RE TAM MEI KAM

CACV 39/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 39 OF 2014

(ON APPEAL FROM HCB NO. 3777 OF 2011)

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JUDGMENT

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Hon Chu JA giving the Judgment of the Court:

Background

1.  This is Madam Tam’s appeal against the decision of Kwan JA given on 4 July 2014 ordering her to provide security for costs on appeal.

2.  The background leading to this appeal can be briefly stated as follows.

3.  Madam Tam was adjudged bankrupt on 25 April 2012.

4.  Madam Tam’s deceased daughter, Madam Mui Yim Fong, had by her will left her entire estate (“the Mui estate”) to an offshore discretionary trust known as the Karen Trust and appointed HSBC as the trustee of the Karen Trust and the sole executor of her will.  By an order made in HCMP 2981/2004 on 20 November 2007 (“the Maintenance Order”), HSBC was directed to pay out of the Mui estate a monthly sum as specified for the maintenance of Madam Tam.  By an order dated 26 June 2012 (“the Suspension Order”), the monthly payment was suspended due to insufficient liquid assets in the Mui estate.  The liquidity of the Mui estate improved significantly in August 2013 and HSBC was in a position to resume payment.  There is an accrued maintenance payable to Madam Tam of about $2 million.

5.  On 2 September 2013, Madam Tam’s trustees in bankruptcy (“the Trustees”) applied for an income payments order (“IPO”) under section 43E of the Bankruptcy Ordinance, Cap. 6 in respect of the accrued maintenance and future monthly maintenance payable to Madam Tam. On 12 November 2013, Madam Tam applied to strike out the IPO application, to remove the Trustees from office and for payment to her of the accrued maintenance.     

6.  The applications were heard by L Chan J. By his decision handed down on 21 February 2014 (“21 February 2014 Decision”), the judge dismissed Madam Tam’s application to strike out the Trustees’ application and to remove them from their office.  He made an IPO, the effect of which is that Madam Tam would receive: (i) $157,276 out of the accrued maintenance; and (ii) $48,000 a month out of the monthly interim maintenance.

7.  On 27 February 2014, Madam Tam brought the present appeal, which is against the 21 February 2014 Decision.  

8.  On 5 May 2014, the Trustees applied for security for costs of the appeal on the basis that Madam Tam is impecunious and it is likely that they would encounter difficulty, undue expense and delay in enforcing a costs order against her.

9.  Kwan JA heard the application on 4 July 2014 and ordered Madam Tam to provide security for costs on appeal in the amount of $307,500 within 56 days of the order.

10.  On 11 July 2014, Madam Tam issued a summons seeking to appeal against Kwan JA’s order pursuant to Order 59 rule 14(12) of the Rules of the High Court, Cap. 4A. In support of her appeal, Madam Tam had made an affirmation and also lodged a written submission.

The applicable legal principles

11.  Under Order 59 rule 10(5) of the Rules of the High Court, Cap. 4A, the Court of Appeal may, in special circumstances, order that security shall be given for the costs of an appeal as may be just.

12.  It is settled practice to require security for costs to be given by an appellant who would be unable through impecuniosity to pay the costs of the appeal, if unsuccessful. Security for costs may also be ordered upon proof that the respondent will be likely to encounter undue delay or put to undue expense in enforcing any order for costs in the appeal. The court, however, has a discretion and is entitled to consider other relevant factors such as the strength of the appeal to determine whether or not it would be just to order that security for costs be provided.  But once a case of impecuniosity or some other factor such as difficulty or expense in enforcing a costs order is demonstrated, it is generally up to the appellant to demonstrate countervailing factors militating against an order being made: See Chung Kau v. Hong Kong Housing Authority & Others [2004] 2 HKLRD 650 and Hong Kong Civil Procedure 2014 Vol.1 paras.59/10/26 & 59/10/27.

13.  In deciding whether to order security for costs of an appeal, the court takes into account the fact that the appellant has already had the issue concerned determined in the court below, and it is prima facie an injustice to a respondent to allow an appeal to the Court of Appeal to proceed without security for costs being furnished in circumstances where the respondent will be unable to enforce against the appellant any order for costs made by the Court of Appeal: Hong Kong Civil Procedure 2014 Vol.1 para.59/10/25. 

Kwan JA’s decision

14.  In coming to the decision to order security for costs on appeal, Kwan JA first observed that the current surplus in Madam Tam’s bankruptcy estate is insufficient to satisfy the outstanding debt owed to Madam Tam’s creditors, and that if Madam Tam was to fail in her appeal resulting in an adverse costs order against her estate in bankruptcy, this would further deplete the assets of the estate to the prejudice of her creditors.  Kwan JA next had regard to the Trustees’ obligation under the common law[1] and section 84 of the Bankruptcy Ordinance to administer the estate in such a manner as to maximise the return from estate assets and thereby to maximise satisfaction of creditors’ claims and any possible surplus for the bankrupt.       

15.  Kwan JA then considered the various contentions raised by Madam Tam on her apparent impecuniosity. Firstly, with regard to her assertion that her impecuniosity was not of her making in that but for the 21 February 2014 Decision, she would have the use of the $2 million accrued maintenance and would be able to meet any liability for costs in the appeal, Kwan JA held that it was a circular argument.

16.  Secondly, Kwan JA rejected the arguments that the Trustees had only given vague and unclear replies to the judge on the value of the Mui estate and the claims to the Mui estate, and on the total amount of the outstanding debt, legal costs and other amounts due from Madam Tam’s estate to her creditors and the Trustees. Kwan JA also rejected the argument that the Trustees had never been genuinely worried about Madam Tam’s impecuniosity.

17.  Thirdly, Kwan JA did not accept Madam Tam’s assertions that there will be an early discharge of her bankruptcy and/or that there is possibility of funds forthcoming. With regard to Madam Tam’s contention that she has validly terminated the Karen Trust by notice to HSBC in May 2014 so that she and her four grandchildren are now absolutely entitled to the full benefits of the trust, Kwan JA considered it clearly was not a straightforward matter, and the matter will most likely have to be litigated upon such that it will take time for the dispute to be resolved. 

18.  Kwan JA thus concluded that special circumstances have been made out for security for costs to be provided on appeal in that Madam Tam is impecunious and that there is a real risk any costs liability imposed on her in this appeal would further deplete the bankruptcy estate.

19.  Next, Kwan JA considered the merits of the appeal.  Upon a preliminary assessment of the grounds of appeal, Kwan JA was of the view that they have no strong merits and therefore do not constitute countervailing factors for the court to exercise discretion not to order security for costs on appeal.  She was further of the view that it is just that Madam Tam should not be allowed to embark on the appeal without providing security, so as not to further prejudice the interests of her creditors.

The appeal against Kwan JA’s order

20.  Madam Tam appeals against the order for security on the grounds that: (1) Kwan JA erred in law in her earlier decision in Koo Shing Sun v. Hung Wing San Tony (unreported) CACV241/2012, 11/04/2013, and in applying the case to the Trustees’ application herein; and (2) Kwan JA’s reasoning for rejecting Madam Tam’s contentions are flawed.  

21.  In Mok Pak Keung v. Wong Ip Ming (unreported) CACV 78/2000, 8 September 2000 at para.7, Rogers Acting CJHC held that:

“When the appeal is thus brought to the Court of Appeal on appeal from a decision of a single judge, what the Court of Appeal is doing is reviewing on appeal the exercise of discretion by the single judge. In my view the same rules apply in that respect as apply to the Court of Appeal in other cases when it is reviewing the exercise of a discretion by a judge. They can be summarised that the Court of Appeal will not interfere with the exercise of a discretion unless it is satisfied that the judge had applied wrong principles of law or had given a wholly erroneous weight to some matters or failed to take into account some other matters or indeed if the judgment was plainly wrong.”

See alsoMak Shiu Tong v. Yue Kwok Ying & Anor (2004) 7 HKCFAR 228, 240 at §30; and Tang Wai Cho v. Tan Wai Leung (unreported) CACV289/2011, 18 October 2013 at §16.  With these principles in mind, we turn to consider the grounds raised by Madam Tam.

Koo Shing Sun v. Hung Wing San Tony

22.  In paragraph 34 of the Reasons for Decision handed down on 10 July 2014, when dealing with the amount of security to be ordered, Kwan JA referred to Koo Shing Sun v. Hung Wing San Tony and held that:

“[T]here is no good reason why the costs of an application for security for costs should not be included in the amount to be provided as security, as costs of the appeal should embrace the whole process, including applications in the appeal court incidental to the appeal. The choice is between ordering costs of the application for security to be paid in any event (in which case these estimated costs would be included in the security to be provided), or ordering such costs to be paid by the paying party forthwith.”

23.  Kwan JA considered it was appropriate to include the estimated costs of the Trustees’ application for security in the security to be provided, instead of ordering Madam Tam to pay the costs of the application forthwith.  Although Madam Tam suggests that this is an error in law, she has not elaborated on it.  We see no basis for the argument.  We also do not see why, as matter of legal principle, Koo Shing Sun v. Hung Wing San Tony is distinguishable or inapplicable to the present case.

Madam Tam’s impecuniosity

24.  Madam Tam also argues that the reasoning in paragraphs 17, 19, 27 to 30 and 32 of Kwan JA’s Reasons for Decision are flawed.  Paragraph 17 relates to Madam Tam’s assertion that her impecuniosity was the result of her being wrongly deprived of the $2 million accrued maintenance. Kwan JA rejected this argument as being circular because the judge had held that the bulk of the accrued maintenance constituted her income for which an IPO was made. Since she is challenging the correctness of the judge’s decision on this, if she fails and the judge’s decision is upheld, she will not be able to resort to the accrued maintenance in meeting an adverse costs order against her.  In our view, this must be right.

25.  Paragraph 19 relates to Madam Tam’s argument that the Trustees should have no worry about her being impecunious, having regard to the value of the Mui estate and the fact that Madam Tam could ask HSBC to pay off her debt and to discharge her bankruptcy since she is the biggest beneficiary of the Mui estate.  Kwan JA, after considering the replies given by the Trustees to the judge on the value of and claims to the Mui estate, disagreed that they were vague or unclear. It was further pointed out that the fact that the judge had suggested that Madam Tam could ask HSBC to pay off her debt did not mean that the Trustees should not be concerned about a real risk of an adverse costs order against Madam Tam would further deplete the assets of the bankruptcy estate.  We agree.

26.  Paragraphs 27 and 28 concern Madam Tam’s assertion that she had validly terminated the Karen Trust by the notice she served on HSBC in May 2014 and that her bankruptcy will be discharged from the assets of the trust.  In reply to this argument, the Trustees had referred to HSBC’s reply that there was no basis on which Madam Tam would be entitled to terminate the trust.  The Trustees also identified several legal difficulties faced by Madam Tam, including the fact that she had previously challenged unsuccessfully the validity of her daughter’s will and of the Karen Trust and if the matter were to be re-litigated, she would have to overcome the hurdle that what she now contends is not an abuse of process; that the Karen Trust was established under the laws of Cayman Islands and its terms provided that the laws of the Cayman Islands and the Courts of the Cayman Islands shall be the initial law of the trust and the initial forum governing the administration of the trust; and further that there are substantial doubts in the merits of Madam Tam’s construction of clause 31 of the trust and her assertion that there had been contravention of clause 31 and also non-compliance with formalities by HSBC on the execution of a deed of appointment to appoint additional beneficiaries.

27.  In light of the submissions advanced by the Trustees, Kwan JA concluded that if Madam Tam should persist in pursuing her assertion that the Karen Trust had been validly terminated, legal proceedings will most likely have to be instituted and it would take time for the dispute to be resolved.  In our view, Kwan JA is clearly right. It is unrealistic to suggest that Madam Tam’s bankruptcy will soon be discharged with funds from the assets of the trust.

Merits of the appeal against L Chan J’s decision

28.  Paragraphs 29, 30 and 32 concern the merits of Madam Tam’s appeal against the judge’s decision to make an IPO and to refuse to remove the Trustees.  Madam Tam has raised a number of grounds in the Notice of Appeal.  In her written submissions in this appeal, Madam Tam has identified two principal grounds of the appeal, namely, (1) the judge erred in his construction of section 43E(1) of the Bankruptcy Ordinance; and (2) the judge had failed to deal with the “abusive” conduct of the Trustees.  Madam Tam submitted that Kwan JA had failed to form a preliminary view on these issues and had not explained why she did not think there were strong merits in the appeal.

29.  Before the judge, Madam Tam had argued that the words “during the period for which the order is in force” in section 43E(1) of the Bankruptcy Ordinance[2] qualify and limit the words “income which is from time to time made to him or which he from time to time becomes entitled” in section 43E(6)[3] so that the words “from time to time” in section 43E(6) should mean “during the period for which the order is in force”.  She further argued that the source of the accrued maintenance is the Maintenance Order, hence she had become entitled to this payment before there was any IPO and the accrued maintenance therefore fell outside the scope of the IPO, which could only cover income that she is entitled to during the period when it is in force. Accordingly, it is her contention that the $2 million accrued maintenance belongs to her and has not vested in the Trustees.

30.  The judge rejected the argument. He held that the Suspension Order had suspended Madam Tam’s entitlement to payment under the Maintenance Order so that she had no entitlement to maintenance during the time when the Suspension Order was in place. The judge further held that the words “during the period for which the order is in force” in section 43E(6) refer to the period during which the IPO can be enforced and not the period during which the bankrupt is entitled to or in receipt of payment.  He concluded that “an IPO can certainly be made to claim income that the bankrupt has received or is entitled to receive during his bankruptcy regardless of whether the entitlement to receive had commenced (but not satisfied) before his bankruptcy.”[4]       

31.  It is Madam Tam’s argument that the judge’s approach to the construction of section 43E is wrong in that he only referred to the authorities and had ignored her analysis and arguments.  She also prays in aid the Chinese version of section 43E[5].

32.  As Kwan JA rightly observed, in dealing with an application for security, it is neither necessary nor desirable to embark upon a detailed examination of the arguments in the appeal: see Chung Kau v. Hong Kong Housing Authority & Ors at 656D-G.  The court needs only make a preliminary assessment of the strength of the grounds of appeal.  We have considered the Chinese and English wordings in section 43(1) and (6), the reasoning of the judge and the authorities referred to in the 21 February 2014 Decision on this issue.  We share Kwan JA’s preliminary view that there are no strong merits in the challenge to the judge’s construction of the section.                                    

33.  Another of Madam Tam’s principal ground of appeal is that the judge had ignored the “abusive” conduct of the Trustees in making another assessment of her reasonable domestic needs in June 2012 when the Official Receiver had already done an assessment in May 2012. 

34.  As can be seen from the Table in paragraph 31 of the 21 February 2014 Decision, the amount of Madam’s reasonable domestic needs as assessed by the Trustees ($50,245) was approximately two-thirds of that assessed by the Official Receiver ($75,246).  The difference lies in the amount of utility bills, whether Madam Tam should employ one or two domestic helpers and whether there should be allowance for tonic food and acupuncture.  The judge had conducted a careful examination of the two assessments alongside with the proposal made by Madam Tam ($91,746) and assessed the monthly reasonable domestic needs of Madam Tam at $48,000, after allowing for inflation.    

35.  That the Trustees are under an obligation to maximise the estate in bankruptcy for the benefit of Madam Tam’s creditors is trite.  In discharging their obligations, they are not bound by earlier proposal or assessment on the monthly payment for Madam Tam, even though it was made by the Official Receiver.  Their re-assessment or reduced proposal proves to be justified in light of the judge’s decision.  It is also pertinent to note that in two of the items (water bill and food), the Trustees’ assessment is higher than that of the Official Receiver. The complaint that the Trustees acted grossly unreasonably and not in good faith in undertaking another assessment of Madam Tam’s reasonable domestic needs has no merits.       

36.  In conclusion, we see no basis for departing from Kwan JA’s decision to order security for costs on appeal to be provided by Madam Tam.  Accordingly, the summons is dismissed. 

Costs of this application

37.  The normal rule is that costs should follow the event.  Applying Koo Shing Sun v. Hung Wing San Tony & Another, the Trustees ask that their costs of the application be made costs of the appeal and that Madam Tam be ordered to provide additional security to cover their costs of this application, which are estimated to be $68,000.  We agree this is an appropriate way to deal with the costs of the application.  We however consider that the quantum of the additional security should be set at $50,000. Given that a little over 5 weeks have lapsed since Kwan JA’s order, we are of the view that a further 35 days from the date of this Judgment (to expire by 15 September 2014) should be given to Madam Tam to provide the security ordered by Kwan JA and the additional security that we now order.

Disposition

38.  Accordingly, we make the following orders:

(1) The summons filed on 11 July 2014 is dismissed.

(2) The costs of the application be costs in the appeal.

(3) The time for complying with paragraph 1 of the order dated 4 July 2014 is extended to 15 September 2014.

(4) Madam Tam shall on or before 15 September 2014 give additional security for the Trustees’ costs of the appeal in the sum of $50,000 by making lodgement in court of the said sum by cash or bankers draft, and until such lodgement is made and notice thereof given to the Registrar of High Court and the solicitors for the Trustees (such notice to be given on the same day as the lodgement is made), all proceedings in this appeal are to be stayed.

(5) In default of Madam Tam making such lodgement as aforesaid within the time specified, or within such further time as the court may for special reasons allow, this appeal do (upon the solicitors for the Trustees certifying such default to the Registrar of High Court) stand dismissed out of this court without further order.

(6) In the event this appeal is dismissed in circumstances as provided for above, Madam Tam shall pay the Trustees their costs occasioned by this appeal, to be taxed if not agreed. 

[1] Moore v Macks [2007] FCA 509 at §§15 to 24; Dubow v Official Receiver & Another [2013] FCA 709 at §§32 to 46.

[2] Section 43E(1) reads: “The court may, on the application of the trustee, make an order (an income payments order) claiming for the bankrupt's estate so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order.”

[3] Section 43E(6) reads: “For the purposes of this section the income of the bankrupt comprises every payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled, including any payment in respect of the carrying on of any business or in respect of any office or employment.”

[4] Paragraph 24 of the Decision dated 21 February 2014.

[5] The Chinese version of section 43E(1) and (6) read:

“(1) 法院可因應受託人的申請而作出一項命令(收入付款令)，為破產人的產業申索在該命令有效的期間並屬該命令指明款額的該破產人的收入。

 (6) 就本條而言，破產人的收入包括不時向他作出的或他不時有權收取的屬收入性質的每項付款，包括就經營任何業務或就任何職位或受僱工作而收取的任何付款。”