ZHONGTAI INTERNATIONAL SECURITIES LTD v. MANY IDEA CLOUD HOLDINGS LTD AND ANOTHER

HCMP 220/2023

[2024] HKCFI 602

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 220 OF 2023

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D E C I S I O N

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Background

1.  These proceedings concern interpleader relief under Order 17 of the RHC over a sum of HK$17,588,000 (“the Sum”), originally held by the Plaintiff (“Zhongtai”) but has now been paid into Court. This is a directions hearing pursuant to the summons of the 1^st Claimant (“MIC”) dated 4 December 2023.

2.  The dispute arose out of a global offering of the shares of MIC. For that purpose, MIC entered into 2 agreements: (a) a Hong Kong Underwriting Agreement dated 7 October 2022 (“HKUA”) and (b) an International Underwriting Agreement dated 3 November 2022 (“IUA”). Under those Agreements, Zhongtai was the Sole Representative; whereas the 2^nd Claimant (“Sunfund”), CLSA Limited (“CLSA”) and Zheshang International Financial Holdings Co Ltd (“Zheshang”) were all underwriters for the MIC shares.

3.  A dispute arose in around November 2022, after the successful listing of the MIC shares on the Hong Kong Stock Exchange, as to the Sum, ie commission and related fees for global offering, that was to be allocated among Sunfund, CLSA and Zheshang.

4.  In essence, Sunfund claims that the Sum should be wholly paid to it, as it had already distributed commissions to CLSA and Zheshang pursuant to a Tripartite Agreement, using its own funds.

5.  MIC’s position is that the IUA and HKUA require MIC to make a determination (by exercising its contractual discretion) as to the proper allocation of the Sum in circumstances where the underwriters (as here) were unable to reach an agreement amongst themselves. MIC has exercised the discretion to determine that Sunfund was to be paid $3.588m, CLSA $4m and Zheshang $10m (“MIC’s Determination”).

6.  The Sole Representative took a neutral stance. It applied for interpleader relief on 10 February 2023 and was granted leave to pay the Sum into Court on 9 March 2023.

7.  CLSA and Zheshang have made claims to the Sum. However, through its solicitors’ letter dated 19 February 2024, Zheshang has stated that it was not prepared to be joined in these proceedings “at this time” and that this should not be construed as a waiver of any of its rights.

8.  The parties have set out their proposed directions and disagreements in a Joint Memorandum. The current disputes are:

(1)  Whether MIC should remain as a party to these proceedings;

(2)  Whether Zheshang should be joined as a party; and

(3)  Whether proceedings should continue by way of pleadings or affidavit evidence with cross-examination.

Whether MIC should remain as a party to these proceedings

9.  The Sum is made up of: (i) the Remaining Non-Discretionary International Commission; (ii) the International Incentive Fee; (iii) the Non-Discretionary Hong Kong Commission; and (iv) the Hong Kong Incentive Fee.

10.  Under the HKUA and IUA, MIC was to pay the Sum to Zhongtai as settlement manager. Upon presentation of an invoice by Sunfund, Zhongtai was to pay Sunfund the Sum. Upon receipt of the Sum, Sunfund was to allocate it among Sunfund, CLSA and Zheshang according to the Tripartite Agreement among these 3 entities.

11.  Subject to what Zheshang has to say, there is no dispute that the Sum should be allocated to Sunfund, CLSA and Zheshang. The only question is how. That question in turn depends on (i) whether the Tripartite Agreement existed; (ii) whether in the absence of the Tripartite Agreement, MIC had a discretion to determine the proper allocation of the Sum among the underwriters; and (iii) whether such discretion was exercised properly in accordance with contract when MIC’s Determination was made.

12.  Sunfund submits that MIC need not remain as a party because it has already determined how the Sum should be allocated under the IUA. Once it has paid Zhongtai, MIC no longer has any role to play. Similarly, once Zhongtai has paid Sunfund, it no longer has any role to play in the allocation of the Sum among Sunfund, CLSA and Zheshang. Sunfund, CLSA and Zheshang should be left to argue their rights over the Sum.

13.  Further, Sunfund’s position is that it had already used its own funds to pay the commissions due:

(1)  to CLSA, $448,683.20; and

(2)  to Zheshang, $160,752.80.

14.  CLSA’s position, consistent with MIC’s, is that there was no alleged Tripartite Agreement. The $448,683.20 only covered a brokerage fee that was separate and distinct from CLSA’s entitlement to the commissions. MIC retains a discretion in dividing up the Sum among Sunfund, CLSA and Zheshang.

15.  Zheshang’s position is unknown.

16.  At the hearing, I have invited MIC to consider if it would stay neutral, that it be bound by the ruling of the Court in the interpleader proceedings, that the Sum be distributed to the rightful party after the Court has made its decision and that affirmations filed by MIC shall form part of the evidence.

17.  Ms Au, counsel for MIC, suggested that MIC would accede to the suggestion only if all parties agreed not to argue issue (iii) in paragraph 11 above. Subsequent to the hearing, Sunfund has proposed that, if MIC were ordered to step out of the proceedings, Sunfund would give an intended undertaking not to challenge the determination of the distribution of the Sum made by MIC on the grounds of the Braganza principle.

18.  This intended undertaking is not accepted by MIC as it does not entirely cover Sunfund’s right to challenge issues (ii) and (iii) in paragraph 11 above. I do not consider it necessary to go into the details. Suffice to say that if any issues are still open to argument, then the undertaking should not be accepted by the Court.

19.  In my view, MIC should remain a party for the following reasons.

20.  Firstly, the test for interpleader is whether each of the rival claimants has a prima facie case against the interpleading party, not whether the adverse claimant has a claim against each other: DLA Piper Hong Kong v China Property Development (Holdings) Ltd [2010] 1 HKLRD 903 at §22. Accordingly, so long as MIC has a claim against the Sole Representative, it matters not that MIC is not an ultimate beneficiary of the Sum.

21.  Secondly, MIC has a chose in action against the Sole Representative, a contractual right to see to the proper allocation and distribution of the Sum. If the Sole Representative fails to do so, it may be liable to a claim in breach of contract.

22.  Thirdly, given that Zheshang’s stance is unclear, MIC should remain a party to protect its position as against Zheshang.

23.  Fourthly, Sunfund submits that what MIC can argue as regards MIC’s Determination can be advanced by Sunfund, CLSA or Zheshang. As long as CLSA adopts MIC’s case, CLSA has everything it needs to argue if the exercise of discretion was reasonable. There is no reason for MIC to incur costs on the same arguments.

24.  I am unable to agree. Whilst the interpretation of the contractual provisions may be argued by Sunfund, CLSA or Zheshang, it is for MIC to justify MIC’s Determination, if a party is to allege that MIC had exercised the contractual discretion capriciously or unreasonably in breach of what is generally known as the Braganza principle.

Whether Zheshang should be joined as a party

25.  Zheshang’s position stated in its solicitors’ letter is dubious. There is no way the Court would allow Zheshang to adopt a wait and see approach. Zheshang should be joined to bind it to the outcome of the present proceedings and prevent duplicity of proceedings. This would not, of course, prevent it from taking a neutral stance.

Whether pleadings should be filed

26.  Whether the Court should order pleadings to be filed is a question of case management. Proportionality, having regard to the issues/amount at stake is a material consideration.

27.  Issue (i) on the existence of the Tripartite Agreement (or, possibly, 2 bi-party agreements) is a crisp factual dispute. The parties are business people. One could reasonably expect that in public offerings and underwriting, material matters would be largely recorded in writing. MIC was listed on the Hong Kong Stock Exchange on 9 November 2022. It is in the interest of every party to have the matter resolved as quickly as possible. MIC does not have a positive case on issue (i). It appears that resolution of this issue would turn largely on construction of correspondence rather than oral evidence among Sunfund, CLSA and Zheshang.

28.  Sunfund has summarized the quantum involved as follows:

Table 1 on Sunfund’s current case:

Party	Entitlement
2nd Claimant	HK$17,588,000
CLSA	HK$448,683.20 (already paid)
Zheshang	HK$160,752.80 (already paid)

Table 2 on CLSA’s current case:

Party	Entitlement	Approximate Difference in Quantum[1] compared to Table 1
2nd Claimant	HK$3,588,000	HK$14,000,000
CLSA	HK$4,000,000	HK$3,551,316.80
Zheshang	HK$10,000,000	HK$9,839,247.20

29.  Table 1 is principally related to issue (i), the value of which, insofar as CLSA and Zheshang are concerned, is relatively small. It is not worth the costs of full-fledged litigation with pleadings filed.

30.  Table 2 is principally related to issues (ii) and (iii). The former involves a question of interpretation of contract; the latter involves a distinct exercise of discretion by MIC. Affidavit evidence, with cross-examination of deponents would be appropriate to deal with there 2 issues.

31.  Accordingly, having regard to the need for expediency and proportionality, I do not consider it appropriate to direct the filing of pleadings.

Conclusion and Directions

32.  Given the above analyses, I consider it appropriate for MIC to remain as a party, Zheshang to be joined and I decline to order the filing of pleadings. I therefore order as follows:

(1)  CLSA and Zheshang be joined as parties to these proceedings.

(2)  Sunfund shall be the Plaintiff.

(3)  MIC, CLSA and Zheshang shall be the 1^st, 2^nd and 3^rd Defendants, respectively.

(4)  Leave to CLSA and Zheshang to file and serve their affirmations (if any) within 42 days from the date of this order.

(5)  Leave to Sunfund and MIC to file and serve their respective affirmations in reply (if any) within 35 days thereafter.

(6)  No further affirmations shall be filed without leave of the Court.

(7)  This originating summons shall be restored for a directions hearing to be heard on a date to be fixed, not before sub-paragraph (5) has been complied with. One hour is to be reserved.

(8)  At the directions hearing,

(a)  The Plaintiff shall provide an agreed set of all the relevant contractual provisions relied on by the parties and an agreed set of abbreviations.

(b)  The Plaintiff shall provide an agreed set of undisputed facts.

(c)  The Plaintiff shall provide an agreed list of issues.

(d)  The parties shall provide a joint set of estimates as to trial time.

(e)  The parties shall inform the Court as to whether it is necessary to cross-examine witnesses and who to cross-examine.

(f)  Costs of this Summon be in the cause.

33.  I thank counsel for their assistance.