THE COUNCIL OF THE LAW SOCIETY OF HONG KONG v. THE OFFICIAL RECEIVER AND ANOTHER

HCMP 889/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.889 OF 2005

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J U D G M E N T

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Introduction

1. By resolution dated 2 July 2002 (“the Resolution”), the Council of the Law Society resolved to intervene into the practice of Messrs Tommy Lai & Co (“the Firm”).  By virtue of the Resolution and pursuant to section 2 of Schedule 2 of the Legal Practitioners Ordinance, Cap.159 (“LPO”), the moneys held in the clients’ accounts and office  accounts of the Firm became vested in the Council, which in turn hold the same on trust for the persons beneficially entitled to them.  The Council has however encountered various problems in the administration of the trust of the moneys vested in them.  Most of them have been resolved.  Those which have not prompted the Council to apply, as trustee, under section 6 of Schedule 2 of LPO and Order 85 rule 2 of the Rules of the High Court for the court’s determination and directions by originating summons dated 29 April 2006.

2. The substantive hearing of the originating summons took place on 29 November 2006.  The defendants were all absent.  After hearing Ms Cheng, solicitors appearing for the Council, I adjourned the matter for her to submit a draft order for my approval, which she did on the following day.  Having considered the draft, I will an order in terms.

3. I now set out my determination and directions (where applicable) on the questions raised in the originating summons below.

Background circumstances

4. The background circumstances leading to this application may be summarised as follows.

5. The intervention agent appointed by the Council to implement the Resolution has encountered substantial difficulties in the investigation of the accounts of the Firm.  The hard disc of the computer at the account section of the office premises of the Firm has gone missing.  The agent has been unable to find any accounting records showing the amounts due to/from each client of the Firm.  He only found some of the payment vouchers, receipts, bank statements, cheque books and cheque stubs at the office premises of the Firm.  He had to rely on those incomplete bank statements and to make enquiries with the relevant banks to find the amounts standing in the Firm’s accounts.

6. On 20 September 2003, the Council opened 3 intervention bank accounts with The Bank of East Asia Limited (“the Intervention Accounts”).  The Council had also closed the original clients’ accounts and office accounts of the Firm and caused the moneys kept in those accounts to be transferred to the Intervention Accounts.  Difficulty arose with the clients’ accounts and office accounts maintained with The Hong Kong and Shanghai Banking Corporation Limited (“HSBC”) and Standard Chartered Bank (“Standard Chartered”).  HSBC and Standard Chartered held up releasing the relevant credit balances to the Council because they had received requests from the 1^st defendant for closure of accounts of the Firm and remittance of the credit balances in those accounts to the 1^st defendant’s office.  The balances held up by HSBC and Standard Chartered represented a substantial portion of the Firm’s moneys.  As at 29 April 2005, the balances were about HK$337,873.82 in the clients’ accounts, and about HK$36,681.41 in the office accounts.  Such balances have since remained unchanged to date.

7. This brings me to the questions set out in the originating summons.  And I will deal with them in the order as set out in Ms Cheung’s submissions.

Question 1

8. The 1^st question is, in substance, whether or not HSBC and Standard Chartered should close all the clients’ accounts and office accounts and release the moneys with interest to the Council to be held in the Intervention Accounts.

9. I accept Ms Cheng’s submission that pursuant to Section 26A and Schedule 2 of LPO and the Resolution, the moneys held in those clients’ accounts and office accounts should be vested in the Council.  HSBC and Standard Chartered should close them and release the moneys with interest to the Council to be held in the Intervention Accounts.

Question 2

10. The 2^nd question is whether or not, by reason of the misappropriation of clients’ moneys of the Firm to Mr Lai Kwok Ming personally through the Firm’s office accounts, the moneys in all office accounts of the Firm, in particular those under the office accounts with HSBC and Standard Chartered and those deposited and/or to be deposited with the Intervention Office Account, together with any interest accrued thereon, shall be deemed to be and the Council shall be entitled to apply the same as clients’ moneys of the Firm, and if so, whether or not the 1^st  and 2^nd Defendants shall have no claim over such moneys.

11. On the evidence before me, no less than HK$1.125 million had been misappropriated from one of the Firm’s clients’ accounts with HSBC to Mr Lai Kwok Mai personally.  The intervention agent had made enquiry with Mr Lai, who had been made bankrupt on 13 August 2003, about the misappropriation.  But Mr Lai has made no response to date.

12. In the circumstances, I accept that moneys in the Firm’s office accounts had been heavily mixed up with the clients’ money and accordingly rule that the Council is entitled to apply the same as clients’ moneys of the Firm and that the 1^st and 2^nd defendants shall have no claim over the same.

Question 3

13. The third question, relating to the matter of verification of claims, is whether or not the Claims Investigation Report by the intervention agent shall be deemed to be a verification of the claims and be adopted and approved, such that further verification can be dispensed with.

14. The intervention agent has received 42 claims amounting to HK$8,560,120.00, which well exceeds the amount available for distribution.  In the circumstances, the Council considered that it would not be justifiable to instruct any professional accountant to verify the claims.  The intervention agent was therefore instructed to make a preliminary assessment of the 42 claims.  The agent took the view that because of the appalling state of the Firm’s accounts, it would be impractical for the claims to be independently verified against the accounting records of the Firm.  Based on the evidence produced by the claimants, who had the burden to prove their claim, and after cross-checking the same against what may remain available from the records of the Firm, the agent formed his assessment as shown in the Claims Investigation Report.  In sum, out of the 42 claims, 6 of them are admissible.

15. I accept Ms Cheng’s submission and will answer the 3^rd question in the affirmative.

Question 4

16. The 4^th question is on counsel’s fees.  It is couched in these terms : whether or not counsel claiming for outstanding professional fees in respect of services rendered for clients of the Firm (“lay clients”) are not qualified as beneficiaries entitled to a share upon distribution of the moneys of the Firm, notwithstanding that moneys had been deposited by lay clients as costs on account and notwithstanding that there is evidence showing the moneys had been deposited by lay clients for the purpose of putting the Firm in funds to settle such professional fees of counsel.

17. It is trite that counsel’s fees are honorarium and not debts recoverable in law.  So normally counsel is not even a creditor, let alone a beneficiary of the trust money in the client’s accounts.  Ms Cheng submitted that some may argue that in respect of moneys paid by lay client on account of counsel’s fees, these are earmarked for a specified purpose and result in a trust in favour of the counsel for whose purpose the money were paid.  But the position in law is that the payer of the money retains beneficial interest in the moneys throughout.  No beneficial interest is created in favour of the person for whose purpose was intended when the money was paid to the trustee: see Twinsectra Ltd v Yardley [2002] 2 WLR 802, at p.830 F-H.  I agree.

18. I will therefore rule that counsel claiming for outstanding professional fees in respect of services rendered for clients of the Firm are not qualified as beneficiaries entitled to a share upon distribution of the moneys of the Firm.

Question 5

19. The 5^th question is whether or not the moneys in and/or to be deposited into the Intervention Accounts should be paid to the Council for satisfaction of the costs of the Council of and incidental to this application in priority to any of the claims or to any of the beneficiaries, and accordingly no distribution shall be made out of those moneys to any of the claims received and no claimants or beneficiaries shall have any claim whatsoever against the Council in relation to the same.

20. In the ordinary case of an application by trustee for directions, costs of all parties as between solicitor and client are normally ordered to be borne by the trust estate.  But here the money in the estate is not sufficient to meet the costs, which may well exceed HK$500,000.00.  Ms Cheng very fairly agreed with my observation that the moneys should be distributed to the beneficiaries first.  And I so rule.

Question 6

21. The 6^th question is the method of distribution of the moneys to the beneficiaries.  I think the fairest way of distribution is the parri passu method, that is, to distribute the moneys rateably in accordance with the size of the original contribution.  Ms Cheng also agreed.

Question 7

22. The final question is whether or not the Council is authorized to make distribution of the said money without setting aside any part thereof to meet future claims (if any).  In theory, there is always the possibility that some claimants may come up in the future to assert a claim after distribution has been completed.  But I think that possibility is extremely remote in the present case.  Ample notice had already been given to the public for lodging claims with the Council since 2002.  And 42 claims had been lodged accordingly.  It is highly unlikely that any claims will be made in the future.  Accordingly, I will direct that the Council may proceed to effect distribution without retaining any part of the funds to meet future claims.

Costs

23. Finally, I will reserve the costs of this application, which can be conveniently dealt with at the costs application adjourned under my order made on 30 May 2006.