Re The Grande Holdings Ltd

HCCW 177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 177 OF 2011

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J U D G M E N T

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Introduction

1.On 10 July 2014 Sino Bright Enterprises Co., Limited (“Sino Bright”), a creditor of the Company, issued a summons for an order that the Provisional Liquidators’ decision to admit the proof of debt of Sidley Austin LLP (“Sidley Austin”) in the sum of US$1,764,451.62 (“Debt”) be reversed.

2.The fees claimed by Sidley Austin were incurred in advising and representing the Company and other parties in litigation in California. Three retainer letters were signed in September and October 2009.  They were all in substantially the same terms.  The section dealing with fees and expenses provides:

“Fees and Expenses. Our fees will be based on the billing rate for each attorney, legal assistant, and litigation support person devoting time to this matter. Our billing rates for attorneys currently range from $330 per hour for new associates to $875 per hour for senior partners. Time devoted by legal assistants is charged at billing rates ranging from $195 to $285 per hour, and billing rates for litigation support personnel range from $105 per hour to $110 per hour. These billing rates are subject to change from time to time. We anticipate billing you monthly and expect that our bills will be paid within 30 days after your receive them.”

3.This I understand to mean that Sidley Austin’s fees would be calculated principally by reference to time spent and hourly rates charged subject to adjustment when the bill had been reviewed by the partner in charge in order to determine whether the fee calculated on a time basis was reasonable or whether it included duplication or inefficiencies, which required a reduction in the final figure, or did not adequately reflect the value to the client and might justify an increase.  This is how, in my experience, solicitors calculate their fees and I have no evidence to suggest that the practice is materially different in California.

4.Sino Bright argues that the fees claimed in the various bills submitted by Sidley Austin and unpaid, which go to form the Debt are not a liquidated debt and, therefore, their proof should not have been admitted.  This is not to say that Sidley are not due the Debt.  The issue goes to their right to have their proof admitted for voting purposes at the first meeting of creditors.  Companies (Winding-up) Rules, rule 125 provides:

“125. Cases in which creditors may not vote

A creditor shall not vote in respect of any unliquidated or contingent debt, or any debt the value of which is not ascertained, nor shall a creditor vote in respect of any debt on or secured by a current bill of exchange or promissory note held by him unless he is willing to treat the liability to him thereon of every person who is liable thereon antecedently to the company, and against whom a bankruptcy order has not been made, as a security in his hands, and to estimate the value thereof, and for the purposes of voting, but not for the purposes of dividend, to deduct it from his proof.”

5.Sino Bright argues that the determination of the amount payable to Sidley Austin involves a subjective element of assessment that prevents the amount of the bills properly being characterised as liquidated. It points to my decision in Pan Sino International Holding Limited [1] in which I refer in paragraph 7 of the judgment to §6/2/4 of the Hong Kong Civil Practice 2010 which states:

“A liquidated demand is in the nature of the debt, i.e., a specific sum of money due and payable under or by virtue of a contract. Its amount must either be already ascertained or capable of being ascertained as a mere matter of arithmetic. If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not a ‘debt or liquidated demand, but constitutes damages’.”

I then go onto say in paragraph 8:

“Mr Wong who appeared for Lawrence accepted this distinction. He argued that the claim was for a liquidated sum because its assessment was merely a matter of arithmetic. His client had demonstrated, so he argued, the time that it had recorded for the work it had carried out and no evidence had been filed to show the records were false or inaccurate and therefore assessing the claim was simply a matter of multiplying time by charging rates. I disagree. Lawrence has failed to appreciate the following. The assessment of the proof for the purpose of voting at a meeting convened in accordance with Rule 124 of the Rules is not the same as the examination of the proof under Rule 94 for the purposes of admitting or rejecting the proof for the purposes of determining distribution of assets. The latter is likely only to take place if sufficient assets have been realized to justify the process. It is presumably because the liquidator is not expected to undertake a definitive assessment of the proof that Rule 125 provides that a creditor shall not vote any unliquidated or contingent debt, the determination of which might require considerable work. Assessing whether or not Lawrence is entitled to prove for the amount it claims by way of professional fees for the services that it has provided involves a consideration of the work it has done and whether or not the number of hours claimed are justified. This goes beyond an arithmetical exercise and is not the kind of task that a liquidator is to be expected to undertake in order to determine whether or not to admit a proof for voting purposes. In my view Lawrence’s claim was correctly treated as an unliquidated claim.”

6.In Odgers on High Court Pleading and Practice [2] the authors explain what constitutes a claim for a liquidated amount in other contexts:

“Whether the plaintiff’s claim comes within the definition of a “debt or liquidated demand” affects not only the question whether the plaintiff should indorse his writ with a claim for fixed costs, but also the form of judgment which can be obtained in default of acknowledgment of service or defence (see Chapter 4). When the amount to which the plaintiff is entitled can be ascertained by calculation, or fixed by any scale of charges or other positive data,[3] it is said to be “liquidated” or made clear. The House of Lords held in Miliangos v. George Frank (Textiles) Ltd.,[4] departing from previous authority, that the court has power to give judgment in a foreign currency and that a claim for a debt or liquidated demand may therefore be made in a foreign currency. But when the amount to be recovered depends upon the circumstances of the case and is fixed by opinion or by assessment or by what might be judged reasonable, the claim is generally unliquidated. It has, however, been clearly decided that a claim upon a quantum meruit, where the plaintiff states the precise sum which he claims as the value of his services, is a liquidated demand[5]…”

7.It will, however, be noted that at the end of this passage there is reference to the English Court of Appeal’s decision in Lagos v Grunwaldt [6] in which the court considered, amongst other issues, whether a claim on contract for a quantum meruit was a “debt or liquidated demand ” for the purposes of the then form of Order III, r. 6 of the Rules of the Supreme Court.  Farwell LJ says this at pages 47 to 48 of his judgment:

“…The first is that Order III., r. 6, does not apply, because this is not a debt or liquidated demand arising under a contract. It is a claim on contract for quantum meruit. In my opinion that is within the rule. I think the words “debt or liquidated demand” point to the old division of common law actions to be found in Bullen and Leake, 2^nd ed., p. 28. The old indebitatus counts “which have from time to time been rendered more and more concise are designated with little difference of meaning by the terms indebitatus counts, money counts or common counts; the expression common counts or common indebitatus counts being often used to designate those of most frequent recurrence, viz., where the debt is for goods sold and delivered, goods bargained and sold, work done, money lent, money paid, money received, interest, and upon accounts stated; and the expression money counts being sometimes used to particularize those for money lent, money paid, and money received. The most appropriate name seems to be indebitatus counts.” And the learned authors go on to say, “there were also formerly in use counts known as quantum meruit and quantum valebat counts, which were adopted where there was no fixed price for work done or goods sold, &c. These counts, however, have fallen into disuse, and have been superseded by the general application of the indebitatus counts.” In my opinion that is the true view; everything that could be sued for under those counts comes within the description of debt or liquidated demand.”

8.As is apparent from the end of this passage Farwell LJ found that the expression “debt or liquidated demand” was a term intended to refer to the various different indebitatus claims that had been known to the common law and which had included claims on contract for a quantum meruit.  It followed that a claim on contract for a quantum meruit was, for the purposes of Order III, r. 6, to be treated as a “debt or liquidated demand”.  It does not follow that a claim for a quantum meruit, a reasonable sum in other words, is a liquidated debt for the purposes of Rule 125.

9.The Hong Kong Court of Appeal considered the meaning of debt, which it is well established means a liquidated sum provable in bankruptcy[7]; in Bright Island Corp. v Chao [8]. In a joint judgment Mayo VP and Chung J refer at paragraph 38 to a passage from Professor Fletcher’s The Law of Insolvency:

“38. Mr Scott referred us to a passage at p.96 in Ian Fletcher, The Law of Insolvency (1990), which is of some assistance. Here, the author of the work states:

‘The requirement that the debt be a liquidated sum is one of considerable significance, and was originally established by the common law of bankruptcy long before becoming part of the express statutory provisions. It is therefore vital to appreciate which species of claim can be classified as “liquidated”, and which cannot, since this quality is so central to the concept of a good petitioning creditor’s debt. The decisive hallmark of a liquidated claim is that the process of quantification is already complete, and there is an absence of any element of “penalty” to be imposed over and above the actual loss sustained. Thus, claims in tort are of their very nature unliquidated until judgment has actually been given, or until a binding settlement has been concluded between the parties, because until then the process of quantification of damages remains unfinished, albeit the plaintiff may furnish an indication of a sum of damages which he believes to be appropriate. Claims in contract, on the other hand, are generally liquidated in nature at all stages, but if the sum included an element which is held to be “penal”, this will render the claim an unliquidated one. Likewise if the true quantum of loss directly and naturally resulting from a breach of contract or a breach of covenant cannot be immediately and definitely established, the claim must be considered as unliquidated for the time being.’

39.  Mr Scott submitted that this was an accurate statement of the law. The essential requirement was whether it was possible to arithmetically calculate the amount due and owing. Le Pichon J had held this to be the case in Re Kwok Chok Yee [2000] 2 HKC 543.”

10.The ability to calculate arithmetically the sum claimed is, as the above quote makes clear, an essential requirement of a liquidated claim, however, it does not follow that simply because it is possible to calculate a value for a claim arithmetically that the claim is necessarily properly treated for the purposes of Rule 125 as a liquidated debt.  This is illustrated by the approach of the court to a claim by solicitors for unpaid fees.  In Truex v Toll [9] Proudman J considered whether a claim for solicitors’ fees that had not been judicially assessed or agreed was a claim for a liquidated sum for the purposes of section 267 of the Insolvency Act 1986.  Such a claim could be calculated as a matter of arithmetic by multiplying time spent by an hourly rate.  The judge says this at paragraphs 24 and 25:

“24. None of the Thomas Watts & Co, the Turner & Co or the Joseph cases concerned a bankruptcy petition. However it would seem to follow as a matter of principle that a claim for solicitors’ fees not as yet judicially assessed or determined is not a claim for a liquidated sum which can be the subject of a bankruptcy petition under section 267 of the Insolvency Act 1986, even if the period for challenge under the 1974 Act has expired. Commentators (e g Muir Hunter on Personal Insolvency) therefore express the view that the earlier decisions to the contrary are inconsistent with the decisions of the higher courts and have been overtaken by them.

25.  It is indisputable that the sum claimed becomes a liquidated sum once the fees have been assessed by the costs judge or determined in an action. The issue in the present case is as to what else can convert a solicitor’s unassessed bill into a debt capable of founding a bankruptcy petition.”

11.There are two underlying reasons for this.  The first is that a client has a right either pursuant to statutory procedures or at common law to challenge the reasonableness of the fees his solicitor wishes to charge.  The second, and the immediately relevant reason, arises from the nature of the solicitor’s right to be paid, which is a right, implied into his retainer, to be paid a reasonable sum.  In Turner & Co. v O. Palomo S.A.[10] Evans LJ, giving the judgment of the court, explained it thus at 51G:

“Mr. Downes takes what is essentially a pleading point. He submits that the solicitor’s right to claim a reasonable sum for his services is governed by special requirements relating to his status as a solicitor, and secondly, that it is always subject to the terms of the express agreement made in the particular case. The term he relies upon in the present case is the agreement made in October 1996 that Mr. Spencer’s services would be charged at £180 per hour. It follows from this, he submits, that the client agreed to pay that amount for every hour which Mr. Spencer devoted to the matter in question, regardless of how many hours he might spend. He accepts that a solicitor who proceeded more slowly than a competent solicitor could be deprived of his charges for the excess period which, on that hypothesis, would be due to his own failure to act as a reasonably competent solicitor would. But that, he submits, is a matter for counterclaim, alleging negligence, and no counterclaim is made here.

Mr. Morgan submits that the legal basis for the solicitor’s claim is found in section 15 of the Supply of Goods and Services Act 1982 in any case where a contract exists between the solicitor and client. The contract contains a statutory implied term “that the party contracting with the supplier will pay a reasonable charge,” and what is a reasonable charge is a question of fact. This has to be read, in the case of a solicitor, subject to the terms of the retainer in the particular case and subject also to the statutory provisions which give the solicitor, as well as the client, certain additional rights. But we do not see any difficulty in holding that the solicitor’s claim is for a reasonable sum, whether by statute or at common law, and not for a liquidated sum. Again in accordance with general principles, the burden of proving that the sum is reasonable rests upon him. This is supported, if authority is needed, by the judgments in In re Park, 41 Ch.D. 326 and Jones & Son v. Whitehouse [1918] 2 K.B. 61 which I have quoted above.

The submission that a counterclaim is necessary, where an hourly rate is agreed, seems to us to be contrary to the basic rule that the solicitor is entitled to claim no more than a reasonable remuneration for the work that he was retained to do. As Mr. Morgan put it, the solicitor would normally be required to prove the reasonableness both of the number of hours spent and of the hourly rate which he has charged. When the hourly rate is agreed, he is left to prove the former but not the latter. There could, of course, be a case where the client agreed to pay for as many hours as the solicitor in fact worked, notwithstanding that he would or might devote more time to the matter than a reasonably competent solicitor would. However, that is not the present case, and in our judgment the deputy High Court judge was entitled to hold that a triable issue as to the reasonableness of the charges was raised by the defence evidence in the circumstances of this case.”

12.Necessarily an assessment of what is a reasonable sum involves more than just an arithmetical calculation, although in the first instance it will be possible to arithmetically calculate the sum the solicitor claims. 

13.The retainers, as I have mentioned, do not in my view contain an agreement that Sidley Austin is entitled to be paid for all the time that their fee earners’ record at rates within the bands referred to in the retainer letters.  The rates and hours recorded are the starting point, but it seems to me, and I have no evidence of Californian law relevant to the retainer letters’ interpretation before me, that a determination of the amount payable involves an assessment at least of the amount of work for which they are entitled to be paid or confirmation from the Company that the fees are agreed.  Mr. Chain, who appeared for Sidley Austin, sought to persuade me otherwise, but it seems to me that on the basis of what I have before me, and at this stage it is not in dispute that the matter falls to be assessed on a broad-brush, macroscopic level[11], this is the most credible reading of the retainers.

14.Mr. Chain also sought to argue that if I took this view I should still find that the claim was liquidated because of, what he argued was, the difference, apparent from the expert evidence filed by the Company’s own expert Christopher Rolin, in the way under Californian law any challenge to the reasonableness of the fees had to be made.  Mr. Rolin says this in paragraph 9 of his first report:

“Finally, should a review of Sidley’s legal fee invoices for the Kayne I and Kayne II matters (which I have not been provided with) and other relevant documentation indicate that there is a basis for challenging the amount of fees charged by Sidley, Grande may have the ability under California law to bring a cause of action against Sidley challenging the appropriateness of those fees.”

15.Mr. Chain argued that this tells the court that under Californian law the question of the reasonableness of the sum claimed is not relevant to quantification of the claim.  It can only be raised by way of making a claim against the attorney and seeking a set-off.  Thus it follows, says Mr. Chain, that under Californian law the sum claimed in the invoices issued under the retainers are for a liquidated sum because nothing remains to be done to quantify them.  I find this unconvincing.  Mr. Rolin says that any counterclaim would be based on breach of the retainer and it follows from what he says that the retainer must contain an implied term that the fees charged are reasonable otherwise there would be no relevant term to allege had been breached.  Mr. Rolin does not address expressly the nature of Sidley Austin’s claim as a matter of Californian law, and neither does Sidley Austin nor the provisional Liquidators’ experts.  The reason for this is that the expert evidence is directed to an argument raised by the Company that Sidley Austin had at some stage of the Californian proceedings had a conflict and this arguably deprives them of a right to payment.  There is, therefore, a danger in reading too much into Mr. Rolin’s report in regard to the issue that I am now considering, but to the extent it is relevant I do not think that it suggests that Sidley Austin’s right to payment does not contain some implied qualification that the fees must be reasonable, on the contrary it suggests that it does.  In my view if that is the case it follows that the claim involves more than simply adding up hours and multiplying them by an agreed range of rates.  It also involves a degree of judgment about whether all the time recorded is properly chargeable. This is not an academic point.  If one goes through the time records appended to the bills one finds items that to a Hong Kong or English lawyer seem questionable.  For example in the bill dated 19 May 2009 7 hours is recorded, and charged for, for researching the time limits for filing a motion to compel and drafting a research note.  If the narrative contains an accurate description of the work carried out it does seem questionable whether this is reasonable.  One might have expected a firm of Sidley Austin’s stature to know what the time limits for filing proceedings are and not expect to charge a client for a junior lawyer spending 7 hours researching the matter.

16.Mr. Kentish who appeared for the Provisional Liquidators pointed out two further matters, which he suggested were relevant to a determination of the application.  First, that there was no evidence that the Company had objected to the fees billed and, secondly, that the statement of affairs included the sum claimed by Sidley Austin without any indication that the sum claimed is in dispute.  If the fees had been agreed then he suggests, in my view correctly and I did not understand Mr. Joffe to dispute this, it would turn, what might otherwise be, an unliquidated claim into a liquidated one.  These are fair points, but what has not been put before me is any correspondence or any record of how the parties dealt with the bills after they were rendered over 4 years ago.  The only evidence I have is in a short affirmation from Christopher Ho in which he suggests that the Company must have taken issue with the level of fees otherwise they would have been settled.  In my view the evidence that the parties have filed does not allow me to reach a conclusion on whether or not the Company did or did not object to the bills.

17.In conclusion in my view the sums claimed are not for a liquidated sum and the Provisional Liquidators’ decision to admit them for voting purposes should be reversed.  So far as costs are concerned I do not think that the Provisional Liquidators’ decision to admit the proofs was demonstrably wrong at the time it was made largely because the fees were included without qualification in the statement of affairs.  I will make a costs order nisi that Sino Bright’s costs and the Provisional Liquidators’ costs are paid out of the assets of the Company. If any party wishes to challenge the costs order they should issue a summons within 12 clear calendar days.

Mr Tim Kentish, of Lipman Karas, for the Provisional Liquidators

Mr Victor Joffe and Mr M C Law, instructed by K & L Gates, for Sino Bright Enterprises Co. Ltd, a creditor

The Christopher Chain, instructed by Sidley Austin, for Sidley Austin LLP, a creditor