THE COUNCIL OF THE LAW SOCIETY OF HONG KONG v. CHENG CHUN CHONG AND ANOTHER

HCMP 929/2018

[2018] HKCFI 2093

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 929 OF 2018

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D E C I S I O N

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1.  This is an application by originating summons by the Council of the Law Society of Hong Kong (“the Council”) for the court’s directions and determination of a number of questions arising out of the intervention in the practice of Messrs S Cheng & Yeung (“the Firm”) on 2 September 2016.

2.  The firm was a firm of solicitors in Hong Kong which practised as a partnership of Mr Cheng Chun-Chong and Mr Yeung Kar-ming at all material times.  They are respectively the 1st and 2nd defendants in these proceedings.

3.  On 1 September 2016, the Council resolved to intervene in the practice of the Firm on suspicion of dishonesty of the Firm’s employee pursuant to section 26A(1)(a)(ii) of the Legal Practitioners’ Ordinance,  Cap. 159 (“the Ordinance”).

4.  On 2 September 2016, notices of the intervention was served on the 1st and 2nd defendants and a large volume of files were seized from the Firm’s offices by Messrs Chui & Lau, Solicitors, the intervention agent appointed by the Council (“the Intervention Agent”).

5.  Section 2 of Schedule 2 to the Ordinance provides:

“(1) ...if the Council passes a resolution to the effect that any sums of money to which this section applies, and the right to recover or receive them, shall vest in the Council, all such sums shall vest accordingly (whether they were received by the person holding them before or after the Council’s resolution) and shall be held by the Council on trust to exercise in relation to them the powers conferred by this Schedule and subject thereto upon trust for the persons beneficially entitled to them.”

(2) This section applies -

(a) where the powers conferred by this section are exercisable by virtue of section 26A of this Ordinance, to all sums of money held by or on behalf of the solicitor or his firm or the foreign lawyer or his firm in connection with his practice or with any trust of which he formally was a trustee.”

6.  It follows from section 2(1) of Schedule 2 to the Ordinance that the Council stands in the position of a trustee with regard to the money held by the Firm which has since been vested in the Council pursuant to its resolution.  As trustee of such funds, the Council may in an appropriate case apply to the court, exercising its equitable jurisdiction, for directions or determination of any question arising in the execution of a trust: see Order 85, rule 2(2)(a) of the Rules of the High Court.

7.  Further, section 6 of  Schedule 2 to the Ordinance provides:

“In any case where the Council is unable to ascertain the person to whom any moneys referred to in a notice served under section 2(3) belong or whether the Council otherwise thinks it expedient to do so, the Council may apply to the Court of First Instance for directions as to the transfer of such moneys.”

8.  This application is thus made for the court’s direction, on the disposal of the funds vested in the Council.

9.  As an application by a trustee to the court for directions relating to the administration of a trust, not all beneficiaries need to be joined as parties in these proceedings: Order 85, rule 3(2) of the Rules of the High Court.

10.  In order not to heavily burden the application herein with a large number of claimants and to save costs, the claimants have not been joined as party hereto. However, the Council has taken steps to give notice of the present application to all the claimants so that they may choose to take an active part in the present proceedings if they see fit to do so.  Up‑to‑date, no claimant has indicated his intention to do so, save that a letter has been sent to the Intervention Agent by a firm of solicitors acting for one of the claimants and the letter is dated 24 July 2018.  The content of the letter has been noted by this court.

11.  Notices of Intervention were served on 14 banks with which the Firm held bank accounts, and the moneys thereat are now all vested in the Council. 

12.  The total amount of client’s money and office money held by the Council stands at $2,675,730.64 and $329,788.71 respectively (“the Funds”).

13.  Two rounds of advertisements were published at one Chinese and one English newspaper and the Gazette to invite claims on the Funds.  The Council received 55 claims in the total sum of $11,295,784.47.  There are also 47 conveyancing files in which the Firm had stakeheld stakeholder moneys amounting to a total sum of $809,295.40.

14.  Directions are being sought from the court as to whether the claims made by the claimants should be verified or proved. 

15.  In discharge of the Council’s duty as trustee under a statutory trust, it is of course reasonable and prudent that the claims from the claimants should be verified and proved.

16.  It is proposed by the Council that the claims made by the claimants be proved to the satisfaction of the Intervention Agent, who is also authorised to verify the claims and the amount thereof, and to determine if the claimants are properly qualified to be entitled to distribution, and that the Council should be at liberty to apply for further directions from this court in case of any genuine doubt in its verification or determination.

17.  The Council further suggests that this court may consider it proper to give directions to deal with the Funds held on account of the Firm in the manner set out below.

Further Notice

18.  Two rounds of advertisements to invite claimant to submit claims have been published, and directions is sought from the court whether any further notice should be given, and if so, in what form or manner. 

19.  The Council points out that a long period of time has lapsed since intervention on 2 September 2016 and ample opportunity and time has been given for claims to be made.  If further notice is to be given, distribution of client’s money to claimants would no doubt be delayed.  Even if a further notice is issued, there is always the possibility that not all potential claimants are drawn out.  It is proposed therefore, that no further notice needs to be effected before distributions to the claimants.

Setting Aside Funds for Future Claims

20.  Directions is sought from the court as to whether the Council should made distribution of the client’s money without setting aside part of the funds for future claims. 

21.  The Council points out that the Firm was intervened on 2 September 2016, that is almost two years ago, and many claimants are very eager to receive distribution as soon as possible.  To save further costs and to speed up distribution of the client’s money to the claimants, it is proposed that no part of the Funds be set aside to allow for possibility of future claims.  In any event, it would be difficult to determine how much of the Funds should be set aside for future claims and when should it be released.

Cut‑Off Date

22.  Direction is sought from the court as to whether there should be a cut‑off date so that any claimants filing new claims thereafter shall not be entitled to the distribution of the client’s money. 

23.  The Council submits that, as a matter of practicality, there has to be a cut‑off date.  Otherwise if there are claims submitted and accepted after verification after all or part of the distributions are made to the claimants, the Council would be in a very difficult if not impossible position to recall the distributions already made and to re-adjust distributions every time a new claim is submitted, and there would be no end in the distribution exercise.  The appropriate cut‑off date may be the date of the order of this court.

Claimants Failing to File Statement of Truth

24.  In those cases where the claimants had failed to file the Statement of Truth, nor respond to repeated reminders of the Intervention Agent, direction is sought from the court whether such claimants should be entitled to share in the client’s money.  As the claimants have failed to prove their claim, it is proposed that such claimants should be excluded from distribution of the client’s money.

Uncontactable Stake Files Clients

25.  Regarding the stakeholder file cases where the clients could not be contacted or letters sent to them were returned undelivered or they did not respond to repeated letters of the Intervention Agents, direction is sought from the court as to whether such claimants should be entitled to share in the client’s money.  It is proposed that, as a matter of practicality, they are contactable and should be excluded from distribution of the client’s money.

Clients Defrauded by Chong

26.  In those cases where payments made by the claimants to the Firm were misappropriated by Chong instead of being paid into the bank accounts of the Firm, direction is sought from the court whether such claimants should be entitled to share in the client’s money for the misappropriated payments.

27.  The question of whether those claimants whose payments had been defrauded by Chong (“the Defrauded Claimants”) should be entitled to distributions from the client’s money would bound to give rise to a conflict of interests between the Defrauded Claimants and other claimants. 

28.  I am told that the modus operandi of Chong’s fraud appears in paragraph 25 of the Affirmation of Lau Wing-keung.  In investigation of the claims, for the cheques issued by the claimants in purported payment to the Firm, the Intervention Agent had obtained from the relevant banks of the Firm copies of the cheques presented to the relevant banks, to see whether the payee of the cheques had been altered to Chong, and whether the monies represented by the cheques had indeed been paid into the Firm’s bank accounts.  Where the investigation shows that the payee of the claimants’ cheques were altered to Chong, “Chong” would be marked in the column “Payment to the Firm/Chong”, in the result of investigation.  The total amount of such claims together with item (7) in the list of claims where cash was handed to Chong stands at $3,544,850.

29.  In this regard, the Council submits that there is no evidence that the money so paid by the Defrauded Claimants to Chong by cheque or cash have been paid into the Firm’s bank account, or can be traced to the Funds.  Therefore, the entitlement of the Defrauded Claimants to the Funds would be doubtful.

Basis of Distribution of the Funds

30.  Direction is sought from the court as to the basis on which the client’s money should be distributed. 

31.  Traditionally, in the present situation of a deficiency in client’s money, the starting point would be the “first in, first out” Clayton’s Rule.  But the rule is often regarded as unfair and has been much criticised and not applied in numerous authorities.  In Hong Kong, the pari passu approach has been confirmed in Re CA Pacific Finance Limited (No.2) [1999] 2 HKLRD 102,  at 107F.

32.  It takes only a very small counterweight to displace the rule in Clayton’s case.  It is commonly recognised that a pari passu solution is the usual solution.  The pro rata approach is, in most cases, likely to be the most appropriate approach because of the very nature of a solicitor’s general client account [see: Re Ahmed Co (a firm) and Ors [2006] EWHC 480 (Ch) pages 19 to 20, paragraphs 133 to 135].

33.  The “first in, first out” rule would give rise to a lot of practical problems and difficulty and it is submitted by the Council that its application here would be unjust and impracticable.  It is therefore proposed by the Council that the pari passu method be adopted in distributing the client’s money to those claimants entitled to its distribution.

Costs

34.  Section 10 of Schedule 2 to the Ordinance provides that subject to any order for costs that may be made by the court, any costs incurred by the Council shall be paid by the solicitor concerned as a debt owed to the Council.  In the present case, however, given that the 1st and 2nd defendants have both been adjudged bankrupt, there is no real prospect of any recovery by the Council from them. The Council therefore asks that the office money be applied towards payment of its costs and paid on a solicitor and own client basis.

35.  It is usual for costs to be paid out of the trust estate.  The court has power to order that the costs and expenses relating to an application such as the present to be paid out of trust assets, see: CA Pacific Finance Limited (No.2) supra at 107 C and D.  The trustee in bankruptcy of the 1st and 2nd defendants do not object to payment of office money towards intervention costs.

36.  Having considered the submissions of Mr Lau Wing-keung, I am of the view that the suggestions and proposals put forward by the Council as alluded to above accord with principle and authorities and would give effect broadly to the beneficial entitlement of the claimants.

37.  Accordingly, I consider it appropriate to make an order in terms of the draft order lodged by the Council, save that at paragraphs 10 and 11 thereof, the words “should be” be deleted, and the definition of “client’s money” at paragraph 1 thereof should be amended in the form which I have dictated earlier. 

38.  I so order.