GEOFFREY L. BERMAN (IN HIS CAPACITY AS TRUSTEE OF THE LENDER TRUST) v. SPF CDO I, LTD AND OTHERS

HCMP 1321/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1321 OF 2010

____________

____________

________________________

REASONS FOR DECISION

_________________________

Introduction

1.  The Plaintiff, Geoffrey Berman, has commenced these proceedings in his capacity as trustee of the Lender Trust (“Trust”) seeking in his originating summons the determination of this Court on the following question: Whether the Plaintiff has the leave of the Court to enter into the Deed of Assignment with Remedy Asia Limited on the terms set out in the Exhibit “GB-1” to the Affidavit of Geoffrey L. Berman dated 20 May 2010.  I shall refer to Mr. Berman and Remedy Asia Limited in this judgment as the “Assignor” and the “Assignee” respectively.

2.  On 8 July 2008, Syntax-Brillian Corporation (“Company”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”).  On 6 July 2009 the Bankruptcy Court made an order confirming the Second Amended Chapter 11 Liquidating Plan that had been filed by the Company and other related companies (“Plan”).  One element of the Plan was the creation of the Trust which came into being on 7 July 2009 and holds certain assets of the Company on trust for the beneficiaries of the Trust who are the senior secured creditors of the Company and the other related companies, which are the subject of the Plan.  The Assignor was appointed its trustee.  The books of the Company show debts owed to the Company by 2 companies (whose identity it is appropriate to keep confidential) for goods supplied to them (“Indebtedness”).  Under the terms of the Plan, title to the Indebtedness vests in the Trust.  Both companies are incorporated in Hong Kong and I shall refer to them together as the “Debtors”.

3.  Under the terms of the proposed Deed of Assignment, the Assignee will have an opportunity to investigate the bona fides of the Indebtedness, conduct a comprehensive review of the Company’s books and records as they relate to it and commence proceedings against the Debtors.  It is, in other words, what is commonly referred to as a funding agreement.  On 19 March 2010 the Bankruptcy Court granted a motion issued by the Trust approving the Deed of Assignment.  The motion was granted, as I understand it, on the basis that the present application would be made to this court.  This application is supported by the defendants, who are beneficiaries of the Trust.

4.  When the matter first came before me I raised a number of questions concerning the basis upon which I was being asked to make the order that is sought.  I did so for 2 broad reasons.  First, because it was unclear to me whether I was being asked to decide an issue pursuant to RHC O.85, namely, whether the Assignor should be permitted to assign the Indebtedness on the terms of the Deed of Assignment under rule (3)(d) or to make an order that would assist the Bankruptcy Court in the implementation of the Plan.  Secondly, it was unclear to me on what basis it was suggested it was permissible for me to express an opinion, which is the crux of the matter, on whether or not the proposed Deed of Assignment engages the rules prohibiting maintenance and champerty, which remain a criminal offence in Hong Kong, on an application to which the Debtors are not a party.  I adjourned the summons sine die to allow the Assignor the opportunity to file further submissions.

5.  Further written submissions have been filed. These make it clear that I am being asked to determine a question pursuant to RHC O.85 and that the question is whether or not execution of the Deed of Assignment would constitute a criminal offence by infringing the prohibition against maintenance and champerty.  The Assignor accepts that any decision by me would not prevent the Debtors challenging any proceedings brought against them on the ground of maintenance and champerty.

6.  The common law rules making maintenance and champerty criminal offences, torts and a ground of public policy for invalidating tainted contracts were part of the law of Hong Kong prior to 1997 and remain applicable by virtue of Article 8 of the Basic Law: Unruh v Seeberger [2007] 2HKLRD 414, §78.  Unruh v Seeberger, to which I return in more detail later, itself involved a challenge by a defendant to a claim brought by an assignee under a funding agreement on the grounds of champerty.  In Re Cyberworks Audio Video Technology Ltd. [2010] 2 HKLRD 1137 I decided that an assignment of a chose in action by a liquidator to a third party litigation funder was not inconsistent with the common law rules prohibiting maintenance and champerty.  My decision was based on the inclusion in section 199(2)(a) of the Companies Ordinance of an express power to sell a chose in action, the exercise of which the Court of Final Appeal in Unruh v Seeberger recognise has become accepted (as demonstrated by English rather than Hong Kong authority) as one of the cases where conduct which would otherwise constitute maintenance and champerty does not do so: §10.

7.  Although the Assignor has a role, under the United States Bankruptcy Code, which is similar to that of a liquidator, he is not a liquidator who may apply to the court under section 199(3) of the Companies Ordinance.  The first question that arises for consideration is whether or not I should answer the question posed by the originating summons at all.

Is the Plaintiff entitled to the guidance it seeks?

8.  As I explained at the outset of this judgment the Assignor, Mr. Berman, is a trustee.  The way in which the question which has been formulated on his behalf for the court’s consideration tends to obscures the extent of what is sought.  The Assignor does not seek simply the Companies Court’s endorsement of his decision to assign an asset of the Company.  The Assignor comes before the court seeking its guidance as to whether or not the course of conduct on which he wishes to embark is lawful and appropriate.  Generally the court does not give opinions on whether or not a proposed course of conduct is lawful.  As Lord Bridge explained in the decision of the House of Lords in Ainsbury v Millington [1987] 1 W.L.R. 379:

“[i]t has always been a fundamental feature of our judicial system that the courts decide disputes between the parties before them; they do not pronounce on abstract questions of law when there is no dispute to be resolved.

Different considerations may arise in relation to what are called “friendly actions” and conceivably in relation to proceedings instituted specifically as a test case.”

9.  Mr. Thomas Lee, who appeared for the Assignor, argued that the court should not be deflected by this principle from answering the question put before it.  First, he argued that the authorities demonstrate that the court strives to recognise and assist the court of the bankrupt’s domicile with a view to achieving unitary bankruptcy proceedings.  This I accept. I do not think that of itself this principle is of any assistance in the present case as it does not, in my view, and it was not so argued, justify treating the Assignor as entitled to make an application under section 199(3), although as will become apparent later in this judgment, nothing in my view ultimately turns on this.  Secondly, he argued that the Trust falls within the ambit of the Recognition of Trust Ordinance, Cap. 76, which I accept. Thirdly, and in my view, most relevantly, Rules of the High Court, Order 85 (“O.85”), which provides in rule 2 for applications for the determination of questions arising in the administrative of trusts, is not restricted in its application to domestic trusts.  This is I accept.  It is well established that the courts of equity operate in personam and not in rem: see Chellaram v Chellaram [1985] Ch 409, Scott J at 426 post.  The prospective defendants to the proceedings the Assignor contemplates are within the jurisdiction and I see no impediment to a foreign trustee making an application in these circumstances for guidance that it would be permissible for a domestic trustee to seek.

10.  As Lord Bridge acknowledged in the passage that I have quoted above from Ainsbury v Millington, there are qualifications to the principle that the court does not answer academic questions and O.85 is one such exception.  The nature of the guidance which a trustee seeks under O.85 is by necessity both prospective and contingent on future events. The Privy Council recognised as much in Marley v Mutual Security Merchant Bank & Trust Co Ltd [1991] 3 All ER 198 at 201D, per Lord Oliver, stating that:

“A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court.”

11.  In Public Trustee v Cooper [2001] WTLR 901 Hart J, adopting the summary put forward by Robert Walker J (as he then was) in an otherwise unidentified chambers judgment in 1995, recognised four categories of questions usually raised by applicants in the O.85 jurisdiction.

“At the risk of covering a lot of familiar ground and stating the obvious, it seems to me that, when the court has to adjudicate on a course of action proposed or actually taken by trustees, there are at least four distinct situations (and there are no doubt numerous variations of those as well).

(1) The first category is where the issue is whether some proposed action is within the trustees' powers. That is ultimately a question of construction of the trust instrument or a statute or both. The practice of the Chancery Division is that a question of that sort must be decided in open court and only after hearing argument from both sides. It is not always easy to distinguish that situation from the second situation that I am coming to … [He then gave an example].

(2) The second category is where the issue is whether the proposed course of action is a proper exercise of the trustees' powers where there is no real doubt as to the nature of the trustees' powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers. Obvious examples of that, which are very familiar in the Chancery Division, are a decision by trustees to sell a family estate or to sell a controlling holding in a family company. In such circumstances there is no doubt at all as to the extent of the trustees' powers nor is there any doubt as to what the trustees want to do but they think it prudent, and the court will give them their costs of doing so, to obtain the court's blessing on a momentous decision. In a case like that, there is no question of surrender of discretion and indeed it is most unlikely that the court will be persuaded in the absence of special circumstances to accept the surrender of discretion on a question of that sort, where the trustees are prima facie in a much better position than the court to know what is in the best interests of the beneficiaries.

(3) The third category is that of surrender of discretion properly so called. There the court will only accept a surrender of discretion for a good reason, the most obvious good reasons being either that the trustees are deadlocked (but honestly deadlocked, so that the question cannot be resolved by removing one trustee rather than another) or because the trustees are disabled as a result of a conflict of interest. Cases within categories (2) and (3) are similar in that they are both domestic proceedings traditionally heard in Chambers in which adversarial argument is not essential though it sometimes occurs. It may be that ultimately all will agree on some particular course of action or, at any rate, will not violently oppose some particular course of action. The difference between category (2) and category (3) is simply as to whether the court is (under category (2)) approving the exercise of discretion by trustees or (under category (3)) exercising its own discretion.

(4) The fourth category is where trustees have actually taken action, and that action is attacked as being either outside their powers or an improper exercise of their powers. Cases of that sort are hostile litigation to be heard and decided in open court...”

12.  The first three categories are concerned with the prospective conduct of the trustees and are rarely adversarial in nature. Only in the fourth category does an application give rise to adversarial litigation over past events.

13.  Put simply, the evaluation of a trustee’s proposed conduct and the determination of its foreseeable consequences without the existence of adversarial litigation is an ordinary incidence of the O.85 jurisdiction. Such applications do have a substantive effect.  The effect of their determination, at least so far as domestic trusts are concerned, is that the beneficiaries will be prevented from claiming that the actions taken by the trustee are unlawful or in breach of his duties to the trust: X v A [2006] 1 All ER 952 at [29] – [30].  In the present the case the position is more complex than normal.  As I have already noted the Bankruptcy Court has approved the terms of the Deed of Assignment and, presumably, this provides the Assignor with protection from complaints by beneficiaries who, in any event have supported this application.  That approval was, however, subject to an application to the Hong Kong Court.  It follows that the substantive effect of this application, if successful, is to complete the process envisaged in the application to the Bankruptcy Court and allow the Assignor to execute the Deed of Assignment.

14.  The O.85 jurisdiction is not, however, an invitation for a trustee to ‘test drive’ factual scenarios in order to assess how to carry out his duties.  In addressing this concern Mr. Lee referred to the decision of the Court of Appeal in Leung v Secretary for Justice [2006] 4 HKLRD 211 which sets out the principles applicable when determining how the court should respond to a hypothetical or academic question.  In that case, Ma CJHC (as he then was) held that where the court is concerned with proposed conduct the court may grant appropriate relief in exceptional cases.  The court identifies, on a case-by-case basis, whether the circumstances are sufficiently exceptional to warrant the exercise of its discretion.

15.  I have reservations about the direct application of this approach to the O.85 jurisdiction. As I have already explained, proceedings within the O.85 jurisdiction would almost always tend to be sufficiently exceptional.  There must, however, be some proper limit on the nature of the questions that trustees are allowed to place before the court. Where the question falls within the second category identified in Cooper, I take the view that in addition to the criteria articulated in Leung it is for the trustees to demonstrate on the evidence, that they have considered the issues that they have placed before the court fully, and having concluded how best to exercise their discretion and demonstrate to the satisfaction of the court that they intend, subject to the approval of the court, forthwith to act on that conclusion.  A similar test, in relation to the determination of the rights of beneficiaries under the English equivalent of O.85, is suggested by the editors of Underhill and Hayton Law of Trusts and Trustees, 17^th Ed, at para 87.26. This ensures that no abstract questions are placed before the court.

16.  In the present case, I am satisfied that the Assignor has determined that the Deed of Assignment represents the proper course of action and intend to take action based on that conclusion.  However, and quite legitimately, he is concerned that the proposed Deed of Assignment maybe found to be void and unenforceable under Hong Kong law on the grounds of maintenance or champerty, and wishes the guidance of the court as to whether or not in these circumstances he can properly execute the Deed of Assignment.  In conclusion, the question posed by the originating summons can properly be answered by the court.  I now turn to consider that question.

The Deed of Assignment: Applicable Law

17.  The Deed of Assignment envisages a two step process. Firstly, the Assignor will assign the Indebtedness to the Assignee and in return will share in the proceeds of the litigation if there is any recovery.

18.  The law in Hong Kong has long permitted the assignment of debts, subject to certain conditions, under s.9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23). This section provides:

“Any absolute assignment, by writing under the hand of the assignor (not purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this section, section 11 of this Ordinance and sections 25 and 49 of the Conveyancing and Property Ordinance (Cap 219) had not been enacted) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor:

Provided that ….”

19.  Assignments of choses in action are still subject to the prohibition against champerty: Bank of China (Hong Kong) Ltd v Chan Yeuk Wai [2007] 1 HKLRD 172. In that case the principal obligation (on which judgment had already been obtained) and the guarantees provided as security for the principal obligation were assigned to the plaintiffs who applied for summary judgment.  Their application for summary judgment was rejected at first instance but was allowed on appeal.  In considering the defences raised by the defendant, the Court of Appeal considered whether the assignment could be construed as champertous.  Citing Trendtex Trading Corp & Another v Credit Suisse [1982] AC 679 and Camdex International Ltd v Bank of Zambia [1998] QB 22 the Court of Appeal held that the assignment of a bona fide debt was valid and that no question of maintenance or champerty arose even if the necessity for litigation to recover the assigned debt was already contemplated. Any objectionable element alleged to invalidate the assignment had to be proved independently and distinctly.

20.  In Trendtex the plaintiff was owed a significant debt by a Nigerian company and was in turn indebted to Credit Suisse, its bankers.  The plaintiffs assigned their claim against the Nigerian company to Credit Suisse.  Credit Suisse subsequently assigned the claim to an unknown third party.  Lord Wilberforce, at page 694, held that the agreement was executed at a time when Credit Suisse had already contemplated selling the claim to the third party.  This was held to contradict the public policy prohibition on trafficking in litigation.

21.  Lord Roskill held that the proper approach required the court to review the agreement as a whole.  Where the assignment was of a property right or interest and, either (i) the cause of action was ancillary to that right or interest, or (ii) the assignee has a genuine commercial interest in enforcing the assignment, the assignment should not be struck down as an assignment of a bare cause of action or as savouring of maintenance.  He held that the agreement before the court in Trendtex was objectionable because it was a step towards the sale of a bare cause of action to a third party, who had no genuine commercial interest in the claim, in return for a division of the spoils.

22.  Hobhouse L.J. (as he then was) in Camdex International explained the principles applicable to the assignment of any chose in action, including a debt, at page 39C:

“An assignment of a debt is not invalid even if the necessity for litigation to recover it is contemplated. Provided that there is a bona fide debt, it does not become unassignable merely because the debtor chooses to dispute it. Suing on an assigned debt is not contrary to public policy even if the assignor retains an interest. What is contrary to public policy and ineffective is an agreement which has maintenance or champerty as its object; such a consequence will not be avoided by dressing up a transaction which has that character and intent as an assignment of a debt. But, because the assignment of a debt itself includes no element of maintenance and is sanctioned by statute, any objectionable element alleged to invalidate the assignment has to be proved independently and distinctly in the same way as any other alleged illegality has to be proved in relation to a contract which is on its face valid.”

23.  The decision in Bank of China (Hong Kong) Ltd was given a few months before the Court of Final Appeal gave its decision in Unruh. Neither Bank of China (Hong Kong) Ltd nor Camdex International were cited to the Court of Final Appeal when it heard the appeal in Unruh. The Court of Final Appeal was cited the decision in Trendtex.

24.  I need not quote extensively from the decision in Unruh.  In my view, there are three relevant propositions that can be identified from this case. The first proposition goes to the object and purpose of the prohibition against champerty.  The Court of Final Appeal found that the common law recognises the prohibition as having two objectives.  First, to prevent agreements to share in the spoils of litigation which may encourage the perversion of justice and endanger the integrity of the judicial processes. Secondly, to prevent arrangements, which involve a third party “trafficking” or “gambling” in the outcome of litigation.

25.  The second proposition that I draw from Unruh is the importance of access to justice considerations.  It is not the goal of the prohibition against champerty to stifle good claims by an impecunious plaintiff.

26.  The third proposition is that there have always been a miscellany of practices that have been held by the courts to be unobjectionable even though they are practices, which it can fairly be argued do not differ in substance from practices which have traditionally been condemned. In my view the result of Camdex International and Bank of China (Hong Kong) Ltd is to include in this category the assignment of choses in action, except and insofar as they reveal some further element that would make the assignment invalid and illegal.

27.  In my view the central question to be answered by the court when assessing the assignment of a chose in action is whether or not there is a proper commercial purpose to the transaction, which gives rise to no risk of the corruption of the judicial and litigation process.

The Deed of Assignment: Validity

28.  In my judgment the Deed of Assignment is not caught by the prohibition against champerty.  I reach this conclusion because it clearly has a legitimate commercial purpose, namely, the funding of a claim that might otherwise not be capable of prosecution and it is the type of transaction that ought not to be stifled by the prohibition against champerty. This conclusion is consistent with my decision in Re Cyberworks Audio Video Technology which would require (in line with the decision in Bank of China (Hong Kong) Ltd) an independent indication that the agreement would give rise to trafficking or gambling in litigation before a funding agreement became objectionable.

29.  I accept that in the present case the Company cannot recover the debts that it is proposed are assigned without further funding and that the Assignor has obtained the approval of the beneficiaries to the Deed of Assignment.  The importance of access to justice in such circumstances, which have obvious similarities with the circumstances in Re Cyberworks Audio Video Technology, is to be balanced against the policy reasons that require the control of such actions.

30.  Finally, I also consider it decisively important that the Assignor has been appointed by the Bankruptcy Court and has received the approval of that court to the terms of the Deed of Assignment.

31.  I make an order that the Assignor has the leave of the court to enter into the Deed of Assignment with Remedy Asia Limited on the terms set out in Exhibit “GB-1” to the affidavit of Geoffrey L. Berman dated 20 May 2010.