THE COUNCIL OF THE LAW SOCIETY OF HONG KONG v. TAI SZE WA formerly practicing as S.W. TAI & CO

HCMP 2219/2021

[2022] HKCFI 2339

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2219 OF 2021

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J U D G M E N T

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INTRODUCTION

1.  The Defendant (“Mr Tai”) was the sole proprietor of SW Tai & Co (“the Firm”), a sole proprietorship. The Intervention was pursuant to section 26A(1)(c) of the Legal Practitioners Ordinance, Cap 159 (“LPO”) on the basis that Mr Tai had failed to comply with various provisions of the Solicitors’ Accounts Rules, Cap 159F. Charles Chu & Kenneth Sit (“CCKS”) have been appointed as the Plaintiff’s intervention agent. The Plaintiff (“Council”) intervened in the practice of the Firm, on 13 May 2020 (“Intervention”).

2.  By this originating summons, the Council seeks the Court’s determination and directions on 3 broad areas pursuant to Order 85, rule 2(1) of the Rules of the High Court, Cap 4A:

(1)  As to distribution of money held in the Office and Client Accounts of the Firm, including verification of claims against the Firm and giving of notices to potential claimants;

(2)  As to disposal of the Firm’s files and accounting documents; and

(3)  As to payment of the Council’s costs of and occasioned by the present application and the Intervention.

SERVICE OF PROCEEDINGS

3.  The originating summons and supporting affirmation of Mr Hau Pak Sun have been served on Mr Tai, who has acknowledged service on 3 January 2022. Mr Tai has not filed any affirmation or submission in opposition to the originating summons. As Mr Tai has not filed an acknowledgement of service, the 2^nd affirmation was not served on Mr Tai pursuant to Order 65, rule 9 of the Rules of the High Court. Mr Tai was, however, still served with the written submissions of the Law Society.

4.  All the claimants who dispute the adjudication of CCKS have been given notice of the present application and the date for disposal of the originating summons. None of the claimants have filed evidence or submission in response.

5.  As I am satisfied as to service, I proceed to consider the originating summons in the absence of Mr Tai.

THE FIRM’S MONEY AND THE CLAIMS

6.  The Council is holding the following money on trust pursuant to section 2(1) of Schedule 2 to LPO:

(1)  Money in the Office Account in the sum of HK$12,822.03 and US $30.63; and

(2)  Money in Client Account in the sum of HK $13,521.06 and SG$50.

7.  There is a total of 24 claims in the total amount of HK$23,773,128 and RMB 2,145,000.

8.  Following a verification process, CCKS adjudicated that 7 claims (C1-6 and C24) in the total amount of HK$10,350,000 should be accepted in full, and 4 claims (C7, C11, C12 and C19) in the total amount of HK$3,087,739 should be admitted in part. The accepted total amount is HK$13,437,739. These claims shall be referred to collectively as (“Verified Claims”). The Verified Claims are supported by documents.

9.  Notification of partial or total rejection and the reasons thereof have been sent to the relevant claimants. Only 3 of them have disputed the assessment and they are claimants C11, C17 and C23. After considering the response of those 3 claimants, CCKS maintained its rejection of those claims. As of the closing date for submission, those 3 claimants have not made any submission.

10.  In respect of C11,

(1)  The claimant was verified to be a client of the Firm in various civil litigation. Between March and June 2019, C11 had allegedly deposited a sum of HK$3,680,000 into the Firm’s account for the purpose of acquiring shares in a company called Sunrise Air Conditioning Equipment Ltd (“Sunrise”) for the settlement of ongoing disputes. CCKS found, amongst others, that HK$80,000 and HK$131 had been paid out for counsel fees and disbursements respectively.

(2)  Upon adjudication, CCKS partially admitted the sum claimed at HK$1,099,819.

(3)  Whilst accepting that counsel fees and disbursements had been paid out, C11 raised objection on the ground that such money would not have been incurred but for the “negligent and unsound advice” rendered by the Firm.

(4)  I agree with CCKS that C11’s objection was inconsistent with his initial stance that he did not wish to claim the HK$80,000 paid to counsel. In any case, C11 did not dispute the authority of the Firm to pay out the HK$80,000 and HK$131.

(5)  Any claim in negligence that C11 may have against the Firm is a separate matter. I hold that C11’s claim against the trust money in the hands of the Council must be rejected.

11.  In respect of C17, the claimant was not a client of the Firm but claimed that the Firm had received a cheque of HK$4,800,000 drawn by a third party, representing money to be held by the Firm in escrow. CCKS was unable to identify that payment in the Firm’s bank accounts or ledgers. On C17’s own case, the cheque was from a third party called Huang Zhigang. Despite CCKS’ request, C17 has not produced evidence that the cheque had been presented for payment. CCKS therefore rejected the claim. I agree with that adjudication.

12.  In respect of C23, it was for outstanding photocopying machine charges. C23 appeared to be a creditor of the Firm. Even if there was evidence showing that money had been deposited by clients of the Firm as costs on account to settle third party fees, the third parties rendering service should not be entitled to any distribution of the Firm’s money. CCKS therefore rejected the claim. I agree with that adjudication.

13.  In respect of the rest of the 11 claims,

(1)  8 claims (C8-10, C14-16, C18 and C20), being for counsel fees, are honorarium and not debts recoverable in law. They have been rightly rejected: Council of the Law Society of Hong Kong v Official Receiver [2007] 2 HKLRD 148, Poon J (as he then was), §17.

(2)  1 claim (C22), being for service rendered, are not recoverable from the money held by the Council on trust.

(3)  C13 claimed a sum of $1,200,000 held by the Firm in escrow but C13 was not a client of the Firm. The dispute over the entitlement to the escrow money is subject to litigation between C13 and an entity called HK Kova, but the Firm is not a party. CCKS rejected the claim on the ground, amongst others, that the relationship between the Firm as stakeholder and C13 as the depositor is contractual and not fiduciary. The money is not trust money. The stakeholder is not a trustee or agent but the principal who owes contractual obligations to the depositers: Kenneth Sit (a firm) v Pacific Bulk Logistics Limited and Pacific Bulk Shipping (Cayman) Limited [2021] HKCFI 1373, §24, Anthony Chan J. I agree with the adjudication.

(4)  C21 has sued the Firm for repayment of an investment sum and guaranteed profits in the total amount of RMB 2,145,000. Although this may give rise to a contractual claim, it does not give rise to a claim over the trust money in the hands of CCKS.

14.  I am satisfied as to the adjudication of the claims by CCKS. I am also satisfied that, despite requests of the Council, Mr Tai has not settled those claims.

15.  I now proceed to the questions set out in the originating summons.

Question 1: whether the Firm’s Money (save as to costs payable to and received by the Firm after 13 May 2020) should be distributed to the claimants and if so, the basis on which the Firm’s Money should be distributed

16.  Having regard to paragraph 8 above, I am of the view that the Firm’s Money should be distributed to claimants of the Verified Claims.

17.  There are circumstances showing that the funds in the Office Accounts were mixed with client’s money as deposed to by Mr Hau. I accept that the Plaintiff should use the funds in the Office Account, other than costs payable to and received by the Firm after the date of Intervention, for distribution to the Verified Claimants. The pari passu method should be adopted in view of the fact that the Verified Claims will exceed the money of the Firm. The alternative methods such as rolling charge or rule in Clayton’s case are not practicable or unjust.

Q2 & 3.  Whether the claims should be verified or proved and, if so, in what manner? Whether Mr Hau of CCKS or any other person should be authorized to verify the claims made by the claimants and to determine if they are the beneficiaries properly qualified for distribution

18.  The Council has already verified and adjudicated on the claims. It is not necessary to carry out further investigations. If further evidence is received which cast doubt on the Verified Claims, Mr Hau, who has been investigating the claims of the Firm with proprietary, is a proper person to verify the same.

Q4.  Whether any notice or further notice should be given to invite potential claimants for the Firm’s money to notify the Council of their claims and, if so, in what manner should such notice be given?

19.  On 25 September 2020, the Council had placed advertisements in 2 local newspapers and the Gazette to give notice of the Intervention and invited claimants to contact CCKS to make claims to monies held in the Client or Office Accounts of the Firm. Notice of these proceedings has also been given to the claimants.

20.  As ample time has been given for claims to be made, this Court considers it unnecessary for further notices to be given.

Q5.  Whether the Council should be authorized to make distribution of the Firm’s Money without setting aside any part thereof to meet future claims which are not made known to the Council at the time of distribution

21.  Given that there are grossly insufficient funds in the Firm’s Accounts to pay the Verified Claims and ample time has been given for claimants to make claims, this Court considers it unnecessary to set aside money to meet future claims.

Q6.  Whether files should be destroyed in accordance with the criteria set out in Mr Hau’s affirmation dated 30 December 2021

22.  A total of 4,055 files in 383 carton boxes have been collected by the Council upon the Intervention. 472 former clients have received part of the files from CCKS.

23.  Where the closing date is not recorded or apparent from the files, the Council adopts the last active date of each file as the closing date. As a fall back, the Council has adopted the date of commencement of the Intervention, ie 13 May 2020, as the closing date. The proposal is to destroy the files in the following time frames after the closing date of the relevant file or from the day counted after 13 May 2020:

(1)  Conveyancing files - 15 years;

(2)  General files - 7 years; and

(3)  Criminal files - 4 years.

24.  The proposed disposal is on a rolling basis and in accordance with the Law Society’s policy as set out in §12 of the decision of this Court in The Council of the Law Society of Hong Kong v Tang Ming Fai Joseph [2020] HKCFI 2992. I accept the proposal.

Q7 & 8.  Costs

25.  Costs should follow the event. The Council’s cost of and occasioned by the present application be paid by Mr Tai forthwith on a solicitor and client basis, summarily assessed at $348,295.

26.  The Council’s costs of and occasioned by the Intervention be paid by Mr Tai on a solicitor and client basis and shall be recoverable from Mr Tai as a debt owing to the Council.

Conclusion

27.  I make an order in terms of the draft order amended in accordance with the above rulings under the various questions. Any monies representing costs payable to and received by the Firm from time to time deposited in the Firm’s bank accounts or directly to the Law Society after 13 May 2020 should be applied towards payment of the Council’s costs.

28.  I thank CCKS for their assistance.