LEHMAN & CO MANAGEMENT LTD v. EFFISCIENT LTD AND ANOTHER

CACV 180/2015

[2021] HKCA 1657

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 180 OF 2015

(ON APPEAL FROM HCCW NOS. 377 AND 383 OF 2010)

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(ON APPEAL FROM HCCW NO 377 OF 2010)

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AND

(ON APPEAL FROM HCCW NO 383 OF 2010)

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(Actions consolidated pursuant to the order of the Honourable Mr. Justice Harris dated 17 January 2011)

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D E C I S I O N

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Hon Barma JA (giving the Decision of the Court):

The application

1.  This application for payment out by Lehman & Co Management Ltd (“Lehman Management”)  by summons (“the Summons”)  dated 16 May 2018 arose out as follows:

(1)  By an order[1] (“the Buyout Order”)  of Harris J dated 15 November 2011, Effiscient Ltd (“Effiscient”)  was ordered to buy out the 50% shareholding in LehmanBrown Ltd (“the Company”)  owned by Lehman Management.  The other 50% shareholding in the Company was owned by Effiscient.  Relevantly, a subsequent order of Harris J dated 16 January 2015 provided for a schedule (“the Schedule”)  pursuant to which Effiscient was to pay the purchase price by 12 quarterly instalments beginning on 31 January 2015. 

(2)  By a further order of Harris J dated 9 June 2015, execution of the Buyout Order (and hence payment under the Schedule)  was stayed until the resolution of proceedings (HCMP 775/2012 and HCA 6/2015)  brought by the Company against Mr Edward Lehman (“Mr Lehman”)  and alleged associates of his.

(3)  Lehman Management appealed against Harris J’s decision to grant a stay. By a judgment dated 7 March 2018 (“the Judgment”), this court upheld Harris J’s decision, but imposed a condition (“the Condition”)  that the total amount of the outstanding instalments as of the date of the Judgment, together with interest accrued thereon, should be paid into court within 42 days (i.e. by 18 April 2018), and that thereafter, any other remaining instalments should be paid into court, with accrued interest, on their due dates.

(4)  On 19 April 2018, Effiscient paid the sum (“the Sum”)  of US$52,644.50 into court.

2.  Lehman Management complained that the Sum was paid one day later than the prescribed deadline and, more importantly, that it fell considerably short of the amount that ought to have been paid into court, which was US$644,220.50 by Lehman Management’s calculation. Its solicitors sent two letters (dated 24 and 27 April 2018)  to Effiscient’s solicitors requesting full payment but to no avail. This led to Lehman Management taking out the Summons applying for:

(1)  release of the Sum to it together with interest;

(2)  lifting of the stay and leave to enforce Harris J’s order dated 16 January 2015; and

(3)  payment of the outstanding sum of US$425,456.00 together with interest by Effiscient to Lehman Management.

Effiscient’s explanation

3.  Effiscient filed an Affirmation of Zhou Han Brown on 8 June 2018, in which it explained that it had assumed that the instalments under the Schedule, which should have ended by 31 October 2017, had been suspended by virtue of the stay and that the obligation to make payments only revived (and time only started running again for making payments pursuant to the Schedule)  on 7 March 2018 (ie the date of the Judgment), so that all dates in the Schedule should be put back to reflect this (so that the due dates for payment would be varied accordingly). Because of this, Effiscient only paid the Sum into court on 19 April 2018, believing that this was in compliance with the Condition.

4.  This explanation is unsatisfactory. The Condition is clearly worded, and its effect was also apparent from in the court’s exchange with counsel at the hearing, which was reflected in the Judgment:

(1)  Thus, [7] of the Judgment noted:

“Mr Bleach, for Effiscient, indicated that his client would be prepared to pay the balance of the purchase price due, together with accrued interest, into court in accordance with the schedule contained in the order in the petition proceedings”.

(2)  Further, in [17] of the Judgment, the sentence immediately preceding the imposition of the Condition reads:

“Although Mr Barlow submitted that the full purchase price should be paid into court at once, I see no reason to depart from the schedule laid down in the order.” (Emphasis added in both extracts.)

5.  There can thus be no doubt that “total amount of the outstanding instalments to date” meant the total amount of outstanding instalments calculated in accordance with the Schedule in its original form.

6.  Effiscient was at all times legally represented and should have sought clarification (from the court, if necessary)  had there been any genuine confusion on its part as to the terms of the Condition. It has also not provided any explanation for its failure to respond to Lehman Management’s letters dated 24 and 27 April 2018.

Analysis & disposition

7.  The principles governing the court’s powers under O.22A are well-established:

(1)  The court has wide powers and an unfettered discretion over money paid into court to achieve justice between the parties on the facts and in the circumstances of the case.

(2)  It is always necessary to consider the purpose of the initial payment into court, and where the applicant for release of the payment is in principle entitled to the money, then the respondent must demonstrate good reasons to justify why the court should retain the money instead of releasing it.

(See Hong Kong Civil Procedure 2021, Vol.1, §22A/1/1, MGA Entertainment Inc v Toy and Trends (HK)  Ltd, unreported, HCA 2152/2002, 8 July 2014 at §§16-18, Ng Chi Kwan Danny Summer v Yeung Yiu Kwai, unreported, HCPI 633/2011, 28 November 2014)

8.  As set out at [8] to [16] of the Judgment, the stay was granted in the circumstances that:

(1)  There was some ultimate common ownership interest on both sides of the “equation”.

(2)  The ultimate beneficiary of Effiscient’s payment of the purchase price for Lehman Management’s shareholding in the Company was likely to be Mr Lehman, while the Company (which had brought claims against Mr Lehman)  would (as a result of the buyout)  be ultimately owned by the ultimate owners of Effiscient (ie the Browns).

(3)  The Company has a sufficiently arguable claim against Mr Lehman which may be relied upon to offset the purchase price payable by Effiscient.

9.  The Condition was imposed in these circumstances as security for the purchase price of Lehman Management’s share in the Company, pending the resolution and/or crystallisation of the other claims brought by the Company against Mr Lehman. It also had the effect of mitigating the prejudice to Lehman Management should the Company fail to proceed with its claims against Mr Lehman reasonably expeditiously (see [17] of the Judgment).

10.  In the circumstances of this case, we consider the following matters to be pertinent to the court’s exercise of discretion.

11.  First, the imposition of the payment in condition was to provide a measure of protection for both sides.  It would ensure that the purchase price to be paid by Effiscient for Lehman Management’s share in the Company was in fact paid, so that Lehman Management would be assured of receiving payment at the end of the day (should it be entitled to any after the Company’s claims against Mr Lehman had been determined)  It would thus serve to mitigate the prejudice to Lehman Management of being kept waiting for payment pending the resolution of those claims. In this regard, it may be noted that although Effiscient has been granted an irrevocable (save with leave of the court)  proxy to exercise all voting rights attached to the share, the share remains registered in the name of Lehman Management pending satisfaction of the purchase price.

12.  Second, the payment in also serves to provide a measure of protection to Effiscient, by ensuring that the funds are retained in court and not released to Lehman Management pending the Company’s claims against Mr Lehman being determined, so that if any set off arises, it will still be effective. As Barma JA observed at [16] of the Judgment, Effiscient has established that the Company has a sufficiently arguable claim against Mr Lehman to justify the granting of a stay.

13.  Based on the evidence available, the Company’s claims against Mr Lehman have remain unresolved. Lehman Management’s solicitors alleged in their letter dated 30 May 2018 that Effiscient had not taken any steps in the previous two years to cause the Company to pursue the claims, an allegation which is denied by Effiscient. Other than that, there is no evidence from which this court can come to a view as to whether or not Effiscient and the Company have failed to proceed with the other claims against Mr Lehman expeditiously. However, based on counsel’s submissions, it does not seem that Lehman Management places any real reliance on this ground in support of the Summons.

14.  Third, although Effiscient has not put forward any good explanation for its failure to comply with the Condition, this is mitigated by the fact that Efficsient has indicated (through its solicitors)  that it is willing to pay the balance within 14 days of any direction or order made by this court. Lehman Management has not identified any prejudice or loss that it will suffer as a result of the delay in payment.

15.  Taking account of all the relevant circumstances and balancing the interests of the parties, we think that the appropriate order to make would be to order that Effiscient should pay the outstanding sum of US$425,456.00, together with interest calculated by reference to Harris J’s order of 16 January 2015)  into court within 14 days, and that in default of such payment, the stay shall be lifted and the Sum (together with any interest accrued on it)  shall be released to Lehman Management forthwith.

16.  In our view, if Effiscient fails to make such payment, there can be nothing unfair in permitting Lehman Management to receive the Sum, particularly as Effiscient has enjoyed the benefit of exercising the voting rights attached to the share in the interim.

17.  We would also make it clear that even if Effiscient makes the payment of the outstanding US$425,456 plus interest within the time indicated, it will remain open to Lehman Management to apply to lift the stay and seek payment out should the Company fail to proceed with its claims against Mr Lehman reasonably expeditiously.

Costs

18.  As far as costs are concerned, as this application was necessitated by Effiscient’s failure to comply with the Condition, we make a costs order nisi that Effiscient should pay the costs of and occasioned by the Summons to Lehman Management, to be taxed on the party and party basis if not agreed.