Winston Ka Sun Chu and Another v. Peter Mo Wan Lung and Others

HCA000975/1979

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Coram: Hon. Clough, J. in Court

Dates of Hearing: 30 April, 1, 4 and 8 May 1984

Date of Delivery of Judgment: 11 May 1984

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JUDGMENT

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1. I made an order on the 1st of May 1984 in this action on the application, on a preliminary issue by Mr. Neville Thomas, leading counsel for the Plaintiffs, for the winding up of the affairs of the partnership of the two Plaintiffs and four Defendants who had formerly practised as solicitors under the name of Messrs. Peter Mo & Company. I indicated that the order when drawn up should include a direction for accounts to be taken in respect of profits earned by the first, second and fourth Defendants which were attributable to the use of partnership assets after the dissolution. I also indicated that the accounts were to be taken on the basis that any former partner might claim just allowance in respect of services rendered by him for the benefit of the partnership since the 31st of July 1978 when the partnership was dissolved.

2. I deferred the determination of the full terms of the order in order to ascertain the state of the receivership of the partnership assets and to enable counsel for all the parties to endeavour to ascertain whether it would be possible to achieve some measure of agreement between the parties so as to minimise the accounts and enquiries to be required to be taken and made under the order of the court to be made at the conclusion of the trial.

3. Prodigious efforts were made by those advising the parties to arrive at a basis for the Receivers' accounts. The position was made more complicated by the fact that the partnership between the parties had followed an earlier partnership between the first Plaintiff and the first, second and third Defendants which had not been the subject of settled accounts.

4. After three days of deliberation by the parties the court was presented with draft minutes of order at a late hour on the 4th May 1984 which it approved. An order as to costs was made on the same day. Before the order could be perfected the court entertained doubts regarding the terms of the order and restored the matter for further hearing on the 8th of May 1984 so that counsel could speak to the draft minutes of order. On that date I made an order in terms of the amended draft order which had been accepted by counsel for all the parties.

5. The final order made by the court provides the basis for the Receivers' accounts which are directed to be passed on or before the 1st of October 1984 and it also includes provisions usually made on further consideration in that it authorises payment of the parties' costs out of the balance due from the Receivers after payment of the debts of the partnership (subject to payment of the Receivers' remuneration) and also authorises distribution of the net balance to the parties. Accordingly if the Receivers are able to pass their accounts as directed further consideration should be a formality.

6. It is significant that in the course of their deliberations the parties did not include in the proposed draft order any express direction that any of the parties were entitled to claim just allowance in respect of services rendered for the benefit of the partnership after its dissolution on the 31st of July 1978 and the proposed draft order contained a direction that no account should be taken of any profits attributable to the use of partnership assets by any of the parties after the 31st of July 1978. To this extent the relief granted by the court on the 1st of May 1984 was very sensibly abandoned by the relevant parties who were content that the order should be the vehicle for ultimate distribution of the partnership assets which has been long delayed as a result of this action.

7. I now give my reasons for my decision in what turned out to be a trial without issues suitable for trial because such issues as were outstanding on the 1st May were of character which should be determined when the accounts and enquiries are taken and made. As indicated above those issues were abandoned when the order was under consideration by the parties but I have nevertheless given below my reasons for all my decisions in this action.

8. The action has a long history. It began on the 7th of March 1979 when the Plaintiffs issued their writ for the winding up of the partnership. On the 22nd of May 1979, on the application of the Plaintiffs, Yang J. appointed Mr. Wong Hong Yuen, a Chartered Accountant, to be the Receiver of the partnership assets and on the 24th of July 1979 Mr. Tan Man Kou was also appointed by Yang J. to be a Receiver jointly with Mr. Wong. By this time the pleadings were closed but soon afterwards the action seems to have gone to sleep until the 9th of August 1982 when the second Defendant gave notice of intention to proceed. Thereafter the matter proceeded at a desultory pace until the trial which was preceded by several last minute interlocutory applications in connection with the pleadings of the first and second Defendants.

9. By their Statement of Claim filed on the 3rd of March 1979 the Plaintiffs plead that they and the four Defendants practised as solicitors under a partnership at will on terms therein pleaded as to remuneration and shares of net profits, and that the partnership was determined on the 31st of July 1978 by virtue of a written notice dated the 23rd of June 1978 given by the third Defendant. The parties are alleged to have been unable to agree upon the terms of the winding up of the partnership whose assets are alleged to be of the substantial value mentioned in the Statement of Claim.

10. These allegations are the basis for the prayer in the Statement of Claim for the usual relief sought in a straight forward dissolution situation where the former partners are at loggerheads, namely a declaration of dissolution, all necessary accounts and enquiries and the appointment of a receiver.

11. A claim for a special account is also made in the prayer of the Statement of Claim against the first, second and fourth Defendants who are alleged to be accountable because they have made profits attributable to the use of partnership assets since the dissolution. A point arises on the pleading of this claim and so it is necessary to refer to the relevant paragraphs of the Statement of Claim. It is pleaded in paragraph 4 that on the 28th of July 1978 the first, second and fourth Defendants commenced to practise under the name of Messrs. Mo, Ives and Yeung at the partnership premises without the prior knowledge or consent of the Plaintiffs. In paragraph 6 it is pleaded that on the 1st of October 1978 the fourth Defendant commenced his own practice in other premises. By paragraph 7 the Plaintiffs alleged that on the 3rd of October 1978 the first Defendant commenced his own practice "under the identical firm name of Messrs. Peter Mo & Company, Solicitors" at the partnership address without the prior knowledge or consent of the Plaintiffs.

12. These allegations are the basis for the pleading in paragraph 8 of the Statement of Claim in the following terms:-

"8. By reason of the matters aforesaid, the 1st, 2nd and 4th Defendants have made use of the staff and assets including the goodwill of the said Partnership for the purpose of their own business without the consent of the 1st and 2nd Plaintiffs."

13. By paragraph 11 of the Statement of Claim the Plaintiffs plead that the third Defendant is joined as a party to the action as a necessary formal party. He filed a defence on the 30th of April 1979 admitting the dissolution of the partnership and the absence of agreement regarding the terms of the winding up. By his counsel, Mr. Chan, he indicated to the court that he sought the winding up of the partnership with the minimum of cost and at the earliest opportunity.

14. The fourth Defendant filed a Defence on the 12th of April 1979 in which the only issue raised concerned the Plaintiffs' allegation that he was liable to account for the profits attributable to his user of partnership assets. He admitted in paragraph 2 of his Defence that in or about the end of July 1978 he and the first and second Defendants had desired to set up a partnership as solicitors under the name of Messrs. Mo, Ives and Yeung but pleaded that the business never commenced and that therefore he was not liable to the special account as alleged by the Plaintiffs.

15. However the fourth Defendant had by his solicitors' letter dated the 28th of April 1984 admitted to the plaintiffs' solicitors that between the lst of August and the 1st of October 1978 he had opened files in respect of 8 matters at the premises of the dissolved partnership and during the second day of the trial he consented by his counsel to judgment as claimed in the Statement of Claim save as to costs and without admission that the firm of Messrs. Mo, Ives and Yeung had ever carried on business at all.

16. The first and second Defendants filed a Defence and Counterclaim on the 20th of April 1979. The Defence is short and enigmatic. It consists of three paragraphs, the last paragraph being the conventional general traverse.

17. The first paragraph admits that the parties are solicitors and formerly carried on a partnership as such under the name of Messrs. Peter Mo & Company but denies the other allegations in paragraph 1 of the Statement of Claim which included the allegation that the partnership was a partnership at will and set out all the alleged terms of remuneration and shares of the net profits of the partners. In particulars dated the 23rd of March 1984 the first and second Defendants, having been required to state when they alleged the partnership was dissolved, pleaded that the partnership had been dissolved since the 1st August 1978.

18. By paragraph 2 of their Defence the first and second Defendants pleaded that from about October 1977 the partnership was carried on pursuant to the terms and conditions contained in an undated Deed of Partnership signed by them. In subsequent particulars they pleaded inter alia that they signed the Deed in question on the 29th of October 1977.

19. Paragraphs 2 and 3 of the Statement of Claim whereby the Plaintiffs contended that the partnership (pleaded in paragraph 1 to be a partnership at will) had been determined on the 31st of July 1978 were denied by the general traverse in paragraph 3 of the Defence.

20. However this seems to have been simply a pleader's aberration because the prayer of the Counterclaim seeks relief in respect of the partnership "in dissolution" and Mr. Robert Johnson, leading counsel for the first and second Defendants, made it clear to the court in his submissions that the fact of dissolution on the 31st of July 1978 was common ground even if there was a potential hypothetical issue as to the legal basis of the dissolution. Mr. Johnson also made it clear that it was not only the Plaintiffs who sought a final order on the preliminary issue raised by Mr. Thomas but also the first and second Defendants who sought to limit the directions in the order for the winding up to the barest essentials necessary to achieve early distribution.

21. As the pleadings in the Statement of Claim and the Defence of the first and second Defendants stand the only possible issue of fact between the relevant parties is whether or not the first and second Defendants (the fourth Defendant having conceded the taking of the account in the terms indicated above) made use of partnership assets after the date of dissolution for their own purposes and thereby rendered themselves liable under section 44 or 31 of the Partnership Ordinance (Cap. 38) to account to their former partners in respect of any profits thus made.

22. Citing Manley v. Sartori [1927] 1 Ch. 157, Mr. Thomas rightly contended that once it was established that some use had been made of the partnership assets by a former partner for his own profit subsequent to dissolution the court should not enquire further at the trial but should order an account in terms similar to that ordered by Romer J. in that case.

23. Mr. Thomas referred to numerous items of documentary evidence that he contended substantiated the Plaintiffs' allegation that the first and second (and fourth) Defendants had made use of partnership assets after the dissolution. In particular there was the letter dated the 4th of September 1978 to the Law Society headed in the matter of Peter Mo & Co. and signed by the first, second and fourth Defendants in which they asserted that - "As we see it Messrs. Peter Mo, M.E. Ives and Michael Yeung Ka Wing are continuing the practice of Peter Mo & Co. under that style or firm name." In a later passage in the same letter they refer to themselves as "the continuing partners".

24. Bearing in mind that it was not until the 22nd of September 1978 that the first and second Defendants purported to exercise an alleged option to purchase the interest of their former partners in the partnership assets and that no entitlement to the use of the partnership assets is pleaded by virtue of the purported exercise of any such option, the letter dated the 4th of September 1978, by itself, was in my judgment ample justification for directing the special account sought by the Plaintiffs.

25. I do not dwell on the other evidence relied on by Mr. Thomas on this point because Mr. Johnson, in resisting the special account sought by the Plaintiffs, did not seek to challenge the adequacy of the evidence of user of assets. Instead he took what he fairly described as an unattractive pleading point. It was nevertheless an ingenious point to which Mr. Thomas could, for understandable reasons, provide no answer as a matter of pleading.

26. Mr. Johnson stressed that in the Statement of Claim paragraph 8 contains the allegation in explicit terms of the use of staff and assets, including the goodwill, of the partnership by the first, second and fourth Defendants for their own purposes. However that user is pleaded "By reason of the matters aforesaid". Accepting that "matters aforesaid" include all matters pleaded previously in paragraphs 1 to 7 inclusive of the Statement of Claim, Mr. Johnson stressed that in paragraph 4, which is the first relevant part of the pleading, it is pleaded that on the 28th of July 1978 the first, second and fourth Defendants commenced their own practice under the firm name of Messrs. Mo, Ives and Yeung at the partnership address.

27. The relevant Defendants have all denied that they ever in fact practised together under the name of Messrs. Mo, Ives and Yeung The Plaintiffs accepted at the trial that there was not any evidence in the documents before the court to prove otherwise. Moreover, there is no reference in terms in paragraph 4 to the use of partnership assets by the relevant Defendants.

28. Apart from paragraph 4, no allegation is made against the second or fourth Defendants prior to the allegation contained in paragraph 8 which is made "By reason of the matters aforesaid". The activities of the fourth Defendant are the subject of paragraph 6 of the Statement of Claim but to material allegation is there made against him.

29. It seems to me that Mr. Johnson's contentions are right in the context of Mr. Thomas' preliminary application for judgment on admitted facts. If paragraph 4 is not admitted or proved the factual basis for paragraph 8 is not established except to the extent that there remains the pleading in paragraph 7 of the Statement of Claim that the first Defendant began his own practice on the 3rd of October 1978 in the partnership premises. On this footing the issue on user of assets is confined to the first Defendant only.

30. However the reality of the situation is that it is common ground that there was a solicitors' partnership between the parties which was dissolved on the 31st of July 1978 and the Plaintiffs contend, on the basis of cogent documentary evidence which the first and second Defendants did not by their leading counsel contest at the trial, that the first and second Defendants continued the former partnership's business in its premises with its assets. Mr. Johnson fairly acknowledged that his clients have come to court knowing what the Plaintiffs are alleging against them. Moreover, as Romer J. observed in Manley v. Sartori (supra) at page 165:-

"...... where surviving partners continue to carry on the business, prima facie they are carrying it on by reason of their possession of the assets of the partnership; and the executors of the deceased partner are prima facie entitled to a share of the profits proportionate to his share in the assets of the partnership. It is for the surviving partners to show, if they can, that the profits have been earned wholly or partly by means other than the utilization of the partnership assets."

31. By analogy with the case of surviving partners it seems to me that the first and second Defendants are obliged to show that the profits they earned at the relevant times have been earned wholly or partly by means other than the use of the partnership assets. The fact that the use of partnership assets at the material time has not been adequately pleaded against the second Defendant although the relevant special account is included in the prayer for relief does not, in my judgment, preclude the court from directing such an account or an inquiry in the face of the unchallenged evidence before the court. The special account or inquiry is in my judgment part of the relief that the court is empowered to grant on dissolution. Moreover O.43 rule 2(1) clearly provides that the court may direct any necessary accounts or enquiries to be taken or made at any stage of the proceedings on application by a summons : c.f. Lindley on Partnership at page 576.

32. It follows that if the relevant special account were to be refused at the trial of this action on a technical ground of pleading it would be open to the Plaintiffs to apply by summons for the taking of the special account the necessity of which is, in my judgment, manifest. The consequence of refusal by the court at the end of the trial of the relevant special account and any ancillary inquiries would merely be multiplicity of proceedings which all the parties seek to avoid in an action which has already frozen the parties' distributable assets for 5 years. Furthermore, as Mr. Thomas pointed out, the fourth Defendant had already consented to the relevant account. In the event the Plaintiffs subsequently abandoned the special account in question but, for the reasons given above, I held on the 1st May that they were entitled to that account.

33. The only issue between the relevant parties raised by the Statement of Claim and Defences of the first, second and fourth Defendants concerning profits attributable to the use of partnership assets having been disposed of at the trial by the direction for a special account, the issues, if any, raised by the Counterclaim remained for consideration.

34. In paragraph 4 of the Counterclaim the first and second Defendants pleaded that since the 1st of August 1978 "..... the Management of the said partnership has been the responsibility of the 1st and 2nd Defendants". This allegation, which was later particularised, was the basis for the claim in paragraph (ii) of the prayer for a declaration that the first and second Defendants were entitled to remuneration for their management services between the dissolution and the appointment of the Receiver at a rate of $1,000 per day.

35. In their Defence to Counterclaim filed on the 2nd of May 1979 the Plaintiffs formally denied all the allegations in the Counterclaim. However by a letter dated the 13th of April 1984 to the first and second Defendants' solicitors the Plaintiffs' solicitors made the Plaintiffs' attitude abundantly clear by stating the well established principle (which is enshrined in O.43 rule 6) that just allowance was implicit in any order for an account and that the issue to be determined on the taking of the account is which of the former partners, if any, did contribute to the winding up and what, if anything, he or they deserve by way of reward.

36. Mr. Johnson, who claimed to see the hand of Mr. Thomas behind the Plaintiffs' solicitors' letter dated the 13th of April 1984, contended that there had been a substantial change of attitude on the part of the Plaintiffs on this and other matters on the 13th of April 1984 but he readily accepted that there was not an issue for trial on the question of his clients' claim for just allowance for their services since dissolution.

37. In paragraph 5 of the Counterclaim and the particulars thereof dated the 23rd of March 1984 the first and second Defendants allege that the second Plaintiff removed about 300 files belonging to the partnership in breach of his fiduciary duty and without the knowledge, consent or agreement of the "partnership". This allegation was the basis for the claim in paragraph (iii) of the prayer for a declaration that any order for an account should include an account for the removal of the 300 files by the second Plaintiff. Again this allegation was the subject of the Plaintiffs' general denial in their Defence to Counterclaim.

38. Suffice it to say that although Mr. Johnson contended that there had been a substantial shift of attitude by the Plaintiffs on this matter he accepted that Mr. David Pyott, the solicitor acting for the Receivers, had inspected all the relevant files which are in the possession of the Plaintiffs and advised the Receivers that the Plaintiffs had acted with propriety in taking over the work of the relevant clients and that prima facie the Plaintiffs were not accountable to the former firm for any part of the fees earned since the dissolution by the Plaintiffs. Mr. Pyott's excellent report dated the 13th April 1984 was before the court.

39. Again, Mr. Johnson detected the hand of Mr. Thomas in instigating clarification of the position regarding these files of the former firm which are also referred to in the Plaintiffs' solicitors' letter dated the 13th of April 1984. Be that as it may, by the trial this issue had been eliminated.

40. Although there was no apparent basis in the body of the Counterclaim for it paragraph (i) of the payer of the Counterclaim contained a claim for a declaration that the first Defendant is solely entitled to practise as a solicitor under the name of Peter Mo & Company. When required to particularise this claim the first Defendant relied on the Deed referred to in paragraph 2 of his Defence, his capacity as a partner and on the alleged consent of the Plaintiffs at a partnership meeting in June 1978 upon which the first Defendant acted, thereby giving rise to an alleged estoppel.

41. Once again Mr. Johnson contended that the Plaintiffs had shifted their ground after raising an issue on this claim. However he readily accepted that the Plaintiffs had by their solicitors' letter dated the 13th of April 1984 made it clear that they do not contend that the first Defendant is in any way precluded from practising as a solicitor in his own name, although they expressed justifiable reservations regarding his entitlement to a declaration that he was solely entitled to practise under that name.

42. It was thus apparent by the time Mr. Johnson had concluded his submissions that, once the pleading issue had been disposed of in the manner indicated above, there were no effective issues for trial. Any areas of contention between the parties regarding profits made from the use of partnership assets after dissolution and just allowance claimed by any former partner should be resolved in the taking and making of appropriate accounts and inquiries to be directed in the order of the court for the winding up of the partnership assets.

43. After judgment had been given on that footing on the 1st of May 1984 the parties and their counsel and solicitors entered into negotiations aimed at minimising the directions to be contained in the order of the court. The outcome was the approval of the order of the court on the 4th of May which was varied slightly on the 8th of May under the circumstances already described above.

44. It only remains to give my reasons for the order made on the 4th of May directing that the costs of the parties were to be paid out of the assets of the former partnership. As in the case of any other administration action the general rule is that the costs of a partnership action are paid out of the partnership assets unless the action has been rendered necessary by the negligence or misconduct of a partner, in which case the court will order that partner to pay the costs of the action occasioned by such negligence or misconduct. This has been the rule since Hamer v. Giles (1879) 11 Ch D 942. Butcher v. Pooler (1883) 24 Ch D 273 is authority for the rule that the costs of taking the accounts directed at the hearing in order to ascertain the partnership fund are usually paid out of partnership assets in the absence of impropriety or unreasonableness even where the accounts are disputed on grounds which are held to be ill founded : see Lindley at page 574.

45. In the present case it was common ground that the third Defendant was joined as a necessary party to the action and no allegation of misconduct was made against him. By his counsel he contended that he should not have to bear any of the costs of the action out of his own pocket. None of the other parties sought to persuade the court that his costs should not come out of the partnership assets and I considered that his case was manifestly one for the usual order.

46. The fourth Defendant instructed his counsel to make no submissions on costs. On the second day of the trial he had consented to an order for the winding up of the partnership assets albeit without conceding that he had ever practised with the first and second Defendants in the partnership premises after the dissolution on the 31st of July 1978. None of the other partners contended that the usual order should not be made as to his costs. I could find no basis for attributing negligence or misconduct to him and accordingly ordered that his costs of the action be paid out of the partnership assets.

47. As in the case of the submissions at the trial, the real contest when it came to costs turned out to be between the Plaintiffs on the one hand and the first and second Defendants on the other hand. Each leading counsel defended the conduct of his clients and invited the court to conclude that his adversary's clients' conduct had been unreasonable to the extent that they should be the subject of an adverse order as to coats.

48. Considering all the circumstances and the extraordinary length of time taken to get this action on for what proved to be a formality of a trial without effective issues suitable for trial followed by three days of negotiations during the hearing time resulting in an order which has probably saved very substantial costs hereafter, I was unable to conclude that the Plaintiffs or the first or second Defendants had been guilty of negligence, misconduct or unreasonable behaviour of such a degree as to deprive any of them of an order for their costs to come out of the partnership assets.

49. Happily the proceedings had been so conducted that the court never had to enquire into the reasons for the disharmony between the parties. The ground for dissolution of the partnership was not misconduct of any of the parties but the notice dated the 23rd of June 1978 served by the third Defendant on the other parties and the only allegations and counter allegations made in the pleadings related to alleged liability to account in respect of the use of partnership assets or the removal of clients' files after the dissolution.

50. The only real issues between the relevant parties were as to accounts in relation to matters arising after the dissolution and such issues were not in my judgment issues concerning negligence or misconduct of the degree contemplated by Jessel M.R. in Hamer v. Giles (supra) at page 945 where he gave the example of failure by a partner to keep the accounts as requiring an adverse order as to costs in a partnership action.

51. The only point of substance on costs as between these parties was that the Plaintiffs had on the 13th of April 1984 very sensibly, by their solicitors' letter of that date, made their position clear in relation to the relief sought in the Counterclaim and had at about the same time permitted the Receivers' solicitor Mr. David Pyott to examine all the relevant files in the Plaintiffs' possession and to satisfy himself that the Receivers had no claim to make in respect of them on behalf of the partnership.

52. Undoubtedly this move served to shorten the hearing at the trial and Mr. Johnson for the first and second Defendants acknowleged this. However he was, in my judgment, fully justified in emphasising that these moves came at the last moment, after what seemed to me to have been years of forensic trench warfare. Moreover Mr. Johnson's submissions were brief and candid and the greater amount of the hearing time was taken up with the negotiations which resulted in what is intended to be a practical order leading to the winding up of the partnership assets with the minimum of further delay.

53. Furthermore the Plaintiffs had in the course of the negotiations abandoned the only special account they sought in their Statement of Claim against the first, second and fourth Defendants. Much of the hearing time taken up by Mr. Thomas' helpful submissions had been concerned with this account arising out of the alleged user of partnership assets by the first, second and fourth Defendants after the dissolution.

54. In all the circumstances I concluded that it would be a proper exercise of the court's discretion as to costs to order that, as in the case of the third and fourth Defendants, the costs of the Plaintiffs and the first and second Defendants of the whole action should come out of the partnership assets. It seemed to me that the parties had failed to appreciate the true principles applicable to a partnership action. Having decided to make no order on the Counterclaim I dealt with the parties' costs of the action as a whole.

55. As to the basis of taxation, the experience and considerable industry of counsel was unable to produce any modern reported authority where the basis of taxation of the partners' costs in a partnership action had received consideration. By analogy with the modern practice in administration actions in the Chancery Division of the English High Court I considered that it was open to the court to order taxation of all or some of the parties' costs in a partnership action on the common fund basis under Order 62 rule 28(3) notwithstanding the award of only party and party costs to the former partners in Hamer v. Giles (supra) at page 948.

56. However, in the circumstances of the present case where the third Defendant was the only party who had raised no issues regarding special accounts or any other matter not suitable for the trial of the action, I considered it appropriate that he should be awarded costs to be taxed on the common fund basis and that the other party's costs should be taxed as between party and party.

Representation:

Mr. Neville Thomas Q.C. with Mr. Patrick Fung M/s. Poon & Sum for the 1st and 2nd Plaintiffs.

Mr. Robert Johnson Q.C. with Mr. Ronny Wong M/s. Wilkinson & Grist for the 1st and 2nd Defendants.

Mr. William Chan instructed by M/s. Woo & Woo for the 3rd Defendant.

Mr. B.K. Ho instructed by M/s. T.S. Tong & Co. for the 4th Defendant.