TANG WAI LEUNG v. TANG WAI CHO

HCSD 7/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 7 OF 2016

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AND

HCA 2207/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2207 OF 2007

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J U D G M E N T

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1.  In the underlying action (HCA 2207/2007), Mr Tang Wai Cho (“Cho”) claimed against Mr Tang Wai Leung (“Leung”) for beneficial ownership of a property on the ground of resulting trust. The claim was dismissed after trial with costs. Cho made a number of unsuccessful applications to appeal and to adduce evidence on appeal, for which he had to bear costs. Separately, Leung lost an interlocutory application before trial but successfully obtained costs for the appeal (which was dismissed because Cho could not provide security for costs).

2.  The net position is that Cho owed Leung costs of $727,388.60, whereas Leung owed Cho costs of $168,486.50 for the interlocutory application, at which point in time Cho was legally aided.

3.  Cho issued the present statutory demand for $168,486.50 against Leung. 

4.  Leung applied to set it aside on the ground that he should be allowed to set off costs owed by him against the costs owed by Cho pursuant to rule 48(5)(a) of the Bankruptcy Rules, Cap 6A.

5.  Cho disagreed, pointing out that all moneys payable to the respondent as a legally aided person should be paid to the Director of Legal Aid (“DLA”) under section 19A of the Legal Aid Ordinance, Cap 91, (“LAO”); and that under section 18A of LAO, DLA has a first charge against the money so recovered, unless a set-off was granted by the court under section 18A(4) of LAO.

6.  The sole issue is whether or not set-off of the costs between a legally aided person and a non-aided person is permissible.

The legal framework under the Ordinance

7.  Under section 18A(1) of LAO, DLA has a first charge on any property which is recovered or preserved for the aided person in the proceedings (“the first charge provision”).  Under section 18A(3)(a), such property includes any sums recovered under an order for costs made in the legally aided person’s favour with respect to the proceedings.

8.  Under section 18A(4) of LAO (“the set-off provision”):

“The charge created by subsection (1) on any damages or costs shall not prevent a court or the Court of Final Appeal allowing them to be set off against other damages or costs in any case where a solicitor’s lien for costs would not prevent it.”

9.  Section 19A provides as follows:

“(1)  All moneys which may become payable to an aided person–

(a)  by virtue of an order, including an order of the Court of Final Appeal, made in connection with the proceedings to which his legal aid certificate relates;

...

shall be paid or repaid, as the case may be, to the Director unless the Director by notice in writing to the person responsible for payment and to the aided person directs otherwise. (“the payment provision”) (emphasis added)

...

(4)  Only the Director shall be capable of giving a good discharge for moneys which may become payable to the Director under this section. (“the discharge for moneys provision”) (emphasis added)

(5)  In this section reference to an "aided person" (受助人) includes an aided person whose legal aid certificate has been revoked or discharged.”

10.  Section 19B(1)(a)(i) of LAO provides that “upon receipt of all moneys paid to him pursuant to section 19 or 19A, the Director shall retain any sum paid by virtue of an order or agreement for costs made in the aided person’s favour.”

11.  Regulation 9(6A) of the LA Regulations provides that:

“The Director has the right to enforce an order for costs in favour of an aided person made in proceedings for which the Director has issued a certificate, whether the certificate has been discharged or revoked, and the Director may bring proceedings in his official name in a court of competent jurisdiction to recover the costs ordered.” (“the enforcement provision”)

Development of the law in UK

12.  The English legislation has undergone various changes but do contain provisions substantially similar to the Hong Kong legislation, with differences which I will identify.

13.  The English courts have refused to grant set-off in Anderson and The Debtor v The Law Society; but granted set-off in Carr v Boxall; Cook v Swifen; Currie v Law Society; and Lockley.

14.  In Carr v Boxall [1960] 1 WLR 314, having considered the payment to Law Society provision and set-off provision, the court ordered payment or set off of the plaintiff’s taxed costs against the legally aided defendant’s award of damages standing in court. 

15.  In Anderson v Hills Automobiles (Woodford) Ltd [1965] 1 WLR 745, the court considered the payment provision and the discharge for monies provision and declined to order set-off.  Carr v Boxall was considered of no assistance because the provisions were not argued there.

16.  In Cook v Swinfen [1967] 1 WLR 457, at 463, set off of costs against damages was likewise permitted.  The Court of Appeal recognized that the contest for £1,100 damages awarded to the plaintiff was really between the Legal Aid Fund (which had a charge on damages) and the defendant who won on costs.

17.  In Currie & Co v The Law Society [1977] 1 QB 990 at 995, May J considered set-off to be permissible but declined to grant it as a matter of decision.  He considered the equivalent of the payment provision (payment to Law Society instead of to DLA), the first charge provision, the set-off provision and the enforcement provision.  He held that the mere fact that a party was in receipt of legal aid, or the existence of a charge in favour of the Law Society should not necessarily prevent the court from ordering a set off (p 997A). Upon proper construction, the court should in general exercise its discretion under the set-off provision to allow a set off of costs and/or damages, before giving effect to the first charge provision.  Prima facie there should be a mutual set off in the first place and only thereafter was the legal aid fund entitled to recoup itself out of the remaining balance.  Nevertheless, even though the discretion should generally be exercised in a particular way, the court still had discretion.  It remained a question of what was fair and just between the parties and the legal aid fund (pp 999H to 1000A).

18.  Referring to the conflicting decisions in Carr and Anderson, May J opined that if the set-off provision had been drawn to the attention of the Court of Appeal, Anderson would have been decided differently and that Anderson was decided per incuriam (pp 996F to 997B).

19.  Inexercising discretion,May J noted that the costs order was imposed on the plaintiff personally, pursuant to the court’s disciplinary power.  He considered that the real question was whom did the judge intend to compensate by the order made against the plaintiff personally.  The answer must be that the judge intended to compensate the legal aid fund.  To allow a set off would not achieve the object of that costs order and so set off was disallowed (pp 997C to 998B).  The court also interpreted Cook v Swinfen as a case in which the contest on costs was between the non-aided party to the litigation and the legal aid fund; and that it was only just and equitable that the privately funded litigant should be preferred to the fund itself, which had been set up not to penalize unassisted parties but to give assistance to those who needed it.

20.  In The Debtor v The Law Society (1981 WL 695915), 9 Feb 1981, CA, the husband owed his former wife (legally aided) costs in divorce proceedings. The wife became bankrupt and the husband acquired some of her debts pursuant to various assignments.  The Law Society issued a bankruptcy notice against the husband for the costs.  The husband sought to set off the costs against the debts acquired from the wife.  Templeman LJ considered the UK equivalent of the payment provision, discharge for monies provision and enforcement provision and refused to order set-off.

21.  The rationale of Templeman LJ was that the State having paid out solicitors, counsel and other expenses of litigation of an assisted person in the first instance, got its money back.  The money never belonged beneficially to the legally aided person (p 2). 

“[referring to Regulation 18(4), ie the enforcement provision] In my judgment this means that the assisted person never obtains the slightest entitlement as beneficiary to a single penny payable by virtue of an order in his favour for costs made after his legal aid certificate has been granted. Any order for costs is only made in the name of the assisted person for the purposes of identification and taxation. The money must be paid to the solicitor or the Law Society; the assisted person can neither sue, nor give a good receipt for the money; the Law Society can bring proceedings in its own name and ignore the assisted person altogether, and thus the money comes to the Law Society, or to the solicitor, and from them it goes straight to the Legal Aid Fund, to which it belongs by section 8(1) [of the Legal Aid Act 1974]. No set-off can arise, because the money never belongs to the assisted person; it belongs to the Legal Aid Fund, whence it is paid out in the first instance and comes back in due course.”

22.  This case did not refer to any of the precedents, nor did it discuss the set-off provision.  It may also be distinguishable on the ground that the debts acquired from the wife could not be regarded as “costs” or “damages” to which the set off provision could apply.

23.  Lockley v National Blood Transfusion Service [1992] 1 WLR 492 at 496, involved set-off of costs in interlocutory proceeding (which the legally aided plaintiff had to pay) against costs and/or damages of the main action which the plaintiff may recover. 

24.  Scott LJ considered the first charge provision and the set-off provision. He found that the set-off provision did not create any new right of set-off (and dissented from Currie to that extent) but simply preserved the position under general law against legally aided parties notwithstanding the legal aid board’s charge (p 495A-B).  An assessment of the amount that would be reasonable for the legally aided person to pay, was not a precondition of, and, indeed, had nothing to do with, set-off (p 496B-E).

25.  Scott LJ laid down the broad propositions that set-off of costs against damages or costs to which a legally aided person has become or becomes entitled in the action may be permissible.  The set-off is no different from and no more extensive than the set-off available to or against parties who are not legally aided. The broad criterion for the application of set-off is that the plaintiff’s claim and the defendant’s claim are so closely connected that it would be inequitable to allow the plaintiff’s claim without taking into account the defendant’s claim.  As it has sometimes been put, the defendant’s claim must, in equity, impeach the plaintiff’s claim (pp 496G to 497C).

26.  Applying those principles, Scott LJ considered that interlocutory costs incurred in the progress of an action to trial and ordered to be paid by a plaintiff to a defendant would in equity impeach the right of the plaintiff to recover from the defendant costs of the action ordered to be paid by the defendant.  A set-off of costs against costs, when all were incurred in the prosecution or defence of the same action, seemed so natural and equitable as not to need any special justification.  Scott LJ would expect a party objecting to the set-off to give some special reason for the objection.  It was less obvious that a set-off of costs against damages would always be justified. 

27.  Scott LJ considered Anderson to be no longer binding for the reason that there was no UK provision similar to the payment to DLA provision at the time of Lockley (p 496E).  This is distinguishable from the Hong Kong legislation.  Moreover, Scott LJ did not refer to the enforcement provision or The Debtor v The Law Society.  Accordingly, there are 2 English Court of Appeal authorities having different views on the set-off provision. 

Development of the law in Hong Kong

28.  In Chan Sai Lun Henry v Chan Wai Wah, Lily-Ann, CACV 96/1997, 15 May 2000, pp 6-8, a Master ordered that the issue of a certificate for costs of the legally aided D2 be delayed until she had paid (1) the non aided plaintiff a taxed sum of $90,820.50, and (2) other costs for which D2 was liable (estimated to be $3 million).  The order was akin to a set off.  DLA sought leave to appeal out of time.

29.  Cheung J (as he then was) opined, obiter, that there were merits in DLA’s intended appeal that sections 19A(1), 19A(4), 19B and Regulation 9(6A) arguably prevented set-off of costs by the plaintiff against costs awarded to a legally aided defendant (p 8).  He also observed, obiter, that if the condition imposed by the Master was set aside, it would mean that the DLA would be able to enforce the costs order in favour of D2 against the plaintiff when the plaintiff, for all practical purposes, would not have any prospect of recovering the substantial costs that had been ordered in his favour. However, leave to appeal was refused on other grounds.

30.  Cheung J has considered Anderson, Carr, Cook, Currie and Lockley.  Like Scott LJ in Lockley, Cheung J was alert to the fact that the payment to DLA provision applied to Anderson but not Lockley.  He did not, however, consider the impact of the set off provision on the other provisions that he relied on.

31.  Lockley was followed in other Hong Kong cases but none of these cases referred to the reasoning of Templeman LJ in The Debtor v The Law Society.  Set-off of costs in different but related employees compensation proceedings and personal injuries proceedings was ordered in Singh Harpel v Najib Transport, DCPI 494/2009, 23 November 2009, §§47-49 & 51, HH Judge Lok (as he then was).  Set-off of costs in the same proceeding was ordered in Yeung Kam Shing v ISS Eastpoint Facility Services Limited, DCEC 999/2008, §17, HH Judge Leung.

Proper interpretation of the relevant provisions in LAO

32.  Mr Maurice Chan submits that neither the legally aided party (by private settlement with the unaided party to set off each other’s payable costs)nor the court can circumvent DLA’s power.  He submits that if The Debtor v The Law Society had been brought to Scott LJ’s attention, Lockley might not have been decided in the way that was.  Likewise in Yeung Kam Shing.  He also submits that Anderson was correctly decided in accordance with the law at the time, similar to the Hong Kong law. Anderson applies and there should be no set-off.

33.  Mr Maurice Chan submits that the set off provision is not a statutory set off creating a new right against DLA’s first charge but a mere preservation of the general law; and that as such, it cannot “trump” the payment to DLA provision and discharge for moneys provision, as fortified by the enforcement provision.

34.  I note that the enforcement provision was added to the Regulations in 1995.  According to the explanatory note in the gazette, Reg 9A(6) is to make clear DLA’s right to recover costs where an order for costs is made in favour of a legally aided person.  In my view, the starting point is that the enforcement provision, read with the payment to DLA provision, first charge provision and discharge provision make clear that DLA (and no one else) is beneficially entitled to an order for costs in favour of a legally aided person.  The rationale is that DLA, having paid on behalf of the legally aided person, recoups as much as possible for the benefit of the legally aid fund: The Debtor v The Law Society.

35.  To vary this position, there must be a written direction from the DLA under section 19A(1).  I agree with Mr Maurice Chan that the legally aided party cannot, by private settlement, agree to a set-off of costs with the unaided party without DLA’s consent and that the payment provision is more strongly worded than the UK counterpart.

36.  Alternatively the position can be varied if there is a court order on set-off under section 18A(1) of LAO, notwithstanding the first charge provision.  The principles laid down by Lord Scott in Lockley (paragraphs 25-26 above) apply.  The reason is that the purpose of the LAO, as set out in its preamble, is “to make provision for the granting of legal aid in civil actions to persons of limited means and for purposes incidental thereto or connected therewith.”  LAO does not exist to penalize non-aided litigants: Currie. Set-off is only to the extent of costs that “may become payable” to DLA and DLA is not personally required to pay the non-aided person beyond that.  

37.  Section 19A(4) does not undermine the court’s power to grant set-off.  After set-off, it may be that no money becomes payable to the DLA, as in Yeung Kam Shing.  That would mean there is nothing for the DLA to enforce or give a valid discharge under section 19A. 

38.  I therefore disagree with Mr Maurice Chan that the set off provision cannot “trump” DLA’s rights under section 19A(1) and (4) and Reg 9(6A).

39.  By way of example, the set-off provision is useful in the following scenarios:

(a)  When both parties are legally aided;

(b)  When there are several applications, a claim and counterclaim, or related claims, between the legally aided person and the non-aided person, and the court directs set off of costs and pronounces a net order in favour of the legally aided person.

40.  However, it has to be borne in mind that equitable set-off is permissible for unliquidated claims (such as untaxed costs), but requires the cross-claims to be between the same parties and to be sufficiently connected: Hong Kong Civil Procedure 2017, Vol 1, §18/17/2.

41.  The statutory power of set-off is of course discretionary.  The test is whom did the cost order intend to benefit in the first place.  It is up to the party opposing the set-off to come up with reasons.  Currie (paragraph 17 above) should be followed.

42.  Singh Harpel was correctly decided.  After trial, the court allowed the defendant to set off costs that the plaintiff (then non-aided) had to bear in employees’ compensation proceedings against damages that the defendant had to pay the plaintiff (then legally aided) in personal injuries proceedings.  It was not a case of setting off costs payable by or to DLA.

43.  Yeung Kam Shing was also correctly decided.  The trial judge expressly deferred the question of payment out of monies in court until after taxation and set-off (§7) and DLA was permitted to make representation.  Accordingly, it could not be said that DLA has become beneficially entitled to the costs made in favour of the legally aided person meanwhile. HH Judge Leung held that the monies in court did not form property recovered for the purpose of the first charge.  As a result of the set-off, simply no money became payable to the legally aided person for the purpose of section 19A.

Ground for setting aside the statutory demand

44.  Neither DLA nor the court has directed set-off.  I am afraid this cannot be done now because the beneficiaries to the costs orders are different.  With regard to the taxed costs of $168,486.50, the payor is Leung and the beneficiary is DLA. With regard to the taxed costs of $727,388.60 (the bulk of it being pre-legal aid), the payor is Cho personally and the beneficiary is Leung. Leung cannot ask for DLA’s money to be applied to set off Cho’s liability.  There is no unfairness to Leung, because, instead of set-off, DLA has already paid Leung in full for costs incurred in the period covered by legal aid.  It may be different if DLA has not yet paid Leung all costs due under a court order.

45.  Since set-off is not available, there is no ground to set aside the statutory demand.

46.  After this hearing, as directed by this court, Cho has taken out a summons seeking a declaration that Leung is not entitled to set off his costs against Cho/DLA’s costs.  Although served with this summons, DLA has not taken a stance different to that advanced by Mr Maurice Chan.  Having regard to my views in paragraphs 32-45 above, I grant the declaration sought. 

Conclusion

47.  The application to set aside the statutory demand is dismissed.  I also grant an order in terms of Cho’s summons.  There shall be an order nisi for Leung to bear Cho’s (effectively DLA’s) costs, to be summarily assessed on 16 March 2017 on the papers.  There shall be legal aid taxation of Cho’s own costs.

48.  I do not think Leung refused to pay DLA out of spite or with a view to delay but because of a debatable view taken of the LAO.  Pursuant to rule 48(7) of the Bankruptcy Rules, I order that Cho/DLA be at liberty to issue a petition for bankruptcy only 28 days after this decision is handed down.

49.  I thank counsel for their able assistance.