LIU XIAN FENG SAM AND ANOTHER v. LIU BO AND OTHERS

cacv 54/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 54 of 2006

(on appeal from HCA NO. 5474 of 2001)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1.  This was an appeal from the order of Yam J dated 15 December 2005 varying an earlier mareva injunction and allowing the first defendant to withdraw the sums of $600,000 and $23,800 for legal costs and living expenses.  Whilst the plaintiffs’ appeal related to both sums in question, at the hearing, Mr Chain who appeared for the plaintiffs was content not to challenge that part of the order that related to living expenses of $23,800.  The appeal was therefore treated as relating solely to the $600,000 in respect of legal costs.  At the conclusion of the appeal hearing, the appeal was allowed with reasons to be given later which we now do.

2.  The proceedings concerned the plaintiffs’ proprietary claim to about US$2.5 million in a bank account.  On 21 December 2001 the plaintiffs obtained a mareva injunction over the monies pending trial.  This was varied on 17 May 2004 when Recorder Wong allowed the release of specific sums to the first defendant for legal expenses.  This included the estimated fee of $125,000 for senior junior counsel for the first day of the trial of the action estimated to last for 10 days and $405,000 being the estimated fees for counsel for the remaining 9 days of the trial.

3.  The trial commenced on 28 November 2005.  On the fifth day, namely, 2 December 2005, the first defendant discharged his solicitors Messrs Paul Kwong & Co. and his counsel Mr Jimmy Kwong.  His application to the court for a substantial adjournment and a sum of $1 million to be released to him to retain new lawyers was refused.  The case was adjourned to Monday, 5 December.  New counsel being Mr Louie Mui instructed by Messrs Eddie Lee & Company appeared to resume the trial which continued until 15 December 2005 when it was adjourned due to the state of the court’s diary.  It was at that stage that an application was made by the first defendant for a variation of the injunction by allowing the release of $600,000 to the first defendant being the estimated legal costs (comprising counsel’s refreshers and solicitors’ costs) for the period from 12 to 16 December 2005 and 9 to 13 January 2006, a total of eight trial days and a sum of $23,800 on account of the first defendant’s living expenses.  The relief sought was thus in part in respect of costs already incurred.

4.  The affirmation in support of the application did not address, among other things, the arrangement the first defendant had entered into with his new legal team.  It should be noted that despite the change of solicitors, the handling clerk/legal executive from the beginning of the proceedings up to the end of the trial had always been the same individual.  At the hearing of the application, a letter from the former solicitors was produced which showed that former counsel had been paid in accordance with the Vine formula and that counsel’s fees had already been paid in full for the 10-day trial.  Pausing there, I find it remarkable that the first defendant’s former solicitors should have seen fit to enter into a fee arrangement with the first defendant’s former counsel on that basis given the circumstances for the funding of counsel’s fees.

5.  The first defendant also produced a written agreement between him and Eddie Lee & Company:

“	15/12/2005

Re: HCA 5474/2001

I, LIU BO, am the 1^st Defendant of the above action.  The former lawyer representing me has been dismissed by me because of my lack of communication with him.

I now have an unspecified amount of legal costs held by Messrs. Paul Kwong & Co., but this is not enough to deal with the newly retained lawyer to represent me to handle this case.  I now first deposit ten thousand Hong Kong dollars with the newly retained law firm and shall instruct my former law firm to refund the unused money.  I am willing to pay Messrs. Eddie Lee & Company twenty thousand Hong Kong dollars a day and understand that it is necessary to retain a Counsel to attend the trial on my behalf.  If I cannot pay up the legal costs within 3 months after the trial, I am willing to pay an annual interest of 5% on top of the costs that I owe until full payment thereof, I understand that my current lawyer has the right to sue me in Court for all the unpaid legal costs.

Eddie Lee & Company (signed) Liu Bo (signed)

TO: Messrs. Eddie Lee & Company                              Liu Bo”

6.  The judge allowed the application.  His reasoning appears from the following passage in his judgment:

“8. … There is no other funds from which the first defendant Liu Bo can derive $600,000 he required for his legal fees.  The only thing he has is the agreement with the solicitors …

9. … I do not think this court should rely on the charitable attitude of a firm of solicitors who has bravely agreed to conduct the case for a foreigner so that he could be legally represented in this court in this jurisdiction, in order to ensure that he would get the best possible result through the due process of the law.

10. If I just rely on this agreement because of the charitable attitude of this firm of solicitors, then this will discourage solicitors from taking up cases on liability basis only.”

7.  It should be mentioned that on 17 January 2006, judgment was delivered in favour of the plaintiffs.  However, it was said that the court should not have regard to that fact since what was relevant was the evidence before the judge at the time of the application.

8.  It will be seen that as a result of the arrangement between the first defendant and Eddie Lee & Company, the first defendant was not left without legal representation when the trial resumed on 5 December 2005.  Whilst a sum of $112,000 was available from the previous firm being one half of the unused refreshers, that was hardly enough to fund two days’ of the first defendant’s estimated legal costs shown in schedule “A” to the summons.  By 15 December, the first defendant had had a total of nine days of legal representation at the trial by his new legal team.  The only reason it seems to me that such representation was possible was because of the arrangement evidenced in the “agreement” dated 15 December 2005 submitted in evidence.  The agreement evidenced a credit arrangement given by Eddie Lee & Company to the first defendant.  It is clear that the need to retain counsel was taken into account.  The only reasonable construction of that agreement was that Eddie Lee & Company were prepared to advance credit not only in respect of their own profit costs but also what was required to pay counsel entitling them to an annual interest of 5% on legal costs paid within three months after the trial.

9.  That analysis is entirely consistent with legal representation being provided to the first defendant without payment of costs on account other than $10,000 from the first defendant and a sum of $112,000 from the previous firm.  There was no evidence that as at the date of the application the first defendant was going to be left unrepresented.  Indeed, it was a curious feature of the application that it was to cover legal fees as from 12 December.  On the basis that the unused refreshers were sufficient to cover 2 days’ worth of refreshers of the new legal team, how the fees incurred for the remainder of that week were to be defrayed was not explained nor was there any explanation of any change in circumstances between the 12 and 15 December when the summons was actually issued seeking fees in part retrospective to 12 December.

10.  Mr Chain who appeared for the plaintiffs submitted that there was no evidence to show that there was any need for funding at that stage.  The only evidence adduced pointed to a credit arrangement being in place.  The applicable legal principles appear from the following passage of the judgment of Roch L J in Ostrich Farming Corporation Ltd v Ketchell [1997] EWCA Civ 2953 (10^th December, 1997):

“When, as in this case, a plaintiff makes a proprietary claim to funds in the possession of the defendant and has obtained from the court a Mareva injunction freezing assets in the hands of a defendant, an application by that defendant for the release of monies from the frozen funds to be used to finance his defence to the plaintiff’s claim involves a two-stage process: see Fitzgerald and others v Williams and others [1996] 2 All ER 171 at 178E, the judgment of the then Master of the Rolls, Sir Thomas Bingham.  The first stage is in effect a hurdle that the defendant must clear before the court’s discretionary power to release monies from the frozen funds for the purpose of financing the defendant’s defence arises.  That hurdle is to establish on proper evidence that there are no funds or assets available to the defendant which can be used by him to pay his legal expenses other than the assets in respect of which the plaintiff brings his proprietary claim.”

11.  Can the first hurdle be satisfied where credit is available to the first defendant?  As Roch L J explained in that case, the reason for the first hurdle is that the defendant should not be permitted to diminish the funds which the plaintiff claims are his and in respect of which the defendant is (if the plaintiff is correct) a trustee for the plaintiff.  To clear this hurdle, a defendant has to provide evidence on affidavit giving a full and frank account of his finances to the court.  Given this rationale, credit upon which a defendant can draw is plainly part of his finances or resources.  In my view, its availability makes it impossible for the first hurdle to be cleared.

12.  It may well be that had a different arrangement been entered into between the first defendant and his new solicitors and an application made promptly, he might well have been able to clear the first hurdle.  But that would be speculation.  In my view, the judge failed to apply the correct legal principles and the judgment must therefore be set aside.

Hon Sakhrani J:

13.  I agree.