HUA CHIAO COMMERCIAL BANK LIMITED v. THE PROCEEDS OF SALE OF THE VESSEL "FORTUNE FOUNDER" FORMERLY REGISTERED AT THE PORT OF PANAMA

Admiralty action in re against: The proceeds of sale of the motor vessel "FORTUNE FOUNDER" formerly registered at the Port of Panama.

1986 Folio AJ 133

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ADMIRALTY JURISDICTION

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JUDGMENT

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1. This is a motion brought in an admiralty action in rem against the proceeds of sale of the motor vessel "FORTUNE FOUNDER". The claimant is a bank which claims under two mortgage agreements. There is no doubt that there is now outstanding a sum of US$456,972.24. I have already indicated that I am ready to enter judgment for that sum in default of acknowledgement of service. That sum is equivalent to something like HK$3.5 million.

2. The balance of the proceeds of sale of the motor vessel "FORTUNE FOUNDER" which still remain in Court is something like HK$1.5 million. So it is perfectly obvious that the judgment that I have just entered would scoop the pool. The issue which arises on the second and contested part of this motion, is the question whether a plaintiff in another action can maintain the priority that he has already obtained in respect of costs awarded to his solicitors in that action. The sum involved is just over HK$18,000.00. It really gives rise to a very nice little problem indeed upon which I confess that my mind has fluctuated several times in the course of this argument. It is another aspect of the wellknown problem which besets courts, as to which of two comparatively innocent parties is to suffer where the fund available is insufficient to meet both claims. The point here is this : unless the priority can be maintained, plainly the fund will not cover this particular sum in costs.

3. The position arises in this way. Last December there were four potential claimants against this ship. Two were two groups of crew members; the third was a company in the Philippines who had been providing managerial and agency services; the fourth was the bank. The same firm of solicitors Messrs. Crump & Co. were acting for the first three claimants. They were in touch with the bank. I have seen an attendance note of 21st December of last year in which a representative of the firm of solicitors, speaking to a member of the business department of the bank, was advising him that the solicitors had caused the vessel to be arrested "on behalf of our clients for outstanding wages, and had entered a caveat against the release of the ship in respect of the crew manning agent's claim". That is the claim with which I am concerned here. It later formed the subject matter of Admiralty Action AJ 298 of 1985.

4. On strict analysis that December, there was a wealth of difference between those four claimants. The strict order of priorities then was this. The outstanding claims for wages ranked first. The bank's claim under its mortgage ranked second. The manning agent's claim, which was a doubtful claim in an action rem in any event, plainly ranked behind the bank. From which it followed that there would be no prospect at all having regard to the sums involved of that plaintiff recovering anything in respect of this ship or an action against the ship, because the bank's prior claim would sweep the pool. At that stage in December, it is by no means clear that any body at the bank appreciated this fine point. Certainly there was then no suggestion on behalf of the bank that it was going to assert its prior claims as against this particular agency plaintiff and postpone him completely out of any money at all.

5. Negotiations proceeded apparently between the bank and the owners, with the bank trying to persuade the owners to meet these claims, all three of the claims, and the owners trying to persuade the bank to put up the money to enable them to do so. That got nowhere. With the result that the solicitors proceeded in the three admiralty actions which had then been lodged for all three claimants. In one of them, an order for appraisement and sale of the vessel made on the 15th of January. The next important event is 25th March of this year, when a motion came before Mayo, J., dealing amongst other things with the priorities of the claim. By that time judgment in default had been obtained in all three admiralty actions for specific sums of money.

6. One of the unfortunate things which happened here, whether by accident or design I know not, is that the bank did nothing in the face of these actions. It did not enter any Caveats at all in respect of any of them and the practice of the court in Hong Kong appears to be that when matters come before the court, and when the court is invited to determine priorities out of a fund, the court appears to act, and the profession appears to act, exclusively upon the presence or absence of Caveats. It may be asked what is the point of a Caveat System unless you rely upon it. I am told that the procedure which is available in 0. 79, r. 22(2) which provides for postponement and advertisement and which is widely used in London, is hardly ever used in Hong Kong. It is certainly not for me, a complete new comer to this jurisdiction to start rewriting practice. But I think that the circumstances of this case, show, that there is certainly room for questioning this practice, and whether or not further time should not be given or questions asked, or disclosure made, (I do not mind how it is put), on these matters. Because the plain fact of the matter was, in this case, that there was an outstanding mortgagee whose existence was well known certainly to the plaintiffs. It does not seem to me that the matter was ever revealed to the judge, and their position in the batting order was as a result totally ignored. This may be a "proper" result of the reliance of the court on the Caveat System, but it is not a proper result when you look at the matter as a whole. That is why I suggest those with much greater experience than myself look again at the practice.

7. The effect of that was that the three judgment sums were ordered to be paid out of the fund in court so that in effect the agency plaintiffs got priority for their judgment which they would not otherwise have obtained. An order was made for the taxation of the three sets of costs in those three actions, with the same priority as the judgments.

8. At that stage, the plaintiff's solicitors were in touch with solicitors for the bank, and were told that the bank at that stage, had not instructed them to stand in the way of this taxation. Notice of the taxation was given. The first document is dated 12th of May, and then on the 30th June, the taxation documents were sent to the solicitors who attended the taxation on 10th July. All three taxations were dealt with together. Certain objections were made in respect to each of the taxation and some sums were taxed off.

9. The position which arises today is this. Application is made to set aside Mayo, J.'s order of 25th March, and to restate the priorities. It is accepted that nothing can be done about the two wages claims and the costs of those actions, which rank in priority anyhow. It is accepted that nothing can be done about the judgment debt in the agency action because that has been paid out. The only item which is outstanding is the solicitors' costs of that action, which were taxed in the sum of just over $18,000.00. The question is whether it is right, in the circumstances to set that order aside for the purpose and the limited purpose simply of discharging the existing priority afforded by the order to this claim for costs.

10. There is no doubt that the court has jurisdiction to reopen orders of this nature. Authority for that proposition goes back as far as Sir Robert Phillimore in 1871 in the case of The Markland⁽¹⁾ and The Fair-port (No. 4)⁽²⁾ a decision of Karminski, J. In the first of those decisions, one of the justifications that Sir Robert offers for the existence of this jurisdiction was "the avoidance of the infliction of an injustice upon parties who have a prior legal claim over those funds". That is the passage founded upon by Mr. Sussex for the bank. He says this: The bank had its priority. Going back to December, that is beyond a peradventure. The bank by failing to enter Caveats permitted or allowed the court to make the order of 25th March, which gave an unwonted priority to the judgment. But there is no justification now for not restoring the true position. There would not be any injustice about it, because that judgment debt was just over US$4,000.00. The successful plaintiffs, can out of this unexpected and as it were uncovenanted bonus, pay their solicitors themselves. There is nothing that has happened which would justify the court in displacing the bank from its existing priority beyond, perhaps, directing that the solicitors should have the costs of the taxation itself.

11. In response to that, the successful plaintiff in the other action, say that you cannot just look at the matter now. You have to go back to December when this claim was adumbrated, and when the bank made no attempt to distinguish between the true prior claims, i.e. the wages and the postponed claim, i. e. the agency, and made no suggestion that they were going to stand upon their true priority. That is the vital moment, so Mr. Smith for that party and the solicitors suggested, because that is when the costs were being incurred; that is when the risk was being incurred in this third action. The bank's attitude then was, “ Oh, yes, this matter should be paid, it should be settled by the owner". They were not making any suggestion that they were going to exercise their strict rights then. So the action proceeded and these various steps were taken. If there had been any threat of the bank to exercise its priority then who knows what might have happened.

12. Again whatever may be said about the imperfections of the practice, the fact is that the failure to enter Caveats resulted in Mayo, J. making the order he did. Ever since then, the plaintiffs and the their solicitors in their action have had the "security" of this order. It is all really reinforced by the attendance on the taxation. It is quite inadequate now to allow only the costs of the taxation, and not the cost of the bill.

13. I have here two very delicate exercises in balancing justice and injustice. Because the plaintiff has the legal priority beyond a peradventure, and can assert that any thing which detracts from that is "unjust" to him in the sense that that word is used by Sir Robert Phillimore.

14. The successful plaintiff in the other action, the intervener, can counter that by saying: "Look at the facts of this case, having regard to the bank's conduct consistently since last December, it would be unjust to set this order aside now at the eleventh hour after all the costs have been incurred and restore them to their strict legal position"

15. As I have said, I found this matter a very nice one to deal with, but in the event, I have come to the conclusion that it would be wrong for me, in the particular circumstances of this case, to interfere with the order that Mayo, J. made. I think there is considerable force in the point that a party who is possessed in law of priority really is under an obligation to make its position clear at a very much earlier stage than the bank did here. I think the bank failed to look at its position properly way back in December and really allowed these three claims to go on together as there was no sort of distinction between them at all. That is how they were dealt with from start to finish. If as a result the third claim gets the benefit of the actual priority of the first two, then I do not think by reason of their conduct, the bank can complain.

16. So that as far as this motion is concerned, I shall enter judgment in the terms that I have already indicated but decline to revoke Mayo, J.’s order.

(1)    (1871) L.R. 3 Adm. & Ecc. 340

(2)    (1967) 1 Lloyd's Rep. 602