A SOLICITOR v. THE LAW SOCIETY OF HONG KONG

CACV 529 /2018

[2020] HKCA 141

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 529 OF 2018

(ON APPEAL FROM THE ORDER OF THE SOLICITORS DISCIPLINARY TRIBUNAL DATED 2^ND OCTOBER 2018)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

Background

1.  This is an application brought by the Law Society for security for costs of an appeal brought by a solicitor who was the subject of disciplinary proceedings.  The Law Society made this application on the ground that the appellant is impecunious.

2.  The appellant admitted all the ten complaints against him at the second hearing of the Solicitors Disciplinary Tribunal (“the Tribunal”).  On 2 October 2018, the Tribunal made the following decision on sentence and costs:

(1)  on the 1^st complaint (breach of Rules 2(a) and (d) of the Solicitors’ Practice Rules, Cap 159H by failing to comply with a notice of inspection dated 23 October 2013 issued by the Council of the Law Society): fine of $50,000;

(2)  on the 2^nd complaint (breach of Rule 7 of the Solicitors’ Accounts Rules, Cap 159F (“the Rules”) in that on around 4 October 2013 the appellant transferred and/or allowed $127,191 to be transferred from the client account of his firm to the bank account of the Hong Kong Solicitors Indemnity Fund Limited for payment of the firm’s contribution to the professional indemnity fund): fine of $20,000;

(3)  on the 3^rd complaint (breach of Rule 7 of the Rules in that from July 2012 to April 2013 he drew and/or allowed money to be drawn from the firm’s client account for payment of the firm’s office expenses): fine of $20,000;

(4)  on the 4^th complaint (breach of Rule 7 of the Rules in that for the year ended 30 April 2009 he drew and/or allowed money to be drawn from client accounts such that there were debit balances in those client accounts): fine of $20,000;

(5)  on the 5^th complaint (breach of Rule 8(1) of the Rules in that on divers dates he drew or allowed cash to be drawn from the firm’s client accounts as “costs”): fine of $50,000;

(6)  on the 6^th complaint (breach of Rule 10 of the Rules in that he failed to keep properly written up books and accounts to show the firm and/or his dealings with clients’ money and/or failed to record these dealings within three working days, and/or that all other dealings were not recorded before the end of the following month): fine of $60,000;

(7)  on the 7^th complaint (breach of Rule 10A of the Rules in that since 1 February 2008 he failed to prepare bank reconciliation statements with regard to the firm’s client accounts): fine of $50,000;

(8)  on the 8^th complaint (breach of Principle 13.02 of the Hong Kong Solicitors’ Guide to Professional Conduct and Rules 2(c), (d) and (e) of the Solicitors’ Practice Rules in that he drew or allowed to be drawn cheques from the firm’s client accounts which were not honoured): fine of $40,000;

(9)  on the 9^th complaint (breach of Principle 12.05 of the Hong Kong Solicitors’ Guide to Professional Conduct and Rules 2(a) and (d) of the Solicitors’ Practice Rules in that he failed to pay counsel fees within two months of submission of counsel’s fee note): fine of $50,000;

(10)  on the 10^th complaint (breach of Rule 9A of the Rules in that he failed to remedy promptly his breaches of the Rules: fine of $10,000;

(11)  for a period of three years from the date of the decision, the appellant cannot practise in Hong Kong as a sole proprietor or partner of a firm of solicitor; during such period, any practising certificate issued by the Law Society to the appellant should be issued subject to the condition that he cannot prepare, handle or sign any vouchers, journals, receipts, cheques or any other documents relating to money of the clients or office money of such firm or handle in any manner whatsoever money of the clients or office money of such firm; and

(12)  costs of the disciplinary proceedings including the costs of the Law Society in its investigation and the costs of the clerk of the Tribunal be paid by the appellant on a full indemnity basis to be taxed by a taxing master if not agreed.

3.  On 25 October 2018, the appellant filed a notice of appeal in respect of the penalty (total fine of $370,000 with restrictions on practice for three years) and full indemnity costs.  He filed a notice of setting down of an appeal on 18 January 2019.

4.  The present summons was issued by the Law Society on 26 June 2019, seeking security for the costs of the appeal in the sum of $645,032, with an affirmation in support.  On 29 July 2019, the appellant filed an affidavit in opposition and the Law Society filed its affirmation in reply on 5 August.

5.  On 13 August, the appellant’s solicitors wrote to the court stating that he is now in possession of additional information on his current financial information which in the appellant’s view demonstrates that the Law Society’s claims are unfounded and that he is in a position, should his appeal be unsuccessful, to meet an adverse, taxed costs “albeit only in instalments”.  The appellant sought leave to file a further affidavit to include updated information and other matters relevant to the merits of the appeal following its finalisation which he anticipated would be by 15 August when he would be “formally seeking the necessary leave”. Lastly, the appellant requested that the application for security for costs be determined at an oral hearing, rather than on paper.

6.  However, instead of “formally seeking the necessary leave”, the appellant simply filed his 2^nd affidavit on 16 August without leave.

7.  The court wrote to both parties on 19 August with the directions of the Registrar of Civil Appeals stating that pursuant to Practice Direction 4.1 paragraph 36(11), the appellant’s 2^nd affidavit shall not be considered by Court of Appeal and should not be included in the application bundle without the permission of the court.

8.  To date, no application has been made by the appellant for leave to file his 2^nd affidavit, which has not been included in the application bundle. We shall not concern ourselves with it.

9.  Having considered the evidence filed by the parties and their submissions, we decline to hold an oral hearing for the application for security for costs.  We think it is entirely appropriate to determine this application on paper. 

Legal principles

10.  Pursuant to Order 59 rule 10(5) of the Rules of the High Court, the Court of Appeal may, in special circumstances, order that such security shall be given for the costs of an appeal as may be just.

11.  It is the 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, without proof of any other special circumstance.  The court will order security upon proof or an inference that the respondent will be likely to encounter undue delay or be put to undue expense in enforcing any order for costs in respect of the appeal.  It may decline to order security where the insolvency or impecuniosity of the appellant arises from what he alleges to be the wrongful act of the respondent. There is no absolute rule that security will not be awarded in that situation. The question is whether awarding security would amount to a denial of justice to the appellant (Hong Kong Civil Procedure 2020, vol 1, §§59/10/26 and 59/10/27).

12.  In Chung Kau v Hong Kong Housing Authority [2004] 2 HKLRD 650, these matters were emphasised at 656A to H:

(1)  The fact that an appellant is impecunious does not lead automatically to an order that security for costs must be provided.  The court 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.

(2)  Once the existence of impecuniosity has been demonstrated, it is generally up to the party resisting the application to demonstrate countervailing factors militating against such an order being made.  A common countervailing factor are the merits of an appeal.

(3)  In considering the merits, a detailed examination is neither required nor desirable.  The court should form some sort of preliminary, even instinctive, view.  Where the merits appear to go strongly one way or the other, this may, by itself, be a decisive factor.  However, if the court takes the view that the appeal could really go either way, then generally it will look to the existence of any other factors to tilt the balance, in the absence of which security will be ordered.

(4)  The overriding consideration for the court is to consider whether “special” (not exceptional) circumstances exist making it “just” to order security.

Impecuniosity

13.  The Law Society submitted it may be inferred that the appellant is impecunious and that it would encounter obstruction, undue delay or be put to undue expenses in enforcing any orders for costs in respect of the appeal.  It relied on these matters for the inference to be drawn:

(1)  In a judgment of the Court of Appeal in April 2014 (HCMP 3269/2013), Lam VP noted the appellant’s financial difficulties when deciding to direct the Law Society to issue a practising certificate to the appellant subject to restrictions.  He remarked on the general impression of the appellant’s financial instability arising from the history of the appellant’s debt due to a bank, his indebtedness to the Inland Revenue Department and to a finance company, taking the view that the financial difficulties could not be brushed aside as a short‑term cash flow issue (§40).

(2)  At the hearing before the Tribunal in April 2019, the appellant’s counsel submitted that the appellant did not have any assets and was reliant on the support of his sisters for his expenses at about $30,000 a month.

(3)  In the appellant’s affidavit of means filed in the disciplinary proceedings in May 2017 to provide information of his current and previous financial position and his ability to pay any fines and costs that the Tribunal might impose, he stated that he only had $4,000 in a bank account and he continued to live off intermittent loans to him by his family and friends (§14).  The bank statement exhibited to his affidavit showed a balance of $2,800 odd as at 4 May 2017.

(4)  He has failed to pay the fines imposed by the Tribunal in October 2018 of $370,000.  In his notice of appeal, he seeks to pay any costs order of the disciplinary proceedings which may be varied by the Court of Appeal by instalments not exceeding $6,000 a month.  In his affidavit in opposition, he repeated the suggestion of paying costs at $6,000 a month (§9).

14.  The appellant asserted in his affidavit in opposition that he is not impecunious.  He relied on the following:

(1)  a “Statement of Assets” of his firm and a letter dated 22 November 2012 stating that the assets of his firm at the time were in the region of $14 million (§10);

(2)  his one-third entitlement of his father’s estate (§36);

(3)  $650,000 was owed to him for “assisting” in a Scottish appeal case (§§37, 38);

(4)  his present earning, which is between $30,000 to $50,000 (§40); and

(5)  a potential claim of several million dollars relating to events that had occurred in 2013 and/or 2014 for misappropriation by a former colleague and against a firm of solicitors in respect of profit costs payable to his firm (§43).

15.  He asserted in his submission that he had been in financial difficulties as a result of the forced closure of his firm, the initial refusal of the Law Society not to renew his practising certificate at all (which was overturned on appeal in HCMP 3269/2013), the “wrangling” with the Law Society because of additional conditions it insisted on for issuing a practising certificate, and the time taken for the Tribunal to decide on the penalty.  He submitted that his finances are “far healthier” since the conclusion of the disciplinary proceedings.

16.  We are satisfied that the appellant is impecunious, and that the Law Society would likely encounter undue delay, obstruction and expense in enforcing any costs order in its favour in this appeal.

17.  Regarding the assets of the appellant’s firm, he admitted that he was unable to recover the bulk of these assets for one reason or other. The assets of his father’s estate appear to be located overseas.  There is no documentary evidence to substantiate the assertion in his submission that his one-third entitlement has a value of around $600,000.  As for the debt allegedly owed to him for work done in respect of a Scottish appeal case, this is not supported by any documentary evidence and it is not apparent why the appellant was engaged to “assist” in respect of an appeal overseas.  Although the appellant asserted in his submission that from July 2018 to September 2018, his total earnings were $1.9 million consisting of various commissions salaries and income, there is no documentary evidence in support of such earnings.  The fact remains that the total fines imposed by the Tribunal of $370,000 remain outstanding to date.

18.  The appellant accepted in his submission he does have “cash flow” issues, in that the realisation of his father’s estate will inevitably take time, so will the payment for his work in the Scottish appeal case, and proceedings to recover the potential claim of several million dollars will inevitably be lengthy (it is not apparent if any proceedings have been commenced).  He admitted that he cannot pay “in one go” the amount requested.

19.  Despite his claim in his submission that his financial position has improved since the conclusion of the disciplinary proceedings, his position in his letter to the court in August 2019 is that he is only able to meet an adverse taxed costs order by instalments should his appeal be unsuccessful.

20.  He has sought to invoke section 25^[1] of the Legal Practitioners Ordinance, Cap 159, stating that this provision provides a “backstop” in that the Law Society’s costs would be paid by the Secretary for Justice out of the general revenue in the event the Law Society should fail to recover from him, so the Law Society is not at risk as to costs.  This is misconceived.  Costs may be paid out of the generally revenue where the expenses “could not reasonably be recovered” from the person who is the subject of the disciplinary proceedings.  This provision is hardly a reason for not ordering security for costs against an appellant where it is established that undue delay and expense may be encountered in enforcing a costs order against him.

21.  We are not satisfied that the appellant’s financial difficulties were caused by any wrongful act of the Law Society as alleged.  He had been in financial difficulty even before the intervention of the Law Society. And as the Court of Appeal directed the Law Society to issue a practising certificate to him subject to conditions one of which was that he was not permitted to practise as principal, he would have to close down his firm in any event, as he was the only principal of his firm at that time.

22.  Hence, the burden is on the appellant to demonstrate a sufficient countervailing factor why he should not be ordered to provide security for costs of this appeal.

Merits of the appeal

23.  For the merits to be a sufficient countervailing factor, the appellant would need to show there are one or more grounds of appeal which are very strong, with substantial prospects of success (Laerdal Medical Ltd v Hong Kong Haocheng International Trade Ltd, CACV 154/2017, 20 November 2017, §15).

24.  One of the contentions raised in the notice of appeal is that the full indemnity costs order is manifestly excessive and/or obviously and plainly wrong.  Our preliminary view is that this is a ground of appeal with substantial prospects of success.  The Tribunal did not give any reason why a full indemnity costs order was imposed, contrary to the guidance given in Solicitor (302/02) v The Law Society of Hong Kong [2006] 2 HKC 40 at §148.  The full indemnity costs order provided for in section 10(2)(e) of the Legal Practitioners Ordinance should not be a usual order.  The normal principles for imposing an indemnity costs order in civil litigation apply to proceedings before the Tribunal; indemnity costs should be imposed only in rare and exceptional cases where there has been reprehensible, scandalous or outrageous conduct on the part of the solicitor who is the subject of the proceedings (Solicitor (302/02) v The Law Society of Hong Kong [2006] 2 HKC 40 at §§146, 193, 216; A Solicitor v The Law Society of Hong Kong, CACV 182/2014, 30 June 2015, §58)^[2].

25.  It is not clear why the Tribunal saw fit to impose a full indemnity costs order, as no explanation for this was given in its reasons. It is uncertain if the Tribunal had taken into account only the relevant factors for making this order.  The Court of Appeal might find it necessary to remit the question of costs back to the Tribunal for its consideration.  In light of these circumstances, the appellant has, prima facie, a ground of appeal with substantial prospects of success and this would constitute a sufficient countervailing factor against an order for security for costs.

26.  We do not think any of the other grounds of appeal raised in the notice of appeal are of sufficient merit for present purpose.

27.  For the above reason, we decline to exercise our discretion to order the appellant to provide security for costs of his appeal.

Costs of this application

28.  As the appellant has successfully resisted this application, we think it appropriate that he should have the costs of this application, not forthwith, but in any event.  We exercise our discretion to reduce the costs he is to recover from the Law Society by 50%, to take into account that much time and costs were incurred in addressing contentions raised by him that are without merit or irrelevant.

29.  We have considered the statement of costs submitted by the appellant dated 27 December 2019 for summary assessment.  It is in the total sum of $331,635, of which $213,625 was the appellant’s time charges in his capacity as a solicitor for what appeared to be over 38 hours of work, and $107,000 was counsel’s fees for holding a series of conferences of over 19 hours.  We are of the view that the costs claimed are grossly excessive for a straightforward application of this kind. In our assessment, reasonable costs should not exceed $80,000.  We would award costs of $40,000 to the appellant.

30.  The costs order and gross sum assessment are orders nisi.  Any party desirous of seeking a variation may apply within 14 days of the handing down of this judgment.