FAIRBAIRN & KWOK v. MIDDLE EAST FINANCE INTERNATIONAL LTD

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY NO. B303 OF 1985

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Re: KAMLA SUJANANI or KAMLA LAVINIA SUJANANI alias MALITA N HEMANDAS

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JUDGMENT

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1. On the 9th October 1984 Middle East Finance International Limited (MEFI) obtained judgment against Kamla Sujanani (the debtor) and Mart Electronics Limited for the sum of US$84,732.29, HK$514,334.05, interest and costs. Judgment in the same terms was obtained against the debtor's husband on the 25th November 1984. The judgments arise as a result of a guarantee executed by the debtor and her husband in favour of Mart Electronics Limited of which company they were the directors and only shareholders. No payment has been made under the judgments.

2. A bankruptcy petition was presented by MEFI on the 6th June 1985 against the debtor after she had failed to comply with the requirements of a bankruptcy notice founded upon the judgment debt. The debtor opposed the petition on the grounds that her assets for division amongst the unsecured creditors after appropriate deductions were insufficient to pay a dividend of 15% under the provisions of section 9(3) of the Bankruptcy Ordinance. This defence is no longer available to a debtor having been repealed on the 18th July 1986 by the Bankruptcy (Amendment) Ordinance 1986. After a contested hearing a receiving order was made by Mayo, J. on the 8th October 1985.

3. An appeal was filed by the debtor against this decision. Upon an application by MEFI the debtor was ordered by the Court of Appeal to pay the sum of $40,000 as security for costs which sum was paid by the debtor's mother-in-law, Mrs K. L. Sujanani. The appeal was allowed by the Court of Appeal on the 18th February 1986 when the receiving order was discharged. The debtor's costs of the appeal and in the Court below were ordered to be paid by MEFI.

4. The present summons was issued in the appeal proceedings, but has since been transferred to the bankruptcy file. By the summons. the applicants, Fairbairn & Kwok who were the debtor's solicitors in the bankruptcy proceedings seek an order under section 70 of the Legal Practitioners Ordinance, Cap. 159 for a charging order against MEFI for their costs pursuant, to the order made by the Court of Appeal.

 

Section 70 provides:

"70.    Any court in which a solicitor has been employed to prosecute or defend any suit, matter or proceeding may at any time declare the solicitor entitled to a charge on the property recovered or preserved through his instrumentality for his taxed costs in reference to that suit, matter or proceeding and may make such orders for the taxation of the said costs and for raising money to pay, or for paying, the said costs out of the said property, as it thinks fit, and all conveyances and acts done to defeat, or operating to defeat, that charge shall, except in the case of a conveyance to a bona fide purchaser for value without notice, be void as against the solicitor:

 

        Provided that no order shall be made if the right to recover the costs is barred by any statute of limitations. "

5. The applicants had agreed to represent the debtor in place of the debtor's former solicitors, Stevenson & Wong, provided that her family would be responsible for her costs as the debtor had insufficient assets for this purpose. A letter dated the 13th July 1985 to the applicants was signed by the debtor's brother-in-law, Prem L Sujanani in which he agreed, on behalf of himself and his father, to pay the fees and costs of the debtor and her husband who was also defending a bankruptcy petition presented against him by MEFI founded on the same judgment debt under the 15% provision. The applicants have received $20,000 from the debtor's family on account of costs which on a solicitor and own client basis are estimated to amount to approximately $150,000. In respect of the costs ordered to be paid by MEFI no bill of costs has yet been taxed, but a draft bill on a party and party basis has been prepared which amounts to $100,455. On a solicitor and own client basis there is, therefore, a deficiency of about $130,000.

6. The applicants have approached the debtor with regard to payment of further costs without success, but they have been urged by the family to make efforts to effect recovery from MEFI.

7. Mr Faulkner who appeared on behalf of MEFI, submitted that the applicants should look, in the first instance, to the family for payment of their costs by reason of their contractual obligation to pay and particularly as they have assets in Hong Kong. Mr L. H. and Mrs K. L. Sujanani, the father-in-law and mother-in-law of the debtor reside in Japan and only visit Hong Kong for short periods, but there is uncontradicted evidence that they own two properties in Hong Kong which are unencumbered. Although there was no valuation of the properties before me, it is quite apparent that their value would well exceed the amount of the applicants' costs. Prem L. Sujanani now lives in Abidjan, West Africa, but has a bank account in Hong Kong.

8. It has been settled by authority and it is not challenged that property recovered through the instrumentality of a solicitor includes costs where costs are the only subject matter of the judgment see Dallow v. Garrold ⁽¹⁾ and In re Blake⁽²⁾.

9. Mr Barretto, counsel for the applicants submitted that although the power under section 70 of the Legal Practitioners Ordinance is discretionary, nevertheless, the applicants are prima facie entitled to a charging order. He cited In re Blake⁽²⁾ which held that provided no conduct of the solicitor was involved very exceptional circumstances must be made out to justify the court refusing an order. He also referred to The Dirigo⁽³⁾ which decided that the solicitor's right is treated in the nature of a salvage right upon which he is entitled to a charge on a fund or property recovered or preserved by his instrumentality.

10. Mr Faulkner drew my attention to Harrison v. Harrison⁽⁴⁾ where the Court of Appeal allowed an appeal from an order that gave the solicitors, who formerly acted for the wife as petitioner in divorce proceedings, a charge for costs on an annual sum of £130 which after the dissolution of the marriage was secured by the husband under a court order. The court held that if the solicitor makes out a prima facie case that he will not, otherwise, get his costs, a charging order ought to be made, but decided that the solicitors were not entitled to charge the wife's order unless it was established that it was to be inferred that the solicitors could only look to the wife's separate estate. The Court concluded that the solicitors had not made out a prima facie case, that such an order would be just and reasonable. The husband who had not been sued by the solicitors for the costs was held to be primarily liable so that no steps should be taken to charge the wife's order until all reasonable recourse had been made to the husband.

11. In the earlier cases which included In re Bassett⁽⁵⁾, In re A Debtor⁽⁶⁾ and In re Drummond⁽⁷⁾ the courts were anxious to preserve the sanctity of a solicitor's lien when set-off was not allowed. At that time the solicitor's lien was treated as sacrosanct. However, later there was a change in approach. In the case of  In re A Debtor No. 21 of 1950 (No. 2) ⁽⁸⁾ Danckwerts, J. in his judgment at p.617 had this to say:

"...... later the tide seems to have turned against the debtor and the consideration rendered to the solicitor's lien seems to have been reduced. In Blakey v. Latham 41 Ch. D. 518, 522, Kay, J., described the supposed equity of the other party's solicitor as the most extraordinary equity he ever heard of. "

Mr Faulkner places great reliance upon this authority where the facts are similar to those in the instant case. The applicant there obtained a receiving order against the debtor, but on appeal the receiving order was set aside on account of defects in the bankruptcy proceedings. The applicants were ordered to pay the costst of the appeal and below which amounted to £72, but the applicants were judgment creditors of the debtor for a sum of £409.14 being the balance outstanding of a larger sum for which they had originally obtained judgment. The debtor's solicitors had notified the applicants of their intention to issue execution upon the applicants to recover their costs. The applicants applied to the court for a stay of payment and intimated that they were going to present a fresh bankruptcy petition. In considering whether a stay should be granted, Danekwerts, J. in his judgment at p. 618 and 619 said

On the other hand, it is said that unless the debtor recovers these costs, his solicitor will have no chance of being paid, and that this will discourage solicitors from giving persons who are in danger of being made bankrupt the legal assistance which they need against proceedings wrongfully instituted against them. It is said also that a set-off would enable the creditor to that extent to be paid in full. On the other hand, if the debtor recovers the costs, his solicitor obtains payment in full .................................... But it is difficult to see why an unpaid creditor should be required to provide for the costs of his debtor's solicitor, and be subject to the risk of an execution to recover the amount of such costs. Accordingly it seems to me that a stay of execution should be granted in this case. "

12. Harman, J. who concurred with the decision had this to say at p. 621 and 622 :

"I agree, therefore, with my brother Danckwerts in thinking that we have a discretion to allow this set-off, or a stay, which amounts to much the same thing, if it be just. In my opinion it would be right to allow it. I cannot see that as between the parties themselves there can be any justice in allowing the debtor to levy execution against the goods of his creditor, nor do I think this ought to be allowed for the sake of the debtor's solicitor. I cannot see any reason why the creditor should pay the costs of his debtor's solicitor if the latter is unable to do so, nor do I believe that a solicitor accepting the retainer of a person against whom bankruptcy proceedings are pending does so in reliance on the view that the petitioner's solicitor may blunder and thus give him the advantage of an order for costs against the petitioner. "

13. The solicitor's lien was considered by Scarman, J. in In the Estate of Fuld, Decd. (No. 4)⁽⁹⁾ in which he held that the court's discretion should only be exercised if it is necessary for the solicitor's protection and to the extent that it is necessary to safeguard his lien.

14. Mr Barretto contended that the applicants should not be deprived of the fruits of the judgment for MEFI should have been aware that the debtor had no significant assets with which to pay her costs, so that in those circumstances MEFI should have taken into account that if they failed in the proceedings a sum by way of costs would have to be set aside for this purpose. Mr Finger, the applicants' solicitor has deposed to the fact that if the debtor's family refuse to pay the costs there may be difficulty in obtaining an order for substituted service of the proceedings out of the jurisdiction whilst he expressed doubts as to whether the applicants can successfully obtain judgment and thereafter execution. However, I am unable to agree that his fears are justified for there would appear to be no difficulty in obtaining an order for substituted service by post to the two addresses of Mr L.H. and Mrs K.L. Sujanani in Hong Kong and also in Japan and upon Prem L. Sujanani in West Africa. Service could also no doubt be effected upon the debtor and her husband in Hong Kong.

15. There is uncontradicted evidence of the assets of the family in Hong Kong upon which the applicants would be able to issue execution in the event that judgment is obtained. It is, in any event, clear that at the present time there has been no actual refusal by the family to pay the costs, but merely a reluctance to pay without recourse by the applicants in the first instance to MEFI. There is indeed no evidence to indicate that the applicants will not receive their costs from the family. In these circumstances it cannot be said that the applicants have been deprived of the fruits of the judgment because they have not exhausted all rights available to them to enforce payment by the family who are contractually liable to pay their costs. I would echo the words of Danckwerts, J. and Harman, J. in In re A Debtor, No. 21 of 1950 (No. 2)⁽⁸⁾, for it would indeed be a bizarre situation if MEFI were required to pay costs to the debtor's solicitors when they are owed by the debtor a sum of well over $1,000,000. In this case there is no determined sum that is claimed by the applicants, for their bill of costs has not been taxed although this does not preclude the court from making an order. As I have said the family has not refused to pay the applicants' costs and there are clearly assets available in Hong Kong which could be used for this purpose, whilst no steps have been taken to sue the family. Mr Barretto asserted that MEFI are primarily liable in the same way as the husband was in Harrison v. Harrison⁽⁴⁾. However I do not agree for by virtue of the letter of the 13th July 1985, there is a contractual obligation by the family to pay the solicitors. Once all steps have been taken by the applicants to exhaust all their rights, they may be entitled to enforce the order against MEFI, but any sums found to be due would probably be subject to a right of set-off by MEFI in respect of the judgment debt. However, this stage has not yet been reached by the applicants.

16. In all the circumstances, and in the exercise of my discretion the application for a charging order will be refused for it would be manifestly unjust and unreasonable to make such an order.

(1) (1884) 14 Q.B.D. 543

(2) (1945) 1 Ch. 61

(3) (1920) PD 425

(4) (1888) 13 PD 180

(5) (1896) 1 Q.B. 219

(6) (1907) 2 K.B. 896

(7) (1909) 2 K.B. 622

(8) (1951) Ch. 612

(9) (1968) PD. 727