CHINA LIFE TRUSTEES LTD v. CHINA ENERGY RESERVE AND CHEMICALS GROUP OVERSEAS CO LTD AND ANOTHER

CACV 337, 340 & 346/2022, [2023] HKCA 966

On Appeal From [2022] HKCFI 795

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 337, 340 & 346 OF 2022

(ON APPEAL FROM HCA NO 146 OF 2020)

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J U D G M E N T

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Hon Yuen JA:

1.   I agree with the judgment of G Lam JA and the orders he proposes in paragraphs 88 and 89 below. 

Hon Au JA:

2.   I agree with the judgment and the orders of G Lam JA. 

Hon G Lam JA:

3.   The main question in these appeals is whether a garnishee order obtained by the plaintiff, as judgment creditor, in respect of the credit balance in a bank account of the 1^st defendant, the judgment debtor, should be made absolute.   The issues arising concern the precise legal status of the credit balance and, in particular, whether it was subject to a Quistclose trust or encumbered by security interests. 

Background

4.   The 2^nd defendant is a company listed in Hong Kong heading a group of companies called the China Energy Reserve and Chemicals Group (“Group”).   Between April 2015 and May 2018, eight series of bonds were issued by eight of the 2^nd defendant’s subsidiaries (all incorporated in the British Virgin Islands) respectively to finance the operations of the Group.   Three of these bonds are particularly relevant for present purposes, namely:

(1)  The first series, being HK$2 billion 6.30% bonds issued on 27 April 2015 by the 1^st defendant, CERCG[1] Overseas Co Ltd, which were to mature in 2022 (“2022 Bonds”).   They are solely held by China Life Trustees Ltd (“China Life”). 

(2)  The second series, being US$350 million 5.25% bonds issued by CERCG Overseas Capital Co Ltd (“Overseas Capital”) on 11 May 2015 which matured in May 2018 (“2018 Bonds”).   They are held by a number of investors, five of whom had formed themselves into the “Ad Hoc Committee” referred to in §11 below. 

(3)  The fourth series, being US$400 million 5.55% bonds issued by CERCG Holding Ltd on 14 April 2016, maturing in 2021 (“2021 Bonds”).   China Life is a major holder of these bonds. 

5.   Bank of Communications Trustee Ltd (“Trustee”) was the common trustee of all eight bonds.   Each of the bond issuers agreed with the Trustee under a trust deed that it would pay the Trustee the principal and interest in respect of the relevant bond.   As trustee, the Trustee held on trust for the relevant bondholders the benefit of each issuer’s covenant to pay the principal and interest, as well as the 2^nd defendant’s promise as guarantor referred to in the following paragraph. 

6.   Each of the bond issuers was a special purpose corporate vehicle with no material operations and no significant net assets.   Upon issuance of the bonds, each issuer’s primary assets were expected to be inter-company loans within the Group.   The 2^nd defendant was the guarantor (or, for the third series, the “keepwell provider”) of all eight bonds.   It agreed with the Trustee to guarantee the payment obligations of each issuer. 

7.   The 2022 Bonds were the first of the eight bonds to be issued but the last to mature, whereas the 2018 Bonds were the second to be issued but the first to mature.   The 2022 Bonds were denominated in HKD, while the other seven bonds were all denominated in USD. 

8.   On 11 May 2018, Overseas Capital defaulted on the principal and interest payable under the 2018 Bonds.   This triggered cross-defaults of the other bonds, including the 2022 Bonds.  Subsequently, the 1^st defendant also failed to pay the interest due on the 2022 Bonds.   On the basis of these defaults, on 25 January 2019 the Trustee gave notice to both defendants to accelerate and demand payment under the 2022 Bonds. 

9.   As the defendants had failed to make payment of the 2022 Bonds, the Trustee commenced the action below (HCA 146/2020) against the defendants on 24 January 2020 and obtained summary judgment on 29 October 2020 for HK$2 billion together with interest and other charges.   Post-judgment skirmishes then followed including a failed application made by the defendants for stay of execution of the judgment and a successful application by the Trustee for an interim post-judgment Mareva injunction which restrained the 1^st defendant from dealing with its assets up to the value of HK$2 billion including, in particular, the money in an account held by the 1^st defendant with Bank of Communications (Hong Kong) Ltd (“BOCOM” and the “D1 Account”).  

10.   On 9 March 2021, on the ex parte application of the Trustee, Master Kot granted a garnishee order nisi in respect of the balance in the D1 Account (“Funds”), which stood then at about US$123 million.   The Funds included the amount of US$120 million remitted to the D1 Account in three tranches (US$20 million, US$30 million and US$70 million on 15, 16 and 21 May 2018 respectively) in circumstances described in greater detail below.   The garnishee order rendered the Mareva injunction unnecessary which was therefore later discharged by consent.   The garnishee order remained to be made absolute pending a hearing to show cause.   For its part, on 13 April 2021, the 1^st defendant issued a summons seeking an order to set aside the garnishee order on the ground of material non-disclosure. 

11.   Meanwhile, five major holders of the 2018 Bonds formed themselves into an ad hoc committee (“Committee”).   They procured the Trustee also to commence an action on 21 September 2020 against Overseas Capital and the 2^nd defendant for the amounts outstanding under the 2018 Bonds (HCA 1607/2020).   On 19 March 2021, judgment was entered by consent for, inter alia, the principal sum of US$350 million. 

12.   Following the default and cross-defaults in May 2018, the Group had engaged the bondholders in restructuring discussions but no agreed restructuring has been achieved to date.   The Group wished to deploy the Funds in a group-wide restructuring covering all bondholders but China Life considered that it was entitled to the Funds by virtue of the garnishee order. 

The decision below

13.   The garnishee order nisi and the application to set it aside eventually came before Au-Yeung J (“judge”) on 4 January 2022.   By then, as the Trustee had found itself in a position of conflicts having been instructed by the Committee to oppose the making of the garnishee order absolute, China Life, the sole beneficial owner of the 2022 Bonds, was permitted to be substituted as plaintiff.  

14.   Neither the garnishee, i.e. BOCOM, nor the defendants appeared at the hearing before the judge.   The opposition was taken up by the Committee.   They contended that the garnishee order should not be made absolute because the Funds were subject to an express trust, a resulting trust, or a Quistclose trust in favour of another Group company called China Energy Reserve and Chemicals Trading Co Ltd (“Trading”).  

15.   In her decision dated 18 March 2022 (“Decision”),[2] accepting that the Committee had standing to show cause against the garnishee order, the judge nevertheless rejected its contention that the Funds were held on trust.   It was not clear who the beneficiary was in the express trust contended for by the Committee. The judge did not consider there was any sufficiently clear manifestation by Trading as the settlor to create an express trust. [3]  The submission that the US$120 million was held on a presumed resulting trust in favour of Trading because it was a voluntary payment made by Trading to the 1^st defendant was also rejected by the judge in reliance on the principles set out in Big Island (HK) Ltd v Wu Yi Development Co Ltd (2015) 18 HKCFAR 364. [4]

16.   So far as Quistclose trust was concerned, the Committee submitted that the US$120 million was transferred to the 1^st defendant in May 2018 initially for the purpose of making payment on the 2018 Bonds, and was subsequently held by the 1^st defendant, after the initial purpose failed, for the purpose of being used in a restructuring of all the bond debts of the Group.   As such, it was never intended to be at the free disposal of or to belong beneficially to the 1^st defendant.   The judge rejected the argument, stating as follows:

“ 84.  Firstly, there was simply no exclusivity of purpose if a transferor could change the purpose from time to time. Restructuring has gone on for years, covering at least the restructuring proposals on 17 August 2018, 8 November 2019 and 25 March 2020 without success. The desperate attempt of using restructuring as a ground for stay of execution of judgment has even been rejected by this Court in the decision dated 26 February 2021 (§34(2) above). In between those proposals, there has never been re-transfer of the Funds from D1 back to CERC Trading, nor has the latter ever demanded for a re-transfer. Even on the CERC Parties’ case, the intended restructuring was to benefit bondholders, including those of D1. 

85.  Secondly, BOCOM Trustee/China Life has been deprived of its debt for over 14 months since the Judgment. To accept the Ad Hoc Committee/CERC Parties’ argument on Quistclose trust would be endorsing a debt dodger’s charter. It would not only deprive China Life of its fruits of judgment now, but also those of other bondholders in the future, because the CERC Parties can forever unilaterally declare the Funds as not belonging to any of the individual companies within its Group. 

86.   Thirdly, the purpose of the Funds was not solely for repayment of the 2018 Bonds (as suggested by the Ad Hoc Committee) but at least part of it was as security for the 2021 Bonds and 2022 Bonds. ”

17.   In relation to the third reason, the judge considered that the sum of US$70 million was remitted to the D1 Account on 21 May 2018 as security for the 2021 Bonds and the 2022 Bonds, having regard to the communications between China Life’s investment manager, China Life Franklin Asset Management Co Ltd (“China Life Franklin”), and the Group in May 2018 as referred to below. [5] On that basis, it was not a debt in respect of which a garnishee order should be made, and it was for China Life to inform the court of the conditions for realising the security and how to apportion the money between the two sets of bondholders. [6]

18.   The judge held that the defendants, who had not appeared, were taken to have abandoned their application to set aside the garnishee order for non-disclosure.   Her Ladyship nevertheless considered, and eventually dismissed, the various allegations of non-disclosure. [7]

19.   In the result, the judge made absolute the garnishee order in respect of the Funds except for the sum of US$70 million. 

20.   By a further decision on 12 August 2022,[8] the judge granted leave for China Life to appeal against the refusal to make absolute the garnishee order in respect of the US$70 million, and also gave the 1^st defendant and the Committee leave to appeal against the garnishee order absolute, but only on the ground of appeal that there was a Quistclose trust over the Funds and not on the grounds based on express trust and resulting trust.   As there was no renewed application to this court for leave to appeal on those rejected grounds, their appeals are confined to the Quistclose trust issue. 

The 1^st defendant’s and the Committee’s appeals (CACV 337 & 346/2022)

21.   The 1^st defendant’s and the Committee’s appeals both challenge the judge’s decision to make absolute the garnishee order, on the ground that the Funds were subject to a Quistclose trust in favour of Trading. 

The legal principles

22.   The court has jurisdiction to make a garnishee order even if the judgment debtor is a trustee rather than the beneficial owner of the debt in question, but it would not normally make a garnishee order absolute in those circumstances: Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v Shell International Petroleum Co Ltd [1990] 1 AC 295, 350-351.  In the present case it is common ground that the garnishee order should not be maintained if the Funds were subject to the Quistclose trust contended for so that they did not belong to the 1^st defendant.  

23.   The law recognises that where property (usually money) is transferred on terms which require it to be applied for a purpose without leaving it at the free disposal of the recipient, a trust may arise over the property in favour of the transferor.   Such a trust is often referred to as a Quistclose trust, after the decision of the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.   Its juridical nature and the applicable principles were elucidated by Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164.   This court has adopted those principles in Typhoon 8 Research Ltd v Seapower Resources International Ltd [2002] 2 HKLRD 660, which are not in dispute in this case.  

24.   The parties need not have used language expressly setting up a trust.   Equity intervenes because it is unconscionable for a person to obtain money on terms as to its application and then disregard the terms on which he received it.   The duty imposed is fiduciary in character because the person who advances money for a particular purpose only and not for any other purpose places his trust and confidence in the recipient to ensure that the money is properly applied. [9]

25.   A Quistclose trust does not however necessarily arise merely because money is paid for a particular purpose.   That fact alone, found frequently such as in payments made in advance for goods or services, is not enough to create a trust. [10]  The question in every case is whether the parties intended the money to be at the free disposal of the recipient.   His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose. [11] 

26.   Although reference is sometimes made to the parties’ intention, as explained by the UK Privy Council in Prickly Bay Waterside Ltd v British American Insurance Company Ltd [2022] UKPC 8 at §31, the relevant intention does not have to be “mutual” in the sense of being shared or reciprocated; it would be enough if one party imposed it on the other who acquiesced in it.  

27.   The approach to the ascertainment of intention is objective.   The parties’ subjective thoughts hidden in their own minds are irrelevant.   What is material is the outward manifestations of their intention.   Such intention is to be collected objectively from the terms of the arrangement and the circumstances of the case. [12] Thus a party who makes payment secretly wishing to set up a trust will fail to do so if the objective circumstances do not have that effect.   Conversely, if the settlor entered into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. [13] 

28.   Whilst the paradigm may be a case where the payee has received funds to be applied for an exclusive designated purpose, it has been said that a Quistclose trust can take many forms[14] and that subtle distinctions should not be made between “true” Quistclose trusts and trusts which are merely analogous to them. [15] What is required as a minimum to constitute a Quistclose trust is not an intention that the funds transferred should not form part of the general assets of the recipient, but an intention that the payer should retain some beneficial interest in the funds or, in other words, a sufficient indication that the payer did not intend to dispose of the entire beneficial interest in the funds. [16]

29.   There is no dispute here that, as has been said in Bieber v Teathers Ltd [2013] 1 BCLC 248,[17] in deciding whether particular arrangements involve the creation of a trust and with it the retention by the paying party of beneficial control of the moneys, proper account needs to be taken of the structure of the arrangements and the contractual mechanisms involved.   It has further been said in that case that:

“ It is therefore necessary to be satisfied not merely that the money when paid was not at the free disposal of the payee but that, objectively examined, the contractual or other arrangements properly construed were intended to provide for the preservation of the payer’s rights and the control of the use of the money through the medium of a trust. ”

Counsel for the Committee and the 1^st defendant criticise this sentence as suggesting that the parties have to intend to create a trust.   But reading the relevant passages in that case in their entirety it is clear that what is meant by Patten LJ, with whom Sullivan and Arden LJJ agreed, is not a subjective intention to create a trust, which is irrelevant, but an objective intention, taking account of the relationship and arrangements between the parties, that the money in question should continue to belong beneficially to the payer unless and until the relevant conditions are complied with.   This is not different in substance from Lord Millett’s statement in Twinsectra at §71 that the “settlor must, of course, possess the necessary intention to create the trust” and the statement by Briggs LJ in Bellis v Challinor [2015] EWCA Civ 59 at §57 that:

“ There must be an intention to create a trust on the part of the transferor. This is an objective question. It means that the transferor must have intended to enter into arrangements which, viewed objectively, have the effect in law of creating a trust …”

30.   Where a Quistclose trust arises, the money remains the property of the payer unless and until it is applied in accordance with his directions and insofar as it is not so applied must be returned to him. [18]  It is in nature a resulting trust where the payer does not part with the entire beneficial interest in the money.   The recipient has no beneficial interest in the money but only a power or duty to apply it in accordance with the payer’s instructions. [19]

31.   The duty on the part of the recipient to keep the money separate is an incident of a Quistclose trust should one arise from the circumstances, rather than a pre-condition for the existence of such a trust. [20]  Whilst segregation is not always required, the absence of a provision for a segregation is a powerful factor indicating there is no Quistclose trust. [21]

The 1^st defendant’s and the Committee’s contentions

32.   The grounds of appeal and contentions advanced by Mr Laurence Li SC and Mr Sik Chee Ching on behalf of the Committee and by Mr Frederick Chan and Mr Jeffrey Chau on behalf of the 1^st defendant in their respective appeals may be summarised together broadly as follows:

(1)  The three reasons relied upon by the judge for finding against a Quistclose trust are erroneous.   Thus, first, the judge erred in holding that exclusivity of purpose was a pre-requisite for a Quistclose trust.   Exclusivity of purpose is in truth only one way of demonstrating that the recipient does not have the right of free disposal of the property received.   The fact that the transferor subsequently changed the purpose does not preclude a Quistclose trust from arising. 

(2)  Secondly, the judge erred in saying that finding a Quistclose trust in this case would be endorsing a “debt dodger’s charter” and that the Group could “forever unilaterally declare” the Funds as not belonging to any individual group company.   The fact that China Life’s judgment had remained unpaid is irrelevant.   The judge ought instead to have focused on the objective evidence including the terms of the contemporaneous documents. 

(3)  Thirdly, the judge erred in holding that at least part of the funds was for being security for the 2021 and 2022 Bonds. This finding was not supported by evidence. 

(4)  The judge failed to address the key question of whether the Funds were at the free disposal of the 1^st defendant.   The judge erred by wrongly focusing on the absence of express statements restricting the 1^st defendant’s power.   The circumstances in this case show that the Funds were originally intended for the purpose of paying the principal of the 2018 Bonds and were not at the 1^st defendant’s free disposal. 

(5)  In addition, the 1^st defendant submits that the judge erred in “conducting a paper trial” and that instead she should have declined to make absolute the garnishee order or directed a trial on the issue on the ground that the dispute regarding the true ownership of the Funds cannot be resolved on the affirmation evidence. 

33.   The principal point seems to me to be whether the requisite intention for finding a Quistclose trust is evinced from the evidence (point (4) above).   I shall therefore deal with that question first before turning to the other points made. 

34.   I should record that at the hearing, this court granted the Committee’s application for leave to adduce two documents[22] in evidence, which was in our view part and parcel of the evidence that was placed before the judge and ought to be included. 

The evidence

35.   The evidence concerning the Group, the D1 Account and the funds therein is mainly contained in the affirmations of Norman Lin (CEO of the intermediate holding company[23] within the Group), Cyrus Yau (Finance Manager of the bond issuers and Trading) and William Chow (Deputy CEO of China Life Franklin), and the documents exhibited to these affirmations.   In examining the evidence it is of course the primary facts that are of significance.   Assertions of subjective intention and retrospective statements as to the nature of the transaction need to be approached with caution, even if admissible. [24]  The proper legal characterisations of the facts and relationships and the rights and obligations arising therefrom are generally a matter of law beyond the scope of factual evidence.   With this in mind, the crux of the evidence may be summarised as follows.  

36.   Each of the bond issuers was a special purpose vehicle whose principal activities were intended to be the issuance of the bonds and the on-lending of the proceeds to companies within the Group.   Save for three bonds[25] which were intended for funding a specific acquisition in the Mainland, the proceeds of the bond issues were expressed in the offering circulars or subscription agreements to have been intended to be used either partly or wholly for “general corporate purposes”. 

37.   All the funds raised from the bonds were transferred to a bank account of Trading, which functioned as the “general treasury” for the Group, for it to distribute within the Group as appropriate. These transactions were accounted for as inter-company loans by the relevant bond issuer to Trading.   In due course, Trading in turn provided funds to the bond issuers, by remitting the requisite amounts to the designated bank accounts, to enable them to make interest payments to their bondholders.   Such payments resulted in a corresponding reduction in Trading’s indebtedness to the bond issuers. 

38.   The D1 Account was opened on 24 March 2015 as the first bank account opened in Hong Kong by a bond issuer within the Group for collecting bond proceeds, the 1^st defendant being the first such issuer.   The D1 Account was also intended to be used to facilitate future interest or redemption payments to holders of the 2022 Bonds.   The interest payments on the 2022 Bonds were in fact paid from the D1 Account (in every November and May) up to May 2018. 

39.   When the 2018 Bonds were issued shortly after the 2022 Bonds, given the close proximity in time and the fact that the D1 Account comprised a USD sub-account, Overseas Capital did not open a bank account in its own name but instead designated the D1 Account for the purposes of transactions in connection with the 2018 Bonds.   Thereafter, all the half-yearly interest payments paid on the 2018 Bonds up to 16 May 2018 were also paid from the D1 Account (the 1^st defendant having given authorisation to BOCOM for that purpose), with funds remitted by Trading. 

40.   As for the US$120 million remitted to the D1 Account in May 2018, the money originated from the last and eighth series of bonds issued by the Group, namely, US$150 million 5.55% 6-month bonds issued by CERCG Capital Ltd on 8 May 2018. [26]  The bond proceeds of US$150 million which according to the Offering Circular were intended to be used for “general corporate purposes” of the Group, were paid into Trading’s bank account.   This was booked as a loan from the bond issuer to Trading.  

41.   On 11 May 2018, the 2018 Bonds matured, but the Group did not have the funds to pay the principal and interest.   On 14 May 2018, Trading paid US$9,190,000, through a company it controlled, to the D1 Account.   Immediately before that deposit, there was a credit balance of US$39,574.57 in the USD sub-account in the D1 Account. 

42.   Also on 14 May 2018, having regard to the default on the 2018 Bonds, Norman Lin requested Chen Yihe, Chairman of the Group, for approval for the transfer of US$20 million from Trading to the D1 Account to “ease the pressure”.   The request was made in these terms:

“ 由于2018年5月11日的支付债息及赎回债券已脱期及处于违约阶段，现申请从『国储贸易公司』光大银行账户调拨 USD20,000,000 到交通银行账户 (China Energy Reserve and Chemicals Group Overseas Co Ltd) 以暂缓压力。

赎回及付息日期	债券资料	赎回及债息金额
2018年5月11日	第2次发行3年期，USD3.5亿债劵	USD3.592亿

以上申请，敬请领导签批。”[27]

43.   The Chairman gave his approval the next day, 15 May 2018.   Accordingly, on that date, a sum of US$20 million was remitted by Trading to the D1 Account.   The credit advice from the 1^st defendant’s bank simply stated that it had credited the D1 Account with US$20 million by order of Trading, with the message being a transaction reference number. The outward remittance debit advice given to Trading by its bank recorded the message to be “Payments”.  

44.   On 16 May 2018, the Trustee, as trustee in relation to the 2018 Bonds, published a notice to the bondholders, stating:

“ the Trustee has been informed as follows:

(a) that the Issuer remitted payment of the interest payable on the Bonds on 14 May 2018 to its own account in Hong Kong, but did not at the same time give matching instructions to the Principal Paying Agent^[28] enabling it to debit that account in order to make payments to Bondholders;

(b) no remittance of principal has been made;

(c) accordingly the Issuer failed to remit the interest and principal payable on the Bonds to the Principal Paying Agent prior to the Maturity Date as required under the Agency Agreement;

(d) the Issuer and Guarantor have now given instructions to the Principal Paying Agent to debit the account referred to in (a) above with the interest amount due to the Maturity Date, and the Principal Paying Agent is now taking steps to try to remit those funds to Bondholders; and

(e) the Issuer has stated that it expects to make full payment of principal and any outstanding interest on or around 25 May 2018. ”

45.   On 16 May 2018 interest payment in the total sum of US$9,187,500 was duly paid from the D1 Account, albeit late, to holders of the 2018 Bonds.  

46.   On the same date, a sum of US$30 million was remitted by Trading to the D1 Account.   No internal approval documents were disclosed in relation to this remittance.   The credit advice received by the 1^st defendant and the outward remittance debit advice received by Trading from their respective banks were similar to those for the remittance of the US$20 million. 

47.   Starting from 17 May 2018, China Life Franklin, as investment manager for China Life, expressed concerns and demands to the Group in light of its default on the 2018 Bonds, which had triggered a cross-default under the 2022 Bonds.   Thus, at 23:48 on 17 May, Dr He Xuanlai of China Life Franklin emailed the Group, expressing concern and requesting for information on the Group’s assets, as follows:

“ 我司得悉交银信托已于2018 年5 月16 日给2018 年5 月11日到期的，由中国国储能源化工集团作为债券担保人发行的票面利率为5.25%的债券（ISIN XS1227680409）持有人发出违约事件通告。公司由于未能在该债券到期日（2018 年5月11日）偿还本金，已经实际构成该债券发行说明中定义的违约事件，此违约事件已经触发了我司持有的分别于2021，2022 年到期的（ISIN XS1376566714）（HK0000241288）债券发行说明书中定义的交叉违约。根据债券说明书约定，一旦触发交叉违约，我司有权要求贵司加速偿还，即要求公司提前偿还我司持有债券本金。根据此情况，为了维护我司权利，保护我司作为债券持有人利益不受损害，我们提出如下要求：

请贵司于2018 年5 月18日中午12 点前提供我司如下文件：

1. 截止2018 年5 月17日公司未受限现金余额

2. 公司未抵押银行的固定资产名录以及估值

3. 公司抵押银行的固定资产名录，以及抵押率

4. 公司持有的其他公司股权名录以及投资金额

5. 公司详细架构图包括中国境内以及海外分支机构

6. UBS Syndicate Loan 的发债说明书，以及具体条款及抵押品合同（如有）

7. 公司现时所有有息债务情况，包括或有负债

我们提出此要求主要用于衡量贵公司资产质量，保障我司利益。我们有权要求公司提供相应的抵押品作为增信以维护我们作为债权人的利益。若公司未能在上述时间内给予我方反馈且提供相应文件，我司有权宣布我司持有的两只债券（ISIN XS1376566714，HK0000241288) 交叉违约即立刻偿还本金。由此造成的一切后果由贵司承担。”^[29]

48.   On 18 May 2018 at 09:49, Norman Lin replied on behalf of the Group that they were making every effort to respond to the requests.   At 12:39, Norman Lin emailed to He Xuanlai an attachment showing Trading’s bank account balance of over US$70 million at China Everbright Bank.   He Xuanlai swiftly asked at 12:46 when that US$70 million would be transferred to BOCOM.   Norman Lin replied at 14:31 that under normal approval process it could be transferred to BOCOM by the morning of 21 May 2018. 

49.   China Life Franklin and the Group had a telephone conference on 18 May 2018.   Afterwards, Isaac Lai of China Life Franklin emailed the Group at 18:59 summarising the matters discussed, including a requirement for the Group to provide details of its planned remittances to BOCOM.   In response, on 19 May 2018 at 12:51, Norman Lin emailed Isaac Lai the following funding plan: US$70 million by 21 May, US$100 million by 23 May, and US$130 million by 24 May.   At 21:49, Isaac Lai emailed Norman Lin a list of requests, stressing that the proof of remittance of US$70 million by 21 May was especially important.   One of the enquiries raised was what security the Group could concretely provide for China Life’s protection (“具體能提供及保障我方的抵押品”). 

50.   On 21 May 2018 at 09:09, Trading applied to its own bank for remittance of US$70 million to be made to the D1 Account.   In the application the message to the beneficiary, i.e. the 1^st defendant, was simply stated as “Payments”.   After the remittance was completed, Norman Lin informed He Xuanlai accordingly at 09:25.   The credit advice and the outward remittance debit advice were similar to those for the remittances of the US$20 million and US$30 million. 

51.   At 10:29 that morning, Isaac Lai sent Norman Lin a revised list of requested information.   Among other things, the Group was asked, after the money had all been received by BOCOM, whether it would automatically be paid to the bondholders and when.   There was also a request for the Group to remit the US$130 million one day earlier, so as to avoid any delay which would have an irreversible impact on the confidence of the capital market.   At 11:58, Norman Lin provided the Group’s responses.   In relation to the enquiry about security (mentioned in §49 above), he stated that concrete matters would be provided for after discussions between both sides (“具體事宜雙方協商後提供”).   At 18:46, Norman Lin sent Isaac Lai a proof of account balance of the 1^st defendant issued by BOCOM showing an available balance of US$120,042,074.57.   This comprised the US$20 million, US$30 million and US$70 million deposited in the D1 Account on 15, 16 and 21 May 2018 respectively together with pre-existing funds. 

52.   The Group was eventually unable to procure the transfer of a further US$230 million into the D1 Account on 23 and 24 May 2018 as contemplated.   On 25 May 2018, the issuer and the guarantor of the 2018 Bonds announced the default on the 2018 Bonds, stating that they proposed to engage with the bondholders to discuss remedying the event of default and cross-defaults as soon as possible, including a potential consensual restructuring of the bonds.   The Trustee also published a similar notice to the holders of the 2018 Bonds. 

53.   On the same date, Norman Lin instructed BOCOM that US$30 million would be transferred out of the funds in the D1 Account that day, and another US$35 million two weeks later, to pay the holders of the eighth series of bonds (issued by CERCG Capital Ltd). These transfers were eventually not made. 

54.   The Group soon began discussions with the bondholders, including China Life, on restructuring the debts, based on a proposal that the Group would use, inter alia, the US$120 million in the D1 Account for the purpose of the restructuring.   The Group also paid to all bondholders interest accrued on all eight series of bonds up to 20 December 2018. 

55.   On around 29 May 2019, the USD funds in the D1 Account were put on time deposit in order to earn more interest.   The deposit, together with interest accrued, has since remained in the D1 Account. 

The accounting treatment

56.   As is usual, the Group used a computerised double-entry system for book-keeping.   Each financial transaction of a group company was recorded in a journal where the particulars were manually input into a voucher by a member of the accounting staff under the supervision of the Finance Manager, Cyrus Yau.   The 1^st defendant, as a BVI company, was not required to produce audited accounts but, as with other members of the Group, kept a trial balance showing the closing balances of all general ledger accounts at a particular point of time.  

57.   In relation to the sums of US$20 million, US$30 million and US$70 million remitted to the D1 Account in May 2018, the following entries (in equivalent amounts in HKD, the currency of the accounts) may be noted:

(1)  In the books of the 1^st defendant, a journal voucher was created debiting “BCC – USD S/A” (i.e. the USD savings account in the D1 Account) for each of the sums deposited, and crediting “C/A – CERCG Overseas Capital (USD Bond)” for the same amount, with the particulars “Funds from Trading for Overseas Capital Bonds pay’t”. The three entries totalled exactly HK$930 million. 

(2)  In the books of Overseas Capital, a journal voucher was created, debiting “C/A – CERCG Overseas Co (HKD Bond)” and crediting “C/A – CERCG-Trading”, for each of the sums transferred, with the particulars entered as “Fund trf to Overseas from Tdg for Overseas Capital bonds pay”.  

(3)  The corresponding journal vouchers of Trading have not been disclosed, but it may be inferred that equivalent book entries debiting Overseas Capital and crediting Trading’s own bank account would have been created. 

(4)  In the 1^st defendant’s trial balance for May 2018, a new “period debit” for BCC – USD S/A in the amount of HK$930,022,581.87, and a new “period credit” for C/A – CERCG Overseas Capital (USD Bond) in the amount of HK$930,019,375.00, were recorded.   The closing debit for BCC – USD S/A (HK$930,329,284.78) was less than the closing credit for C/A – CERCG Overseas Capital (USD Bond) (HK$930,445,115.00) by HK$115,830.22.   This difference was accounted for by (i) the interest that had accrued on the D1 Account, which was not credited to Overseas Capital, and (ii) a currency exchange rate difference between the D1 Account and the current account.   The opening and closing debits for C/A – CERCG-Trading were the same, showing that the three deposits were not taken to have reduced Trading’s indebtedness to the 1^st defendant. 

(5)  In the 1^st defendant’s trial balance for March 2021 (when the garnishee order was first made), the debit for BCC – USD Time Deposit had increased to HK$953,243,867.25 (equivalent to US$122,999,208.68) due to the accrual of interest since May 2018, whereas the amount standing to the credit of Overseas Capital remained the same as the closing credit in May 2018 at HK$930,445,115.00. 

(6)  The trial balances of Overseas Capital were not disclosed, but it may be inferred that there were equivalent credits of Trading and debits of the 1^st defendant. 

(7)  The 1^st defendant’s trial balances that have been disclosed also show that the interest accrued and received on the USD balances in the D1 Account was credited to Interest Income.   Thus for example interest in the sum of US$413.79 shown in the statement of the D1 Account for May 2018 was credited, in the equivalent amount of HK$3,206.87, to Interest Income in the 1^st defendant’s May 2018 trial balance. 

Analysis

58.   The evidence in my view demonstrates that the US$120 million was derived from the proceeds of the eighth series of bonds. The proceeds were on-lent by that bond issuer to Trading.   The US$120 million was remitted by Trading to the D1 Account in May 2018 for the purpose and in anticipation of the payment (together with another US$100 million and US$130 million expected on 23 and 24 May 2018 respectively) of the principal of the 2018 Bonds in the total sum of US$350 million.   That was the burning issue the Group was faced with at the time.   If the 2018 Bonds could be repaid, even though slightly late, immediate cross-defaults on the remaining seven bonds could be avoided as they had not yet matured.  

59.   But it is clear on the authorities that it is not enough that the money has been paid to the recipient for a specified purpose; commercial life would be impossible otherwise: Twinsectra, §73; Prickly Bay, §39.   It is necessary to look for objective indication that the money is not intended to be at the free disposal of the recipient.   Thus, in Quistclose, a letter was sent by the borrower, with the concurrence of the lender, to the borrower’s bank referring to an agreement already reached that the money “will only be used to meet the dividend due on July 24, 1964”,[30] and the money was paid into a new “ordinary dividend No.  4” bank account specially opened for that purpose.   It was held that the mutual intention of the lender and the borrower, and the essence of the bargain, was that the sum advanced should not become part of the borrower’s assets, but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend.  

60.   In Twinsectra, the lender was only prepared to make the loan to Mr Yardley if repayment was secured by a solicitor’s personal undertaking.   The solicitor in question gave an undertaking, inter alia, that: “1.  The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client. 2.  The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purpose. ”  Lord Millett said that these provisions made it “crystal clear” that the money was not to be at Mr Yardley’s free disposition. [31]

61.   In the present case, there was nothing in the terms of the payment from Trading to the 1^st defendant that showed any agreement between them or any condition imposed by Trading that either the 1^st defendant would not have free disposal of the money or Trading would retain some beneficial interest in or control over it. The first remittance of US$20 million was preceded by the approval by the Group Chairman of Norman Lin’s request (see §42 above).   That communication specified the purpose of the payment, but contained nothing that, construed objectively, imposed any restriction on the use of the funds by the 1^st defendant. 

62.   The second remittance of US$30 million was not accompanied by any document that expressed its purpose at all.   It can be inferred that it was made for the purpose of payment of the principal of the 2018 Bonds, but there is no evidence of any terms restricting its disposal once remitted to the D1 Account. 

63.   The third remittance of US$70 million was surrounded by certain communications between the Group and China Life Franklin referred to in §§47-51 above, the focus of which was China Life’s concerns arising from the default on the 2018 Bonds.   They showed that the US$70 million was intended to be used in aggregate with the remitted US$50 million and the anticipated US$230 million to redeem the 2018 Bonds.  But even assuming knowledge of those communications could be imputed to Trading and the 1^st defendant, there was nothing there that imposed any restriction on the 1^st defendant not to use the money in any other way.  

64.   The banking documents such as credit advices and remittance advices said nothing even about the purpose of the transfers.   The accounting journal vouchers mentioned the purpose of the 2018 Bonds payment.   There was however no communication to the 1^st defendant or even an internal file note from which an intention on the part of Trading to retain a beneficial interest in the money can objectively be discerned.   Nor can one see or infer from the evidence any agreement or arrangement between Trading and the 1^st defendant as to what should happen if the US$120 million was in the end not used for the purpose of paying the 2018 Bonds. 

65.   Mr Li and Mr Chan submit that in the absence of express terms imposing restrictions such as those found in the decided cases, the requisite intention can nevertheless be gathered from the circumstances.   As special circumstances in this case, they refer to the following.   The 1^st defendant was a special purpose vehicle.   The USD sub-account within the D1 Account was a segregated account not used for the 1^st defendant’s purposes. Overseas Capital had been authorised as a joint signatory to give instructions relating to that sub-account.   The payment of US$120 million into the D1 Account was not for the 1^st defendant’s purposes, but for the redemption of the 2018 Bonds on behalf of Overseas Capital.   The Group had liquidity issues in May 2018.   If the 2018 Bonds were not paid, there would be cross-defaults on all the remaining bonds and a group-wide restructuring would be inevitable in which case it would not have been the intention for the US$120 million to be used to satisfy one particular bondholder’s debt. After the primary purpose failed, the Group regarded the US$120 million as funds available for a general restructuring based inevitably on rateable payment of all bondholders. 

66.   I accept that the requisite intention can in principle be collected from the circumstances in an appropriate case.   But I do not consider that the circumstances here show the intention contended for. 

67.   The 1^st defendant may have been set up as a special purpose vehicle for the purposes of the 2022 Bonds.   But this does not mean that any money transferred to it that is not connected with the 2022 Bonds is necessarily held by it on trust for the payer. 

68.   Counsel for the Committee and the 1^st defendant emphasise that the US$120 million was intended for payment of the 2018 Bonds.   But as is well established, it is not enough that the money has been paid to the recipient for a purpose.   No doubt money is often transferred within groups of companies to subsidiaries for particular purposes. The mere existence of such a purpose cannot be sufficient to give rise to a trust.   Furthermore, the circumstances relied upon have to be examined in their context.   As pointed out above, proper account needs to be taken of the “structure of the arrangements” and the relationship of the parties.   The crucial and, as far as counsel’s research has shown, unique feature in this case is that the payer and the payee were not parties at arm’s length, but wholly owned sister companies within the same group.   Although there is no evidence on the directorship of the 1^st defendant, the reality is that the 1^st defendant would be expected to act and would act in accordance with the Group’s plans, at any rate without the intervention of external interests.   As counsel for the Committee themselves submit,[32] it was the Group, not the 1^st defendant, that was “calling the shots”; there was “no need for an express statement” that the 1^st defendant could not apply the funds freely and it was “commercially unrealistic and unnecessary for there to be a contract setting out the restrictions” on how the 1^st defendant could apply the money. 

69.   Viewed against the parties’ relationship and the structure of the transactions envisaged, it is in my view equally unrealistic to suggest there was a trust established to limit the 1^st defendant’s freedom to deal with the money.   Any desired control could be effected through the corporate chain of command.   Since the Group was in full control of the 1^st defendant, there was no need to preserve control through the retention by Trading of beneficial interest in the money as against the 1^st defendant.   There is nothing to show that the Group intended to retain control of the money through Trading (as submitted for the Committee) rather than through the 1^st defendant, both of which were wholly owned subsidiaries.   From the Group’s perspective in 2018, the money was as much “immediately available cash”[33] when owned by the 1^st defendant as when it was in the ownership of Trading.   To speak of Trading placing “trust and confidence”[34] in the 1^st defendant to ensure that the money was applied for the purpose for which it was transferred, thereby occasioning the intervention of equity, seems to me to be unreal. 

70.   It is said that the USD sub-account within the D1 Account was not used by the 1^st defendant but had been used for the purposes of Overseas Capital which had been made a joint signatory. Indeed Mr Chan goes so far as to submit that it was a “trust account”, though it is not entirely clear what is meant by this and the term has not been used in the evidence.   In one respect this is not a typical situation of a Quistclose trust where money is advanced for a specific purpose and once the purpose is carried out the recipient owes a debt to the payer.   In the present case if the purpose was carried out, there would be no debt owed by the 1^st defendant to Trading.   Instead, there would be a debt owed by Overseas Capital to Trading (which would set off and pro tanto reduce Trading’s pre-existing indebtedness to Overseas Capital) and a corresponding reduction in Overseas Capital’s liability to its bondholders.  

71.   In my view this does not advance the Quistclose trust case.   First, although Overseas Capital was a joint signatory, neither the 1^st defendant nor the Committee has advanced a case that the money was held on trust for Overseas Capital.   Secondly, neither has contended that the 1^st defendant was an agent for Trading or for Overseas Capital and as such agent held the money on trust for its principal.   Even in the case of agency, there is no fixed rule that an agent’s duty to account gives rise to a trust of the money received in his hands.   It depends on the intentions of the parties arising from the agency relationship.   For example it could well have been intended that the 1^st defendant functioned as a sub-treasury company for funds in USD and as such acquired beneficial ownership of the funds deposited in the D1 Account but incurred a corresponding debt to another group company.   The fact that funds were paid to the 1^st defendant in anticipation of being used for the purposes of another group company or for the Group as a whole does not imply that the funds were not intended to become beneficially held by the 1^st defendant.  

72.   Thirdly, there is nothing whatsoever that indicates the USD sub-account was a trust account in the sense that it was used by the 1^st defendant to hold money on trust for others or was designated for that purpose.   The assertion that it was a trust account begs the question whether there was a trust in the first place.   Reliance is placed on the Trustee’s notice dated 16 May 2018 which stated that Overseas Capital had remitted funds for the interest payment on the 2018 Bonds “to its own account in Hong Kong” (§44 above), but this was no more than an acknowledgment that the D1 Account was named as the designated account for the purpose of making payment to holders of the 2018 Bonds.   It was not a declaration of trust by the 1^st defendant over any funds in the D1 Account.   Fourthly, it is submitted that there was segregation of the US$120 million because it was deposited into the USD sub-account and not mixed with the balance in the HKD sub-account, but this fails to take account of the credit balance in the sum of US$39,574.57 which existed prior to May 2018 and became mingled with the incoming US$20 million on 15 May 2018.   There is no analysis in the evidence or submissions as to what the pre-existing balance comprised and its ownership. The assertion made by counsel at the hearing that it did not belong to the 1^st defendant is no more than that, and is not borne out by the accounting evidence, as explained below. 

73.   The accounting entries have been set out at §§56-57 above.   Cyrus Yau said that where funds were remitted previously by Trading to the 1^st defendant for interest payment of the 2022 Bonds, the 1^st defendant would debit its bank account and credit its current account with Trading, reducing pro tanto the closing debit which reflected a reduction in Trading’s indebtedness to the 1^st defendant.   He made the point that this was not how the US$120 million was booked.   It is notable however that the sum was recorded by the 1^st defendant as a debit to (i.e. receivable from) its bank account and a credit to the current account with (i.e. a payable to) Overseas Capital.   Corresponding entries were made in Overseas Capital’s books in the form of a debit to (i.e.  receivable from) the 1^st defendant and a credit to the current account with (i.e. a payable to) Trading.   These entries are in my view entirely consistent with the money being treated as beneficially paid to the 1^st defendant, giving rise to a debt owed to Overseas Capital, and in turn a debt owed by Overseas Capital to Trading (resulting in a corresponding reduction in Trading’s net indebtedness to Overseas Capital), instead of a debt owed directly by the 1^st defendant to Trading. The indication was that the 1^st defendant ended up owing Overseas Capital the money – with Overseas Capital in turn owing it to Trading – rather than holding it on trust for Trading. 

74.   This is reinforced by the 1^st defendant’s trial balances which contained the relevant amounts as debits to bank account and credits to Overseas Capital.   Cyrus Yau said that the debits and credits in the trial balances did not “necessarily” equate to assets and liabilities on a balance sheet, and asserted that the amounts standing to the credit of Overseas Capital in the 1^st defendant’s trial balances from May 2018 onwards did not represent a liability or other amounts due to Overseas Capital.   He did not however explain why and how remittances not belonging to the 1^st defendant at all would go on to its trial balances, other than saying that “the ‘credit’ was meant (for internal-keeping purpose) to record the earmarking of such funds at the material time in May 2018 for the intended redemption of the 2018 Bonds” and that the credit was subsequently “simply carried over from the initial entry made in May 2018”.   These attempts to explain away the entries are assertions of subjective thinking and as such can have but little weight.   Objectively, it seems to me that the accounts reflect that the payment of US$120 million into the D1 Account was treated as inter-company transfers of funds giving rise to credits and debits reflecting inter-company payables and receivables.   There is nothing in the entries or in any other accounting document that evince an intention to create a trust over the money.   On the contrary, as Cyrus Yau admitted, in the 1^st defendant’s books the interest that accrued on the USD savings in the D1 Account was not credited to the current account with Overseas Capital, nor, one may infer, to the current account with Trading, which suggests that neither of them was regarded as being entitled to the interest.   Instead, the 1^st defendant’s disclosed trial balances suggest that, as would be the usual course, interest received was credited to Interest Income throughout.   This in turn suggests that the USD funds transferred into the D1 Account had all along been regarded by the Group as the assets of the 1^st defendant. 

75.   Mr Li said that if the US$120 million was not in the event used to repay the 2018 Bonds, there would be cross-defaults and a group-wide restructuring would become necessary.   On that basis it could not have been the intention of the Group for the money to be used to repay one particular bondholder.   It is submitted that if China Life could lay its hands on the Funds it would get a “windfall”.   One might quibble whether recovering less than half of the principal lent can be said to be a windfall, though there is a serious point made here, which is that China Life would, in priority over other bondholders, take the benefit of the US$120 million.   But the Group could have moved the money elsewhere.   If a group decides to “park” money in a subsidiary simply via inter-company payables and receivables, it takes the risk of exposure to action by that subsidiary’s creditors.   If it wishes to insulate money transferred to a subsidiary from that subsidiary’s creditors on the ground that the money belongs to some other group company, it is incumbent on the group to make that clear.   In Prickly Bay at §47, the Privy Council stated:

“ In a commercial setting, there must be clear evidence that parties intended a trust to arise in circumstances where a trust would not normally exist and particularly if a trust would be contrary to settled commercial practice. ”

76.   Thus examined, the so-called windfall arises not so much from the court’s rejection of the Quistclose trust case as from the omission by the Group either properly and clearly to set up a trust over the US$120 million or to move the money out of the 1^st defendant at an earlier time. 

77.   On the basis that the money was not impressed with a Quistclose trust upon the transfer into the D1 Account, there is no suggestion that such a trust could or did subsequently arise because the Group later formed an intention to use it for a group-wide restructuring.   The evidence is in any event not clear as to when the money became clearly intended for such purpose.   As at 25 May 2018, after it transpired that there was not enough money to redeem the 2018 Bonds, the Group planned to use US$65 million out of the funds in the D1 Account to repay the holders of the eighth series of bonds (see §53 above).   The evidence from the Group was that the US$120 million had been intended for funding payments to all bondholders in a restructuring “since at least August 2018”. 

78.   For these reasons, I would hold that the requisite intention for a Quistclose trust has not been made out from the evidence. 

Exclusivity of purpose

79.   It is submitted on behalf of the 1^st defendant and Committee that the judge erred in finding that exclusivity of purpose was a prerequisite to a Quistclose trust,[35] overlooking the point that exclusivity of purpose is only one way of demonstrating that the property is not at the free disposal of the recipient.   In Prickly Bay at §31, it was said:

“ It is also possible that the trust does not require that the property should be ‘exclusively’ used for the purposes of the Quistclose trust. The payer or other transferor may have given other directions, or the parties may have agreed to other terms, since, as emphasised above, the Quistclose trust is only a default trust. ”

80.   In fairness to the judge, this was not quite how the argument was put to her.   Before the judge, the Committee argued that the money was transferred for the purpose of paying the 2018 Bonds and was later retained for restructuring, and that there was exclusivity of purpose at any one time. [36] It may not be entirely accurate for the judge to say that “there was simply no exclusivity of purpose if a transferor could change the purpose from time to time”. [37]  The ability of the transferor to alter the purpose for which the funds must be applied is not in principle inconsistent with their being required to be applied exclusively for a specific purpose.   It was recognised in Twinsectra[38] that depending on the circumstances the payer may be able to countermand the payee’s mandate even while it is still capable of being carried out.   But it is clear that the judge had in mind the question whether the money is at the recipient’s free disposal. [39]  For the reasons explained above, the Committee and the 1^st defendant fail on that question. 

Debt dodgers’ charter

81.   On behalf of the 1^st defendant Mr Chan criticised the second reason given by the judge (see §16 above) as being irrelevant.   Read in context, in saying that there would be a debt dodger’s charter if the Group could unilaterally declare the Funds as not belonging to any particular company, it seems to me that the judge was simply highlighting the absence of objective indicia in the evidence showing that the money did not belong to the 1^st defendant.   She was correct to reject the subjective and retrospective assertions of ownership of the Funds. 

Purpose of providing security for the 2021 and 2022 Bonds

82.   The third reason given by the judge for rejecting the Quistclose trust case is that the purpose of the Funds was not solely for repayment of the 2018 Bonds but at least partly for providing security for the 2021 and 2022 Bonds.   The judge said it was China Life’s case that US$70 million deposited into the D1 Account on 21 May 2018 was to be security for the 2021 and 2022 Bonds.   The judge referred to the email from Dr He to the Group at 23:48 on 17 May 2018 (§47 above) which stated: “我们有权要求公司提供相应的抵押品作为增信以维护我们作为债权人的利益” (We have the right to demand that the company provide relevant security to boost confidence so as to safeguard our interests as a creditor. )  She also referred to the statement in the affirmation of William Chow, Deputy CEO of China Life Franklin,[40] that the transfer of US$70 million was effected on 21 May 2018 “upon China Life’s express demands for security after the default of the 2018 Bonds, rather than as a self-initiated ‘act of good faith’ to repay the 2018 Bonds”.   The judge found that the US$70 million had been provided to China Life as security.   As such it could not also form the subject matter of the Quistclose trust contended for. 

83.   This finding is challenged by all three parties to these appeals.   I am with respect satisfied that it is erroneous.   On the evidence, including the new evidence adduced by the Committee, as discussed above at the time when it was remitted to the D1 Account, the US$70 million was intended for repayment of the 2018 Bonds.   China Life did demand the money be transferred to BOCOM, but it did so with knowledge that it was intended to be applied towards redeeming the 2018 Bonds.   There was no evidence of any intention on the part of either the Group or China Life that the US$70 million itself should immediately be used to secure the obligations under the 2021 and 2022 Bonds.   Dr He’s email of 17 May 2018 merely asserted a right to demand security.   Whilst William Chow did assert that it was agreed at the telephone conference on 18 May 2018 that funds including the US$70 million would be remitted “as further security” to safeguard China Life’s interests under the 2021 and 2022 Bonds,[41] he had not attended that conference and did not identify the source of his information for that assertion.   Further, on 19 May 2018 at 21:49, Isaac Lai by email asked the Group what security could be provided to protect China Life, to which Norman Lin replied on 21 May 2018 at 11:58 (shortly after the US$70 million was remitted) that concrete matters would be provided for after discussions between both sides (see §51 above).   The evidence read as a whole provides no basis for finding any specific intention for the US$70 million to be charged as security for the 2021 and 2022 Bonds.   In addition I agree with the submission made on behalf of China Life that there was no requisite agreement on the necessary terms for the US$70 million to be subject to either a fixed charge or a floating charge. 

84.   In fairness to the judge, China Life’s affirmations before her Ladyship did contain assertions that the US$70 million was deposited as security for the 2021 and 2022 Bonds.   The contemporaneous and objective evidence, however, does not in my opinion shows that a security interest had been created. 

Trial of an issue

85.   The 1^st defendant’s contention that the judge should at least have ordered a trial on the question of the ownership of the money has no merit in this case.   It is for those contending for a Quistclose trust to adduce the relevant evidence.   This the 1^st defendant had done by way of numerous affirmations.   While there are opposing assertions between the parties as to the ownership of the money, there is no conflict in the evidence of primary facts or issue of credibility turning on witnesses’ evidence.   What is called for is the interpretation of the facts and the application of the law to the evidence.   As Order 49 rule 6(2) of the Rules of the High Court (Cap 4A) makes clear, the court may “summarily determine the questions at issue”.   There was no suggestion to the judge that there should be a trial.   In fact the 1^st defendant did not even appear at the hearing. 

Conclusion on the 1^st defendant’s and the Committee’s appeals

86.   For the above reasons, I consider that the judge was correct to hold that the US$120 million was not subject to a Quistclose trust, and that accordingly the 1^st defendant’s and the Committee’s appeals should fail. 

China Life’s appeal (CACV 340/2022)

87.   Having reached the conclusion that there was no Quistclose trust, the judge said that it was an appropriate case to make absolute the garnishee order, subject to the question of quantum.   She went on to exclude the US$70 million from the garnishee order on the ground that it had been encumbered as security for the 2021 and 2022 Bonds.   She stated that it was for China Life to inform the court of the conditions for realising the security and how to apportion the money between the two bonds. [42]  For the reasons explained in §§82-84 above, I consider that finding to be erroneous. 

Disposition and costs

88.   For the reasons above, I would dismiss the 1^st defendant’s and the Committee’s appeals but allow China Life’s cross-appeal.   The judge’s order excluding the US$70 million[43] should be set aside, and the garnishee order made absolute without such exclusion. 

89.   I would also make an order nisi that the costs of the Committee’s application to adduce new evidence be in the cause of its appeal, that the 1^st defendant and the Committee do pay China Life the costs of their appeals respectively with a certificate for two counsel, and that there be no order as to the costs of China Life’s appeal.