LEE SHUK YEE v. EDWIN KWOK WING YUN AND ANOTHER

CACV 114/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 114 OF 2003

(ON APPEAL FROM HCMP NO. 2507 OF 2000)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a decision and order of Deputy Judge Carlson dated 2 May 2003 whereby the judge dismissed the plaintiff's appeal from the order of the master, who had lifted a stay of execution of an allocatur dated 28 August 2001. At the conclusion of the hearing of this appeal this court reserved its judgment which we now give.

Background

2. The 1st and 2nd defendants in this action are the trustees in bankruptcy of the property of Lee Shuk Mei and Lee Sin Chung. As it happens, the person who is the trustee in respect of both bankruptcies is the same person, namely the solicitor who had previously acted for the bankrupts in other proceedings. It might be mentioned that initially the trustee in both instances had been the Official Receiver.

3. The plaintiff is the administratrix of the estate of her late father. The father had, altogether, 11 children. Amongst the other children were Lee Shuk Mei and Lee Sin Chung. The father died in 1990 and his wife had predeceased him. Five of the children considered that they should have the right to administer his estate. There were contested proceedings. The plaintiff was the plaintiff in those proceedings and amongst the four defendants were Lee Shuk Mei and Lee Sin Chung. For convenience those proceedings will be referred to below as the original proceedings. It suffices to say that the plaintiff was successful in obtaining judgment in that action and also a consequential order for costs in her favour. Those costs were taxed at $1,713,618.36 and in 1999 allocaturs were obtained which totalled that amount. Shortly prior to the taxation however, Lee Shuk Mei and Lee Sin Chung had been declared bankrupt. It would seem that the plaintiff was unaware of that at the time of the taxation.

4. Letters of administration were granted to the plaintiff on 28 July 1998. Apparently the major asset of the father's estate had been a property in Tuen Mun. On 17 May 1999 the plaintiff, in the course of administration of her father's estate, entered into an agreement for the sale and purchase of the property for the sum of $27 million and executed an assignment on the same day. The agreement was registered in the relevant Land Registry on 28 May 1999. The assignment was registered on 8 June 1999.

5. On 27 May 1999 the Official Receiver, who was then the trustee in bankruptcy of Lee Shuk Mei and Lee Sin Chung, registered the bankruptcy orders against the property. The plaintiff's solicitors complained to the Official Receiver about the registrations. On 21 December 1999, the Official Receiver replied that the object of registering the bankruptcy orders against the property had been to attempt to secure the proceeds of sale. The letter indicated that all rights to follow and trace the proceeds from the sale of the property were reserved. On the same day a letter of abandonment of claim against the property was executed by the Official Receiver. That letter of abandonment was registered on 29 December 1999. Meanwhile, on 28 December there were general meetings of creditors in respect of both Lee Shuk Mei and Lee Sin Chung and the solicitor who had previously acted for Lee Shuk Mei and Lee Sin Chung was appointed Trustee for the administration of both estates.

The present proceedings

6. It was against that background that the present proceedings were commenced by Originating Summons issued on 23 May 2000. The relief sought was a declaration that the registration of the bankruptcy orders against the property was null and void and a declaration that by the assignment the plaintiff did assign all the estate right and interest in the property to the purchaser free from the bankruptcy orders. These proceedings had a comparatively short history. They were discontinued because the plaintiff, having sold the property, had no locus standi. There was an order for costs in favour of the defendants. Those costs were eventually taxed at $144,342 and an allocatur was sealed. On 31 October 2001, the master granted a stay of the allocatur on the basis that the plaintiff had an order for costs in her favour in excess of $1.7 million.

7. The litigation between the parties does not end there. There were a number of matters which gave rise to cause for concern, to say the least, that the father's estate had not been properly administered. That, however, is not a matter which is directly relevant in these proceedings. On 7 June 2002 Chung J, in proceedings begun by the trustee in bankruptcy of the property of Lee Sin Chung, namely HCMP 3904 of 2001, ordered that the plaintiff should deliver an account of the administration of the estate to be verified by her by affidavit. As will be referred to below, in the face of an affirmation of the plaintiff, which was apparently unfiled, affirmed on 6 July 2002 in those proceedings and which was exhibited to an affirmation of the plaintiff's solicitors in these proceedings, it would be difficult to contend that the estate had been properly administered. There is an admission in that affirmation that there has been distribution of the proceeds to only six of the children of the deceased.

8. The upshot of all this has been that there was an application to lift the stay of execution of the allocatur. That came before the master on 26 August 2002. On that occasion, the master made an order giving the plaintiff leave to file an affirmation within 14 days. The apparent purpose of that order was to enable the plaintiff to give an account of how she had incurred costs on behalf of the estate in obtaining the Letters of Administration and to demonstrate that the costs which had been incurred by her in her personal capacity had been charged to and paid out of the estate. The plaintiff did not file an affidavit or affirmation herself. There was an affirmation, to which reference has already been made, by the solicitor which exhibited the unsatisfactory and apparently unfiled affirmation made by the plaintiff. In short the master was not satisfied and the stay of execution was lifted.

The appeal to the judge

9. The matter first came before the judge in November 2002 and a judgment was handed down in December. In that judgment, the judge held that the plaintiff had a right of set-off, to set-off the costs owed to the estate, namely the $1,713,618.36 in respect of which an allocatur had been obtained, against the amount of costs in the present proceedings. The judge said that he was satisfied that, as a matter of law, the estate, through the plaintiff as its administratrix, was entitled to set-off the order for costs obtained by the plaintiff in her personal capacity in the original proceedings for which she had the right to be reimbursed against the unsuccessful defendants in those proceedings and hence against their trustee in these proceedings. The judge, however, accepted the submission that that there was no evidence to support the claimed expenditure by the plaintiff on behalf of the estate which could give rise to the subrogation. Put simply, the plaintiff had not herself filed any evidence to show that costs, which should legitimately have been reimbursed from her father's estate, had in fact been reimbursed. This was a crucial matter since otherwise, the plaintiff would not be able to offset any costs prior to being appointed administratrix because they would have been costs incurred in her personal capacity and not as administratrix. The judge therefore adjourned the matter and gave the plaintiff a final opportunity to put her house in order.

10. At the adjourned hearing of the appeal on 2 May 2003, the judge summarised the evidence filed on behalf of the plaintiff. There were two firms of solicitors involved. The judge considered that the evidence in respect of the first firm was so scanty that it was of no weight at all: see paragraphs 9-11 of his judgment. The evidence in respect of the other firm appears to have been slightly better and the judge was disposed towards accepting it as evidence of some costs. Nevertheless, the judge considered that the evidence was deficient in relation to demonstrating how the relevant amounts had been claimed by the plaintiff and paid out of the estate. As such the plaintiff had failed to provide the evidence which the judge had considered at the previous hearing would have been provided without difficulty.

11. In the light of his criticism of the evidence filed, the judge dismissed the appeal. It should also be mentioned that at the adjourned hearing, Ms Irving, who appeared on behalf of the defendants, sought to reopen the issue of mutuality and argue the case again on the basis of a new authority In re A Debtor, ex parte The Peak Hill Goldfield, Limited [1909] 1 KB 430. The judge however refused to be drawn into such an argument because he had already decided the matter in his first judgment. In my view, he took the correct course. Having once decided the matter, it would have been inappropriate to allow that to be reviewed. All the judge could do was, as he did, to indicate that if the party was dissatisfied with the result it would have to appeal.

This appeal

12. On this appeal two issues became relevant. The first was as to whether the order for costs represented by the allocaturs in favour of the plaintiff in the original proceedings could be used to offset the order for costs obtained by the defendants in the present proceedings. In the first judgment in the court below the judge analysed the basis upon which it could be said that the plaintiff was owed costs and owed costs in her same capacity. As already indicated, whilst in concept he was prepared to hold that that was the case, he was only prepared to do so if sufficient evidence was forthcoming and in the event, it was not. The matter which Ms Irving sought to argue on the resumed hearing, 2 May 2003, related to whether there could be mutuality in respect of the various orders as to costs because the costs in the original proceedings were owed by Lee Shuk Mei and Lee Sin Chung in their personal capacities whereas the costs to which the defendants, i.e. the trustee, were entitled in the present proceedings were owed to him as trustee of the two bankrupt estates.

13. Under section 35 of the Bankruptcy Ordinance, Cap. 6, debts can only be set-off if there is mutuality. In my view, because of the requirement of mutuality, the plaintiff's claim to set-off the two sets of costs cannot be sustained. As explained in the Peak Hill Goldfield Limited case what must be considered is the identity of the party who is entitled to receive the debt when payable: see Cozens-Hardy MR at pages 434-5. As Fletcher-Moulton LJ put it at page 437:

"Moneys which under a bankruptcy became payable to the trustee by the petitioning creditor because they were payable to the debtor, come prima facie within the mutual credits clause, but not if they are moneys which, upon bankruptcy, become payable to the trustee in his right as trustee and not by virtue of their being payable to the debtor."

14. The point is also considered in SET-OFF by SR Derham 3rd Edition, para. 13-04:

"A right accruing to the trustee in his own right is a right founded upon the trustee's own title, rather than that of the bankrupt. An example of the latter is a right arising in favour of the estate after the bankruptcy, which is not derived from an obligation incurred by the party liable before the bankruptcy. Thus there may be an award of costs made in favour of the trustee in an action brought to recover a debt owing to the bankrupt's estate. The defendant's obligation to pay the costs only arises after the bankruptcy as a result of his failure to pay the debt to the trustee upon demand, and so it may not be brought in as a set-off against an indebtedness of the bankrupt."

Reference is made to the case Ex parte Young; Re Day & Sons (1879) 41 LT 40. The decision in that case clearly supports the proposition in the text.

15. In this case, the costs in the present proceedings are owed to the trustee of the two bankrupt estates. It is he who has incurred the costs. He may be entitled to recoup those costs out of the assets of the two estates, but unless and until he does so the bankrupt estates have no interest in the matter: the rights of the trustee will not have been subrogated to the bankrupts or their estates. On the other hand, the allocaturs obtained in the original proceedings were against Lee Shuk Mei and Lee Sin Chung. On the basis that the allocaturs are valid, they represent debts which may be proved in the bankruptcies but not against the trustees. There is thus, in my view, no mutuality between on the one hand the allocaturs in favour of the plaintiff and on the other hand, the allocaturs obtained by the trustee of the two bankrupt estates, i.e. the defendants.

Whether there has been payment by the father's estate

16. The judge came to the clear conclusion that the plaintiff's evidence fell far short of anything that was acceptable to prove that the plaintiff had been legitimately reimbursed from the father's estate. Thus he was not satisfied that the amount owing on the allocaturs in the plaintiff's favour had been subrogated to the father's estate. For the reasons given by the judge below, I would not interfere with that decision. I would add, nevertheless, that this failure on the part of the plaintiff is, perhaps, symptomatic of a more serious failure on her part. As already noted on 7 June 2002, in the HCMP 3904 of 2001 proceedings, Chung J ordered that the plaintiff should file an account of the administration of the estate of her father within 14 days. There was an appeal to the Court of Appeal which was disposed of by consent: the time for rendering the account of the administration was ordered to be extended until 5 pm on 4 July 2002.

17. From anything that can be determined from the court file in the HCMP 3904 of 2001proceedings, no account has been filed. The only relevant thing which appears to have occurred is that there has been a change of solicitors. In those circumstances, the only attempt at providing an account appears to be in the affirmation the plaintiff to which reference has already been made, namely the plaintiff's unfiled affirmation dated 6 July 2002 exhibited as "AWLW-7" to the third affirmation of Au Wing Lun William filed in these proceedings on 9 September 2002. Paragraph 17 of the plaintiff's unfiled affirmation discloses distribution of the net proceeds arising from the administration to only 6 beneficiaries leaving out the other 5 children. Seemingly, the explanation for this is given in paragraph 17 of the affirmation where it is said:

"The Fraudulent Siblings (a reference to at least Lee Shuk Mei and Lee Sin Chung and possibly the other 3 of the 5 children who did not receive a share of the estate) are not entitled to claim a share in the Estate as they have conspired to defraud the Estate and absconded with monies belonging to the Estate and owed tax legal costs to the Estate in the sum of HK $1.7 million. I have therefore not distributed to them any share in the Estate."

18. The reference to the siblings been fraudulent is taken to be a reference back to an allegation made in paragraph 10 of the same affirmation where it is alleged that Lee Shuk Ping and Lee Sin Chung were directors of the company who have failed to provide the plaintiff with relevant information. It is then said in the following paragraph that Lee Shuk Ping and Lee Sin Chung had conspired with Lee Suk Ting, Lee Shuk Mei and Lee Suk Chai and absconded with rental income, interest and proceeds of sale amounting to "about HK $15 million".

19. It need hardly be said, that this is not a way in which accounts in relation to the administration of an estate should be presented. That this should be done in an affirmation exhibited to an affirmation of a solicitor, whose firm, according to the statement in paragraph 17, had charged legal costs in the sum of HK$7,630,000 is, on the face of it incomprehensible. The matter is further unsatisfactory as regards the expenses since these are clearly listed on a rough and ready basis and not in the form one would expect in relation to administration accounts.

20. At the conclusion of the judgment given in December 2002, the judge below raised the possibility that the parties might compromise the appeal in front of him in order to avoid further meaningless expenditure of legal costs. As it proved, that suggestion fell on deaf ears. I, for my part, would only wish to echo the judge's sentiments that there would appear to have been meaningless expenditure in legal costs. That that expenditure should have amounted already to a third and possibly a half of the value of the estate is, in itself, regrettable. The inability to produce a comprehensible set of accounts after such expenditure would, on the face of the matter, go far beyond being regrettable and would call for inquiry. Clearly, the sooner the matter is rectified the better for all concerned.

Conclusion

21. I would therefore dismiss this appeal and make an order nisi of costs in favour of the defendants.

Hon Le Pichon JA:

22. I agree.