RE LEE SHUK YEE

HCB 10541/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 10541 OF 2004

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J U D G M E N T

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1.  This was the hearing of a bankruptcy petition presented on 3 November 2004 by Edwin Kwok Wing Yun (“the Petitioner”) against Madam Lee Shuk Yee (“Madam Lee”).  The Petitioner is the trustee in bankruptcy of two bankrupts, Lee Shuk Mei and Lee Sin Chung (“the Bankrupts”), who are siblings of Madam Lee.  The petition was based on a debt in respect of costs awarded to the Petitioner in proceedings brought by Madam Lee against him (in his capacity as such trustee) in her capacity as the administratrix of the estate of her late father, Mr Lee Kwong Yuen.

2.  The petition originally described itself as being against “Lee Shuk Yee, the Administratrix of the Estate of Lee Kwong Yuen, deceased”.  It first came before me on 15 September 2005, when I gave leave to the Petitioner to amend it in a number of respects, including the deletion of the reference in the title of the petition to Madam Lee being the administratrix of her late father’s estate.  It seems that the inclusion of this description had given rise to some confusion at earlier hearings, in that the courts previously dealing with the matter had expressed uncertainty as to whether it was sought to bankrupt Madam Lee or to obtain an order for the administration of her late father’s estate in bankruptcy under section 112 of the Bankruptcy Ordinance (Cap. 6) (“the Ordinance”).  At the hearing on 15 September 2005, Mr Bullett, appearing for the Petitioner, made it clear that what was sought was a bankruptcy order against Madam Lee personally, and I therefore gave leave to amend the title of the petition to avoid any further confusion.  I shall, however, have to return to this point when considering the appropriate costs order to make in respect of that hearing.

4.  Madam Lee is one of 11 siblings.  Their late father died intestate in 1990, and there followed contested proceedings in which five of his children, including Madam Lee and the Bankrupts sought the right to administer his estate.  Madam Lee succeeded in those proceedings, and obtained a costs order in her favour against (among others) the Bankrupts.  The costs of those proceedings were taxed at HK$1,713,618.36, and Madam Lee obtained an allocatur for such costs in that amount.  However, before the taxation, the Bankrupts were declared bankrupt.

5.  On 28 July 1998, Madam Lee was granted letters of administration in respect of her father’s estate.  The major asset of the estate was apparently a piece of property in Tuen Mun.  On 17 May 1999, Madam Lee entered into a sale and purchase agreement in respect of the property, by which the property was to be sold for HK$27 million.  An assignment of the property was executed the same day.  The agreement and assignment were respectively registered in the Land Registry on 28 May 1999 and 8 June 1999.  On 27 May 1999, the Official Receiver, who was then the trustee in bankruptcy of the Bankrupts, registered the relevant bankruptcy orders against the property.  Following a complaint by Madam Lee’s solicitors, the Official Receiver made it clear by a letter of 21 December 1999 that the purpose of registering the bankruptcy orders had been to try to secure the proceeds of sale of the property.  Also on 21 December 1999, the Official Receiver executed a letter of abandonment of claim against the property (which had been assigned to the purchaser), which was registered at the Land Registry on 29 December 1999.  Meanwhile, at general meetings of the creditors of the Bankrupts on 28 December 1999, the Petitioner (who had previously acted for the Bankrupts in the proceedings concerning the right to administer their late father’s estate) was appointed their trustee by their creditors.

6.  Notwithstanding that Madam Lee had disposed of the property, which had long since been assigned to the purchaser, and also notwithstanding the registration of the letter of abandonment of claim on 29 December 1999, Madam Lee, in her capacity as administratrix, issued proceedings against the Petitioner (as trustee in bankruptcy of the Bankrupts) on 28 May 2000, seeking a declaration that the registration of the bankruptcy orders against the property was null and void, and a declaration that the assignment to the purchaser was effective to assign all interests in the property to the purchaser free from the bankruptcy orders.  These proceedings were discontinued not long after they were commenced, no doubt because it was realised that Madam Lee, having sold the property, had no locus standi to seek the relief sought.  The order giving leave to discontinue was dated 3 April 2001.  It provided that the costs of the proceedings should be paid by Madam Lee (the Plaintiff in the proceedings, who was described in the title of the proceedings as Administratrix of her late father’s estate), to the Petitioner (the 1^st and 2^nd Defendant in the proceedings, who was described in the title of the proceedings as the trustee in bankruptcy of each of the Bankrupts).  That costs order led to a taxation, in which the costs were taxed at HK$144,342, and an allocatur sealed in that amount.  However, the allocatur was stayed on 31 October 2001 as Madam Lee had a costs order against the Bankrupts of HK$1.7 million odd in her favour, as I have mentioned above.

7.  Some months later, there was an application by the Petitioner to lift the stay on the allocatur.  The stay was lifted by a master, whose decision was eventually affirmed by Deputy Judge Carlson on 2 May 2003.  It was this last decision that was the subject of the appeal in CACV 114/2003.  That appeal was unsuccessful, so that the stay was lifted.  As no payment was made of the costs despite the lifting of the stay, a statutory demand was issued against Madam Lee, followed by the filing of the petition against her.

8.  At the beginning of this hearing, Mr Bullett pointed out that it did not appear that the bankruptcy petition had been served on Madam Lee personally.  Although Mr Allan, appearing for Madam Lee, sought to take this point (which had not been previously taken), I ruled that having regard to the facts that:-

(1)	Madam Lee must be well aware of these proceedings, having instructed solicitors and counsel at a number of previous hearings; and
(2)	Mr Allan could point to no conceivable prejudice to Madam Lee in carrying on with the proceedings, particularly as evidence had been filed, and full submissions (and supplemental submissions) prepared, on her behalf,

I should exercise my discretion under rule 203 of the Bankruptcy Rules to waive the irregularity as to service and continue with the hearing.

9.  In his oral submissions at the hearing, Mr Allan’s main submission was that no bankruptcy order should be made against Madam Lee because the costs order on which the Petitioner relied was made against her in her capacity as administratrix of the estate of her late father.  It followed from this, he suggested, that the order gave rise to no personal liability on her part, but only a liability for such costs on the part of her late father’s estate.  He developed this submission by going on to submit that:-

(1)	Had it been desired to obtain an order for costs against her personally, this should have been applied for at the time the costs order was made, failing which the costs order could only result in a liability on the part of the estate.
(2)	Similarly, the allocatur was made against her as administratrix, and not personally.
(3)	The proceedings against the Petitioner which had given rise to the costs order had been reasonably commenced in the best interests of the estate, as they had been commenced on the advice of solicitors and counsel advising her, as administratrix, in relation to the affairs of her late father’s estate.
(4)	There was no evidence to suggest that she had brought the proceedings against the Petitioner in bad faith.
(5)	The general principle was that the estate should bear the expenses incidental to the proper performance of her duties as the personal representative.
(6)	She was, in any event, entitled to an indemnity out of the estate for all proper expenses incurred in relation to it, including any actions relating to the estate which were brought or defended with the leave of the court, or which it was proper to bring or defend even though no prior leave had been given.

10.  In my view, there is no substance in any of these points.  Although I do not doubt that Madam Lee was acting in her capacity as administratrix in bringing the proceedings against the Petitioner which resulted in the costs order against her, it does not follow that she would be under no personal liability as to costs in respect of those proceedings, so far as the other party to the proceedings is concerned.  Indeed, in my view, the general rule is that where, as in this case, the proceedings in question are commenced by a personal representative, that personal representative is personally liable to the other party for any costs to which the other party is entitled, in the absence of some special order directing otherwise.  It seems to me that this is so both as a matter of authority and of principle.

11.  So far as authority is concerned, it suffices to cite a short passage from the judgment of Oliver J (as he then was) in Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274.  Although this decision concerned the position of liquidators, it is clear from Oliver J’s judgment that the position is the same in relation to trustees in bankruptcy, trustees and personal representatives.  In that case, liquidators had brought proceedings against former directors of a company for fraudulent trading, and against a bank for a fraudulent preference.  The former claim was abandoned at an early stage, but the latter went to trial and was ultimately dismissed.  A draft order providing for costs to be paid by the liquidator was amended by the Registrar to add the words “out of the assets of the company”, apparently on the basis that a costs order against a liquidator was, unless the contrary was expressly stated, limited to the assets of the company.  The liquidator contended that this was the appropriate course to follow, notwithstanding that the company had insufficient assets out of which to meet the costs order.

12.  Oliver J rejected this submission, saying (at p.285d-286a):-

“I am bound to say that I find myself unable to accept counsel for the liquidator’s submissions.  I think that a review of the authorities does disclose that a clear dichotomy between the case where the liquidator is sued and the case where the liquidator initiates proceedings, is established, and indeed it seems to me to be a perfectly reasonable one.  I cannot at the moment see why it should be contended that a liquidator who takes it on himself to institute proceedings, to bring parties before the court, to subject them to costs, and as against whom it is quite clearly established that no order for security can be made, should then be entitled to plead that he is not responsible beyond the extent of the assets in his hands.  I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants.  A trustee or personal representative who institutes proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator, and the authorities which point that way seem to me, if I may say so respectfully, to be completely reasonable.

I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made. ... It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding up or otherwise. ...

In the instant case, in any event, I am quite satisfied that in common justice I ought to made what I conceive to be the usual order for costs against the liquidator, namely simply an order that he do pay the costs, leaving it entirely out of the question whether there be assets of the company out of which he can indemnify himself or not. ...”

13.  I am in respectful agreement with the views expressed by Oliver J.  It seems to me to be quite clear that, as a matter of principle, where a personal representative chooses to bring proceedings against a third party, it is and should be no concern of the third party whether or not such personal representative has an indemnity against the estate which he is administering, and if so, whether such an indemnity is worth anything.  So far as the third party who has been sued is concerned, he is entitled, if he chooses to, to enforce any costs order in his favour against the personal representative, leaving it to the personal representative to take steps to recoup himself out of the estate if he is authorised to do so, and there are funds out of which this can be done.

14.  Quite apart from the common justice of such a position, it seems to me that this follows from the fact that what the personal representative has is a right to be indemnified out of the estate in an appropriate case.  Such a right to an indemnity would be quite unnecessary if the personal representative were under no personal liability at all in the first place.

15.  It therefore seems to me that Mr Allan’s suggestion that absent specific reference to personal liability, no personal liability attached to Madam Lee for the costs of the proceedings against the petitioner is not well founded.  In the absence of any indication to the contrary (and there is none), the costs order and allocatur are enforceable against her personally.  Although the title to the proceedings rightly describes her as administratrix, that being the capacity in which she brought the proceedings, the costs order is nonetheless an order against her personally.

16.  I do not think that the suggestion that Madam Lee acted reasonably in following counsel’s and solicitor’s advice assists her either, so far as the Petitioner is concerned.  While I have some difficulty in seeing how it could have been thought to be for the benefit of the estate to take proceedings in relation to property in which it no longer had any interest, I am prepared to accept for present purposes that Madam Lee was advised to take such proceedings.  However, it would have been easy enough to have made an application to the court by way of a Beddoe summons seeking the court’s views as to whether or not such proceedings should be brought.  Had that been done, one would expect that the proceedings would never have been commenced.  It is not clear why that course was not followed.  In my view, Madam Lee must take the consequences of having proceeded without the benefit (such as it might have been) of a Beddoe order.

17.  In any event, it seems to me that, even with a Beddoe order, the personal representative remains personally liable for costs.  Where a Beddoe order has been obtained, it will be open to him to have recourse to the estate’s assets to meet that liability.  But if the estate has insufficient assets, in the absence of a limitation being expressed in the costs order that costs are to come out of the estate, it seems to me that the personal representative will remain personally liable in respect of such costs.

18.  As to the point that there is no suggestion of bad faith against Madam Lee in relation to her bringing the proceedings against the Petitioner, it does not seem to me that this assists Madam Lee.  Bad faith is not a precondition to personal liability for costs on the part of a personal representative.  Such liability arises, to my mind, as a matter of course where the personal representative institutes proceedings against others.

19.  Nor do I see that the general principle asserted by Mr Allan, that the estate should generally bear the costs incidental to the proper performance of the personal representative’s duty.  First, this begs the question as to whether or not the bringing of the proceedings against the Petitioner was in the proper performance of Madam Lee’s duty, a question which must be determined in the context of a Beddoe application, or an application for an indemnity, in the administration of the estate.  Second, and more fundamentally, it seems to me that this deals only with the question of the incidence of the liability for such costs as between the estate and Madam Lee, and not as between Madam Lee and the Petitioner.

20.  Finally, in relation to the point that Madam Lee would be entitled to an indemnity from the estate in relation to proper expenses, I do not see that this assists her either, for the reasons which I have given in paragraphs 14 and 19 above.

21.  I am therefore satisfied that Madam Lee is personally liable to the Petitioner in respect of the costs order on which the petition is based, and is therefore liable to be made bankrupt on this petition.

22.  The other point raised by Mr Allan at the hearing was that no bankruptcy order should be made because of a conflict of interest on the part of the Petitioner.  This conflict was said to arise out of the Petitioner having acted for the Bankrupts in the original contested proceedings for the right to administer their late father’s estate, and his putting himself forward and accepting appointment as their trustee in bankruptcy.  I am quite unable to see the nature of the conflict that arises as a result of this, nor was Mr Allan able to put forward any real suggestion that there was such a conflict that was material so far as Madam Lee is concerned.  Even if it could be suggested that there was some conflict from the Bankrupts’ point of view, I fail to see how this can assist Madam Lee.  I therefore do not consider that this is a matter which prevents a bankruptcy order being made, if it would otherwise be right to make it.

23.  Mr Allan also raised a number of further points in his written submissions.  These were not really developed at the hearing, but as they were not formally abandoned, I shall deal with each of them briefly.

24.  First, Mr Allan submitted that section 61 of the Ordinance had not been complied with, in that by section 61(b), a trustee could bring or institute legal proceedings (such as this bankruptcy proceeding) with the permission of the creditor’s committee or (by virtue of section 61A) the court.  Mr Allan submitted (as may well be the case) that such permission had not been obtained here.  It seems to me that a complete answer to this point is to be found in the authorities cited to me by Mr Bullett, namely Re a Debtor (No. 26A of 1975) [1984] 3 All ER 995 and Re Branson, ex p Trustee [1914] 2 KB 701, which make it clear that the purpose of section 61 is for the protection of the bankruptcy estate, and as such may mean that a trustee who proceeds without the necessary permission may not be able to have his costs reimbursed out of the bankruptcy estate, but that this does not afford a defence to third parties against whom the proceedings are brought, such as Madam Lee in this case.

25.  Mr Allan also submitted that as the Bankrupts had been discharged from bankruptcy, the Petitioner was functus officio and had no locus standi to present the petition against Madam Lee.  It is correct that the Bankrupts were discharged from their bankruptcy on 28 April 2003.  However, section 32(2)(a) of the Ordinance provides:-

“	(2)	Subject to subsections (1) and (3) to (8), where a bankrupt is discharged, the discharge releases him from all the bankruptcy debts, but has no effect –
	(a)	on the functions (so far as they remain to be carried out) of the trustee and the operation of the provisions of this Ordinance for the purposes of carrying out those functions.”

Thus, unless the trustee in bankruptcy has applied for and obtained his release (as to which the position here is that the Petitioner says that this has not happened, and Madam Lee does not suggest otherwise), he continues in office, and has standing to continue with the administration of the bankruptcy estates for the benefit of the creditors.  I therefore reject this submission also.

26.  Finally, there was a suggestion in Mr Allan’s skeleton that Madam Lee was entitled to set off the costs order in her favour arising from the original proceedings concerning the right to administer her father’s estate against any liability she might have to the trustee.  However, as Rogers VP pointed out in CACV 114/2003, there is no mutuality in relation to such debts so as to enable them to be set off against each other.  As Rogers VP put it at paragraph 15 of his judgment:-

“In this case, the costs in [the proceedings against the Petitioner] are owed to the trustee of the two bankrupt estates.  It is he who has incurred the costs.  He may be entitled to recoup those costs out of the assets of the two estates, but unless and until he does so the bankrupt estates have no interest in the matter: the rights of the trustee will not have been subrogated to the bankrupts or their estates.  On the other had, the allocaturs obtained in the original proceedings were against [the Bankrupts].  On the basis that the allocaturs are valid, they represent debts which may be proved in the bankruptcies but not against the trustees.  There is thus, in my view, no mutuality between on the one hand the allocaturs in favour of [Madam Lee] plaintiff and on the other hand, the allocaturs obtained by the trustee of the two bankrupt estates, i.e. [the Petitioner]”

27.  It seems to me that this is a complete answer to the suggestion that there might be some sort of set off available to Madam Lee.

28.  It therefore seems to me that there is nothing in Mr Allan’s submissions that could justify me in refusing to make a bankruptcy order against Madam Lee.

30.  In the circumstances, I have no hesitation in making the usual bankruptcy order against Madam Lee.

31.  So far as costs are concerned, I propose to make the following order nisi.  The costs of the petition, including any reserved costs (other than those of the hearing before me on 15 September 2005) are to be paid by Madam Lee to the Petitioner, to be taxed on the party and party basis if not agreed.  So far as the costs of the hearing on 15 September 2005 are concerned, it seems to me that the amendment to the title of the proceedings applied for at the hearing arose in part at least because of the confusion which had arisen as to whether the Petitioner was seeking a bankruptcy order against Madam Lee or an administration order against the estate of her late farther.  This confusion was, I think, contributed to by statements in the Petitioner’s 6^th Affirmation in which he sought, alternatively, an order against the estate of her late father.  That amendment having been applied for without prior notice having been given, I felt it right to allow the matter to be adjourned, as Mr Allan said that he would need to take instructions and possibly put in further evidence.  In the event, no further evidence was filed.  In these circumstances, I think the correct course would be to make no order as to costs in relation to the hearing on 15 September 2005.