THE COUNCIL OF THE LAW SOCIETY OF HONG KONG v. CHEUNG KAM MIN MICKEY (previously practising as sole proprietor of Messrs. K. M. Cheung & Co., Solicitors)

HCMP 238/2021

[2021] HKCFI 776

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 238 OF 2021

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R E A S O N S   F O R

J U D G M E N T

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A.    Introduction

1.  These proceedings concern an intervention made by the plaintiff (“Council”) into the practice of the defendant firm of solicitors KM Cheung & Co (“Firm”).

2.  The intervention was made pursuant to a resolution passed on 12 June 2018.  Kevin Ng & Co (“KNC”) was the firm appointed as the intervention agent (“Intervention Agent”).  KNC attended the office of the Firm on 13 June 2018, and commenced the intervention process from that date.

3.  By Originating Summons dated 24 February 2021, the Council applied for determination on certain questions, and for directions, specifically pursuant to section 6 and 10 of Schedule 2 to the Legal Practitioners Ordinance Cap 159 (“LPO”).  The questions and directions related to two broad areas, namely (1) the distribution of monies held by the Firm, and (2) disposal or destruction of the Firm’s files.

4.  The application was supported by two affirmations of Ng Kin Wah, principal of KNC (also the advocate at the hearing). The 1^st affirmation (“Ng1”) was filed together with the Originating Summons.  The 2^nd affirmation (“Ng2”) was necessitated for reasons which I will canvass below.  I gave leave for the filing and use of Ng2 at the hearing itself.

5.  At the end of the hearing, I made the following orders:

1.  The client’s monies deposited with the banks and accounts set out in Schedule 1 to the Originating Summons, together with interest accrued thereon (collectively, the “Client’s Money”), be distributed to those claimants claiming for money deposited with Messrs. K.M. Cheung & Co., Solicitors (the “Firm”) and found to be beneficially entitled to the Client’s Money (collectively, the “Beneficiaries”) on a pari passu basis;

2.  The claims made by the persons claiming to be entitled to the distribution of the Client’s Money (collectively the “Claimants”) be proved by the Claimants on available accounting records;

3.  Mr. Ng Kin Wah of Messrs. Kevin Ng & Co., Solicitors, be authorized to verify the claims made by the Claimants and to determine if they are Beneficiaries properly qualified for distribution;

4.  No further notice need be given (in addition to the notices placed in the Standard and Ming Pao on 8 October 2018, the second notices placed in the Standard and Sing Tao Daily on 9 September 2019 and third notices placed in the Gazette on 13 March 2020) to invite potential claimants for monies deposited with the Firm to notify the Plaintiff or their claims;

5.  The Plaintiff be authorized to make distribution of the Client’s Money without setting aside any part thereof to meet future claims (if any) that may be made by persons whose beneficial entitlement to the Client’s Money are not made known to the Plaintiff at the time of distribution;

6.  The cut off date of filing new claims with the Plaintiff be the date of the Order and any new claims filed with the Plaintiff after the date of the Order shall not be entitled to the distribution of the Client’s Money;

7.  The files of the Firm (excluding original title deeds and documents, such as assignment, power of attorney found in the files, (collectively the “Excluded Files”)) be destroyed in accordance with the criteria set out in the below:-

(a)  Conveyancing files closed for more than 15 years;

(b)  General files closed for more than 7 years;

(c)  Tenancy files with tenancy agreement expired for more than 7 years; and

(d)  Criminal files closed for more than 4 years of 3 years from the expiration of any appeal period, whichever date is the later.

8.  After the destruction of the files under paragraph 8 above, the remaining files of the Firm (excluding the Excluded Files) be destroyed as and when they reach the criteria set out in paragraph 7 above;

9.  The accounting documents of the Firm relating to an accounting period ending not less than 7 years before the date of this Order be destroyed;

10.  After the destruction of the accounting documents under paragraph 10 above, the remaining accounting documents of the Firm be destroyed as and when they reached the criteria set out in paragraph 10 above;

11.  Isolated loose papers and miscellaneous items, including Business Registration Certificate, name chops, compliment slips, names cards of the Defendant and the Firm’s staff, unused blank file covers, letterhead, vouchers, bills, receipts, envelopes, etc. of the Firm, be destroyed forthwith;

12.  The Plaintiff’s costs of and occasioned by the present application and the intervention be paid by the Defendant on a solicitor and client basis and shall be recoverable from the Defendant as a debt owing to the Plaintiff;

13.  The office money deposited with the banks and accounts set out in Schedule 2 to the Originating Summons, together with any sums to be received and any interest accrued and thereon (collectively the “Office Money”) should be applied towards payments of the Plaintiff’s costs in paragraph 12 above to the extent sufficient to cover such costs;

14.  There be further liberty to apply.

6.  However, in light of the developments of the case and some points arising, including as were raised by a former client of the Firm, I said I would hand down the reasons for my judgment on a subsequent date.

7.  These are my Reasons for Judgment.

B.   Background and Approach

8.  The Firm was established in January 2005. The Firm was previously operated by Cheung Kam Min Mickey, as sole proprietor.

9.  The resolution for intervention dated 12 June 2018 recorded the decision of the Council, amongst other things, that:

 (1)  pursuant to section 26A(1)(c) of the LPO, the powers conferred by Schedule 2 to the LPO be exercised to intervene in the practice of the Firm;

 (2)  KNC be appointed as Intervention Agent, subject to supervision by a monitoring committee comprising three named members of the Council;

 (3)  the client accounts, and any positive balance of the office accounts of the Firm, and all sums of money held by or on behalf of the solicitors of the Firm or the Firm in connection with the practice of the solicitors of the Firm be vested in the Council;

 (4)  pursuant to section 7(1)(a) of Schedule 2 to the LPO, notice be served on the Firm requiring production or delivery to the Intervention Agent of all documents in the possession of the solicitors of the Firm or the Firm in connection with its practice, and to authorise the Intervention Agent to take possession of them on behalf of the Council under section 7(2) of Schedule 2;

 (5)  authorisation be given to the Intervention Agent, if necessary, to apply to the Court on behalf of the Council for any appropriate directions.

10.  The intervention itself commenced on 13 June 2018, when KNC attended at the office of the Firm, gave notice of the intervention, and seized from the Firm’s office 169 boxes of closed files, 27 boxes of active files, 32 boxes of accounting documents and 6 boxes of miscellaneous documents and items.

11.  KNC first made efforts to identify and locate files with urgent deadlines, including those with pending conveyancing completion dates and court hearing dates.  Though some assistance was provided by the defendant and the Firm’s clerks, the process was daunting because of the absence of a proper list or system of filing.  At the same time, KNC were understandably fielding what Mr Ng described as an “avalanche” of enquiries from clients of the Firm.  Once the files had been retrieved they were reviewed and indexed.

12.  KNC also investigated the position of the Firm’s bank accounts, containing client monies (“Client’s Account”) or the Firm’s monies (“Office Account”).  KNC also investigated the Firm’s use of accounting software, albeit that a complete set of office and client ledgers for the period before 1 April 2016 was not available.  No physical office and client ledgers for any period were found.

13.  KNC caused three rounds of notices to possible claimants of monies held in any bank accounts of the Firm to be published in English and Chinese newspapers on 8 October 2018 and 9 September 2019, and in the Gazette on 13 March 2020.  In total, KNC received 17 claims against the Firm for an aggregate of $13,649,476.62 (where all references to dollar sums in these Reasons for Judgment are denominated in Hong Kong dollars).  Most of the claims filed by claimants were for refund of payments purportedly made by those clients to the Firm as costs on account for professional work, mainly civil litigation cases.

14.  In Ng1, Mr Ng stated that he had investigated the 17 claims, and as a result (in summary): (a) accepted 3 claims in full in the total amount of $1,119,995.53; (b) accepted 3 claims in part in the total amount of $1,122,475.00 (whilst rejecting the other part of $214,525.00); and (c) rejected 11 claims in full in the total amount of $9,892,481.09.  Therefore, the total amount of accepted claims was put at $2,242,470.53.

15.  In Ng1, Mr Ng also explained the methodology adopted in investigation of those claims.  For present purposes, I do not need to rehearse the broad methodological approach adopted.  Mr Ng then set out the specific approach and result of each claim.

16.  By way of example, ‘Claim 1’ was made by a Ms Cheng Sui Kwan, a former client of the firm who had deposited $90,000 into the Firm’s Client’s Account on 31 May 2018.  The sum was deposited for the purpose of paying stamp duty in relation to the purchase of a property. The Firm’s bank statements showed that a sum of $90,000 was paid out of the Client Account to the Firm’s Office Account on 1 June 2018 for an unknown reason.  On that basis, in Ng1 Mr Ng identified that it was proposed that Claim 1 be rejected as there was no money held in the Client’s Account under Ms Cheng’s file.

17.  With respect, that approach was clearly incorrect.

18.  That that approach was taken has caused understandable consternation amongst former clients of the Firm, including Ms Cheng and her husband Mr Li Cheuk Wing.  The problem has also apparently been exacerbated by the rather poor communication between the Council and/or KNC as the Intervention Agent and the former clients of the Firm.  I will come back to the points made by Mr Li – see below.

19.  The error in approach was belatedly recognised by KNC, leading to the need to file Ng2.  The first point made in that affirmation was to inform the court that this was the first occasion on which KNC was appointed as an intervention agent for the Council.  Next, it was pointed out that since making Ng1 and filing the Originating Summons, Mr Ng had the opportunity to peruse a draft protocol and on investigation of claims relating to another intervention (“Protocol”).  That identified to him that he had not properly addressed one issue in the verification of claims as previously set out in Ng1.

20.  Therefore, based on the Protocol, it has now been confirmed that where money was improperly drawn out of the Firm’s Client’s Account, in the absence of justifications to the contrary, such claims or the related part of the claim should be accepted.  Having reviewed and re-examined all of the 17 claims received, seven of the claims were changed from rejection to either full or partial acceptance.  Therefore, as a result of the change, Mr Ng in summary: (a) accepted 4 claims in full then the total amount of $1,177,495.53; (b) accepted 9 claims in part in the total amount of $1,889,821.20 (whilst rejecting the other part of $870,159.89); and (c) rejected 3 claims in full in the total amount of $8,412,000.

21.  Specifically in relation to Claim 1, the revised decision was to accept the claim, save as to the sum of $25 for which there was some evidence of the cost of conducting a land registry search.

22.  Because of the revision in approach, KNC attempted to contact the affected claimants by telephone and/or by email on an urgent basis, so that Mr Ng could update the court with the information at the hearing.  Each claimant was asked to attend the office of KNC in person as soon as possible, so that KNC could explain to them the results of their respective claims.

23.  I accepted the proposal that the manner of decision on and verification of claim should be by KNC, once it was applying the correct approach identified by the Protocol.  I therefore approved the relevant paragraphs of the order.

24.  I also agreed that no further public notice to make claims was necessary, in light of the three previous notices and the passage of time since the Intervention.  And that no money need be set aside for any future claimants.  I also agreed there should be a cut-off date as at the date of the hearing.

25.  As there are insufficient funds to satisfy all the accepted claims, the proposal was that they would be satisfied on a pari passu basis.  As against the other options, which in context seem to me to be overly intricate and expensive, I accepted that the proposal was fair and correct in this case.

26.  There being no excess after proposed distribution of funds to clients, Mr Ng withdrew the suggestion in his original draft order that any excess funds should be paid from the Client Account towards the costs of the Intervention.  In my view, that suggestion was in any event always wholly inappropriate.  It is difficult to imagine circumstances in which funds held in a Client Account – that is monies which belong to clients – could be used to pay for the costs of the intervention process.

27.  A very small sum of money which might be found in the Firm’s Office Account might appropriately put towards the costs of the Intervention, as it is the defendant which should (in the first instance, at least) be liable for those costs.

28.  As to the disposal of documents, I agreed the proposal that files be destroyed upon satisfaction of certain minimum retention periods, as were set out in the draft order which I approved.

C.   Client Concerns

29.  Prior to the hearing, Mr Li wrote to me by letters dated 11 and 12 March 2021.  In the first letter, Mr Li explained that he (or his wife, Ms Cheng) had engaged the Firm to provide service in relation to the change of title of a property in Hong Kong, and paid the $90,000 to the Firm for payment of the stamp duty on that transaction.  As the transaction had not been completed by the date of intervention in the practice of the Firm, the $90,000 was frozen.  Subsequent to the Intervention and during the investigation, Mr Li and Ms Cheng submitted the claim form, and raised inquiries with the Intervention Agent on several occasions in respect of their money and the status of their claim.  However, Mr Li says, the Intervention Agent always responded with standard and meaningless answers such as “further information pending” or “the information is confidential”, and refused to provide any useful information and assistance.

30.  Mr Li’s letter went on to say that he had recently received two letters from the Intervention Agent.  The first letter was dated 26 February 2021, and stated that a hearing would be held in the High Court on 22 March 2021, where the Council would seek the court’s instructions relating to intervention, including the distribution of client monies.  The second letter was dated 4 March 2021, stating that the claim to $90,000 was initially rejected following the investigation and accounting records inspection, due to the fact that the money had been withdrawn in full and there was no balance of the money in the account.  Mr Li was asked to submit any objection within 14 days, or otherwise the zero balance would form the basis of the application to the court.

31.  Whilst recognising that the Intervention may have been necessary, with a view to maintaining professional standards and integrity, Mr Li expressed disappointment with the manner in which the Council and the Intervention Agent had treated clients of the Firm.  He said that his legitimate expectation to know and be informed of the details in relation to the process of the Intervention and the claim was not met.  Even the letter of 4 March 2020 did not provide any explanation as to the principle of the distribution of client money, and the apparent unfairness or lack of equality of whatever approach was taken.  Mr Li also complained that he had waited over 20 months for the result of his claim, and was asked to give objection within 14 days of being told of the result.  As he put it, the letter from the Intervention Agent rejecting the claim serves as a good example and illustration of how the Council and the Intervention Agent have been dealing with clients, which Mr Li described as unreasonable, thoughtless, obscure and confusing.  Mr Li also understandably commented on the period of over 30 months from the date of Intervention to the hearing before the court.  Mr Li says that delay, and the approach apparently taken, shows the Council has not shown any sense of responsibility as the trustee of client monies, perhaps because it is not subject to public scrutiny but protected by the statutory scheme.

32.  Mr Lee asked to be able to make submissions to the court at the hearing.  I permitted him to do so.  Orally, he mainly raised two questions.  The first was as regards the principle of fairness, Mr Li’s suggestion being that the result on any claim should be provided with sufficient audit details, which might indicate the total amount of claims and claimants and the proposed distribution across those claims and claimants.  The second was as regards accuracy, in circumstances where he was first told that there would be no acceptance of the claim because money had been withdrawn, and was then told there would be partial acceptance.  Even then, no detail was provided except as might have come from attending at KNC’s offices in the circumstances of urgency that was self-created by KNC.

33.  Mr Li also made three further points or suggestions.  One was in relation to possible refusal to permit the continuation of the intervention, or instead for the intervention to be suspended.  The second was to say that the public had the right to know about the requirements of an intervening agent, and to disclose whether monies from the Client Account had been due to being improperly or wrongly removed.  The third was that the Council and Intervening Agent should be urged to provide a specific timetable for return of the money, as well as to provide the claimants with details of the auditing and a clear explanation of the approach to their individual claims.

34.  As to that third point, I was in complete agreement that at least at this stage it ought to be possible for the Council and Intervening Agent to identify the date by which clients would receive payment of those claims (or parts of claims) accepted for distribution on the pari passu basis.  I, therefore, imposed a deadline of 28 days for payment.

D.   Other Comments

35.  There seems to me to be much force in the points made by Mr Li as a representative of the former clients of the Firm. Though the comments arise specifically in the context of the Intervention into the practice of the Firm in this case, they have much wider significance.

36.  If I might respectfully say so, much of the problem arises from two particular failings.

37.  First, the time taken in this Intervention (and, apparently, in other interventions) before claims are settled and paid seems difficult to justify.  In this particular case, acknowledging that the documents held by the Firm were in some disarray, and that the urgent efforts immediately after intervention were directed at dealing with files with looming deadlines, it still took from June 2018 to February 2021 – 32 months – for the assessment of the relatively small number of 17 claims as were originally made (and not all of which were ultimately pursued).  Even then, the original assessment was simply, and to my mind obviously, flatly wrong.

38.  Acknowledging that this was the first intervention in which KNC was involved, it might be thought that it would have been all the more important for the Council to have insured that the Intervening Agent appointed was fully apprised as to the correct approach and protocols to be taken in an intervention.

39.  It is at best unfortunate that KNC was required to re-do the claim assessment process in the period between issuing the Originating Summons and the date fixed for hearing of it.  At the same time, that KNC was able to re-assess every claim in a period of about 10 days does rather suggest that it was not necessary to have taken almost 32 months to have made the original (albeit plainly incorrect) assessment.

40.  Nor is it clear to me on the timetable of this Intervention why the notices inviting claims were given at such long intervals.  The first notice to claimants was published in October 2018, perhaps in the circumstances not swift but not particularly late following an intervention less than four months beforehand.  But the next notice was a further eleven months later.  The third notice was another six months after that.

41.  Perhaps this first point emphasises the need for the appropriate resources and focus to be deployed on any intervention.  There is at least a significant risk that a lengthy process of intervention will not be regarded by the public as a process properly engaging in the protection of the clients of the firm, or in upholding the integrity and reputation of the solicitors profession as a whole.

42.  Secondly, there is clearly a major problem with communication.  Experience teaches that if people are not told what is happening, they tend to suspect or believe that nothing is happening or that the wrong thing is happening.

43.  For myself, I would have thought it basic that the Council and/or the Intervention Agent in any intervention into any firm of solicitors should be conducting regular updates for the clients affected by the intervention.  This might be done every two or three months or so. Particularly in the early stages, if real difficulties are encountered, they could usefully be explained.  Meeting individual queries with generic statements which effectively amount to “you will have to wait and see” is understandably unacceptable.  Anyway, individual queries are much less likely if there is a regular provision of information to explain what is happening, and why resolution of client’s concerns and claims might not be happening as quickly as would be hoped.  The updates should have specific information, not mere generalities – and would hopefully demonstrate greater understanding of, and indeed empathy with, the clients’ position.

44.  Further, a self-imposed requirement to provide regular updated information might have the useful additional effect of reminding the Council and the Intervention Agent to get a move on.  If the Council were to require any Intervention Agent to provide a monthly activity and progress report in a form which might (perhaps with some minor editing or redaction) be provided to affected clients of the relevant firm, the Intervention Agent might wish to put itself in a position to identify suitable activities and progress.  That way, it might be hoped that any regular update would actually identify real progress, so that the number of updates to be provided would be reduced.

45.  I am, of course, not privy to the supervision process applicable to interventions.  But the Intervention Notice in this case (as in others) identified that the Intervening Agent was subject to supervision by a committee of Council members, who are named.  I would respectfully suggest that the level frequency – and stringency – of supervision being provided might be reconsidered by the Council.

46.  Further still, it seems to me that when a claim is assessed the particular claimant is entitled to a proper reasoned assessment, that is an assessment which sufficiently identifies why the claim is either accepted in whole or in part (and if in part why only that part) or rejected.  Further, where it is anticipated (as it must have been in this case) that the funds still held in the Client Account would unlikely be sufficient to satisfy all acceptable claims, it would be sensible to identify that anticipation.  For a client such as Mr Li/Ms Cheng to have to wait for approaching three years before being given any substantive information at all, then to be told simply that the claim was rejected because the money had been removed from the Client Account, does not seem to me to be sufficient in the proper approach to an intervention.

47.  Next, when the Council (ordinarily by the relevant Intervention Agent) comes to court to seek approval of proposed distribution of funds amongst clients, it ought to put forward – without having to be asked – a sensible but rapid timeframe within which any approved distribution would actually be made.  As in this case, it seems to me to be inevitable that courts should require a specific deadline for payment, so that the Council or Intervention Agent should give some prior thought as to a suitable deadline which can be explained and justified.  Suggesting “as soon as possible”, after an already long wait, does not provide sufficient certainty in cases such as this.  The proposed deadline itself might also usefully be communicated in advance to the affected clients.

48.  I acknowledge that the circumstances of any one intervention may differ from the circumstances of another.  But that merely identifies that there is probably no ‘one size fits all’ approach.  Though I previously suggested it in the context of an intervention of hitherto unprecedented scale, it seems to me that each intervention provides an opportunity for the Council and the Intervention Agent to consider and implement a tailor-made approach, one that is specific to and suitable for the particular intervention in question.  Once determined, the approach could usefully be explained, and the progress reported.

49.  Members of the public and former clients of solicitors firms, into which the Council has thought it necessary and appropriate to intervene, obviously should not underestimate the task faced upon intervention.  The circumstances where intervention is considered to be necessary and appropriate likely identify potential problems which have inherent difficulty in being unravelled or overcome.  On the other hand, there seems to me to be much that can be done to ensure the intervention process is performed as quickly as possible, and that any person affected by it is kept reasonably informed of the process, and the particular outcome that person may reasonably expect.

E.   Result

50.  For the above reasons, but against the above comments, I made the orders identified at paragraph 5.