JOHN ROBERT LEES AND ANOTHER v. DRAGON INVESTMENT COMPANY II LLC AND OTHERS

HCA1180/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1180 OF 2003

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J U D G M E N T

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1. The defendant appeals against the decision of Master de Souza given on 7 May 2007 refusing to grant leave to the defendant to adduce expert evidence from a liquidator in this matter.

The plaintiffs’ claim

2. This claim is brought by the plaintiffs who were appointed joint provisional liquidators of Sino American Telecom Inc (“the Company”) by the court on 14 May 1998, the same day on which the defendant presented a petition for the winding up of the Company.

3. The plaintiffs’ claim is for some $5.9 million being the amount of their remuneration and disbursements approved by Kwan J , the companies judge, in August 2004 for payment out of the asset of the Company, but which was not met by any such asset.

4. The basis of the plaintiffs’ claim is an Indemnity Agreement signed between the plaintiffs and the defendant and dated 16 June 1998 which provided that in consideration of the plaintiffs agreeing, at the request of the defendant, “to accept appointment” as joint provisional liquidators of the Company, the defendant undertakes to indemnify the plaintiffs against : 

“

… any liability which may be incurred or suffered … by reason of the appointment of yourselves as joint provisional liquidators as aforesaid or of your acting as such joint provisional liquidators … to the extent that you are unable to recover the same from the assets of [the Company] and provided that such liability shall not have arisen by your own negligence misconduct or default.”

The Indemnity Agreement further provides :

“

In particular (but without prejudice to the generality of the foregoing) [the defendant] hereby agree to indemnify you … in respect of any costs, joint provisional liquidators’ remuneration and joint provisional liquidators’ disbursement to the extent not paid out of the companies’ assets … provided that such … costs, expenses and other liabilities shall not have arisen or been caused by your negligence, misconduct or default.”

The defence raised

5. A number of defences have been raised by the defendant to the claim of the plaintiffs.

6. Some of those defences, such as the defence of past consideration, and the defence that the plaintiffs’ own remuneration was not covered by the Indemnity Agreement (which therefore turns on the construction of the Indemnity Agreement) are not relevant to the present application for expert evidence as it had been conceded by the defendant that those defences involve purely legal argument.

7. Those other defences raised which are relevant to the present application for expert evidence, are said by the defendant to arise out of the plaintiffs’ negligence, misconduct or default in discharging their duties as provisional liquidators of the Company, particulars of which can be summarized as follows :

(a)	fees incurred by applications to appoint the plaintiffs as the provisional liquidators of Remoco (Hong Kong) Ltd and Goldremart Holdings Ltd, being two subsidiaries of the Company which comprised the assets of the Company.  The defendant alleged that the plaintiffs knew or ought to have known such applications were misconceived and should never have been made.  Those applications were ultimately dismissed by Le Pichon J (as she then was) on 21 May 1998;
(b)	fees incurred in an application to the court to sell the assets of the Company to its creditors.  The defendant alleged that the plaintiff knew or ought to have known that such application was misconceived (instead there should have been a scheme of arrangement).  That application was also dismissed by Le Pichon J on 3 July 1998.  The appeal therefrom was also dismissed by the Court of Appeal;
(c)	fees unnecessarily incurred or wasted when Messrs Lui & Carey, having advised on a Loan Agreement (in respect of a loan made by Pheonix Telecommunication Ltd to the joint venture which formed part of the asset of the Company) and after the Loan Agreement had been approved by the court, a partner of Messrs Lui & Carey then advised that the Loan Agreement was incorrect and the terms had to be changed;
(d)	fees also unnecessarily incurred in defending an action by Writ wherein SEC Development Co. Ltd claimed against Remoco (Hong Kong) Ltd in HCA6456/1999.  The defendant alleged that there was no benefit to the Company to defend that claim since, by the time of that claim, the assets of Remoco (Hong Kong) Ltd had already been transferred to Remoco China Ltd, and that it was only of benefit to Pheonix who had requested the Writ to be defended;
(e)	the defendant also relies on the further failures of two solicitor firms, Messrs Lui & Carey and Messrs Dibb Lupton Allsop, as were relied upon by the plaintiffs in contesting taxation proceedings, to be failures which the plaintiffs should have prevented by proper supervision of those two firms of solicitor;
(f)	the defendant alleged that work done after 14 August 2000 in respect of Remoco Hong Kong Ltd was wrongly charged by the plaintiffs as part of the Company’s provisional liquidation despite an order for winding up of Remoco (Hong Kong) Ltd was made on that date;
(g)	the defendant alleged that the plaintiffs’ claim included remuneration for work done by the plaintiffs not within the provisional liquidation of the Company, but was work done for Phoenix and Remoco China Ltd, as well as dealings with the Official Receiver in respect of the winding up of Remoco (Hong Kong) Ltd, which should not be recoverable under the Indemnity Agreement;
(h)	the defendant further alleged that the fees charged by the plaintiffs were excessive and include unbillable an duplicated time; and
(i)	lastly, the defendant also alleged that the plaintiffs failed to pursue the auditors of the Company and of Remoco (Hong Kong) Ltd in respect of the $3.2 million shown in the audited accounts of the Company which the plaintiffs say was fictitious, but which entry the defendant relied on when investing in the Company.

The application for expert evidence

8. On the basis of the defence involving the plaintiffs’ negligence, misconduct and default in discharging their duties as provisional liquidators of the Company, the defendant submits that it is necessary and that the court will be assisted by expert evidence from a liquidator to prove the standard which should be expected from a reasonably competent provisional liquidator in the discharge of his duties as such.

9. In this respect, it was submitted by counsel for the defendant that although provisional liquidators are appointed and supervised by the court, but since the court does not engage in the day-to-day work of a provisional liquidator, evidence from an expert as to such day to day work becomes necessary for the court to decide what is a reasonable standard of conduct in that office.

10. The defendant seeks to draw an analogy with professional negligence cases and relies on the decision of the Court of Appeal in England in the case of Sansom & anr v. Metcalfe Hambleton & Co. [1998] PNLR 542 in which the Court of Appeal, allowing the appeal by the defendant, a surveyor, held that applying the general rule against finding a professional guilty of negligence without evidence from those within the same profession, the judge had not had the expert evidence necessary to make a finding of professional negligence against the defendants. 

11. On the other hand, the plaintiffs submit that since provisional liquidators are appointed and supervised by the court in their work and their conduct, the court is well in a position to determine what is reasonable standard for such conduct and therefore whether such conduct has fallen below such standard so as to amount to negligence or misconduct.

12. Therefore in the present case, where the issues raised concern whether the plaintiffs’ conduct as provisional liquidators have fallen below that standard of competence required of a provisional liquidator in these courts, the court is in a position to judge the level of those standards without the assistance of any expert.

Decision

13. It is trite law and practice that it is always upon a party seeking to adduce expert evidence for it to satisfy the court that expert evidence is necessary to assist the court in matters which the trier of facts will otherwise not have the required or specialized knowledge.  It follows from that that where the issue is one which falls within the knowledge or experience of the trier of fact there is no need for expert evidence.

14. Admittedly, in the majority of cases alleging professional negligence, leave will be given for expert witnesses within that same profession to prove the workings and also standards to be expected from someone reasonably competent in that profession.  But even so, it depends very much on the issues in dispute between the parties.  There is, however, no hard and fast rule that in cases of professional negligence expert witness within the profession concerned must be adduced.

15. As for instance, if a professional driver of a normal vehicle was alleged to have been negligent in his driving, such as a taxi driver, it would be unlikely that expert evidence will be allowed merely to prove the level of driving standard expected of him.  The reason for that is that the judge dealing with the trial can be expected to have such knowledge and experience of such driving standard without the assistance of an expert.

16. Furthermore, in the majority of cases of negligence alleged against a solicitor in the discharge of his duties as such, there is usually no necessity to call expert evidence as to conduct and standard to be expected of a reasonably competent solicitor.  Again the reason for that is that the judge is in a position to decide whether the conduct alleged and proved has fallen below the standard which is reasonably expected of a solicitor from the judge’s own knowledge and experience.

17. In the present case, the first thing to note is that although an analogy has been drawn by the defendant with cases of professional negligence, a provisional liquidator is not per se a profession, rather it is an office and the person appointed by the court to be a provisional liquidator is an officer of the court discharging those duties as such and with the supervision of the court in so doing.

18. While a court may not engage in the day-to-day working of a provisional liquidator, that should not prevent the court from delineating what is a reasonable standard to be expected from a reasonably competent provisional liquidator.  Without such knowledge, a court will not be able to effectively control or supervise a provisional liquidator in the discharge of his duties as such.

19. Based on the issues raised by the defence relating to negligence, misconduct and default of the plaintiffs, as well as the instances particularised relating to that allegation and from all the material before me, it would appear that what has been alleged by the defendant go only to the general conduct of the plaintiffs as provisional liquidators.

20. There is not the least indication that there are any specialised area relating to the disputed issues between the parties (such as accounting or accounting treatment) which the court will need expert evidence to assist it on.

21. Indeed the submission of counsel for the defendant is that they seek to adduce expert evidence to prove the general conduct and standard of a reasonably competent provisional liquidator.

22. Accordingly, I am not persuaded by the defendant that there is such a necessity to adduce expert evidence in the manner suggested.  Rather I accept the views of the plaintiff that the court is in a position to decide what is reasonable standard for a reasonably competent provisional liquidator acting in the discharge of his duties without assistance from expert.

23. This appeal is therefore dismissed and the order of the master below is affirmed.

Cost

24. There will be a costs order nisi that the defendant pays the plaintiffs their costs of this appeal in any event.

HCA 1180/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1180 OF 2003

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J U D G M E N T

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1.  This is an application for summary judgment.  The plaintiffs and defendant are parties to an indemnity agreement by which the defendant agreed to indemnify the plaintiffs from liability incurred as provisional liquidators in a winding up.  Under the agreement the plaintiffs sue to recover an amount a little in excess of $9m.  Part of this has been taxed in the winding up action; as for the balance taxation is pending.  By this application the plaintiffs ask for judgment for the taxed amount less what has already been paid, and a declaration that the defendant be bound to pay the balance after taxation.

Background Facts

2.  The defendant was one of a number of investors in a foreign registered company called SinoAmerican Telecom Inc. (SinoAmerican).  By May 1998 SinoAmerican had become insolvent and unable to meet its debts.  A consortium of its creditors selected the defendant to petition for its winding up.  The plaintiffs were invited to take up the appointment of joint provisional liquidators, which they agreed to subject to the defendant indemnifying them from liability incurred over and above that recoverable from the debtor.

3.  The plaintiffs were duly made joint provisional liquidators by order of 14 May 1998.  That appointment lasted until 6 December 2000 when, following the liquidation of SinoAmerican, they were then made joint liquidators.  The indemnity agreement was signed on 16 June 1998, being a month after their initial appointment.  (A point is taken that this agreement post-dated the appointment, as I shall come to).  But meanwhile, the defendant obtained counter-indemnities from its co-creditors, thus to share out the defendant’s obligations owed the plaintiffs.

4.  During the course of their holding office, it so happened that the plaintiffs recovered nothing at all from the debtor company.  They looked to the defendant for their costs, disbursements and remuneration.  When the defendant declined to pay, the plaintiffs began this action in March 2003.  The sum of $5,930,101.50 was that which was taxed and approved by Kwan J., the judge having conduct of the winding up proceedings, by order of August 2004.  The sum of $528,343.25 having been paid, summary judgment for the balance taxed costs is sought, with a declaration for liability of the balance once that has been taxed.

Legal Principles

5.  Though sparingly exercised, the court does have power to make a declaration on an interlocutory application as long as it is a final one; see the White Book 15/16/7.  This is an application for a final declaration and I am satisfied I have the power.

6.  Otherwise, the legal principles for summary judgment are well known; when applied for the plaintiff is entitled to judgment on a bona fide claim unless the defendant can show a triable issue or an arguable defence.  Whilst the burden is thus on the defendant, he need show no more than that he has a credible defence which he should then be entitled to pursue; see, for example, the general commentary at the White Book 14/4/9, and Man Earn Limited v Wing Ting Fong [1996] 1 HKC 225.

The Indemnity Agreement

7.  This document is central to the issues to be resolved; I reproduce it in full below.

“DRAGON INVESTMENT COMPANY II LLC

June 16, 1998

To:    John Lees and Desmond Chung Seng Chiong, both of 8/F Hong Kong Club Building, 3A Chater Road, and FH Securities Limited and FH Nominees Limited.

SinoAmerican Telecom Inc.

In consideration of your agreeing at the request of the undersigned to accept appointment as joint provisional liquidators of SinoAmerican Telecom Inc, the undersigned hereby undertake jointly and severally to indemnify you, your employees, your respective personal representatives, executors, administrators and successors in title and at all times to keep the same indemnified from and against any liability which may be incurred or suffered by you or to which you may be or become liable by reason solely of the appointment of yourselves as joint provisional liquidators as aforesaid or of your acting as such joint provisional liquidators including your appointment as directors and officers of SinoAmerican Telecom Inc. and/or its subsidiaries or Shenzhen Ligao Telecom Technology Limited to the extent that you are unable to recover the same from the assets of SinoAmerican Telecom Inc. and provided such liability shall not have arisen by your own negligence misconduct or default.

In particular (but without prejudice to the generality of the foregoing) the undersigned hereby agreed to indemnify you, your employees, your respective personal representatives, executors, administrators and successors in title in respect of any costs, joint provisional liquidator’s remuneration and joint provisional liquidators’ disbursement to the extent not paid out of the companies’ assets and undertake to provide funds to meet the abovementioned claims, costs and disbursements immediately upon demand, provided that such actions, suits, proceedings, claims, demands, costs, expenses and other liabilities shall not have arisen or been caused by your negligence, misconduct or default.

This indemnity shall be binding on our respective personal representatives, executors, administrators, and successors in title.

Dated this 16^th day of June 1998.

(Signed)
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James Collins-Taylor
Director”

The Defence Position ……

8.  …… derives from its proposition that there are serious issues of fact and of construction that have to be resolved.  These are matters which taken individually and together warrant an Order 14 application for summary judgment inappropriate.

9.  Summarized, the issues are as follows:

Past Consideration

10.  The order appointing the plaintiffs and their acceptance of that are dated 14 May 1998, but the indemnity agreement was not entered into until 16 June, more than a month later.  The consideration for the indemnity is the acceptance of the appointment; yet that had already occurred.  The argument that the indemnity came into force as an oral agreement does not work, because the written document does not say that, nor is it pleaded.  And an Order 14 judgment cannot be granted on a basis other than that pleaded.  In any event Mr Lees in evidence refers to the agreement as having been entered into on the date of the document.

What is Covered?

11.  The plaintiffs sue for all of their costs and disbursements, including their own fees.  But the indemnity is limited to ‘liabilities which may be incurred or suffered’, and does not extend to guaranteeing the debtor company’s obligations to the plaintiffs.  By its wording the indemnity is against third party liability.  That does not include the plaintiffs’ fees, for which the plaintiffs themselves could not be said to be liable.

When Does the Indemnity Bite?

12.  By its express terms there are two limitations; the first, that the indemnity arises to the extent only that the plaintiffs are unable to recover from the assets of the debtor company, and secondly, that it will not meet such costs as may have been incurred as a result of negligence, misconduct or default.  There is a third and obvious limitation; namely, that it is to indemnify the plaintiffs in their capacity as joint provisional liquidators of the debtor and not for liability for other activity.

13.  The defendant’s evidence was adduced in an affidavit by its director Mr Collins-Taylor who, it can be seen, is the signatory on the indemnity.  He produced a report from a chartered accountant in practice that points to areas of prospective professional negligence as an explanation for the substantial costs incurred, together with the total absence of recovery from the debtor.  These include a failure to consider a suit against the Auditors, and the prospect that some of the work charged up to the company and by default the defendant should realistically have been charged to a third party, called for convenience Phoenix.

The Plaintiffs’ Response

14.  The past consideration argument is disingenuous.  There was an oral agreement confirmed only by the later document.  That is reflected in the wording.  The defendant obtained counter-indemnities from its fellow creditors, and otherwise conducted itself on the basis that there was a valid commitment.  This included sending ‘call’ letters to the other investor for funds to meet the joint liability.

15.  Furthermore, it was obviously a matter of common intention that the plaintiffs would be indemnified for work undertaken whilst in office in consideration for their taking up the appointment and thereafter holding such office.  On the facts the appointment and indemnity were in effect contemporaneous; as at the signing the work had hardly got under way.

16.  As to the argument that the indemnity does not cover their own fees, the plaintiffs respond that such an interpretation is absurd and flies in the face not only of commonsense, but also the words ‘joint provisional liquidator’s (sic) remuneration’ at paragraph 2.

17.  As to the limitations; the first, that the plaintiffs must first recover from the debtor company.  That there are no assets was because those that were said to exist turned out to be no more than worthless choses in action.  It was established to the satisfaction of the court in the winding up proceedings that there was and is nothing to recover; the defendant as petitioning creditor was aware of this.  In any event, the plaintiffs in their office of provisional liquidators were not appointed to wind up the company but to safeguard its assets.

18.  As to the allegation of prospective negligence; at no stage during the winding up proceedings was this put forward.  The defendant had the opportunity to do so but did not.  The court has approved the plaintiffs’ remuneration to the extent that there was a taxation.  As is usual, some of the expenditure was revised downwards and this was and is accepted by the plaintiffs.  Otherwise there was no tag.  Besides, the so-called expert report upon which the defendant invites the court to rely is based on speculation and innuendo, and, as submitted by Mr Barlow: ‘is tantamount to alleging that Kwan J failed to discharge her responsibility as Companies Judge to supervise the plaintiffs and, in particular, to scrutinize the plaintiffs’ remuneration.’

19.  The same approach can be said of the allegation that some of the work charged to the debtor company and the defendant might have been carried out for Phoenix.

The Result

20.  As the aforementioned reads there are a number material unresolved issues going to construction and matters of fact.

21.  On the prospective defence of negligence by the plaintiffs, they claim to have an absolute answer to the allegations of actual or prospective negligence or misconduct; that their performance was at all material times subjected to scrutiny by Kwan J.  That they passed muster under her watchful eye reveals the speciousness of these allegations.  But I accept that this was scrutiny undertaken in winding up proceedings in which emphasis is on the extent of allowable remuneration and would not have gone to issues of negligence unless of the most obvious kind.  In any event, the defendant as a separate contracting party in the deed of indemnity should not be estopped from mounting its own defence under this head.

22.  It is of course not within my province to consider the strength of a defence on those or any of the other grounds.  Suffice to say that, overall, I am satisfied that the defendant has done enough to show there are triable issues.  In the circumstances I give leave to the defendant to defend the action unconditionally.

23.  As for costs; these are nisi.  They are in the cause.

Appeal dismissed: see CACV91/2006 dated 5 October 2006