Re Pro Kt a Ltd (in Liquidation)

HCCW 71/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 71 OF 1995

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Coram: Mr. Registrar C. Chan in Chambers

Date of Hearing: 12 July 2004

Date of Handing Down: 1 September 2004

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DECISION

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1.It has been more than three months since the publication of the Procedural Guide for taxation of bills of liquidators' agents. As expected there are many areas need clarification, one of which is the basis for taxation of the costs of solicitors retained by a liquidator to assist him in performance his duty. I intend to express my thought on this subject. The opportunity arises when Mr. Hunsworth has agreed to the publication of this decision and I am grateful to him.

2.In this case, Mr. John Lees, the liquidator in the above liquidation has with the consent of the Committee of Inspection ("COI") appointed Messrs. Johnson Stokes & Master ("JSM") as the solicitors to act for the above company to pursue a claim for a sum in the hands of another solicitor firm. There was no agreement as to the amount of fees to be charged by JSM. But, I find among the documents submitted for the purpose of taxation a letter from a COI member confirming appointment and it seems to suggest a ceiling to the amount the solicitor would charge by stating: "Provided that the legal fee of JSM is not more than the claim amount." I bear such remark in mind while doing the taxation and examine whether there is any relevance.

3.Following the statutory procedure, JSM through the liquidator submitted its bill no. 1418004 dated 21 May 2004 for taxation. The contents of the bill is very short and I quote its entirety as follows:

“	Re: Recovery of fees	HK$
22/5/2003 to 14/512004	To our professional services rendered in relation to the above matter as more particularly set out in the attached narrative breakdown. NDH's time: 1 hr 40 mins x HK$4,500.00 per hour
	CHJD's time: 3 hrs 20 mins x HK$3,240.00 per hour
	From October 2003
	CHJD's time: 1 hr 15 mins x HK$3,360.00 per hour
	From April 2004
	CHJD's time: 2 hrs. 40 mins x HK$3,600.00 per hour		32,100.00
	Disbursements
	Photocopying	57.00	57.00
			HK$32.157.00"

4.Annexed to the bill is a schedule setting out the various items and the works that have been done by the various fee earners. A copy of the schedule is reproduced as an Appendix to this Judgment. I must confess from the contents of the bill as well as the schedule attached I do not know what is the nature of work performed and what are the issues involved. Without such information I am unable to assess the complexity of the case and the skill required, and to determine what rates I should assign to the different fee earners for the purpose of this taxation. That is one of the reasons why the Procedural Guide requires the agent to give a narrative and description of the nature of work. It will not help simply informing the taxing masters how many letters have been written and received, and how much time has been spent for such work without knowing their contents.

5.I have been greatly assisted by Mr. Hunsworth and Mr. Dobby; both of them attended the taxation hearing and told me what the case was about and what the issue was. After the hearing Mr. Hunsworth has kindly supplied me with the correspondence relating to the period covered by the bill for me to consider. Having examined the documents I have better understanding of the case now.

6.The company went into liquidation in 1995. A Committee of Inspection was formed. From the correspondence I understand that some creditors complained about the composition of the Committee which consisted mainly of bankers. Before JSM was instructed, the liquidator sought advice from another solicitor firm "X". Apart from that, the liquidator with the COI approval also instructed "X" to start recovery process from various debtors who owed money to the company. For some reason JSM was subsequently appointed in place of "X". At that time X had withheld a sum of HK$539,047.17, most probably, as its costs. JSM advised the liquidator that the sum was recoverable.

7.The issue, as I see it, is simple as summarized in a paragraph of the "without prejudice" letter dated 16 April 2004 written by JSM to firm "X" as follows:

"As you are aware the Liquidators' claim against you is for the sum of HK$539,047.17 representing monies which you overpaid yourselves from funds properly belonging to the insolvent estate and deducted by you in contravention of Rule 179(2) of the Companies (Winding Up) Rules. As we have previously set out in open correspondence, it is plain, as solicitors, you can only be paid from the insolvent estate that which has been allowed by the Registrar after taxation. As the then legal advisors to the Liquidators, you would have been aware of this."

8.Mr. Hunsworth submitted that it was a liquidation case and required expertise and special skill. The charge-out rates for fee earners should be higher than the normal rate suggested by the Law Society of Hong Kong. I have no dispute that the practice of insolvency law should be regarded as a specialist area. But, I have reservation that a solicitor who practises in a specialist area is entitled per se to a higher fee rate. Undoubtedly one needs to be trained and to have practised in that area for some time before one can claim to be a specialist. But, we have seen that a number of specialist areas do not ask for higher rates. The ready examples are conveyancing, bankruptcy law, family law and litigation involving personal injuries. The practitioners in those areas do not usually charge higher rates simply because they practise in those areas. It depends very much on the supply and demand for such services in the market.

9.According to statistics in the recent years, the number of cases concerning companies winding-up handled by the Court of First Instance are increasing: there are more cases filed in this court for winding up companies than those relating to personal injuries. However, I am prepared to give some credit to those who practise in insolvency law as the number of lawyers who are familiar with that area of law are not many though steadily increasing. During their years of articles they might not have gained the necessary experience in that area of law; the firms involved may have to devote extra resources to train them before they can properly handle the cases on their own or alternatively, the firms may have to pay higher remuneration to recruit those who are familiar with that area of law.

10.Supply and demand is one of the factors affecting my decision. But, I cannot ignore the other factors commonly known as "the Seven Pillars for taxation" as set out in Paragraph 2 of Part II of the First Schedule to Order 62:

"(a) the complexity of the item or of the cause or matter in which it arises and the difficulty or novelty of the questions involved;

(b) the skill, specialized knowledge and responsibility required of, and the time and labour expended by, the solicitor or counsel;

(c) the number and importance of the documents (however brief) prepared or perused;

(d) the place and circumstances in which the business involved is transacted;

(e) the importance of the cause or matter to the client;

(f) where money or property is involved, its amount or value;

(g) any other fees and allowances payable to the solicitor or counsel in respect of other items in the same cause or matter, but only where work done in relation to those items has reduced the work which would otherwise have been necessary in relation to the item in question."

11.In this case, I do not find any complexity as to facts or law. The issue is very clear. I agree that it requires the knowledge of a specialist to identify the issue. The law involved is rather simple. But, I have to take into consideration that the other side "X" is a solicitor firm. Resistance is normally expected. The COI had been very cautious and did not give its approval until October 2002. The delay, I believe, was due to the hesitation to claim against X, a reputable world-wide law firm. As reasonably prudent men, they worried about the legal fees; that was the reason why one of the COI members in granting his approval suggested to cap the legal fees as stated in paragraph 2 above. Other than that, I see no relevance of that suggestion.

12.The process turned out to be a smooth one. After an exchange of several letters between the two firms, "X" agreed to repay the full amount. It is wrong for me to look at the matter with hindsight or to use the result to decide the costs charged by JSM. I agree that JSM had given very good advice. Had the COI and the liquidator not been properly advised, the amount might not have been recovered. I must give credit and recognition to the expertise of the fee earners involved.

13.In the past for handling complicated liquidation process I usually gave some enhancement to the charge-out rates stipulated in the scale; that scale was suggested by the Law Society of Hong Kong and accepted by my predecessor, Registrar Betts as a good guidance in fixing the rates for taxation. The extent of enhancement depends very much upon the factors I have mentioned in paragraphs 9 and 10 above. For this case, most of the work was done by Mr. Dobby while Mr. Hunsworth played a supervisory role. According to the time claimed in the bill, Mr. Hunsworth spent 1 hour 40 minutes and Mr. Dobby 7 hours 15 minutes.

14.Mr. Hunsworth is one of the senior partners of JSM in charge of litigation. He claimed to be specialized in insolvency law litigation, which I have no reason to doubt. He charged $4,500.00 per hour, about 12% higher than the Law Society suggested rate. Before going any further, I must remind myself the rates were fixed by the Law Society in 1997. As far as I know, the scale of rates was based on findings drawn from statistics collected in 1996 and 1997. Without knowing the oncoming deflation in the following years, my predecessor Mr. Registrar Betts and his colleagues accepted the scale as a good reference point for deciding solicitors' remuneration. Applying the scale to the bills under review for work done in 2003 and 2004 after taking into consideration of the general economic condition in Hong Kong in the recent years I am of the opinion the scale is very much on the generous side.

15.My understanding of the practice in an established law firm is that generally a solicitor who becomes a partner must have proved that he has acquired special skill or expertise in certain area of practice. I agree with Mr. Hunsworth's submission that simply making reference to the number of years of practice without looking at the nature of work is arbitrary and wrong in principle. However, we need a reference point. The Law Society in setting the rates of charges for solicitors must have taken into consideration of their experience, skill and expertise acquired with years progressing after admission and it must have also made reference to the nature of work they are usually asked to handle. In a taxation hearing one must take into consideration the nature of work he is asked to handle in a particular assignment and whether any special knowledge and skill is required. For example, it is wrong in a party and party taxation to allow a solicitor of 20 years' standing to claim $4,000.00 an hour when he deals with a simple straightforward dishonoured cheque case.

16.Mr. Hunsworth has been practising as a solicitor in Hong Kong since 1984. He is very well respected in the profession. But, in deciding the rate I have to take into account the nature and complexity of the work he has to deal with. I find that the subject matter in this case will not be difficult for a solicitor specialized in insolvency law. There were not many documents to study. No research needed to be made. Both the Liquidator and COI did not consider the matter as a matter of urgency. Having considered all the points I have raised earlier I find that the charge-out hourly rate for Mr. Hunsworth in handling this matter should not be as high as $4,500.00. The reasonable and proper rate should be $4,200.00 per hour.

17.For Mr. Dobby, he claimed different rates for different periods:

From May 2003 to September 2003	$3,240.00
From October 2003 to March 2004	$3,360.00
From April 2004 onward	$3,600.00

The changes in rates were made, most probably with reference to the change of his status in the firm and the years of his experience. Mr. Dobby has not given me any reason. He was admitted in Hong Kong in 1998. I believe that during the period Mr. Dobby was promoted and also passed his anniversary of admission. His remuneration had been increased. These are the possible reasons why the rate has been changed. If there are other reasons, I am prepared to review this item.

18.I always reject such argument. I consider it illogical for the same solicitor doing the same piece of work but charging differently because he has reached his admission anniversary. It is ludicrous to think of a situation where a solicitor attending court on 30 March 2004 in respect of a case charged a rate of $3,240.00 and he continued to appear on the next day, 1 April 2004, for the same defendant in the same case but charged differently simply because he had passed his anniversary day of admission or he was promoted to a different position in the firm.

19.Another argument often put forward to support the change is that a solicitor's practice is different from that of counsel. The latter works on his own. For solicitors in a firm they work as a team and support each other financially. They have their own system of promotion and remuneration structure. Is this a factor which a taxing master has to take into consideration in a taxation? I doubt very much he should.

20.When a solicitor was first assigned with the job, his position and rank at that time was considered to be suitable for doing the work and so was his rate of charge. The change of his status in the firm or passing his anniversary day of admission has no relevance to the nature of work he did. Mr. Dobby was admitted in Hong Kong in December 1998. At the time when he did the work, he had practised in Hong Kong for less than five years. His area of specialty is insolvency work. The suggested rate by the Law Society is $2,500.00 per hour. I have no doubt that his experience, expertise and skill have contributed to a successful conclusion of the case. I consider a 20% enhancement of the rate suggested by the Law Society is appropriate. Accordingly, I fix his charge out rate at $3,000.00 per hour.

21.The next question I have to consider is on what basis the costs should be taxed. Mr. Hunsworth submitted that it should be taxed on "trustee" basis or "solicitor and client" basis. No one will dispute that the liquidator is in a position of trust. He holds the assets on behalf of the company and its creditors.

22.By "trustee" basis I believe Mr. Hunsworth has in mind, Order 62 rule 31 which states as follows:

"31. (1) This rule applies to every taxation of the costs which a person who is or has been a party to any proceedings in the capacity of trustee or personal representative is entitled to be paid out of any fund which he holds in that capacity.

(2) On any taxation to which this rule applies, no costs shall be disallowed except in so far as those costs or any part of their amount should not, in accordance with the duty of the trustee or personal representative as such, have been incurred or paid, and should for that reason be borne by him personally."

Mr. Hunsworth submits that I should not tax off any item of cost which has been incurred in the performance of his duty on behalf of the liquidator. I doubt this is the right criterion. As Le Pichon J, as she then was, rightly pointed out in Re Peregrine Investments Holdings Ltd., [1998] 2 HKLRD 670 at 679C-D a provisional liquidator is in a fiduciary position; he is only allowed to charge if he is able to justify his claim.

23.In that judgment she then went further to analyse the position of a solicitor claiming for costs against a provisional liquidator and summarise it in the following way at page 682 I onward:

"(1) An office-holder's own claim for remuneration and the bills of solicitors employed by them are governed by different principles.

(2) As between the office-holder and his solicitors, there is a contract and the office-holder is personally bound to pay to the solicitors their proper charges for work done in accordance with that contract.

(3) As between the office-holder and the estate which he was appointed to administer, the question is whether and to what extent sums which the office-holder is obliged to pay his solicitors are allowable as disbursements in settling the office-holder's accounts.

(4) Sums payable to solicitors engaged by office-holders are in no different position from any other disbursements.

(5) As regards each bill, two questions arise: what is the proper amount payable by the office-holder as clients, and how much of the amount so payable is to be allowed as payment out of the estate."

24.The same argument was adopted by Registrar Chu, as she then was, in Re: Peregrine Investments Holdings Ltd & Others (No. 5) [2000] 1 HKLRD 157 in respect of solicitor claiming for costs against a liquidator. She came to the same conclusion that a solicitor can claim against the liquidator in two ways: (a) on contractual basis against the liquidator personally, and/or (b) against the estate as disbursements of the liquidator.

25.For the present exercise the bill is presented for taxation pursuant to Rule 171 of the Companies (Winding Up) Rules (Cap. 32H). It is taxed against the assets of the company. It will be paid out of the estate, in which various persons may have interests. I find it more appropriate to use the "common fund" basis unless the court has otherwise ordered. The "common fund" taxation is governed by Order 62 rule 28(4) which states as follows:

"(4) On a taxation on the common fund basis, being a more generous basis than that provided for by paragraph (2) (i.e. party and party basis), there shall be allowed a reasonable amount in respect of all costs reasonably incurred, and paragraph (2) shall not apply; and accordingly in all cases where costs are to be taxed on the common fund basis the ordinary rules applicable on a taxation as between solicitor and client where the costs are to be paid out of a common fund in which the client and others are interested shall be applied, whether or not the costs are in fact to be so paid."

26.To compare the different bases of taxation a very good summary is found in Hong Kong Civil Procedure 2004 at paragraph 62/App/14:

"(a) The essence of the party and party basis is what is "proper or necessary", and this is the strictest of the normal heads of taxation.

(b) The common fund basis seems to have been intended to replace the old "solicitor and client" basis, though in doing so it not very happily uses the very phrase itself. In the end, the practical result seems to be that taxation on the common fund basis is little more than a party and party taxation conducted "on a more generous scale". The benefit of any doubt as to whether costs have been reasonably incurred or are unreasonable in amount must be accorded to the paying party.

(c) On the indemnity basis all costs must be allowed save those which have been unreasonably incurred or are unreasonable in amount and the benefit of any doubt goes to the receiving party. Thus if there is no doubt about the reasonableness of any item then there is no difference between common fund costs and indemnity costs.

(d) On the taxation inter partes on the solicitor and own client basis all costs incurred on the express or implied instructions of the client must be allowed even if they are unreasonable. But unusual costs will be allowed only where the solicitor has warned his client that they would not be allowed on the party and party basis, unless the solicitor can show they were reasonable. The benefit of the doubt goes to the receiving party."

27.For a "common fund" taxation I shall allow a reasonable amount ill respect of costs reasonably incurred. In exercising my discretion I have to consider:

(a) whether the costs are reasonably incurred;

(b) whether the amount is reasonable;

and (c) in case of any doubt, the benefit goes to the paying party i.e. the estate of the company.

28.I now come to examine the individual items. Mr. Hunsworth urged me not to adopt a "bloodhound" approach. The taxing master should play the role of a "watchdog". Solicitors are men of integrity; they are officers of the court. In case of gross negligence or dishonesty they are subject to serious sanction. As both the Committee of Inspection and the liquidator have raised no objection to the bill, I should allow the bill in full. I would wish my work were as easy as that. However, the law does not permit me to do so.

29.I must not overlook the burden put upon the claimant to justify his costs claim as set out in page 684 of Le Pichon J's judgment:

“- have the provisional liquidators adduced sufficient evidence to explain the nature of each task undertaken and the considerations which led them to embark upon that task?

- have the provisional liquidators linked the time spent to the explanation?

- is the court satisfied that a reasonably prudent man faced with the same circumstances in relation to his own affairs, would have laid out or hazarded his own money in doing what the provisional liquidators have done?

- have the provisional liquidators produced contemporaneous records of what they have done and why they did it?

- have they produced contemporaneous records of all items of expenditure and of services rendered, how they were calculated and how they were justified?

- should the fees for any item of work be disallowed as being unnecessarily incurred?

- should the fees for any item of work be disallowed as being incurred in breach of duties?"

30.I always find it difficult to do taxation in respect of liquidator's bills or the bills of his agent. There is hardly any opposing party. One of my colleagues commented that notwithstanding Le Pichon J's criticism in her judgment about the attitude adopted by the provisional liquidator, the liquidators continued to pay lip service to the requirements of critical or serious scrutiny of the solicitors' bills. I can fully understand their difficulty: they can hardly raise any objection as they are not familiar with the law of taxation and its procedure. The taxing master is left all on his own. For myself the procedure I adopt is to look at the bill as a whole and consider the nature of the subject matter. I form a view of my own whether the total amount claimed is reasonable. I shall then quickly run through the items as set out in the schedule. If the total amount is reasonable and there is nothing in the bill which looks unreasonable I shall allow the bill in full. There are a significant number of instances I allow the amounts claimed in full.

31.In this case Mr. Hunsworth urged me to do the same. He claimed that the COI had approved the bill in full. Subsequently I received from JSM copies of the resolutions signed by members of COI in passing a resolution of approving the bill. I respect their decision but this does not exonerate my duty to carry out a taxation of the bill submitted. According to Rules 176 and 179(2) the agent will not get its payment unless the bill is taxed. For the facts I shall point later, I find the items claimed are rather unusual and merit some consideration.

32.In the subject bill there are altogether 31 items: some items in the schedule (per Appendix hereto) have caused me some concern. (For the sake of easy reference I have given serial numbers to the items.) Items 3 and 8 which refer to "file administration" and "file administration and document management". These works do not concern a client who instructs the lawyer to do a job: every solicitor has to manage his own affair in a certain way and I do not see why a client has to pay for such administration work. I do not allow the time and costs for these items. Neither have the attendance notes been produced.

33.At least on two occasions i.e. items 9 and 15 Mr. Dobby commenced his work by reviewing the file and charged for it. I doubt its necessity. Mr. Dobby had been continuously working on the file. r do not know the purpose of going through the file again and again. He should be well acquainted with the facts of the case. The fact of the case was relatively simple. r disallow sums relating to it. Neither do r find any attendance note for it.

34.Mr. Dobby needed four different occasions to review a bundle of papers enclosed in the Mr. Lees' letter of 3 June 2003 which was given to me after the hearing. I as a complete stranger to this case completed perusing the papers within 20 minutes and understood the issue. Mr. Dobby had charged it under four different items:

The bundle including the covering letters has 23 pages consisting of the correspondence exchanged between the provisional liquidator and the complaining creditors' solicitors, the minutes of the COI meetings and the letters from solicitor firm X. These are not unusual documents found in a winding up proceeding. They give rise to no difficulty. I must not overlook the fact that Mr. Dobby when he handled the matter, was admitted for five years or less as a solicitor. I allow a slightly more time and allocate 30 minutes for him. I must say that there is no attendance note in support his claim.

35.In the bill the solicitors recorded the time of each item by units of 5 minutes each. I always ask why they cannot give the actual time spent and why the time for each work has to be calculated in units of 5 minutes each. As I find it, with the assistance of a calculator, adding up odd numbers of hours and minutes should not pose any problem. I see no reasons for using units instead of recording actual time spent.

36.To be fair to JSM, I look at the documents and the attendance notes which were supplied upon my requests, I assess how much time is needed for each item. I give my estimates of the actual time spent. I must say there are items without attendance note or document in support e.g. items 12 and 19. There is no way I make assessment. It is only right for me to disallow them.

37.Items 13 and 14 refer to a meeting with Lees and K. Flynn on 19 September 2003. Both Mr. Hunsworth and Mr. Dobby participated in the meeting. No reason is given why two fee earners were required to attend. The general rule is set out in subparagraph (3) of Section 62/App/2l of the Hong Kong Civil Procedure 2004 at page 930:

"(3) Only one fee earner will be allowed for a particular item of work, e.g., drafting pleadings or attendance at court. When a junior solicitor did the work under supervision of a partner, the taxing master will bear in mind, inter alia, the possibilities of duplication of work, the time spent by the solicitor and the partner respectively, and the overall costs incurred as compared to those incurred by a single fee earner. The costs attributable to the solicitor or the partner may be reduced or taxed off where appropriate."

I find no particular difficulty in this case. I do not know what had been discussed. Searching among the documents around that time, I cannot find any attendance note. I do not know exactly what was discussed. I believe that it would be a discussion of general strategy and the steps to be taken. The presence of Mr. Hunsworth would be more than sufficient for the purpose. I find the attendance of another solicitor was unnecessary and I disallow item 13.

38.I do not intend to specify the amounts I have allowed or disallowed on each item in this decision. I shall separately send the bill showing the amount being taxed off to JSM through the liquidator. On the whole, I have deducted a significant amount from the bill. Further, the steps suggested by the Procedural Guide have not been observed and I have to read all the papers before I can do the taxation properly. For those reasons, I make an order nisi that there be no order as to costs for preparing and attending the taxation. Mr. Hunsworth has agreed that this decision be published. I direct a copy of this decision be deposited with the High Court Library for reference.

Mr. Hunsworth of Messrs. Johnson Stokes & Master

The Liquidator being absent