LONGIN INVESTMENT LTD AND ANOTHER v. TRIZONG LTD AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. These proceedings fall into two parts. First, there are interpleader proceedings instigated by the Bailiff by the issue of a summons under O.17. At stake is a debenture issued on 1st September 1987 by the Clearwater Bay Golf & Country Club (the Club). Second, there is an application by the 1st Plaintiff for charging orders nisi which the 1st Plaintiff has obtained in respect of the debenture and also shares in the 1st Defendant (Trizone) held by the 2nd Defendant (Mr. Iwasawa) and his wife to be made absolute.

2. The debenture consisting of 15 units worth $15,000 each, a total of $225,000 is in the name of the Trizone. On 3rd June 1994, the 1st Plaintiff obtained judgement against Trizone for $2.4m in this action. Details of the action between the Plaintiffs and Defendants are not relevant. Following abortive winding up proceedings brought by the 1st Plaintiff during which the Club was notified of the proceedings against Trizone, Trizone paid $600,000 on 14th August 1994. On 18th August, the 1st Plaintiff issued a writ of Fi. Fa. designed, inter alia, to seize the debenture. Execution of that writ was however unsuccessful.

3. On 28th October 1994, the 1st Claimant (Mr. Tsang) notified the 1st Plaintiff's solicitors of his interest in the debenture, namely that he had agreed to purchase the debenture from the beneficial owner, the 2nd Claimant (Mr. Hirose) and had been in possession of the debenture since 1990. Shortly after, on 19th November, Mr. Hirose gave notification of his interest in the debenture, namely that he had put up the whole purchase price and was beneficial owner.

4. Mr. Tsang refused to deliver the debenture to the 1st Plaintiff's solicitors. On 20th December, I made an order ex parte against Mr. Tsang. That order was not immediately given effect to On 24th January 1995, the 1st Plaintiff obtained a charging order nisi against the debenture and the shares in Trizone held by Mr. Iwasawa and his wife.

5. Eventually, on 23rd March, Mr. Tsang delivered the debenture to the Bailiff who issued his summons on 27th March.

6. Mr. Hirose is a banker of some seniority and experience. He is, at present, the general manager of the International Factoring Department of a subsidiary of the Sumitomo Bank in Japan. Between April 1985 and October 1990, he was living in Hong Kong when he was managing director of another subsidiary of that bank. It was his evidence that in 1987 he decided to purchase the debenture as an investment. In the middle of that year the price of debentures was rising. Unfortunately, membership of the Club was not open to individuals only to corporate members. Mr. Hirose mentioned this to Mr. Iwasawa who was working for Messrs Arthur Young, the accountants. Mr. Iwasawa suggested that corporate membership could be purchased in the name of his company Trizone and Trizone would hold the debenture for Mr. Hirose's exclusive benefit, upon Mr. Hirose paying the cost of the debenture and the usual monthly expenses.

7. It is not in dispute that, of the $225,000, Mr. Hirose himself provided $25,000 and borrowed the balance from a business acquaintance who was also a customer of his bank, Mr. Taniguchi. The debenture was acquired in Trizone's name. On 30th June 1987, Mr. Hirose was nominated to use the Club's facilities by Trizone through Mr. Iwasawa. The nomination form which was completed seeks the details of director, partner, officer or other employee nominated to use facilities. Mr. Hirose agreed that he filled in these details completing 'position held' as 'director', indicating he had been employed as such for 3 years. Mr. Hirose also agreed that these details were incorrect, he never at any time having held any position or shares in Trizone.

8. Mr. Hirose said that he repaid Mr. Taniguchi the following year in Japan. He said there was no documentation, such as a receipt, to evidence repayment. He said the whole transaction with Mr. Taniguchi was on the basis of trust. Mr. Hirose also said that he did not use the Club's facilities very much and consequently in 1988 arranged for a Mr. Ayabe to be nominated by Trizone through Mr. Iwasawa. A similar nomination form was used. Mr. Ayabe was also shown as a director when he was not.

9. In February 1990, Mr. Hirose was again nominated by Trizone through Mr. Iwasawa. On this occasion, in the nomination form he was shown as a director of some five years standing Mr. Hirose knew that the would be returning to head office in Japan later in the year and was not sure whether he would return to Hong Kong. He, therefore, arranged with Mr. Tsang for Mr. Tsang to purchase the debenture when Mr. Hirose was able to transfer the legal title to him. According to Mr. Hirose, the price was to be the market price at the time of transfer. Mr. Tsang said the price was to be $1.2m. I do not think anything turns on this because it was Mr. Hirose's evidence that that was the price agreed in 1993 when he and Mr. Tsang met Mr. Iwasawa to discuss what was to be done about the debenture.

10. In the meantime, Mr. Hirose handed the debenture certificate to Mr. Tsang in 1990. Mr. Tsang was nominated by Trizone on 24th June 1990. On this occasion, however, Mr. Hirose quite wrongly signed on behalf of Trizone because he understood that Mr. Iwasawa was having some business trouble and wished to keep his distance. The nomination was accepted by the Club and Mr. Tsang has used the Club's facilities since that time and, of course, paid the monthly outgoings.

11. In December 1993, Mr. Hirose was in Hong Kong on business and met Mr. Tsang and Mr. Iwasawa. Up to this time there had been no steps taken to try and transfer the debenture. Mr. Hirose said that he had been told by Mr. Iwasawa that there were difficulties with the Club about selling or transferring debentures.

12. It is perhaps helpful to mention at this point that indeed the Club do make difficulties about the disposal of corporate debentures. Mr. Kenneth Fan, membership manager of the Club, gave evidence about current practice. If a corporate member wishes to surrender its debenture it must give notice in writing to the Club. The Club will then put the member on a waiting list. The Club allows 10 corporate members to sell their debentures each year. At present, the waiting list is approximately 18 years long. The only way round this obstacle is apparently by way of the secondary market, in which the company itself is sold to another and after sale, there is simply a change of nominee by the company. This practice is known to and accepted by the Club.

13. A secondary market arrangement was apparently made between the parties. Mr. Iwasawa was to sell a flat which was held by Trizone which would leave the debenture as Trizone's only asset. The company itself was then to be sold through Mr. Hirose to Mr. Tsang. Mr. Iwasawa was to be paid $50,000 for his verification that Trizone had no other liabilities. No such verification has ever been received from Mr. Iwasawa, which is hardly surprising because this action by the Plaintiffs had begun in November 1993. Accordingly, the agreement for the disposal of Trizone has never been consummated.

14. In relation to Mr. Hirose's evidence, I make 3 findings of fact. First, I accept that Mr. Hirose put up the money for the debenture as an investment and not because he desperately wanted to play golf or have Club facilities available to him. Second, he has repaid $200,000 to Mr. Taniguchi. Third, he was aware that the rules of the Club require that a corporate nominee should be connected with the company so that his nomination forms were inaccurate, as indeed was the nomination of Mr. Tsang by Mr. Hirose on behalf of Trizone. I make these findings because I found Mr. Hirose to be a frank and honest witness. He was certainly frank about the third finding which I had made.

15. For the purpose of interpleader proceedings, a claimant need not prove that the goods are his absolute property only that he has a right to possession or such title or interest that the Bailiff ought not to have seized the goods. This proposition is neatly encapsulated in the White Book at marginal 17/5/5. It is Mr. Hirose's case that he has a beneficial interest in the debenture because, he having put up the money, Trizone holds the debenture on a resulting trust for him. In other words, there was a presumption of a resulting trust to the real purchaser as set out in Snell's Equity, 29th Edition, page 177.

16. It is the 1st Plaintiff's contention that Mr. Hirose is not entitled to equitable relief because he does not have clean hands. Again, Snell's Equity page 31 explains this maxim. After reviewing various cases on page 32, Snell said

"The maxim must not be taken too widely; 'Equity does not demand that its suitors shall have led blameless lives. 'What bars the claim is not a general depravity but one which has 'an immediate and necessary relation to the equity sued for,' and is not balanced by any mitigating factors."

17. Both parties relied on this passage. For the 1st Plaintiff, it was argued that Mr. Hirose had knowingly broken the rules of the Club to obtain his nomination and that this had 'an immediate and necessary relation'.

18. Plainly, there was a relationship between Mr. Hirose's purchase of the debenture and nomination. Mr. Hirose's primary consideration, however, was to obtain the debenture as an investment. He was not particularly interested in and did not make much use of the actual facilities provided by the Club.

19. Mr. Kenneth Fan, the membership manager, said and I accept that the Club takes seriously the requirement that a nominee member be an employee of the company nominating him. The Club does not verify details of the nomination. It takes the nomination on trust.

20. So trust is an important part of the Club's approach to its membership. That trust was, of course, broken by Mr. Iwasawa and Mr. Hirose. I do not, however, in all the circumstances, regard Mr. Hirose's conduct as being of the kind proscribed by Snell.

21. The 1st Plaintiff had a secondary argument, namely that Mr. Hirose and Mr. Iwasawa had entered into contractual relations in 1987. As a consequence, it was contended that Mr. Hirose is no more than an ordinary creditor of Trizone and must seek to recover his money in the usual way.

22. I reject this argument. I am unable to see how the arrangement made between Mr. Hirose and Mr. Iwasawa amounted to a contract. It was, as Mr. Hirose said, a favour by Mr. Iwasawa. The terms and conditions are too vague to be ascertained with any particularity and the contract, if it be one, would undoubtedly need a number of implied conditions to make it work. Plainly, the relationship which arose was that of trustee and beneficiary between Trizone and Mr. Hirose respectively, arising by way of resulting trust out of the provision by Mr. Hirose of the money for the purchase by Trizone of the debenture. There is no doubt but that Mr. Hirose could call on Trizone to dispose of the debenture and to account to him for the proceeds.

23. Accordingly, I find that Mr. Hirose has established a title to the debenture certificate which was seized from Mr. Tsang by the Bailiff. Mr. Tsang, who had actual possession of the debenture certificate until the Bailiff's seizure, depends for his claim, the details of which I accept, upon the success of Mr. Hirose. I understand that there is no dispute between them. In my view, Mr. Hirose is entitled to the certificate for him to deal with as he sees fit.

24. As far as the charging orders are concerned, the charging order nisi over the debenture must now be discharged. Neither Mr. Iwasawa nor his wife appeared to dispute the charging order in relation to the shares. That order is therefore made absolute.

25. I make an order nisi that the Claimants should have their costs against the 1st Plaintiff in relation to the Interpleader summons and the charging order on the debenture. I make an order that the 1st Plaintiff should have its costs against Mr. Iwasawa in relation to the charging order on the shares.