XCHRX YIP KU v. TOMMY LAI & CO. (A FIRM)

HCSD25/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

STATUTORY DEMAND NO.25 OF 1999

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J U D G M E N T

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1. By an application dated 11 May 1999, Yip Ku ("Yip") applied to set aside the Statutory Demand dated 21 April 1999 of Tommy Lai & Co., a firm of solicitor, the respondent herein. The Statutory Demand of Tommy Lai & Co. ("the Firm") was in respect of the demand for fees alleged to be owing by Yip to the Firm arising out of the Firm acting for Yip in relation to matrimonial dispute and proceedings between Yip and his former wife ("Mrs Yip") in which Yip was seeking substantial financial payment from Mrs Yip by way of ancillary relief. The total sum claimed by the Firm against Yip under the Statutory Demand amounted to $5,523,887 and all but some $180,000 was in respect of fees of various junior and senior barristers who were instructed by the Firm to act for Yip in the matrimonial proceedings.

2. From 1996 onwards, the Firm represented Yip in the heavy matrimonial litigation between Yip and Mrs Yip. The matrimonial proceedings eventually led to a settlement between Yip and Mrs Yip in March 1999 ("Settlement"). When no money was paid by Yip to the Firm after the Settlement, the Statutory Demand was served on Yip and that was about one month after the Settlement. Yip's defence to the Statutory Demand is that there was an agreement between Yip and Mr Tommy Lai ("Lai") of the Firm whereby it was agreed that in lieu of the Firm seeking payment of fees from Yip, the Firm would be paid 30% of the proceeds of money obtained by Yip from Mrs Yip in the matrimonial proceedings ("30% Agreement"). The alleged 30% Agreement was an oral agreement and the existence of such 30% Agreement was hotly denied by Lai.

3. At the hearing it was admitted and agreed by Lai who appeared in person for the respondent Firm that if there was such a 30% Agreement, it would be an illegal agreement and that therefore the Statutory Demand must be set aside. Yip and Lai both filed several affirmations and gave oral evidence at the hearing. The central issue is the existence of the 30% Agreement.

4. The governing principle for the court in relation to setting aside of a statutory demand is well known. Rule 48(5) of the Bankruptcy Rules (Cap.6) provides :-

"(5) The court may grant the application if

(a) ......

(b) the debt is disputed on grounds which appear to the court to be substantial;

(c) .......

(d) The court is satisfied, on other grounds, that the demand ought to be set aside."

5. The court must be satisfied that on the evidence before the court that the alleged debtor applicant has a bona fide dispute on substantial grounds (see Re ICS Computer Distribution Ltd [1996] 3 HKC 440) or there really is substance in the dispute which is raised (see Claybridge Shipping Co. Step Ahead [1997] 1 BCLC 572) or that the evidence of the disputed debt by the alleged debtor is not "tenuous" as described by Le Pichon J (as she then was) in Re Leung Hoi [2000] 1 HKC 276. Halsbury's Laws of England, Vol. 3(2) at note 6 on page 89 stated "the court will normally set aside the statutory demand if, in its opinion, on the evidence there is a genuine triable issue". Grier & Floyd on Personal Insolvency 3rd edition, described the practice at page 7 as "Provided the evidence given by the debtor is not obviously spurious, the bankruptcy court is not the proper venue for adjudicating disputed debts. The court in such a case would normally set aside the statutory demand and oblige the creditor to pursue its claim through the action in the High Court .....".

6. While Yip said there was such a 30% Agreement made in late June 1998, Lai said there was no such illegal agreement and pointed to various documents or conduct tending to show the impossibility or unlikelihood of the existence of such a 30% Agreement.

Circumstances leading to the alleged 30% Agreement

7. Lai's professional career as solicitor was by normal standards somewhat unusual. Lai was a litigation clerk for many years (he worked for a number of solicitors firms in Hong Kong) before he went to study law in the United Kingdom in the late ninety eighties. After articles, Lai obtained his full professional qualification as solicitor in Hong Kong in October 1992. He moved in and out of a few solicitors firms from 1992 to 1994 and in late 1994 he opened his own firm in Shatin as sole proprietor. His main work was litigation although he apparently also did some conveyancing work. It was shortly after Lai started his own practice that he met Yip and then took on Yip as client who had encountered serious matrimonial problems. In August 1995, Lai on behalf of Yip asked for Divorce (for the first time). The first Petition was withdrawn followed by the second Petition for Divorce in 1996.

8. In 1996 when Yip was seeking divorce from his wife, the wife was in control of very large financial assets, the two of them having built up with the property boom in Hong Kong a substantial property business which was mainly run by the Mrs Yip. The extent of the wealth of the family can be demonstrated by the fact that at one stage during the hearing before the court the family wealth was put in excess of one billion dollars and therefore justifying the large teams of lawyers on each side when fighting over ancillary relief. The expectation certainly on Yip's side was that ancillary relief of amount possibly in nine figures might be granted by the court.

9. There was however no settlement between Yip and Mrs Yip but instead the matrimonial proceedings dragged on. Lai therefore was representing Yip throughout from 1996 onwards. The relationship of Yip and Lai however was not wholly on a professional basis of solicitor and client. There were business transactions between them. They appeared to make property investments together and they had money transactions of all kinds such as the lending of money which brought about the subsequent High Court Action No.10782 of 1999 in which Lai claimed against Yip for money lent by him to Yip. A Will was even drafted in April 1997 for Yip by a solicitor (said to be a friend of Lai) whereby Lai was a beneficiary of $5,000,000 under Yip's Will.

10. The long saga between Yip and Mrs Yip came to a head when the court on the 7 May fixed November 1998 as the trial date for the ancillary relief hearing with four weeks reserved. The parties and their lawyers therefore faced the urgent necessity of either settling the dispute or having to incur heavy costs to prepare for the trial.

11. The negotiation for settlement in fact started a month before the fixing of trial date. The wife's side made an offer of $24 million plus costs by letter dated 9 April 1998. Yip's side counter-offered by letter dated 4 May by asking for $35 million plus two shops in Wanchai plus $10 million for costs. The two shops were alleged to be very valuable. The wife after the fixing of the trial date by letter dated 19 May 1998 offered $24 million plus costs plus waiver of some $5.5 million claim. Yip's desire to accept this offer was according to Yip what caused his split with Lai. Yip said he wanted to settle more or less upon the terms offered by his wife but Lai wanted to get more and according to Yip that was why he found he had to change solicitors. Lai said that he did not know why Yip suddenly left without any explanation.

12. Messrs Hau, Lau, Li & Yeung ("New Solicitors") were the new lawyers Yip went to act for him in late May 1999 and by letter dated 1 June 1998 (Exhibit A4) the New Solicitors wrote to the wife's side offering to settle more or less on the wife's offer dated 19 May 1999 ($24 million plus waiver of claims plus costs quantified at $3 million). The wife's side wrote by letter 6 June 1998 enclosing a Consent Order with terms of $16.45 million plus Laguna Flat plus waiver of claims plus costs of $3 million. By letter dated 20 June 1999 the New Solicitors on behalf of Yip accepted this Consent Order offer set out in the wife's letter of 6 June 1998. Therefore on 20 June 1998, Yip and wife have agreed to settle the ancillary relief dispute. But three days later on 23 June 1998, New Solicitors wrote to the wife's side withdrawing the agreement to settle on terms of the Consent Order. What happened is that Lai had come back into the picture and as result of his meeting with Yip, Yip not only agreed not to settle but he further agreed to go back to Lai who had a new strategy to obtain a better deal from Mrs Yip.

13. The new strategy was to find money to pay off what Lai said was the outstanding fees owing to Lai by Yip in the sum of $5 million. No bill was sent by Lai to Yip but the outstanding claim by Yip for incurred costs of $5 million had to be satisfied before Lai could take Yip back as client. The solution to this problem was for Yip to go to Silver City (International) Holdings Ltd ("Silver City") and obtain a large loan from Silver City. Silver City featured very much in this whole story because Silver City was a close business associate of Yip and they were very much involved in large property transactions and other financial dealings. Officers of Silver City such as Mr Orr also featured heavily in money transactions between Yip, Lai and Orr.

14. By the Loan Agreement in Chinese dated 30 June 1998, Silver City agreed to lend Yip $3.6 million to assist with the legal costs of the ancillary relief litigation. Payment was to be made by three installments directly to Lai's firm as follows :-

30 June 1998	$1.50 million
28 July 1998	$1.05 million
28 August 1998	$1.95 million.

15. More or less contemporaneous with the obtaining of the $3.6 million loan from Silver City there was the making of the alleged 30% Agreement which Yip said was part and parcel of the whole arrangement for :-

(a) Yip to go back to Lai;

(b) Lai to be given $3.6 million in satisfaction of his claim for outstanding costs; and

(c) Lai to act on a continent basis so that the claim against the wife for more could continue.

The 30% Agreement between Yip and Lai was to the effect that Yip would give to Lai 30% of what Yip recovers from the wife on the ancillary relief claim and Yip would have no claim against Lai for the legal services. Yip said in evidence that he signed a written document setting out the 30% Agreement but Lai did not give him a copy saying that this arrangement must be kept very confidential and not to be known to anyone else.

16. After the making of the alleged 30% Agreement the parties continued with their preparation for the trial of the ancillary relief which commenced on 23 November 1998 (four weeks reserved). But there was in fact no money to fund this heavy litigation on the Yip side. On the 4 December 1998, an application for interim lump sum payment was made by lawyers for Yip asking the court to make an order that Mrs Yip pay to Yip $6 million to finance Yip's legal costs to enable Yip to continue the ancillary relief trial. The application was dismissed by my judgment of the 11 December 1998 and immediately upon the delivery of my judgment the whole legal team of Yip withdrew and Yip was left to act in person.

17. The trial of ancillary relief somehow then continued between Yip and the wife, eventually leading to the Settlement between Yip and his wife in March 1999. Upon learning of the Settlement, Lai wrote by letter dated 12 April 1999 demanding payment of some $5.34 million consisting almost exclusively of counsel fees. This was followed by the Statutory Demand dated 21 April 1999 which then led to the present application by Yip to set aside the Statutory Demand of Lai.

Issues

18. From the above account it seems to me that there are two issues to consider for the determination of the present application. The two issues are :-

(1) Is it inherently improbable that Lai and Yip made the 30% Agreement which is unlawful; and

(2) Can the contradicting documents and conduct render the dispute of the 30% Agreement (otherwise not inherently improbable) to be of no substance, having regard to the characters and circumstances of Yip and Lai.

Inherent improbability of 30% Agreement

19. It is well known that lawyers in Hong Kong render their legal services for a fee and not on any contingency basis which is not lawful. Normally speaking therefore there will be a strong presumption that a qualified solicitor will be acting lawfully and not unlawfully. But a normal solicitor in a major case such as this would be expected to have obtained money on account from clients and certainly at least sufficient money on account to cover all his potential liability to counsel and outside professionals whom he engaged. This was certainly not the case with Lai. It was also well known from the history of the matter at least from the time when Yip was kicked out of the house by Mrs Yip that Yip was in no financial position to fund a major piece of ancillary relief litigation such as this and that was why there was the complicated resort to obtain the $3.6 million loan from Silver City. So therefore when Yip and Lai were at the crossroad in late June 1998 with Yip about to finalise his settlement with Mrs Yip, something unusual took place. Instead of Lai continued to stay out and just waited to receive payment of his outstanding fees from the large settlement money, Lai got himself back into a piece of very heavy litigation with payment of only $3.6 million. It was in these circumstances that the question had to be asked, is it probable or inherently improbable that Lai made such an agreement.

20. To answer this question, it is essential to have some understanding of the sort of person Lai is. It seems to me having seen him in my court for a large number of days during the hearing of this application that he has in his makeup a mixture which is most unusual for a professional solicitor. He is first of all very streetwise, having been a litigation clerk for many years before he became a solicitor. Secondly he seemed to be so entrepreneurial that he allowed his business side to mix with his professional side. He got into business deals with Yip, a lay client not only in terms of property buying and selling but also in terms of lending money to Yip his client. As he freely admitted he gave (lent) money to Yip his client and most astonishingly with money obtained from Silver City which were meant to be for his legal fees (see for example Exhibits R5(a), 5(b), 6(a), 6(b), 7(a), 7(b) and each one of these very large cheque payment was made by Lai within a matter of days of Lai receiving each of the three installment payments from Silver City under the $3.6 million loan). Thirdly Lai seemed to have very little regard for the propriety of transactions. An example of this is his allowing Yip to make a Will in 1997 (when Yip was his client) giving $5 million to Lai in the Will. I believe very few self-respecting solicitor in Hong Kong will allow himself to be put into that position. Having seen and heard so much of Lai, I have the impression that he is something of a gambler and that in fact in late June 1998 when he managed to win back Lai as client from the New Solicitors, he was merely pursuing a large gamble in his life, namely going after the big game of Mrs Yip.

21. Mrs Yip was big game because the family pot was supposed to be huge and even as late as November 1998 when the property market had turned down, Yip's lawyers were still talking to the court in terms of the family pot being worth a billion dollars. An ancillary relief order based on family wealth of that magnitude could therefore easily run into several hundreds of millions and 30% of this kind of figure would be a life's dream for someone with a very modest start. 30% of a huge payout or settlement would amount to many many times the legal costs which might have to be incurred. There was certainly therefore sufficient temptation for a person such as Lai to enter into the 30% Agreement. In these circumstances, could it be said that it was inherently improbable that someone like Lai would enter into the 30% Agreement in late June 1998. On the material placed before me, I find it was not inherently improbable. I therefore hold the first issue in favour of Yip.

Contradicting evidence

22. The second issue raised by Lai at the hearing is that there are so many documents or undisputed facts ("Contradicting Evidence") which would render the case of Yip of no substance.

23. The Contradicting Evidence relied up by Lai takes many forms, including affidavit evidence from a number of third party independent witnesses describing admissions from Yip and documents signed by Yip.

24. Yip was quite candid when giving evidence about the various admissions it was alleged he had made and the various documents he had signed. In evaluating whether these Contradicting Evidence rendered his case of 30% impossible to believe of incapable of having substance, the court must take into account the nature and character of Yip. Unlike Lai, Yip seemed to me to be a combination of a child and simple businessman. He was by nature trusting and soft and he was always apologetic when it was not necessary for him to do so. In many ways he has the virtue of old fashion courtesy stemmed from his trust in people. How else could one explain a person who gave $5 million to his solicitor in his Will. In my view he was more likely to be a victim rather than someone who would take advantage of people or situations. Having regard therefore to the sort of person Yip is, I do not believe that the Contradicting Evidence are such as to destroy the case of Yip on 30% Agreement and as this matter will now proceed to a formal claim in a High Court Action by the Firm against Yip, I will refrain from analyzing the details of the Contradicting Evidence or their impact on the 30% Agreement. Ultimately, it seems to me that one of the questions for the court trying the High Court Action on the existence of the 30% Agreement would be whether having made the 30% Agreement was it possible for Yip to behave and do what he did (Contradicting Evidence). It might not be an easy question to answer and a great deal of details would have to be investigated at such trial but in my view it was possible for Yip to behave as he did after the making of the 30% Agreement.

25. In the circumstances, it seems to me that Yip has a perfectly viable defence of 30% Agreement and the Statutory Demand of Lai therefore must be set aside. The Firm must pursue its remedy in the normal way namely by way of a High Court Action. The application of the applicant succeeds and I also make an order nisi of costs in favour of the applicant.