MEI YU LAU v. SHIU KI LAU and Others

HCA1063/95

IN THE HIGH COURT OF

THE HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1063 OF 1995

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D E C I S I O N

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1. Four summonses have come on for hearing. The first two are in a sense related and the third and fourth would depend on the court's decision on the first two summonses. They are :

(i) the summons of D2 to D5 for an order that the Plaintiff's claim be stayed unless the Official Receiver in his capacity as trustee in bankruptcy of D1 within seven days or such other period as the court should deem fit adopts those proceedings by applying to be substituted as Plaintiff;

(ii) the Plaintiff's summons to re-re-amend the writ of summons by striking out the name of D1 and substituting therefor the name of the Official Receiver as trustee of the estate of D1, and in the alternative that the Official Receiver be joined as D6;

(iii) the Plaintiff's summons that certain issues be tried as between the Plaintiff and D5 and for the service of interrogatories on D5 as well as discovery and production of documents by her; and

(iv) the Plaintiff's summons for directions as to whether the Plaintiff's solicitors can still act for the Plaintiff in this action when they had acted for D3 in 1995.

Stay of proceedings

2. D2 to D5 contend that the Plaintiff no longer has the necessary locus standi to continue the proceedings. The history of the present proceedings is set out in the judgment of the Court of Appeal handed down on 7 February 1996. A shorter summary appears in reasons I handed down on 9 July 1998 when I refused D2's application to vary the mareva injunction. I will not repeat the history of these proceedings here but reference should be made to the judgment/reasons referred to for a proper understanding of the present application.

3. D2 to D5 accept that they were properly joined under Order 15, rule 6 although the Plaintiff has no cause of action against them. They were necessary Defendants against whom the Plaintiff sought a mareva injunction ancillary to her claim against D1. SCF Finance Co. v. Masri [1985] 1 WLR 876.

4. The submission is that after obtaining judgment against D1, the Plaintiff had two choices open to her. She could have proceeded to execute on her judgment on the various properties in the hands of D2 to D5 and this would have created a lis between her and those Defendants. This she did not do. Instead, she elected to bankrupt D1. It was submitted that as a consequence, as from the date of the receiving order made on 12 June 1996, all the bankrupt's asset vested in his trustee in bankruptcy who is the only person who has the locus to gather in the estate and seek declarations relating to assets alleged to be held on trust for D1.

5. It was thus the submission of Mr Chain, counsel for D2 to D5, is that the Plaintiff by making D1 bankrupt ceased to have any claim against the other Defendants. He relied upon the difference between mareva jurisdiction which is in aid of substantive relief as distinct from a claim for substantive relief. Mercedes Benz v. Leiduck [1996] 1 AC 284. Mr Chain's main submission is that the right of execution against a nominee so as to create a lis was lost upon the taking of bankruptcy proceedings. A creditor does not have an independent claim for a declaration against a debtor's nominee, his only claim is based on execution.

6. Finally, it was also contended that if the Plaintiff is allowed to continue the action, it would render the practice of the Official Receiver in assigning causes of action to interested parties a farce. Moreover, the Official Receiver is not bound by any declaration that the court might make unless he is a party to the proceedings. Mr Chain submitted that once that is recognized, it reinforces the point that the Plaintiff has no locus. She is but a creditor, her right being to prove in the bankruptcy of D1 and the Official Receiver is the only right and necessary party because D2 to D5 may well have rights against D1 in the event that the property is held by them as nominees for D1 and these matters can only be settled between the Official Receiver and the Defendants, but not the Plaintiff.

The nature of the action

7. The Plaintiff seeks declarations that certain assets of D2 to D5 in fact belong to D1. Mareva injunctions are in place restraining D2 to D5 from dealing or otherwise disposing of those assets. It is accepted that D2 to D5 were properly joined as Defendants when the Plaintiff sought mareva relief in aid of its substantive claim against D1. The crucial question is whether the effect of D1's bankruptcy made any difference.

8. Miss Lam, counsel for the Plaintiff, submitted that the relief sought against D2 to D5 has the effect merely of locating and identifying assets of the bankrupt : the Plaintiff does not seek to enforce the judgment debt nor does she in any way, by continuing these proceedings, steal a march on the other creditors. Miss Lam relies on Mercantile Group (Europe) A.G. v. Aiyela [1994] QB 366.

9. In that case, judgment was entered against D1, D2 and D3 (D2 and D3 being companies controlled by D1). About a year and a half later, a mareva injunction was made against D1, D2 and D3 and an order was made against D1 and his wife D4 for discovery of their assets and the assets of D2 and D3. D4 promptly took out a summons to challenge the court's jurisdiction to make the discovery order against her. Four months later, D1 was adjudicated bankrupt. Shortly thereafter, a further worldwide mareva injunction was made against D1, D2 and D3 and a mareva injunction was made against D1 and his wife D4 restraining them from dealing with D4's account at the Midland Bank. Four days later, D4 issued a summons challenging the court's jurisdiction in granting the mareva against her. Both the discovery order and the injunction were upheld.

10. Mercantile Group is reported at first instance in [1993] FSR 745. Hobhouse J held (at 757-8) that :

" Turning now to the position as it existed taking into account the making of the bankruptcy order, the question is whether it disabled the court from granting a Mareva injunction, as opposed to making a garnishee order or an order under section 423 at the instance of the plaintiffs. The submission of Mrs. Aiyela amounts to saying that, even where the court is aware that assets of the bankrupt may be in the process of being dissipated or otherwise lost by the conduct of a third party who for the time being has the control of those assets, the court is powerless at the instance of a creditor to grant an injunction to protect the bankrupt estate.....

As regards Re Smith, the court should not grant an injunction to a plaintiff if he is thereby directly or indirectly going to obtain a preferential position as against other creditors. But that is not the present case. The Mareva relief is purely preservative. It creates no preferential rights over the assets of the defendant for the person who obtains it... Such a jurisdiction was recognised also by Harman J. in Re Oriental Credit Limited [1988] 1 Ch.204 where he held that the court had the power under section 37 to grant an injunction to prevent a director of a company from leaving the jurisdiction when he was required to attend for his examination under section 561 of the Companies Act... Re Claybridge Shipping Co, 9 March 1981, Court of Appeal, provides an example of a case where an earlier Mareva was specifically not discharged despite the later intervention of a winding up order against the defendant company.

...The policy of the Act is to preserve the bankrupt's estate and to prevent steps being taken which may deprive creditors of the distribution to which they are entitled. Transactions between husband and wife are notoriously one of the situations in which an insolvent estate may be wrongly diminished. Section 366 expressly recognises this when it includes the bankrupt's spouse among those who may be required on the application of the Official Receiver or the trustee of the bankrupt's estate to appear for the purposes of giving an account of their dealings with the bankrupt and producing documents. There is nothing in the Act which shows that the court is not to have the jurisdiction which it otherwise would have had to grant an injunction against a third party in support of a judgment which had prior to the bankruptcy properly been entered against the bankrupt and Mareva injunctions which were already in place against the bankrupt...."

11. It went on appeal and, as is apparent from the judgment of Hoffmann LJ at 372F-G, it was not suggested that the bankruptcy affected the court's jurisdiction to grant discovery or mareva relief against D1's wife. In the Court of Appeal, counsel for D4 submitted that a mareva injunction could only be made against a person against whom the Plaintiff had a substantive cause of action. This was rejected by the Court of Appeal, Hoffmann LJ stating at 375G-H :

"...But in Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd. [1993] A.C.334, 362, Lord Mustill said:

'the doctrine of the Siskina, put at its highest, is that the right to an interlocutory injunction cannot exist in isolation, but is always incidental to and dependant on the enforcement of a substantive right, which usually although not invariably takes the shape of a cause of action.'

In this case, the plaintiff's substantive right is a judgment debt owed by Mr. Aiyela. The Mareva injunction against Mrs. Aiyela is incidental to and in aid of the enforcement of that right." (emphasis added)

Steyn LJ agreed, stating (at 376F-377A) :

"In my view Hobhouse J. analysed the issues correctly, and convincingly demonstrated that the court had jurisdiction to make both the July disclosure order and the December Mareva order against Mrs. Aiyela. That is so despite the fact that there was no surviving cause of action against Mrs. Aiyela. Both orders were ancillary to the plaintiff's judgment against Mr. Aiyela and the Mareva which had been granted against him in July. The disclosure order was within the jurisdiction of the court because there was evidence tending to show that substantial assets in the name of Mrs. Aiyela were in truth assets belonging to Mr. Aiyela. She was therefore 'mixed up' in her husband's attempts to make himself judgment proof.... The relevant part of the December order was a Mareva injunction over sums in Mrs. Aiyela's account at the Midland Bank, Tolworth. It was accepted by Mrs Aiyela for the purposes of the hearing before Hobhouse J. that there was an arguable case that Mrs. Aiyela held these sums upon trust for her husband. In these circumstances there was jurisdiction to make a direct order against Mrs. Aiyela. In upholding these orders we are not departing from any relevant authority, which spells out the scope of the court's jurisdiction. It is also just and convenient that the court should have jurisdiction to make such orders."

Counsel for the appellant in that the case was unable to state any substantive arguments or policy reasons militating against a jurisdiction to make those orders.

12. Sir Thomas Bingham MR agreed with Hoffmann and Steyn L JJ. He noted (at 377E-F) that :

" Both principle and authority persuade me that the judges who made these orders did have jurisdiction to make them. I am very pleased to reach that conclusion, for if jurisdiction did not exist the armoury of powers available to the court to ensure the effective enforcement of its orders would in my view be seriously deficient. That is in itself a ground for inferring the likely existence of such powers, since it would be surprising if the court lacked power to control wilful evasion of its orders by a judgment debtor acting through even innocent third parties. The jurisdiction is of course one to be exercised with caution, restraint and appropriate respect for the legitimate interests of third parties. But that the jurisdiction exists, both in relation to the disclosure order and the Mareva injunction, I do not doubt."

D4's petition for leave to appeal to the House of Lords was dismissed.

13. Mercantile Group is therefore clear authority that notwithstanding the bankruptcy of a principal defendant, the court has jurisdiction to make a discovery order or grant a mareva relief against defendants against whom the plaintiff has no substantive claim. If there is jurisdiction to grant mareva relief, it must follow that the court will have the necessary jurisdiction to have the issue resolved between the plaintiff and the other defendants as to whether or not they hold assets that belonged to the principal defendant. Mr Chain's submissions are therefore contrary to or inconsistent with the decision in Mercantile Group.

Declaratory relief

14. A major plank of Mr Chain's submissions is that, in any event, this is not a case where the court would grant any declaratory relief. In essence, his submission is that the Plaintiff is a 'stranger' to the transaction, such that the court is merely being asked to express its opinion in order to help her in securing a larger dividend.

15. Order 15, rule 16 of the Rules of the High Court provides that :

" No action or other proceeding shall be open to objection on the ground that a merely declaratory judgment or order is sought thereby, and the Court may make binding declarations of right whether or not any consequential relief is or could be claimed."

In Terrian Ltd. and Others v. Oriental Peer Co. Ltd. [1998] 1 HKLR 246, the Court of Appeal held at 253G-H that :

"...when considering what limitations, if any, ought to be imposed on the exercise of the court's jurisdiction under the rule in accordance with 'the accepted principles upon which the court exercises its jurisdiction' we derive considerable assistance from the following dictum of Pickford, L.J. in the Guaranty Trust Co. case at p.562 from which Bankes, L.J. expressed no dissent:

'I think therefore that the effect of the rule is to give a general power to make a declaration whether there be a cause of action or not, and at the instance of any party who is interested in the subject matter of the declaration. It does not extend to enable any stranger to the transaction to go and ask the court to express its opinion in order to help him in other transactions.' "

The issue between the parties turns on whether the Plaintiff is 'interested' in the subject-matter of the declaration.

16. The subject-matter of the action is to ascertain whether or not D1 is the beneficial owner of certain assets. If he is held to be the owner, that would augment the estate in which the Plaintiff is virtually the only creditor and therefore the amount of dividends the Plaintiff can expect to receive. I have little hesitation in concluding that the Plaintiff is an 'interested' party.

17. To put the matter in perspective, it is to be noted that to date, some two years since the receiving order, the Official Receiver is only aware of the Plaintiff's claim as judgment creditor of some HK$30 million and a claim by the former US attorneys for D1 in the sum of US$34,000. No other creditor has put in a claim.

18. Mr Tam for the Official Receiver invited the court's attention to the case of Meadows Indemnity Company Ltd. v. The Insurance Corporation of Island Plc. and International Commercial Bank Plc. [1989] 2 Ll. LR 298. There Neill LJ held (at 304) that despite the wide language of RSC Order 15, rule 16, the jurisdiction of the court to grant a declaration is limited (in the words of Lord Diplock in Gouriet v. U.P.W. [1978] AC 435 at 501G-H) to :

".... declaring contested legal rights, subsisting or future, of the parties represented in the litigation before it and not those of anyone else."

It was contended by Mr Chain that in the light of Meadows, the Plaintiff clearly does not have a sufficient interest.

19. In my judgment, Meadows is distinguishable. As to the dictum of Lord Diplock adopted by Neill LJ, it was preceded by the following passage (at 501D-E) :

" The only kinds of rights with which courts of justice are concerned are legal rights; and a court of civil jurisdiction is concerned with legal rights only when the aid of the court is invoked by one party claiming a right against another party, to protect or enforce the right or to provide a remedy against that other party for infringement of it, or is invoked by either party to settle a dispute between them as to the existence or nature of the right claimed." (emphasis supplied)

Plainly, the declarations sought would protect the Plaintiff's right against D1 which is the judgment debt. Moreover, the dictum of Neill LJ cited above has to be read in the light of the facts of that case. What the reinsured tried to do was to obtain a declaration as to the insurer's liability under the original insurance contract. There was no issue between Meadows and the original insured (ICB). Here there is an issue between the Plaintiff and D2 to D5 by virtue of the mareva injunctions granted.

20. Even where Meadows applies, declaratory relief is still available in exceptional circumstances : see the annotation at 15/16/1 of the 1998 Supreme Court Rules. Were it necessary to do so, I have no hesitation in holding that the present case is within the 'exceptional circumstances' category. The Meadows decision does not impinge on a case such as the present : if it does, then Meadows ought not to be followed. In my judgment, the Plaintiff does have a sufficient interest for the purposes of obtaining declaratory relief.

Assignment

21. Mr Chain also submitted that it is open to the Official Receiver to assign the claim to the Plaintiff. He referred to Stein v. Blake [1995] BCC 543. But an assignment goes well beyond the scope of what is sought by the present proceedings i.e. to establish whether certain assets belong to D1. The Plaintiff is not seeking to execute on or enforce her judgment. The fact that an assignment is within the scope of the Official Receiver's powers does not mean that it is the only way the Plaintiff can have locus to continue the action.

Conclusion

22. In the present case, the Official Receiver has neither taken out a declaration suit himself nor applied to stay the creditors' action, nor has he asserted a title to the subject-matter in the declaration. It follows therefore that there is no impediment to the Plaintiff having the issue as to whether D2 to D5 are holding assets that belong to D1 beneficially to be determined.

23. Accordingly, the summons of D2 to D5 to stay the action is dismissed.

Joinder of the Official Receiver

24. On the Plaintiff's summons to join the Official Receiver either in substitution for D1 or as D6, I will make an order that the Official Receiver be joined as D6 so that he will be bound by the outcome of the proceedings between the Plaintiff and D2 to D5.

Plaintiff's summons against D5

25. D5 does not object to the trial of issues relating to the US$219,000 but objects to paragraph 1(2) of the summons as well as paragraphs 3, 4 and 5 of Schedule 1 relating to discovery.

26. Dealing first with discovery, the additional discovery sought relates to payments by D1 to D5 as well as payments from D5 to D1. The discovery does not relate to D5's own assets generally.

27. Having regard to the decision in Mercantile Group, the discovery sought, limited as it is to transactions involving D1, is unobjectionable. Since the scope of the interrogatories and discovery sought is limited, I can see no valid objection on the part of D5 either to the interrogatories or the discovery sought.

28. As to the trial of the issues, the issues set out in para.1(2) of the Plaintiff's summons should also be tried and I so order.

Whether the Plaintiff's present solicitors should be allowed to continue to act

29. On 4 June 1998, the present solicitors for D2 to D5 sent a letter to the Plaintiff's solicitors Y.C. Lee & Pang to the effect that they had once acted for D3 in 1995 in preparing her defence and requesting that they cease to act for the Plaintiff because of the obvious conflict of interest.

30. Mr Lam Yau Yee who is a consultant of Y.C. Lee, Pang & Kwok was assigned to act for the Plaintiff by the Director of Legal Aid on 18 June 1997. At the time he was a partner at his former firm Chung & Partners. He joined his present firm, Y.C. Lee & Pang, as a consultant on 1 December 1997. Mr Lam has filed an affirmation to the effect that since joining his present firm, this action has been handled by him solely and that he has no confidential knowledge about D3's case from other solicitors in that firm. Mr Lam has filed a further affirmation to state that he has not reviewed the file of D3 with his present firm and he has been informed by Mr Pang that the file has been stored at the firm's warehouse since 1995 after they ceased to act for D3 in September 1995.

31. Mr Dickson Pang of Y.C. Lee & Pang who acted for D3 and filed the defence on her behalf in April 1995 and Mr Lam are willing to make a statutory declaration confirming that Mr Pang has not communicated or passed any confidential knowledge about D3's case to Mr Lam. Mr Pang is also willing to give an undertaking not to disclose such confidential knowledge to Mr Lam. But these offers have been rejected.

32. D3's objections are that in the course of acting for D3, Y.C. Lee & Pang had access to the file of Chui & Lau who had previously acted for D3 in an application to set aside the Plaintiff's application for discovery relating to Account F. In addition, Y.C. Lee & Pang has also had access to various conveyancing files of W.K. To & Co. in relation to three of the disputed properties.

33. The evidence is that Y.C. Lee & Pang filed a defence for D3 on 13 April 1995. In early June 1995, they borrowed the file of Chui & Lau for a few days relating to Account F. On or about 23 May 1995, Y.C. Lee & Pang obtained W.K. To & Co.'s conveyancing files relating to three properties for perusal which were returned on 8 June 1995.

34. After the filing of D3's defence, D3 changed solicitors to J. Chan, Yip & So & Partners and all substantive proceedings relating to D3 and all affirmations filed by her have been prepared by that firm as well as her current firm Susan Liang & Co. Further, D3's defence was amended by Susan Liang & Co. on 4 December 1997 before the Plaintiff's case was actually transferred to Mr Lam's present firm.

35. The objection is apparently not because there is any actual conflict : the objection is to the perception of conflict by a reasonable bystander.

36. In the present case, I can see no good reason for not allowing Y.C. Lee, Pang & Kwok, to continue to act as solicitors for the Plaintiff. They ceased to act as solicitors for D3 on 29 September 1995. The defence that they prepared for D3 has since been amended. There is no reason to doubt Mr Lam's evidence that until receipt of Susan Liang's letter of 4 June 1998, he had no idea that his present firm, which he joined as consultant only at the end of last year, had acted for D3 back in mid-1995. The relevant files had been in storage in the firm's warehouse since September 1995, some 15 months prior to his becoming consultant and he has not had any discussion relating to this matter with Mr Dickson Pang who was D3's solicitor in 1995. In these circumstances, it will be a total waste of public funds in the circumstances of this case to direct that another solicitor be assigned by the Director of Legal Aid to handle the Plaintiff's claim. Any reasonable bystander, apprised of the above facts, would not conclude that those facts give rise to any perception of a conflict of interest.

37. I will therefore direct that Y.C. Lee, Pang & Kwok do continue to act in this action for the Plaintiff subject to :

(i) the filing by Mr Lam and Mr Pang of a statutory declaration referred to in paragraph 6 of the 3rd affirmation of Mr Lam; and

(ii) an undertaking from Mr Pang not to disclose his confidential knowledge about D3's case to Mr Lam.

Costs

38. I make an order nisi that the Plaintiff is entitled to the costs of the first three summonses, such costs to be taxed in accordance with the Legal Aid Regulations and that there be no order as to costs on the summons relating to whether Y.C. Lee & Pang should continue to act as solicitors for the Plaintiff in this action.