportunity to present arguments and counter-arguments.

10. It is therefore clear, in my view, that a determination by the Court, after full legal submissions from representatives of both classes of clients, was necessary to decide the fate of the securities in the proper administration of the liquidation. The Respondents were chosen as representatives of each class and approved by the Court. The situation is exactly that described by Browne-Wilkinson V-C in Re Westdock Realisations Ltd [1988] BCLC 354. Having said that there was no fixed practice as to the incidence of costs on summonses issued by liquidators to determine questions arising in the course of their administration, he said (359h):-

"However, there are many cases in which it is essential for the due administration of the liquidator's or receiver's duties to obtain a decision from the court. In such cases, there are often large classes of creditors, contributories or other claimants, the exact membership of which class is often not easily established or even known, who will be affected by such decision. In such a case, the liquidator or receiver joins a representative respondent to argue the point on behalf of the class. Frequently the sum at stake for the individual respondent joined does not justify him incurring the costs involved in litigating the matter. As a result, in order to ensure that the matter is properly determined the costs of the representative respondents are frequently paid out of the fund."

11. Clearly there is no question of the Respondents having to foot the bills themselves and their costs should be provided for. The only question is from which source of funds. As for the liquidators' own costs, they would be fees and expenses that would be subject to scrutiny and approval by the Court in its jurisdiction over liquidators under the provisions of the Companies Ordinance, but the same question arises over the source of funds for the recovery of costs.

12. The issues as to the source of funds for the costs of the Title Application are as follows.

(1) Should any part of the costs be borne by C.A. Pacific Finance ("CAPF")?

(2) Should the costs be recovered completely, or partly, from

(a) CAPS' own assets ("the free assets")

(b) the securities held by CAPS as trustee ("the trust assets")?

(3) If part or all of the costs should be recovered from the trust assets, how should the liquidators go about its implementation?

13. In relation to the 1st issue, I take the view that CAPF should not bear any part of the costs because the Title Application really did not concern it. Although the preliminary issues in this application, as originally framed, were drafted widely enough to include CAPF's involvement, it became clear when the issues in the Application were refined by the parties and when submissions were made, that the Application had little, if anything, to do with CAPF.

14. Although preparation for the Title Application may have involved investigation into the way both CAPS and CAPF operated, and consideration of the books of CAPF, the Application dealt, and dealt only, with the proprietary interest in the securities as between CAPS as broker and its clients. In my view, it would be unfair for CAPF to have to bear any of the costs of the Title Application.

15. The issue then is whether the costs of the Application should be recovered (a) completely from CAPS' free assets, or (b) completely from the trust assets, or (c) partly from the free assets and partly from the trust assets. I am told that the value of the trust assets is about $1b. and that of the trust assets in CCASS alone is about $500m. As opposed to that, the free assets in CAPS are worth only about $38m., even ignoring expenses which may from time to time be incurred and which would have to be met from that fund. Those amounts are approximate only, and would have to remain approximate until all clients' claims are investigated and concluded.

16. The parties have presented a number of suggestions, some more finely-tuned than others, as to the right order on the incidence of costs. In my view however it would be in the best interests of all concerned to make a final and simple order as to costs now.

17. In my view, it would be unfair and unjust for the costs of the Title Application to be recovered from the free assets, whether in whole or in part. One only has to consider the situation of the 2nd Respondent to appreciate the inequity of those options. As far as her relationship with CAPS was concerned, there was no difference from that of the 1st Respondent. CAPS owed a fiduciary duty to both. She and others in her position are as innocent as the 1st Respondent and others in his position. It was due to chance, not by choice, that there was a shortfall in the securities purchased on their behalf when CAPS collapsed.

18. If the costs of the Application are to be recovered in whole or in part from the free assets of the company, that would mean a depletion in the funds which would be available to persons like the 2nd Respondent because it is likely that practical difficulties in tracing would mean that her claim would in effect become an unsecured claim. There is no reason why this class of clients, in addition to losing their securities, should suffer this further injustice.

19. There have been a number of authorities in which the courts have held that the costs of all representative respondents to an application by the liquidators over entitlement to property should be recovered from the property itself. Re Westdock Realisations referred to earlier was one. An earlier case in point is Re Exchange Securities Ltd (No.2) [1985] BCLC 392, 395g. The Court's inherent jurisdiction to make an order of costs such as this has been well-established in cases of administration of trust funds.

20. For the same reason I have given why the costs of the Respondents should not be recovered from the free assets of the company, I am of the view that the fees and expenses of the liquidators in the Title Application should also be recovered from the trust assets. No less injustice would be suffered by the company's unsecured creditors if they had to bear the liquidators' fees and expenses (the quantum of which would be subject to the Court's approval).

21. The jurisdiction of the court to make an order that the fees of the liquidators be paid out of the trust assets was considered in detail in In re Berkeley Applegate Ltd (No.2) [1989] 1 Ch 32. It was recognized that there was a general principle that where a person (in the position of the 1st Respondent) seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property, and to allow the liquidators to take their proper costs out of the property before handing it over to the successful litigants (50H, 51G-H). That type of order has since been followed in the Companies Court, e.g. in Re Telesure Ltd [1997] BCC 580.

22. Accordingly in the light of the circumstances and in the exercise of my discretion, I would order that the costs of the Respondents and the fees and expenses of the liquidators referable to the Title Application should be recovered from the trust assets.

23. The third issue is how that should be implemented. Mr Godfrey Lam for the liquidators suggests that the logistics and matters of detail can be worked out at a later stage. I would however agree with his suggestion that in principle, a fair method would be for all trust asset securities to bear the burden pari passu. Since the value of those trust asset securities fluctuate from time to time, it would I think be fair if their values were crystallised as at the date of CAPS' collapse (20 January 1998). With that principle in mind, I would leave it to the professional judgment of the liquidators to consider the most cost-efficient and "client-friendly" way of implementation, in the trust that the liquidators would consult the Court should they run into any difficulties that would require the Court's resolution.

24. Finally, I have been asked by the parties to consider sanctioning actual interim payment of counsel's fees and 50% of the solicitors' costs incurred in the Title Application, subject to an undertaking from the respective solicitors to effect reimbursement in the event that the costs are taxed down. I have been told the rough figure for counsel's fees and disbursements, and in light of the preparation that has gone into the submissions in the Title Application, I have no difficulty giving that sanction.

25. As for the costs that might have been incurred in considering the merits of any appeal, referred to in the 2nd Respondent's Supplemental Submissions, the appeal period has now expired without an appeal being lodged, and such costs would presumably be quite low. Subject to the quantum being subject to taxation, I also have no difficulty in giving a direction that in principle, the costs of instructing leading counsel to consider the Decision and any merits of an appeal therefrom should also be regarded as costs in the Title Application, as are the costs of the hearing on 17 December 1998 and the further written submissions on costs.