WILLIAM THOMSON v. ROLAND JOHN JEANS AND ANOTHER

DCCJ 3388/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3388 OF 2005

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JUDGMENT

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Introduction

1. In these actions, the plaintiffs, Mr Thomson in DCCJ 3388/2005 (“P1”) and Mr Boewe in DCCJ 3389/2005 (“P2”), claim against the defendants for $500,000 (the “P1’s Investment”) and $250,000 (the “P2’s Investment”) respectively. These were moneys which they had agreed with the 1^st defendant (“D1”) to invest in a company called Wanchai Bierkeller Ltd (the “Company”).

2. At the requests of D1, P1 and P2 paid their investments to the 2^nd defendant (“D2”), a firm of solicitors acting for D1 and the Company at the material times, on about 21 January 2004 and 8 December 2003 respectively.  There is no dispute that D2 had received the payments.

3. There is also no dispute that D2 had released the plaintiffs’ moneys to D1 or the Company.

4. No shares in the Company had been issued to the plaintiffs.  The Company was put into liquidation by a resolution passed in an extraordinary general meeting of the Company held on 4 January 2005.

5. The plaintiffs claim against the defendants for return of their investments on the grounds of total failure of consideration, money had and received, conversion and breach of trust.

6. The writs in both actions were issued on 16 July 2005.  Both plaintiffs served their statements of claim on 29 July 2005.  P1 amended his statement of claim on 13 October 2005 and re-amended the same on 9 July 2012.  P2 also amended his statement of claim on 9 July 2012.

7. D2 filed its defences in both actions on 20 September 2005 and provided particulars on its defences on 26 January 2006.  On 17 May 2006, the court struck out part of D2’s defences in both actions.

8. The plaintiffs filed their replies to D2’s defences in both actions on 4 October 2005.  P2 amended his reply on 5 October 2005.

9. Judgment had been entered against D1 on 20 April 2012 in both actions for breach of unless orders made by the court on 30 March 2012.  The plaintiffs’ remaining claims in these two actions were against D2 only.

10. On 26 February 2013, the court ordered that these two actions be set down for trial either together or one after the other.

11. On 18 July 2013, I granted leave for D2 to amend its defences in both actions.  When granting leave for D2 to amend its defences, I refused to allow certain proposed amendments which would in effect allow D2 to resurrect certain parts of its defences struck out on 17 May 2006.  These included D2’s pleas that D2 had been informed by D1 on usage of the plaintiffs’ investment moneys and that the plaintiffs had beneficial ownership in the shares of the Company (see my decision dated 18 July 2013).  No weight will be given in this judgment to evidence related to these struck out pleas. 

12. The trial commenced on 5 August 2013 and I heard the two actions together.

13. The plaintiffs’ case was that their moneys paid to D2 were for the sole purpose of acquiring shares in the Company.  In its amended defences, D2 pleaded that according to its understanding and honest belief, the Company was entitled to immediate use of the plaintiffs’ investments (the “Investment Money Arrangement”) and that D2 had acted in accordance with the Investment Money Arrangement.

14. The central issue in dispute between the plaintiffs and D2 is whether the plaintiffs’ moneys paid to D2 were immediately at the free disposal of D1 and/or the Company.  If not, whether D2 is liable for releasing the moneys to D1 and/or the Company.

The plaintiffs’ cases and evidence

15. The plaintiffs’ case against D2 was that upon receipt of their moneys, it was impliedly agreed and accepted by D2 that the moneys would be held by D2 to the use of the plaintiffs and for the purpose of subscribing for shares in the Company after execution of the finalized shareholders agreement for the Company (the “Plaintiffs’ Purpose”).  The plaintiffs pleaded that D2 was under a duty not to part with the plaintiffs’ moneys and/or to hold the same as an escrow until the Plaintiffs’ Purpose was fulfilled.  The shareholders agreement had not been finalized or signed and no shares in the Company had been allotted to the plaintiffs.  The plaintiffs pleaded that there was total failure of consideration for their moneys paid to D2 and D2 was jointly and severally with D1 liable to the plaintiffs for moneys had and received to the use of the plaintiffs and for return of the same to the plaintiffs.

16. Alternatively, the plaintiffs claimed that D2 was a constructive trustee in respect of the moneys received from the plaintiffs for the Plaintiffs’ Purpose and was accountable to the plaintiffs on the grounds that D2 knowingly participated or acted in the misapplication of the plaintiffs’ moneys by payments to or on behalf of D1 and/or the Company in breach of the constructive trust. 

17. The plaintiffs in their respective statement of claim claimed against D2 for:-

(1) total failure of consideration;

(2) moneys had and received by D1 through D2;

(3) damages for wrongful conversion by D1; and/or

(4) a declaration that D2 was liable as a constructive trustee.

18. Both plaintiffs had signed witness statements and supplemental witness statements.  They also testified at the trial but call no other witnesses.

DCCJ 3388/2005

19. P1 adopted his witness statement dated 13 March 2012 and his supplemental witness statement dated 25 July 2013 as his evidence-in-chief at the trial.

20. P1 said that he visited the restaurant and bar (the “Bar”) operated by the Company at Lockhart Road in 2003 and got to know D1.

21. In early 2004, D1 told P1 that he was looking for investors to subscribe for and take up shares in the Company.  P1 expressed some interest in taking up shares in the Company.

22. D1 told P1 that the Bar commenced business in November 2003 and D1 was the main director and shareholder of the Company.  D1 further said that he had invested or was investing about $3.3 million in the Company.  He had procured a group of investors to invest up to $400,000 in the Company and was seeking to procure more investors to raise a further sum of $2 million or more.  D1 told P1 that P1 might invest up to $500,000.

23. D1 told P1 that he had appointed D2 to act for D1 and the Company to prepare the legal documentation including an agreement to be entered between D1 and the investors on allotments of shares in the Company.

24. D1 said that the Company’s business would be very profitable and D1 was in charge of the operation and management of the Company’s business without any remuneration.

25. P1 said that relying on the information provided and representation made by D1 and upon D1’s request, he attended the office of D2 with D1 on about 6 January 2004 to meet Mr Ian de Witt (“IDW”) of D2 (the “1st Meeting”) and on 21 January 2004 to meet Mr Eddie Look (“EL”) and Ms Prudence Lee (“Ms Lee”) of D2 (the “2nd Meeting”).

26. In the 1st Meeting IDW gave P1 a draft shareholders agreement relating to the Company (the “Draft Agreement”) prepared by D2 upon D1’s instructions for P1’s approval.  IDW told P1 that after the Draft Agreement was approved by the investors, it would be finalized by D2 for the investors’ signature and D1’s implementation.

27. P1 said that at the 1^st Meeting he had been shown a copy of the Draft Agreement and a copy of a document entitled “Proposed sharecapital distribution”. (See pp 213-223 of Bundle 1)  D1 asked IDW to send P1 a copy of the Draft Agreement for P1’s review and consideration.

28. After P1 read the Draft Agreement, he felt assured and confident that by entering into and signing the proposed shareholders agreement, his subscription money for shares in the Company would be protected and secured and meanwhile would be held in the safe custody of D1’s solicitors.

29. P1 called D1 on about 20 January 2004 and told D1 that he was interested in making subscription for shares in the Company but would like to make some amendments to the Draft Agreement.  D1 said that he would set up another meeting with D2 to discuss and asked P1 to pay $500,000 to D2 pending the signing of the proposed shareholders’ agreement.  D1 subsequently provided the bank details of D2 to P1. 

30. At the 2nd Meeting, P1 requested some amendments to be made to the Draft Agreement to include provisions for 100% of the consolidated profits of the Company to be available for distribution by way of dividend by quarterly and for no directors’ fees to be paid to D1, the Company’s executive director or any directors.  EL said that the proposed amendments required approval by D1 and other intended shareholders.  EL said that he would circulate P1’s proposed amendments to all parties concerned and would let P1 know whether they were agreeable.

31. D1 urged P1 to pay $500,000 to D2 pending the signing of the shareholders agreement.  P1 said that on the basis and understanding that the shareholders agreement would be approved, signed and implemented, he paid the P1’s Investment to D2 to be held by D2 as his intended investment in the Company by way of subscription of shares in the Company.  D2 issued a receipt to P1 describing the payment as “in settlement investment monies”. (See p 869 of Bundle 2B)

32. P1 said that EL had not told him that the P1’s Investment would be held in the client’s account of D2 for the Company.  EL also had not told him that the P1’s Investment would be applied for use by the Company without restriction for the purpose of its business, before and in the absence of execution of the shareholders agreement.  P1 said that it was his understanding from the 2^nd Meeting that the Draft Agreement would, after circulation and clearance of his suggested amendments and depending on mutual agreement thereon, be finalized and signed by all parties concerned and then implemented and put into effect for the purpose of procuring allotments of shares in the Company in proportions as calculated in accordance with the aforesaid “Proposed sharecapital distribution”.  It was also P1’s understanding that the P1’s Investment would be held by D2 pending finalization and execution of the shareholders agreement.

33. P1 stated in his supplemental witness statement that:-

“7. At no time during the said meetings at Tanner de Witt [D2] or my conversations with Mr Jeans [D1] was I asked whether I agreed to the use of my said payment [ie the P1’s Investment] by the Company immediately without my first securing my position and capacity as a registered shareholder of the Company having all the rights of voting in and sharing of dividends of the Company and all other entitlements attached thereto as obviously I would not agree to such a request. Otherwise, I could simply have made my said payment direct to Mr Jeans for the use of his Company without going through the medium of Tanner de Witt and without the necessity of preparation of the legal documentation by Tanner de Witt and legal formalities which at no time, was I prepared to do, as Mr Jeans was relatively unknown to me. On the other hand, I was confident and had a legitimate expectation that Tanner de Witt, a reputable large firm of solicitors, would handle the share transactions professionally to a successful conclusion.

8. Further, it was readily apparent from the said documents prepared by Tanner de Witt and Mr Jeans [ie the Draft Agreement and the “Proposed sharecapital distribution”] that the moneys to be paid by the investing shareholders would form part of the paid-up share-capital of the Company by way of proper allotment(s) of shares in its capital and not to be treated as undefined or nondescript advances to the Company which might not even be recognized or booked in its accounts. In any case, the simple wording of the receipt issued by Tanner de Witt to me for my said payment gave no indication that the same was received on behalf of Mr Jeans or the Company for the immediate use or account of the Company, which would have put me on notice and caused me concern.”

34. After the P1’s Investment was paid, P1 was not contacted by D1 or D2. The Draft Agreement was not finalized nor signed.  No shares in the Company were allotted to P1 despite his repeated enquiries to D1 who repeatedly put P1 off.

35. In about September 2004, P1 called at the Bar and met Mr Brian Anderson (“Mr Anderson”) who introduced himself as the newly appointed manager of the Bar. Mr Anderson told P1 that D1 was stilling looking for investors for the Company and the Company’s business was losing money.

36. Around mid-November 2004, P1 found that the Bar had closed down.  Later, P1 found D1 and was told by D1 that the Company had incurred big losses and would soon be “liquidated”.  D1 said that investment made in the Company including the P1’s Investment was lost and irrecoverable.  When P1 asked D1 why and how D1 and D2 had used the P1’s Investment without P1’s consent or authority, D1 did not give any specific answers and then ignored P1. 

37. P1 was later introduced to P2 by Mr Anderson.  They jointly instructed the solicitors acting for them in these actions to make enquiries with D2 regarding the status of the Company and what had happened to their investments. D2 in reply refused to disclose the status of the Company or the use and destination of their investments.

38. P1 stated that at no time had he given any authority or consent to D2 to make use of or release the P1’s Investment for any purpose other than for the Plaintiffs’ Purpose.  P1 said that the Plaintiffs’ Purpose was never fulfilled or put in place.

39. P1 later learned that at a purported extraordinary general meeting of members of the Company held on 4 January 2005, a purported special resolution of the Company was passed and signed by D1 as the chairman of such meeting to wind up the Company voluntarily.  P1 said that no notice of such meeting was given to him and he did not attend such meeting.

40. P1 said that it was in reliance on the representation made by D1 at the office of D2 and in the belief that the same was true that he paid the P1’s Investment to D2.  P1 said that the representation was untrue and made with a view to procure him to pay the P1’s Investment.  He believed that there had been a total failure of consideration for the P1’s Investment being moneys had and received by D2 to his use for the Plaintiffs’ Purpose.  He said that the P1 Investment was wrongly misappropriated and/or released by D2 without his authority or consent.  P1 said that prior to this transaction, he had no dealings with D1 or D2.

DCCJ 3389/2005

41. P2 adopted his witness statement dated 29 September 2011 and his supplemental witness statement dated 29 July 2013 as his evidence-in-chief at the trial.

42. P2 said that in around October 2003, after he visited the Bar and became a customer, he came to know Mr Jurgen Thorwith (“Mr Thorwith”), the then manager of the Bar.

43. In late November 2003, Mr Thorwith told P2 that the Company was under the supervision and control of D1 who was looking for investors to subscribe for and take up shares in the Company.  P2 expressed some interest in taking up shares in the Company.  Mr Thorwith introduced P2 to D1.

44. D1 said that the Bar commenced business in November 2003 and he was the main director and shareholder of the Company.  D1 further said that he had invested or was investing about $3.3 million in the Company.  He had procured two other investors to invest $400,000 in the Company and was seeking to procure more investors to raise a further sum of $2.45 million to make capital investments or subscriptions in the Company’s capital.

45. D1 told P2 that he had appointed D2 to act for D1 and the Company to prepare the legal documentation including an agreement to be entered between D1 and the investors on allotments of shares in the Company.

46. D1 told P2 that the Company’s business would be very profitable and D1 was in charge of the operation and management of the Company’s business without any remuneration.

47. Mr Thorwith also confirmed the above to P2.  They then gave P2 a document with the heading “Proposed sharecapital distribution” in tabular form which showed that the Company had an invested capital of $3.3 million and a paid up share capital of $165,000. (See p 158 of Bundle 3)  P2 said that after being shown the said document and relying on what D1 and Mr Thorwith had said to him, P2 told D1 that he was interested in making an investment in the sum of $250,000 to subscribe for 12,507 of the 165,000 shares in the Company.  P2 asked to which person’s account he should pay the P2’s Investment and was told by D1 and Mr Thorwith to pay it to the account of D2.

48. P2 said that Mr Thorwith had showed him subsequent emails exchanges between Mr Thorwith and Ms Lee of D2. (See pp 245A-245B of Bundle 3)  In an email dated 26 November 2003, Mr Thorwith informed Ms Lee of the proposed investment of P2 and asked D2 to prepare a document on its letter-head setting out P2’s proposed investment.  In her reply email of the same date, Ms Lee said that she had discussed with IDW but were not quite sure what Mr Thorwith wanted.  Ms Lee stated that they were not in a position to make an offer to potential investors to inject funds to the Company.  Ms Lee also provided in her said email details of D2’s client account.  Mr Thorwith gave copies of these emails to P2 and asked P2 to pay the P2’s Investment to D2’s account.  P2 said that reading these emails together with the information given to him by Mr Thorwith in early December 2003, he understood that D2 was in the process of formulating an offer to be made in the form of legal documents to potential investors.

49. In early December 2003, Mr Thorwith told P2 that D1 had requested D2 to prepare the legal formalities including an agreement intended to be made between D1 and the investors (including P2) in relation to the allotment and issuance of shares in the Company and that meanwhile, in anticipation thereof P2 should pay his intended investment sum to D2’s account.  On 8 December 2003, P2 deposited the P2’s Investment into D2’s account.

50. After P2 paid the P2’s Investment, he was not contacted by D1 or D2 and no receipt for his payment was issued to P2 at that juncture.

51. In his witness statement, P2 said that in January 2004 and on 2 or 3 occasions thereafter when P2 was in Hong Kong, he went to the Bar and asked Mr Thorwith about the progress of the matter and when he would be given the documentation.  Mr Thorwith told him that the paperwork was not ready and would let him know when it was completed by D2.  Mr Thorwith did not indicate when the paperwork was expected to be available.

52. In his supplemental witness statement, P2 said that in early January 2004, Mr Thorwith informed him that D2 had prepared a draft shareholders agreement upon instructions of D1.  Mr Thorwith showed a copy of the draft shareholders agreement to him which named D1 of the one part and 3 persons including P2 with a space for the name of the 4^th person left in blank of the other part. (See pp 159-168 of Bundle 3)  There were provisions for the investors to acquire specific shares in the Company.  P2 went through the draft shareholders agreement with Mr Thorwith generally.  Mr Thorwith told P2 that after all the intended investors were in hand, the shareholders agreement would be finalized and prepared by D2 for execution by the parties concerned.

53. In around mid September 2004, when P2 visited the Bar, he was told by Mr Anderson that Mr Thorwith had resigned and that Mr Anderson was appointed as manager.  P2 enquired from Mr Anderson about the structure of the Company’s share-holdings and whether it was profitable.  Mr Anderson told P2 that D1 was still looking for investors for the Company and that the business was losing money.

54. In mid November 2004, P2 found that the Company had closed down.  He met D1 and was told that the Company had incurred big losses and would soon be “liquidated” and investment made in the Company including the P2’s Investment was lost and irrecoverable.  When P2 asked D1 what had happened and why and how D1 had used his money without his consent or authority, D1 made no reply and went away.

55. P2 said that D2 did not issue receipt for the P2’s Investment to him until December 2004 when D2 issued a receipt dated 30 December 2003 containing the words: “Received the sum of HK$250,000.00 by cheque deposit from client being investment monies.” (See p 208 of Bundle 3)

56. P2 was later introduced to P1 by Mr Anderson and they decided to instruct the solicitors acting for them in these actions to make enquiries with D2 regarding the status of the Company and what had happened to their investments. D2 in reply refused to disclose the application or use and destination of their investments.

57. P2 stated that at no time had he given any authority or consent to D2 to make use of or release the P2’s Investment for any purpose other than for the Plaintiffs’ Purpose which was never fulfilled or put in place.

58. P2 said that it was in reliance on the representation made by D1 and in the belief that the same was true that he paid the P2’s Investment to D2.  P2 said that the representation was untrue and made with a view to inducing him to pay the P2’s Investment.  He believed that there had been a total failure of consideration for the P2’s Investment being moneys had and received by D2 to his use.  He also said that the P2’s Investment was wrongly converted or misappropriated and/or released by D2 without his authority or consent.

59. P2 said that at the outset during his discussion with D1 and Mr Thorwith, he made it clear that he wanted to have documents prepared by D1’s solicitors to evidence and record that he was prepared to make an investment for the purpose of acquiring shares in the Company.  At no time did he agree simply to accept a receipt from D2 for the P2’s Investment as evidence of his investment and holding shares in the Company.

60. P2 denied that D1 communicated with him on a regular basis by way of emails regarding the Company.  He also denied that it was his alleged “understanding” that the P2’s Investment was fund for the use of the Company.

D2’s case and evidence

61. There is no dispute that D2 had received the P1’s Investment and the P2’s Investment.  D2’s case was that at no time was D2 instructed by or acted for the plaintiffs and there was no contractual or other relationship between the plaintiffs and D2.  D2 denied that there was any implied or expressed agreement between the plaintiffs and D2 of any nature.

62. D2 pleaded that the plaintiffs’ moneys were deposited into D2’s account without any instructions from the plaintiffs.  Neither did the plaintiffs make any representation nor make their payments conditional upon any event.  The plaintiffs paid their moneys to D2’s client account without any limitation and without any instructions that they be held to the plaintiffs’ order or otherwise.  D2 further pleaded that it received the plaintiffs’ moneys upon the understanding that D2 would hold the moneys on terms that the Company would be free to put such moneys to immediate use by the Company for its business (ie the Investment Money Arrangement).

63. D2 denied that consideration for the payment of the plaintiffs’ moneys had wholly failed.  D2 pleaded that the plaintiffs’ money were paid in accordance with the Investment Money Arrangement and the moneys were put to use for the business of the Company with the authorization of the Company.

64. D2 further pleaded that since contracts between the plaintiffs and D1 for the purchase and/or allotment of shares in the Company worth the plaintiffs’ moneys were subsisting, the plaintiffs had no claim for money had and received or restitution.

65. D2 averred that D2 paid out in good faith the fund of the Company held by D2.  Such payments were made on lawful instructions of the Company for the purposes of settling liabilities and expenses of the Company or its business. D2 reasonably and honestly believed that the payments were made in accordance with the Investment Money Arrangement.

66. D2’s case was that D2 arranged for incorporation of the Company on 16 July 2003 on D1’s instructions.  Since the incorporation of the Company, funds in D2’s bank account stood to the credit of the Company were assigned a specific reference number “03/299/IDW”.  These funds were held on account of the Company as part of the Company’s general assets.  Since August 2003, expenses for the establishment of the Company and the operation of its business were regularly defrayed by payments out of these funds. (See pp 249-252 of Bundle 3)  The payments were made with express authorization of the Company acting through D1 (See pp 1203-1279 of Bundle 2C).  The plaintiffs’ moneys paid into D2’s bank account formed part of the Company’s fund as aforesaid. 

67. D2 further pleaded that D2 received the plaintiffs’ moneys in its capacity as agent of and solicitors acting for the Company.  D2 did not receive the plaintiffs’ moneys to its own benefit and it had never been enriched.  D2 had paid over the plaintiffs’ moneys to the instructions of the Company in good faith before receiving notice of the plaintiffs’ claims.

68. D2 denied that the plaintiffs’ moneys received by D2 were trust properties belonging beneficially to the plaintiffs.  D2 also denied that it was a trustee, whether express, resulting or constructive, in respect of the plaintiffs’ moneys.  D2 averred that even if the plaintiffs’ moneys were trust moneys belonging to the plaintiffs, D2 was not accountable to the plaintiffs as D2 had no knowledge that the payments were subject to the Plaintiffs’ Purpose and D2 had reasonably and honestly believed that the Company was free to put the plaintiffs’ moneys to immediate use for the business of the Company in accordance with the Investment Money Arrangement.

69. D2’s stance was that there was never communication to D2 of the plaintiffs’ alleged intention of having their moneys held by D2 pending allotments of shares in the Company and signing of the shareholders agreement. IWD said at the trial about the plaintiffs’ aforesaid alleged intention that:-

“Nothing was verbally said, nothing was written, no indications. Nothing was said at all before, during or even after. Not until after the Company was in liquidation and then only through lawyers.”

“None of the investors ever put any condition on the money that was put into our account.”

“We acted in accordance with the clients’ instructions. Yes. You would normally expect, if someone was putting money into an account on a condition, that they tell you what the condition is and, had they done so, we would have adhered to it, but it wasn’t happened. We haven’t done anything wrong. We were instructed to do a matter; we did the matter. At no point, never, was anything communicated to us to the contrary, before, during or after.”

70. D2 denied that the payments out of the plaintiffs’ moneys constituted D2’s acting or participation in the misapplication of the plaintiffs’ moneys or any breach of trust.  D2 averred that the plaintiffs ceased to have any beneficial interest in the plaintiffs’ moneys upon payment of the same out from D2’s account for the purposes of the Company’s business and/or in accordance with the Investment Money Arrangement upon which the purpose or basis of the plaintiffs’ payment was fulfilled.  D2 did not have sufficient knowledge to render it liable as a constructive trustee.  D2 did not receive the plaintiffs’ moneys beneficially but only as agent of the Company.

71. D2 pleaded that even if D2 was found to be in breach of trust, D2 ought fairly to be excused pursuant to section 60 of the Trustee Ordinance (Cap 29) as D2 had acted honestly and reasonably.

72. D2 called IDW and EL to testify at the trial.  IDW gave evidence for both actions and EL only gave evidence for DCCJ 3388/2005.  IDW signed witness statements dated 26 March 2012 and supplemental witness statements dated 22 July 2013 in both DCCJ 3388/2005 and 3389/2005.  EL signed a witness statement dated 26 March 2013 in DCCJ 3388/2005.  At the material times IDW was a partner and EL a solicitor of D2.

DCCJ 3388/2005

73. IDW adopted both his witness statement and supplemental witness statement as his evidence-in-chief at the trial.

74. IDW is a founding partner of D2 which was established in 1999.  He said that D2 started to have dealing with D1 in about late 2002

75. IDW said in his supplemental witness statement that he had previously acted for a bar called “Old China Hand” in Wan Chai.  D1 was one of the shareholders of the Old China Hand and they got to know each other since then.

76. In his supplemental witness statement, IDW told the court about a previous fundraising exercise of the Company made in December 2002 (the “1^st Fundraising”).

77. IDW said that in about December 2002, D1 told him that D1 would like to start a bar business in Wan Chai.  On 13 December 2002, IDW had a meeting with D1 and D1’s partner Mr Paul Watt (“Mr Watt”).  They told IWD that they found an investor for their business.  They discussed that D1 would use D2’s bank account to receive investment funds as they had done before with the Old China Hand.  The funds could only be withdrawn after a minimum amount of $2 million had been obtained.  Mr Albert Hausamann (“Mr Hausamann”), an investor proposed to invest $800,000, joined them in the middle of the meeting.

78. After the meeting, D2 issued a draft letter of understanding to various investors of the bar setting out the purpose of the funding and the withdrawal requirement.  D2 stated in the draft letter that it did not act for the investors.

79. D2 also issued a retainer letter dated 17 December 2002 to D1 and Mr Watt (the “Retainer Letter”).  In the Retainer Letter, it was stated that the role of D2 was as follows:-

(1) preparing documents to set up a company for the bar;

(2) acting as company secretary for the company to be formed;

(3) providing an escrow account for the business before it was incorporated;

(4) releasing funds to D1 for the purposes of the business after the investors had deposited $2 million into D2’s client account;

(5) advising D1 in general as to the setting up of the business.

80. The 1^st Fundraising was not successful.  D1 did not raise enough funds to start the business.  The investors asked for refund.  D1 instructed D2 to make refund to the investors which D2 did.

81. D1 did not give up the idea of setting up a bar in Wan Chai after the failure of the 1^st Fundraising.  D1 instructed D2 to review the tenancy agreement for the bar and to prepare the necessary documentation for incorporating the company for the business.  The Company was formed on 16 July 2003.

82. IDW said in his supplemental witness statement that:-

“16.  I had some discussions with the 1^st Defendant regarding the establishment of the bar.  The role of TDW (ie D2) remained as set out in the retainer letter dated 17 December 2002 (ie the Retainer Letter).  However, the only difference was that the 1^st Defendant did not set any withdrawal threshold to the fundraising, meaning that he could withdraw funds from TWD client’s account any time (the “Subsequent Arrangement”).  The new investors would have to deposit funds directly to TDW’s client’s account, and whenever the 1^st Defendant needed money for setting up the bar, he would provide a written instruction to TDW.  Once TDW received the instructions, it would release the funds to the 1^st Defendant accordingly.” 

83. IDW said that P1 deposited the P1’s Investment to D2’s client account on about 21 January 2004 for the purpose of investing in the business of the Company.  D2 issued a receipt to P1 dated 21 January 2004 stating that: “Received the sum of HK$500,000.00 by transfer (Hongkong and Shanghai Bank) in settlement investment monies.”  IDW said that the P1’s Investment was clearly for the business of the Company.  Since D2 sent out the aforesaid receipt, D2 received no demands, instructions or complaints from P1 regarding the wording of the receipt or the use of the fund until P1 commenced DCCJ 3388/2005.

84. IDW said that D2 had never acted for P1 and EL had at the meeting held on 21 January 2004 (ie the 2^nd Meeting) told P1 that he should seek independent legal advice in this matter.

85. IDW said that it was never discussed that D2 should not have used the P1’s Investment before the shareholders agreement was signed or share certificate was issued.  He said that no such condition was ever expressly or impliedly made.  IDW said that D2 never received instructions to finalize the shareholders agreement or to issue share certificate of the Company to P1.

86. IDW said that D1 would ask D2 to remit funds to him to pay off overhead expenses of the Company.  D1 would give D2 copies of the bills that the Company needed to settle with a covering letter setting out the purpose of the expenses.  D2 would then remit funds as instructed and would record the expenses.

87. Suppliers of the Bar started to claim against the Company in September 2004.  The Bar eventually failed in about October/November 2004.  A resolution was passed in January 2005 to put the Company in creditors’ voluntary liquidation.

88. P1 filed a complaint against D1 to the police and instructed the plaintiffs’ solicitors to inquire with D2 on the P1’s Investment.

89. On 23 December 2004, the plaintiffs’ solicitors wrote to D2 stating that no instructions were given to D2 to release the P1’s Investment for the Company and demanded D2 to return the money.  D2 relied on 3 January 2005 that the P1’s Investment was not held to P1’s order but was to be used in the business of the Company and that D2 were just an agent providing secretarial services on instructions of D1.  D2 said that it did not owe a duty to P1.

90. IDW said that D2 provided certain legal services to the Company and at no time was it instructed by or made representation to P1.  There was no contractual or other relationship between P1 and D2. 

91. IDW further said in his supplemental witness statement  that:-

“18. I understand that the 1^st Defendant communicated with the fellow investors on a regular basis by way of email, and informed them about the development of the bar. I note that Mr Hans-Juergen Boewe (ie P2), the Plaintiff of DCCJ 3389 of 2005, was copied in the emails. I believe it is the investors’ understanding that the funds were used by the 1^st Defendant on the bar immediately after they were deposited to TDW’s account without any restrictions and conditions, and they had never made any complaints to TDW for releasing the funds.

19. In any event, the funds deposited by the investors were all transferred out to the 1^st Defendant and the Company.  TDW held no funds on account for the 1^st Defendant or the investors.  TDW had no beneficial interest in any of the funds from the investors, and it had never known or agreed to be the trustees of the Plaintiff in relation to the funds he paid to the Company.  As [sic] no time did it ever act for the shareholders/investors, all of whom were told to take separate legal advice.” 

92. EL adopted his witness statement as his evidence-in-chief at the trial.

93. EL said that in about 2003 D2 was instructed to assist in setting up a company and to prepare a shareholders agreement for D1.

94. On 9 January 2004, he sent the Draft Agreement to D1 for discussion purposes.

95. On 21 January 2004, he met D1 and P1 at D2’s office.  During the meeting (ie the 2^nd Meeting), EL informed P1 that D2 acted for D1 in this matter and therefore P1 should seek independent legal advice. (See p 855 of Bundle 2B)

96. P1 had a few comments to the Draft Agreement and requested the Draft Agreement be amended to incorporate his comments.  EL said that according to his attendance note for the 2^nd Meeting, he and D1 did not tell P1 that he needed to deposit $500,000 with D2.  EL further said that P1 did not say anything during the 2^nd Meeting about his purpose for paying the P1’s Investment to D2’s account. 

97. On 21 January 2004, EL sent the revised Draft Agreement to D1 incorporating the comments from the 2^nd Meeting.  D2 did not receive any instructions from D1 or the Company to finalize the shareholders agreement or to issue any share certificate of the Company.

98. EL said that since the 2^nd Meeting, he did not meet P1 on this matter again.

DCCJ 3389/2005

99. IDW adopted his witness statement and supplemental witness statement for this case as his evidence-in-chief at the trial.

100. IDW said that he did not attend the meeting between P2 and D1. According to his records, he had not met P2 in relation to P2’s investment in the Bar.

101. On 26 November 2003, Mr Thorwith sent an email to D2 confirming that a new investor (ie P2) was found for the Company.  Mr Thorwith confirmed that the investment sum was $250,000.

102. On about 8 December 2003, P2 paid the P2’s Investment by cheque to D2. P2 did not specify any condition precedent in using the fund.  D2 issued a receipt to P2 dated 30 December 2003 in relation to the P2’s Investment stating that: “Received the sum of HK$250,000.00 by cheque deposit from client being investment monies.”  The receipt was sent to P2 under cover of a letter dated 3 December 2004.  (See p 207 of Bundle 3)  IDW said that the fund was clearly for the business of the Company.  Since D2 sent out the receipt, D2 received no complaints from P2 regarding the wording of the receipt or the use of the fund until P2 commenced DCCJ 3389/2005. 

103. IDW also said that it was never discussed that D2 should not have used the P2’s Investment before the shareholders agreement was signed or share certificate was issued.  He said that no such condition was ever expressly or impliedly made.  IDW said that D2 had never acted for P2 and that D2 never received instructions to finalize the shareholders agreement or to issue share certificate of the Company to P2. 

104. IDW said that emails sent to investors on re-capitalization and financial difficulties of the Company were copied to P2. (See pp 965-966 of Bundle 2B)

105. After the business of the Bar failed, P2 also filed a complaint against D1 to the police and instructed the plaintiffs’ solicitors to inquire with D2 on the P2’s Investment.

106. On 23 December 2004, the plaintiffs’ solicitors wrote to D2 stating that no instructions were given to D2 to release the P2’s Investment for the Company and demanded D2 to return the money.  D2 relied on 3 January 2005 that the P2’s Investment was not held to P2’s order but was to be used in the establishment of a business and that D2 were just an agent providing secretarial services on instructions of D1.  D2 said that it did not owe a duty to P2.

107. IDW repeated D2’s position as set out in para 91 above.

108. In his supplemental witness statement filed in DCCJ 3389/2005, IDW repeated his evidence on the 1^st Fundraising and the background leading to the second round of fundraising involving the plaintiffs, the subject matters of these proceedings.

Discussion and rulings

109. The parties did not have serious disputes on the following basic facts for these cases:-

(1) D1 was a director and shareholder of the Company;

(2) the plaintiffs had agreed to invest in the Company and to subscribe for shares in the Company;

(3) D2 were solicitors acting for D1 and the Company at the material times;

(4) D2 through a service company also acted as company secretary of the Company;

(5) the plaintiffs had paid the P1’s Investment and the P2’s Investment into D2’s client account;

(6) D2 had paid out the plaintiffs’ moneys pursuant to instructions received from D1 acting for the Company;

(7) no shares in the Company had been allotted to the plaintiffs;

(8) no shareholders agreement for the Company had been signed;

(9) the Company had been put into liquidation in January 2005; and

(10) P1 lost the P1’s Investment and P2 lost the P2’s Investment.

110. The matter for trial is whether D2 is liable to return the plaintiffs’ moneys to them or to compensate the plaintiffs for their losses.

111. In their opening submissions, the plaintiffs’ counsel put forward the following three causes of action against D2:-

(1) a claim in restitution on the basis of money had and received because of total failure of consideration;

(2) recovery on the basis of conversion; and

(3) breach of trust in the use of the plaintiffs’ moneys other than for the Plaintiffs’ Purpose.

112. At the first day of the trial, the plaintiffs’ counsel confirmed that the plaintiffs would not pursue their claims based on conversion.  In the premise, I dismiss the plaintiffs’ claims for conversion against D2 and shall only deal with the other two causes of action claimed by the plaintiffs in the judgment below.  In the plaintiffs’ closing submissions, it was state that the plaintiffs’ claim for restitution was alternative to their claims based on Quistclose trust.  In such case, I shall deal with the plaintiffs’ breach of trust claim before I discuss their claim for restitution.

Breach of trust

113. Before the court looks into whether D2 was guilty of breach of trust, the court has to determine whether a trust had been constituted and if so, what the terms of the trust were.

The legal principles

114. As stated above, the central issue in dispute between the plaintiffs and D2 is whether the plaintiffs’ moneys paid into D2’s client account were immediately at the free disposal of D1 and/or the Company.  The trust claimed by the plaintiffs having been breached was one known as Quistclose trust.  The name comes from the case Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.

115. In the Quistclose case a loan was made by the respondent (ie Quistclose Investments Ltd) to Rolls Razor Ltd (“RRL”).  The resolution passed by the board of the respondent expressly stated that the loan was advanced to RRL for the purpose of RRL paying the final dividend due on 24 July 1964.  The respondent drew a cheque in favour of RRL for the loan amount.  RRL deposited the cheque to the appellant bank with a covering letter requesting the bank to open a new “ordinary dividend share account” for the cheque to be credited to this new account.  The covering letter told the bank that the cheque was for the total amount of dividend due on 24 July 1964 and that “this amount will only be used to meet the dividend due on July 24, 1964”.  Before sending the cheque to the bank, a director of RRL called a joint manger of the branch of the bank at which RRL held its account informing the bank manager that RRL had made arrangements with someone to lend or provide money to RRL to pay the dividend due to be paid by RRL on 24 July 1964.  The aforesaid covering letter was sent to the respondent for the respondent to enclose its cheque in it.  The cheque with the aforesaid covering letter was then sent to the said bank manager who arranged to open the new account requested and to credit the cheque to that new account.  RRL was put into liquidation before the dividend was paid out.  The bank set off the credit balance in the new dividend account against part of the debit balance on RRL’s other accounts.  The respondent demanded the bank to repay the aforesaid sum advanced by the respondent to RRL.  The House of Lords held that the mutual intention of the respondent and RRL and the essence of the bargain between them was that the sum advanced should not become part of the assets of RRL but should be used exclusively for payment of those entitled to the dividend.  A necessary consequence from this had to be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondent.  Lord Wilberforce said at p 580C-D that:-

“That arrangements of this character for the payment of a person’s creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.”

116. His Lordship referred to the following judgment of Abbott CJ in Toovey v Milne (1819) 2 B&A 683 at 684 as authority:-

“I thought at the trial, and still think, that the fair inference from the facts proved was that this money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid. That has been done in the present case; and I am of the opinion that that repayment was lawful, and that the nonsuit was right.”

117. In the Quistclose case, the court found that the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and there was no reason why the law should not give effect to it.  In that case, the court accepted that it was necessary to show that the bank had notice of the trust or of the circumstances giving rise to the trust at the time when the bank received the money but not on a later date.  The court found that the aforesaid telephone conversation between RRL’s director and the bank manager and the covering letter to the cheque were sufficient to give the bank notice that the money was trust money and not assets of RRL.  The court also took into account the fact that the bank was aware that RRL could not provide the money for the dividend and that this would have to come from an outside source and that the bank never contemplated that the money so provided could be used to reduce RRL’s existing overdraft with the bank.

118. The Quistclose case concerned a loan for a specific purpose. However, the coverage of Quistclose trust does not stop there.  Lord Millett held “the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust” at Twinsectra Ltd v Yardley [2002] 2 AC 164 at 192H.  His Lordship further observed at 192F-G that:-

“I do not think that subtle distinctions should be made between ‘true’ Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other’s money for a stated purpose, is not free to apply it for any other purpose, and must return it for any reason the purpose cannot be carried out.”

119. The plaintiffs’ counsel submitted that in determining whether the plaintiffs’ moneys were subject of a Quistclose trust, the court should consider the following matters:-

(1) whether the parties intended the money to be at the free disposal of the recipient, or whether the freedom to dispose of the money was excluded by an arrangement that the money should be used exclusively for the stated purpose;

(2) the subjective intention of the parties was irrelevant.  What is relevant was the intention to enter into an arrangement which had the effect of creating a trust;

(3) it is not a pre-condition incidental to the existence of a Quistclose trust that the money should be kept in a segregated account.  Rather, the retention of title to the money to the payer was necessary. 

120. The plaintiffs’ counsel further submitted that the lack of connexion/relationship between the payer and the recipient would not per se negate the existence of a Quistclose trust.  They contended that Quistclose trust was capable of extending to tri-partite situation and that over-rigid characterization of the Quistclose trust was not necessary or preferred.

121. The essence of a Quistclose trust is that money was paid over and there was a mutual intention that the money was for a particular purpose.  The payee is holding the money pending its applicable for the intended purpose. Pending application of the money for the intended purpose, the beneficial interest in the money remains in the payer.  Whether there was such mutual intention is ascertained from the objective circumstances of the case.   

122. In Bieber v Teathers Ltd [2013] 1 BCLC 248, Patten LJ summarized the applicable principles on Quistclose trust at 254f-255g by referring to the House of Lords decision in the Twinsectra case (supra) as follows:-

(1) the question in every case is whether the payer and the recipient intended that the money passing between them was to be at the free disposal of the recipient;

(2) the mere fact that the payer had paid the money to the recipient for the recipient to use it in a particular way is not of itself enough;

(3) it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of the payer and the recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer;

(4) the mechanism by which this is achieved is a trust giving rise to fiduciary obligations on the part of the recipient which a court of equity will enforce;

(5) it is a resulting trust in favour of the payer with a mandate granted to the recipient to apply the money paid for the purpose stated.  The key feature of the arrangement is that the recipient is precluded from misapplying the money paid to him.  The recipient has no beneficial interest in the money: generally the beneficial interest remains vested in the payer subject only to the recipient’s power to apply the money in accordance with the stated purpose.  If the stated purpose cannot be achieved then the mandate ceases to be effective, the recipient simply holds the money paid on resulting trust for the payer, and the recipient must repay it;

(6) the subjective intentions of payer and recipient as to the creation of a trust are irrelevant.  It is sufficient that they intend to enter into the relevant arrangement; and

(7) the particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms.

The issues to be determined in these cases

123. In these cases, the court has to deal with the following issues in determining the plaintiffs’ breach of Quistclose trust claim:-

(1) whether the moneys paid by the plaintiffs into D2’s client account were subject to Quistclose trusts;

(2) if so, the role of D2 in the Quistclose trusts; and

(3) whether D2 had incurred liabilities to the plaintiffs for paying out the plaintiffs’ moneys in accordance instructions from D1 and/or the Company.

Whether there were Quistclose trusts

124. There is no dispute that the plaintiffs paid their moneys into D2’s client account for the purpose of investing in the Company.  IWD agreed at the trial that the plaintiffs’ moneys were for investment in the Company.  There was also no dispute that the way for the plaintiffs to invest in the Company was to subscribe for shares in the Company.  As Lord Millett stated in the Twinsectra case (supra) at p185E that: “A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose.”  The fact that the plaintiffs’ moneys were paid into D2’s client account for the specific purpose of investing in the Company without more was insufficient to create trusts.  The plaintiffs’ case went further.  The plaintiffs said that their moneys were not at the free disposal of the Company when they were paid into D2’s client account.  The moneys were available to be used by the Company only after the Plaintiffs’ Purpose had been fulfilled.  There was no dispute that the Plaintiffs’ Purpose had not been fulfilled and could no longer be fulfilled as the Company had been put into liquidation.

125. The issue needed to be dealt with is whether it was the mutual intention of the parties concerned that the plaintiffs’ moneys paid into D2’s client account were subject to the Plaintiffs’ Purpose.  In tri-partite situations as the cases before me, the court has to examine the mutual intention from two perspectives, namely: (1) between the plaintiffs and D1; and (2) between the plaintiffs and D2.

126. Whether there was such mutual intention is to be determined through examination of the objective circumstances and the subjective intentions of the parties are irrelevant.  This is not to say that the court will superimpose certain purposes for usage of fund as mutual intention between the parties from analyzing the objective circumstances even if the parties do not have such purposes in mind.  Lord Millett had pointed out in the Twinsectra case (supra) at 185B-C that:-

“A settler must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters 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.”

127. When it was said that the subjective intentions of the parties were irrelevant, it only meant that whether the parties had subjective intentions to form a trust were irrelevant.  If the properly construed terms upon which or the objectively ascertained circumstances in which payer and recipient enter into an arrangement have the effect of creating a trust, then it is not necessary that either payer or recipient should intend to create a trust.  The parties have to have the intention of restricting the usage of the fund for a particular purpose or in a particular way and returning the fund to the payer if the fund is not so used.  The objective circumstances are to determine whether the mutual intention of the parties was that pending application of the fund for the specified purpose, the beneficial interest of the fund should still remain with the payer.  This retention of beneficial interest gives rise to a trust, without which, application of fund not in accordance with contractual agreement will only give rise to a breach of contract claim.

Quistclose trusts between the plaintiffs and D1/the Company?

128. There was no dispute that the plaintiffs’ moneys were intended for their investments in the Company.  The issues were whether it was the mutual intention of the plaintiffs and D1 that the plaintiffs’ moneys were not at the immediate free disposal of D1 and/or the Company but subject to the Plaintiffs’ Purpose and the beneficial interest of the moneys should remain in the plaintiffs until the Plaintiffs’ Purpose was fulfilled.

129. P1 testified at the trial that his understanding was that his money would be held by D2 till the Plaintiffs’ Purpose was fulfilled.  P1 said that he had told D1 of the Plaintiffs’ Purpose prior to the meetings at D2’s office.  He said that he had the Plaintiffs’ Purpose in mind from the very beginning as it was very important to him.

130. P1’s evidence showed that he had instructed his banker on 20 January 2004, ie one day before the 2^nd Meeting, to prepare to remit the P1’s Investment to D2’s client account.  (See p 870 of Bundle 2B)  In his email to his banker, P1 stated that:-

“As discussed I would be most grateful if you could organize the necessary document in preparation for making a 500,000 (five hundred thousand dollars) Hong Kong dollar currency transfer to Tanner De Witt – Client Acc as listed below.

I will call you between 1:00/2:00 pm after your lunch tomorrow, to confirm the out come of my meeting and my ultimate decision of when to release the above funds.”

131. In his supplemental witness statement, P1 stated that:-

“5. As requested by Mr Jeans [D1], I gave instructions to Royal Bank of Scotland in Hong Kong with which I had an account, to make remittance of HK$500,000.00 [the P1 Investment] to Tanner de Witt [D2] and understood that this would be done by the following business day.”

132. There was no dispute that P1 had no contact with D2 other than in the two meetings.  It was neither the case of P1 nor the case of D2 that there was discussion in the 1^st Meeting for P1 to pay the P1’s Investment into D2’s account.  It could be seen from the above evidence that prior to P1 attending the 2^nd Meeting he had already made arrangement to pay the P1’s Investment to D2’s client account.  There had to be discussions and agreement between P1 and D1 on such arrangement before P1 sent his said email to his banker.  As at January 2004, the Company had already had its own bank accounts.  The fact that the agreed arrangement between P1 and D1 was for P1 to pay the P1’s Investment into the client account of D2 instead of the bank accounts of the Company supported P1’s contention that D1 knew and agreed that the P1’s Investment was subject to the Plaintiffs’ Purpose and not to be at the immediate free disposal of D1 and/or the Company pending fulfillment of the Plaintiffs’ Purpose.  D1 had not attended the trial to give evidence to rebut P1’s evidence.  (I had on 18 July 2013 refused to grant leave for D2 to adduce witness statement from D1.)  I accept P1’s evidence and find that the mutual intention of P1 and D1 was that the P1’s Investment paid into D2’s client account was subject to the Plaintiffs’ Purpose and was not at the immediate free disposal of D1 or the Company unless and until the Plaintiffs’ Purpose had been fulfilled.  If the Plaintiffs’ Purpose was not fulfilled, the P1’s Investment had to be returned to P1.  I find that the objective circumstances of the transaction supported P1’s contention that a Quistclose trust was created between P1 and D1/the Company in favour of P1 in respect of the P1’s Investment.

133. P2 said at the trial that he had told D1 of the Plaintiffs’ Purpose and D1 had told him to pay his moneys into an “escrow account”.  He said that he had the concept of “escrow account” in mind from the very beginning as it was very important to him.  P2 said in cross-examination that “without escrow account I will not pay any single dollar to anybody else.”

134. Mr Thorwith, who represented the Company in discussing the investment with P2, had in the email sent to Ms Lee of D2 on 26 November 2003 informed Ms Lee that they had found a new investor for the Company but the new investor (ie P2) required a document in D2’s letterhead setting out the amount of the P2’s Investment and the bank account details of D2.  The document had to be signed by IDW, Mr Thorwith and P2.  Mr Thorwith in his email said that he would pick up the document from D2.  He reiterated that the document should have been signed by IDW when he picked it up. (See p 245-B of Bundle 3)  Although the content of the requested document as stated in Mr Thorwith’s said email might not amount to an escrow agreement, the email did show that P2 had requested a document signed by the lawyer acting for D1/the Company in receiving the P2’s Investment.  The fact that P2 requested that the document had to be signed by the lawyer acting for D1/the Company supported P2’s contention that he required the P2’s Investment to be held in escrow pending the fulfillment of the Plaintiffs’ Purpose and such request of P2 was agreed and accepted by D1/the Company through Mr Thorwith.  This confirmed that there was mutual intention between P2 and D1/the Company that the P2’s Investment paid into D2’s client account was subject to the Plaintiffs’ Purpose and it was not at the immediate free disposal of D1/the Company unless and until the Plaintiffs’ Purpose had been fulfilled.  I find that the objective circumstances of the transaction supported P2’s contention that a Quistclose trust had been created between P2 and D1/the Company in favour of P2 in respect of the P2’s Investment.

135. In the premise, I find that Quistclose trusts were created in favour of the P1 and P2 between the plaintiffs and D1/the Company in respect of the P1’s Investment and the P2’s Investment respectively.

Quiistclose trusts between the plaintiffs and D2?

136. The plaintiffs had paid the P1’s Investment and the P2’s Investment into D2’s client account.  I have found that they made the payments with the intention that their moneys would be subject to the Plaintiffs’ Purpose.  I have also found that the objective circumstances supported that Quistclose trusts had been created between the plaintiffs and D1/the Company.  The claims of the plaintiffs against D2 herein were for breach of trust by D2.  Did D2 hold the plaintiffs’ moneys as trustee?  If so, were they Quistclose trusts?  Did the creation of Quistclose trusts between the plaintiffs and D1/the Company mean that Quistclose trusts had also been created between the plaintiffs and D2?

137. Lord Hoffmann pointed out in the Twinsectra case (supra) [2002] 2AC 164 at 168F that: “Money in a solicitor’s client account is held on trust. The only question is the terms of that trust.”  One of the essential terms of such trust is on whose behalf the solicitors are holding the money.  It is common ground that the plaintiffs’ moneys paid into D2’s client account were not for D2’s use.  The question is whether there was a mutual intention between the plaintiffs and D2 that the plaintiffs’ moneys paid into D2’s client account were subject to the Plaintiffs’ Purpose and not at the immediate free disposal of D2 in accordance with instructions from its client, ie D1/the Company.  Until the Plaintiffs’ Purpose was fulfilled, the beneficial interest of the moneys remained in the plaintiffs.  If so, D2 would be holding the plaintiffs’ moneys for the plaintiffs until fulfillment of the Plaintiffs’ Purpose.  This has to be determined in the objective circumstances of the case.

138. P1 said that his understanding was that his money would be held by D2 till the day he received shares in the Company and a signed shareholders agreement.  He agreed during cross-examination that if he had an intention or had a certain understanding, it was crucial for him to communicate that to the counterparty to make sure that they also knew what his understanding and what his thinking was about.  P1 agreed that his aforesaid understanding had never been put in writing or communicated to D2.  P1 said under cross-examination that he could not recall whether he had told D2 not to release his moneys.  P1 also confirmed during cross-examination that his account of the meetings at D2’s office in his witness statement and supplemental witness statement was a complete and accurate account of the meetings to the best of his knowledge.  There was no mention in P1’s witness statement or supplemental witness statement of P1 telling D2 at any of the meetings not to release the P1’s Investment to the Company.  There was also no mention of D1 saying at any of the meetings that the P1’s Investment would be held by D2 pending issuing of shares of the Company or signing of the shareholders agreement.

139. It is common ground that P2 had never had direct contact with anyone at D2 until the end of 2004 when P2 chased D2 for receipt for the P2’s Investment paid into D2’s client account.  It was not the case of P2 that he had communicated to D2 in any ways that the P2’s Investment was subject to the Plaintiffs’ Purpose.

140. The plaintiffs contended that in all the admissible circumstances, there was an objective intention of the parties that the plaintiffs’ moneys were paid into D2’s client account to be held to the plaintiffs’ order pending fulfillment of the Plaintiffs’ Purpose.  Alternatively, the circumstances of the payments of the plaintiffs’ moneys and D2’s knowledge acquired in the course of acting as the Company’s agent in connexion with matters of the Company and its business gave rise to the consequence that D2 had to objectively be taken to have accepted a binding obligation to the plaintiffs not to apply the moneys save for the Plaintiffs’ Purpose.

141. The plaintiffs’ counsel submitted that the plaintiffs’ moneys were deposited into D2’s account for the Plaintiffs’ Purpose.  It per se negated any intention on the part of the plaintiffs to pass away beneficial interest in their moneys and given the nature of a client account and the circumstances of the payments, the plaintiffs’ moneys were immediately impressed with a trust upon receipt into D2’s client account.  They contended that application of the plaintiffs’ moneys by D2 for purposes other than for the Plaintiffs’ Purpose constituted a breach of trust.

142. In Moseley v Cressley’s Company [1865] LR 1 Eq 405 the claimants paid deposits to the defendant for applications for the defendant’s shares. The defendant’s prospectus stated that: “Deposits returned if no allotment made.”  The claimants argued that a trust had been created for the deposits to be returned to them if no allotment made.  Sir W Page Wood VC said at 409-410 that:-

“But if the object had been to create a lien of this kind, the obvious way of doing so would have been to have said in the prospectus that there would be a lien on the deposits until the company was established, or that it was to be set apart as a trust fund in the names of the trustees, to be returned in the event of the company not being established

…… The cases cited by Mr Karslake shew that the Plaintiffs have a legal remedy for the return of their deposits.  They paid their money on the faith that it should be returned if not required.  Upon the faith of these payments the company gets credit, and people trust them.  But, says Mr Karslake, these moneys were not the moneys of the company until the Plaintiffs got their shares.  But that is not so; they were not retained by the promoters, they were paid in to the credit of the company at their bankers.  What was intended to have been done seems to have been done; and there was no trust created, it was merely a debt.”

143. The facts that D2 knew that the plaintiffs’ moneys paid into D2’s client account was for the purpose of investing in the Company and that shares of the Company had not yet been allotted to the plaintiffs, do not necessarily negate intention on the part of the plaintiffs to pass away beneficial interest in their moneys as contended by their counsel.  D2’s counsel submitted that money paid into a company for a projected issue of shares (in the absence of a special arrangement creating a trust) became the property of the company even if the shares were not issued.  He referred to Moseley v Cressley’s Company (supra) and Re Associated Securities Ltd[1981] 6 ACLR 248to support his aforesaid contention. 

144. In Re Associated Securities Ltd, Needham J after considering the Quistclose case (supra) said at 254 that:-

“It is plain that the House of Lords [in the Quistclose case] took the view that the principle being applied in that case did not apply (necessarily) to cases of promises to allot shares. In order to find a trust relationship in such cases it is necessary, in my opinion, to find ‘some special arrangement creating’ it,”

145. His Lordship further noted that in Re Nanwa Gold Mines Ltd [1955] 1 WLR 1080 Harman J conceded that a mere promise to repay was not sufficient to create a trust for the subscription money for shares as in the Moseley case and the mere placing of the money in separate account was also insufficient.  It can be seen that money paid by subscriber to a company for subscription for shares in the company will not usually be considered as subject to a Quistclose trust before the shares are allotted even when such money was placed in separate account.  Some sort of expressed terms as used in the Re Nama case had to be presented.  In the Re Nama case, the share application form contained the following expressed terms:-

“Should either of these conditions [passing of resolution at general meeting of the company and subsequent court sanction to reduction of capital of the company] not be fulfilled, application moneys will be returned and meanwhile will be retained in a separate account.”

146. Harman J held that the above quoted words constituted the company a trustee of the sums paid if the conditions were not fulfilled.  No words to similar effect had been put down in writing or even uttered between the plaintiffs and D2 before or when they paid their moneys to D2’s client account.

147. The plaintiffs’ counsel referred to documents produced during the 1^st Fundraising to substantiate their contention that the plaintiffs’ moneys paid into D2’s client account were held to the plaintiffs’ order until shares in the Company were allotted to them.

148. The documents relied on by the plaintiffs’ counsel included the Retainer Letter which stated that as a measure of security for the investors, “you [ie D1] have given me [ie IDW] irrevocable instructions that any and all money placed into this firm’s [ie D2’s] client account by proposed investors will remain in that account (to their order) until such time as the total amount of cash in the account reaches HK$2,000,000.00”. (emphasis added) (See pp 305-309 of Bundle 2A)

149. The plaintiffs’ counsel also referred to a letter of understanding dated 17 December 2002 signed by Mr Hausamann, one of the investors in the 1^st Fundraising who had also invested in this second round of fundraising but had not lodged any claim for his lost investment.  Mr Hausamann stated in his 2002 letter that: “I further confirm that I will shortly be giving to you the sum of HK$800,000.00 to purchase shares in the Proposed Company once it is formed, and this should equate to a shareholding of 20% in the Proposed Company” and “[t]he said payment of HK$800,000.00 represents an advance against payment for my said shareholding in the Proposed Company.  I confirm that you should retain this money in your firm’s client account, held to my order, until such time as there has been received into your client account the total sum of HK$2,000,000.00 from all prospective investors (including myself).” (emphasis added) (See pp 298-299 of Bundle 2A)

150. The plaintiffs’ counsel also referred to the attendance note of a meeting held on 13 December 2002 between, IDW, D1 and Mr Watt (p 297 of Bundle 2A).  The attendance note recorded that “it was agreed that any investment monies paid to this firm [ie D2] would be held to the order of the shareholders until such time as a minimum had been obtained.” (emphasis added)

151. The plaintiffs’ counsel submitted that no documentary evidence was adduced to support D2’s contention that the arrangements for fundraising involving the plaintiffs were different from that of the 1^st Fundraising.  The plaintiffs’ counsel contended that the plaintiff’s moneys paid into D2’s client account were also held to the order of the plaintiffs as in the 1^st Fundraising and could not be withdrawn unless and until the Plaintiffs’ Purpose had been fulfilled.

152. The plaintiffs’ counsel said that IDW’s evidence was that it was reasonable arrangement in light of the uncertainties surrounding the 1^st Fundraising (ie the Company had not been incorporated, the business had not yet started and whether the minimum amount of $2,000,000 could be raised was unknown) and there was nothing improper or unusual for a solicitors’ firm to use its client account as an escrow account.  The plaintiffs’ counsel submitted that it was correspondingly also a reasonable assumption for the investors who were not D2’s clients to expect the solicitors’ client account to be used merely as an escrow account in light of the uncertainties of the underlying transaction (ie the terms of the shareholders agreement and the percentage of shareholdings of the plaintiffs had not been finalized).

153. IDW’s evidence was that the escrow arrangement for the 1^st Fundraising was suggested by him.  He explained at the trial that he did not make similar suggestion for the second round of fundraising due to change of circumstances including the facts that the Company had been established and had commenced business.  The evidence in respect of the 1^st Fundraising showed that if D2 was holding funds in escrow account, D2 would have prepared documents setting out the arrangements and asked the parties concerned to sign.  The plaintiffs’ alleged purpose was different from the condition and restriction for the 1^st Fundraising.  If it was D2’s understanding that the investors’ funds paid to D2’s client account in the second round of fundraising were subject to the Plaintiffs’ Purpose, D2 would have asked the investors to sign letters of understanding setting out the Plaintiffs’ Purpose as condition for D2 to hold the funds especially when the plaintiffs were not parties to the 1^st Fundraising.  The documents referred to by the plaintiffs’ counsel in respect of the 1^st Fundraising expressly stated that the funds were held by D2 to the order of the investors.  No such documents were produced in respect of the P1’s Investment and the P2’s Investment paid into D2’s client account for this second round of fundraising.  This clearly showed that the arrangements for receiving funds from the plaintiffs were different from the arrangements for the 1^st Fundraising.  The plaintiffs herein were not parties to the 1^st Fundraising.  They had no knowledge of the previous escrow arrangement and D2 had made clear that it did not act for the plaintiffs.  The plaintiffs could not have been expecting their moneys to be subject to the arrangements applicable in the 1^st Fundraising when at the material times they had no knowledge of the 1^st Fundraising.

154. I am of the view that the arrangements for the 1^st Fundraising not only did not assist the plaintiffs, they in fact worked against the plaintiffs’ case.

155. From the general ledger of D2’s client account on D1, it could be seen that some other investors had paid their investments to D2’s client account before the plaintiffs’ payments on 8 December 2003 and 21 January 2004. (See p 249 of Bundle 3)  It showed that Mr & Mrs Findlay paid $200,000 on 18 November 2003; Mr Sherriff also paid $200,000 on the same day; and Mr Hausamman paid $200,000 on 2 December 2003.  Mr Sherriff sent his payment cheque to D2 with a covering letter stating that (see p 743 of Bundle 2A):-

“I have been in touch with Roland [D1], and after reviewing the latest property and Business plan, I have decided to buy into the company. Please find enclosed a cheque for HKD 200,000. I look forward to receiving the share certificate and a copy of the agreement in the foreseeable future.

Trust all is well.”

156. The covering message from Mr Hausammann was simply one word: “Investment”. (See p 760 of Bundle 3B)  In respect of the payment from Mr & Mrs Findlay, only a cheque copy and a receipt were produced. (See pp 738-739 of Bundle 2A) None of these investment payments paid into D2’s client account suggested that the moneys were not at the immediate use of the Company.

157. Furthermore, moneys on account were paid into the same client account of D2 on 13 August 2003 and 22 August 2003.  These moneys were used to pay the Company’s expenses.  (See p 249 of Bundle 3)  One of the objective circumstances when the plaintiffs paid their moneys into D2’s client account was that the funds paid into this account were to be used by the Company to pay its operation expenses.  

158. The uncertainties referred to by the plaintiffs’ counsel were that the terms of the shareholders agreement and the percentage of the plaintiffs’ shareholdings in the Company had not been finalized.  The plaintiffs’ counsel contended that the plaintiffs understood that the reason to deposit their moneys into D2’s client account was because D2 would hold the moneys for them pending the finalization of the shareholders agreement and the allotments of shares in the Company to the plaintiffs.

159. The plaintiffs’ counsel urged the court to approach the issue as to whether Quistclose trusts had been established in these cases from the objective circumstances.  They submitted that the objective circumstances in these cases supported the plaintiffs’ cases.  The supporting objective circumstances included the fact that most of the fundamental aspects of the plaintiffs’ investments to be reflected in the shareholders agreement were not finalized and that it was reasonable to expect that a solicitor’s client account was to be used only as an escrow if there were material uncertainties as to the underlying transaction pursuant to which the payments were made.

160. The plaintiffs’ counsel submitted that the basic terms of the plaintiffs’ intended investments in the Company had not been agreed when the plaintiffs paid their moneys into D2’s client account.  These terms included percentage of shareholding, directors’ fees, dividends policies and power of D1 to appoint directors.  There was an “inherent unlikelihood” that the plaintiffs would agree to allow their moneys to be used by the Company immediately.

161. The plaintiffs’ counsel contended that D2 had knowledge that the shareholders agreement was not in final form when D2 received the plaintiffs’ moneys.  They submitted that therefore there was in effect no real certainty as to the final agreed terms on which the plaintiffs’ moneys were paid into D2’s client account and D2 should know that the terms on which the monies paid into D2’s client account remained unclear and therefore required clarification before D2 could accept instructions from D1 or the Company in relation to the moneys’ application.  Given the lack of communication between the plaintiffs and D2, save for the 1^st Meeting and the 2^nd Meeting in the case of P1, there was no real certainty as to what the plaintiffs were told by D1 and D2 should have communicated with the plaintiffs to ascertain the terms upon which they deposited moneys into D2’s client account.

162. The plaintiffs’ counsel contended that against the background of uncertainties regarding the fundamental terms of the plaintiffs’ investments as aforesaid, it was reasonable to assume, when the potential investors were told to deposit their moneys into a law firm’s client account, as opposed to the Company’s own bank account, that the role of the law firm was to hold the funds for the potential investors until the fundamental terms were agreed by all parties.  They referred to the following comments of Hildyard J made in Challinor v Juliet Bellis &Co [2013] EWHC 347 (Ch) at para 527(4)(a) to support their said contention:-

“(a) the objective probability, there being no sensible indication to the contrary, that the purpose of requiring an investor to make payment into the client account of the solicitor’s firm acting for the investment vehicle is to keep such monies separate and apart from the investment vehicle and under the control of the solicitor pending some further defined event.”

163. The plaintiffs’ counsel submitted that there was no necessity for the Company to use D2’s client account to receive the investment money as the Company had in fact opened its own bank accounts as early as November 2003. (See p 724 of Bundle 2A)  D2’s client account had been used by the Company akin to a “current account” of the Company.  The plaintiffs’ counsel submitted that this was something out of the ordinary as it was not in the daily course of business that commercial parties would expect to use a solicitors’ client account in such way with substantial costs being charged by the solicitors’ firm.  They submitted that the more out of the ordinary the arrangement was, the more it took to make sure that the relevant parties were actually aware of that.  They further submitted that when a company could deposit funds into its own bank account and do the book-keeping with minimum costs, the fact that the company requested a third party to deposit funds into a law firm’s account instead gave rise to a natural inference or an appearance that the law firm had a special role to play rather than being a mere conduit in the transaction.

164. IDW explained that D1 used D2’s account to gather and pay out investment moneys to take advantage of record-keeping and book-keeping functions performed by D2 as D1’s background was in construction and he was not comfortable with numbers.  IDW also referred to the Old China Hand transaction referred to in his supplemental witness statements in which D1 was also involved when similar arrangement was adopted and worked well.  IWD said that D2 had provided similar services to other clients in the course of setting up a business.

165. As D1 had been using company secretarial services provided by D2 through a service company, he might also use the record-keeping service of D2 for the investment moneys.  I do not accept that the mere fact that the plaintiffs’ moneys were paid into a solicitors firm’s client account suggests that trusts were intended in favour of the non-client payers.  D1 and D2 had similar arrangements in previous transaction (ie the Old China Hand transaction).  Such arrangements were in place and had been operating before the plaintiffs paid their moneys to D2’s account. (See paras 155-157 above)  I accept IDW’s evidence and find that the objectives circumstances in this case did not support the plaintiffs’ contention.

166. The plaintiffs’ counsel further submitted that it was not necessary to establish that the moneys held in the solicitor’s client account were held for a client of that firm in order for the solicitor to come under duties of trustees.  They further referred to the following passage of Hildyard J in the Challinor case (supra) at para 568A that:-

“…… The question is not who the firm’s client is, but on whose behalf or to whose order or instruction the money is being held. It is for the solicitor to establish that with certainty; and his or her duty is not to withdraw that money from the client account unless and until clearly authorised to do so by the person on whose behalf or to whose order or instruction the money is held. That accords with a basic principle of the law of trust and trustees, that a trustee must ensure that he or she knows who the beneficiaries are and the terms of the trust in question.”

167. The plaintiffs’ counsel submitted that in the event of any uncertainty as to what directions were given or were to be implied as to the release of or transfer of the moneys in a solicitor’s client account, such uncertainty did not go to undermine the trust but rather undermined the ability of the solicitor-trustee to do anything other than seeking direct instructions from the beneficiaries or remitting the moneys back to them.

168. The above contentions of the plaintiffs’ counsel were premised on the assumption that there were uncertainties as to the terms under which the plaintiffs’ moneys were paid into D2’s client account.  IDW’s evidence was that he considered that the moneys were moneys of D2’s client, ie D1/the Company. D2 had no uncertainty as to on whose behalf the moneys were being held.  The fact that the terms of the shareholders agreement had not been finalized did not necessarily mean that the moneys paid into D2’s client account had to be held on trust for the non-client payers in the absence of any instructions or indications from either D1 or the plaintiffs.

169. D2’s case was that the plaintiffs were not D2’s clients and had never communicated their intended restrictions for the usage of their moneys to D2. D2 only acted in accordance with instructions received from its clients, ie D1 acting for the Company.  The Company’s business had been in operation for some times and moneys held in D2’s client account for the Company had been used by the Company for its business operation prior to the plaintiffs deposited their moneys into that account.  Ms Lee in her email to Mr Thorwith dated 26 November 2003 stated that D2 was not in a position to make an offer to potential investors to inject funds to the Company.  D2 had clearly stated that it was not going to provide any services to the potential investors this time and yet the plaintiffs subsequently paid their moneys into D2’s client account on 8 December 2003 and 21 January 2004 without any indication that these moneys were subject to any conditions.  D2’s perception was that the moneys were moneys at immediate disposal of its client and there were no such uncertainties as contended by the plaintiffs.  This was supported by the objective circumstances of this case.

170. D2’s counsel submitted that in the Challinor case Hildyard J after considering the 9 objective factors set out by him in his judgment concluded that a Quistclose trust arose in that case.  What Hildyard J said in para 568A of his judgment was said in the context of a Quistclose trust having already been found by the court, that a duty then arose on the solicitors as trustees to ascertain the true beneficiary of the moneys in their client account.  This submission of D2’s counsel found support in para 566 of the judgment (ie three paragraphs before para 568A) when the learned judge stated that:-

“Having become a trustee for the Claimants upon receipt into her firm’s [the defendant solicitors firm’s] client account she [Mrs Bellis, one of the principals of the defendant solicitors firm] and her firm could not in equity foreclose the beneficiaries’ interests and become trustee in respect of the same monies for another person without the most unequivocal instructions from her beneficiaries or else complete certainty that they had directed payment to AFL on conditions that had unequivocally been met.”

171. The learned judge further stated in para 573 of his judgment that:-

“Once in that trust, with Mrs Bellis (or her firm) as trustee, Mrs Bellis was bound to establish with certainty who was the beneficiary, and once she had established that to act only in accordance with directions from that beneficiary of which she could be entirely certain.”

172. I agree with D2’s counsel that the starting point was that moneys in a solicitor’s client account were held by the solicitor in favour of his client. In order for there to be a departure from this starting point, for moneys in a solicitor’s client account to be held on trust by the solicitor in favour of a non-client third-party, there had to be objective circumstances showing a mutual intention to do so.  Mere payment into a solicitor’s client account by a third party is insufficient to give rise to a Quistclose trust.

173. In Andrew Brown & Ors v InnovatorOne Plc & Ors [2012] EWHC 1321 (Comm), Hamblen J found that no Quistclose trusts had been created between the solicitors and the non-client payer in respect of funds paid into the solicitors’ client account.

174. In the InnovatorOne case the claimants participated in various investment schemes organized by Innovator with a view to obtain tax relief. The schemes were for the claimants to join various partnerships which would purchase various technology products and exploit the same for profit.  The claimants paid their investments (ie their subscription moneys for interest in the partnership) into the client account of the defendant solicitors who subsequently paid out the moneys pursuant to instructions of Innovator.  The schemes failed before the claimants became partners of the partnerships.  The claimants claimed against various parties including Innovator and the solicitors for return of their investments.  Hamblen J held that until the claimants became partners, their subscription moneys were not at the free disposal of Innovator and were subject to a Quistclose trust.  However, the learned judge found that the trustee of the Quistclose trust was Innovator, not the solicitors.  The learned judge referred to the following facts and matters in para 971 of his judgment to support his aforesaid finding:-

(1) It was clear that the solicitors’ client was Innovator.  The claimants were never clients of the solicitors.  The solicitors did not act for them. There was no retainer letter, no payment for services and little or no direct contact between them.

(2) The account into which the subscription moneys were paid was the client account for Innovator.

(3) The claimants knew or would reasonably have known that the solicitors were Innovator’s solicitors.

(4) The claimants knew or would reasonably have known that their subscription applications were to be made to Innovator and their cheques were to be sent to Innovator.  (The cheques were made payable to designated account of the solicitors in the name of the partnership concerned.  If the cheques were sent to Innovator, Innovator would forward the same to the solicitors.)

(5) The claimants knew or would reasonably have known that significant setting up fees and expenses would have to be paid, and that they were to be paid by Innovator.

(6) The solicitors had no power to direct what was to be done with the subscription moneys.  For moneys in Innovator’s client account, the solicitors’ duty was to follow their client’s instructions.

(7) The claimants had contracts with Innovator and under that contract Innovator was obliged to ensure that costs associated with the establishment of the partnership were paid.

175. Almost all the aforesaid facts and matters referred to by Hamblen J were also found in the case of D2 in these actions.  It was clear that D2’s client was D1/the Company.  The plaintiffs were never clients of D2.  D2 did not act for them.  There was no retainer letter, no payment for services and little or no direct contact between them.  The account into which the P1’s Investment and the P2’s Investment were paid was D2’s client account for the Company.  The plaintiffs knew that D2 was solicitors firm acting for D1/the Company.  This was expressly stated in clause 12.4 of the draft shareholders agreement and the plaintiffs were told to seek independent legal advice.  The plaintiffs knew that their applications for shares in the Company were to be made to the Company.  The plaintiffs knew that the Bar was in operation with operating expenses being incurred and paid by the Company.  D2 had no power to direct what was to be done with the P1’s Investment and the P2’s Investment.  For moneys in D2’s client account for the Company, D2’s duty was to follow its client’s instruction.  The plaintiffs had contracts with D1/the Company to invest in the Company.  Applying the test adopted by Hamblen J, D2 was not the trustee of the Quistclose trusts in favour of the plaintiffs.

176. I agree that the duty for a solicitor to make enquiries as to the true beneficial owner of the money paid into his client account only arises if there is something within the objective circumstances sufficient to give rise to a Quistclose trust in favour of someone who is not the client of the solicitor.

177. P1 in his witness statement stated that he was told at the meeting on 21 January 2004 (ie the 2^nd Meeting) that “pending and subject to such approval and signing of a shareholders’ agreement by the group with me [P1], I needed to deposit with Tanner de Witt [D2], HK$500,000 [the P1’s Investment] for an intended allotment of the Company’s shares to me.”  The plaintiffs’ counsel submitted that it was a suggestion made to P1 at the 2^nd Meeting, the meaning of which was clear that the investment money was to stay in D2’s client account pending the execution of the shareholders agreement.  EL, a participant of the 2^nd Meeting, did not record such discussion in his attendance note for the meeting.  He had no recollection of such matter being discussed in the 2^nd Meeting.  He said at the trial that if someone had asked D2 to hold the moneys on conditions, he would have recorded it in the attendance note and spoken to the supervising partner about what the actual arrangements might be.  He said that holding monies for client had always been a big issue in his mind because that was where the risk lied.  The plaintiffs’ counsel suggested that it might be exchanges between Ms Lee and P1 as D2’s records showed that Ms Lee had also attended P1 on that day.  Ms Lee was in-charge of the company secretary service of D2.  Her job title was “Company Secretary”. (See p 224 of Bundle 1)  She was not involved in the drafting of the shareholders agreement.  The above alleged communication was made in the context of the drafting of the shareholders agreement.  If there was such communication between P1 and D2, it was unlikely that such communication took place between P1 and Ms Lee instead of between P1 and EL.  In fact, P1 was not specific as to who were the parties to the alleged communication.  Although Ms Lee had not testified at the trial, for the aforesaid reasons and reasons set out below, I do not accept this part of P1’s evidence.

178. P1’s evidence showed that he had instructed his banker on 20 January 2004, ie one day before the 2^nd Meeting, to prepare to remit the P1’s Investment to D2’s client account. (See para 130 above)

179. P1 said that such instruction was only a preliminary instruction and the final instruction was subject to the 2^nd Meeting.  However, in his supplemental witness statement, P1 stated that the payment was requested by D1. (See para 131 above)

180. I accept that P1 made the payment to D2’s client account upon D1’s request.  However, it is clear that P1 had prepared for payment of the P1 Investment before he attended the 2^nd Meeting.  I do not accept P1’s evidence that he paid the P1 Investment to D2’s client account upon the alleged suggestion said to have been made to him at the 2^nd Meeting.  I also do not accept P1’s evidence that the alleged suggestion was made to him at the 2^nd Meeting.  Such suggestion by D1 was made to P1 certainly before the 2^nd Meeting.

181. I accept that P2 had the concept of “escrow account” in mind before he paid the P2’s Investment to D2’s client account.  This was showed by the email dated 26 November 2003 sent by Mr Thorwith to Ms Lee of D2. (See para 134 above)  In her reply email also dated 26 November 2003, Ms Lee replied to D1’s request for documents on letterhead of D2 as follows:-

“I have discussed this with Ian [IDW]. We are not quite sure what you want.

As we are not really in a position to make offers to potential investors to inject funds to the company, we have not done this so far, we have not issued any documents to the recent investors who put funds in.

What is that the investor request?”

182. Copy of Ms Lee’s said email had been provided to P2 before P2 paid the P2’s Investment into D2’s client account.  Ms Lee stated clearly that they did not know what P2 required.  In such case, before P2 paid the P2’s Investment to D2’s account, P2 knew that D2 did not know P2’s requirement that the moneys had to be held in escrow and yet P2 paid his money to D2’s account without seeking confirmation from D1 or D2 (whether before or after payment) that his money was placed in an escrow account and without giving any indication or instruction to D2 that his money should be held in escrow by D2.

183. P2 told the court in cross-examination that Mr Thorwith had explained the business plan for the Bar to him.  P2 said that before he decided to invest in the Company he visited the Bar once or twice in a fortnight.  When he went there, the Bar was full with people.  P2 said under cross-examination that “it looks like this business runs exactly what they promised me before I pay the money.  So I was happy.”  P2 said that he was shocked to find the Company became “bankrupt”.  P2 repeatedly said in cross-examination that he trusted D1 and Mr Thorwith.

184. P1 confirmed under cross-examination that he never chased D2 for allotment of shares in the company or the shareholders agreement after the two meetings at D2’s office.  He said that he only chased D1.

185. The plaintiffs did not immediately contact D2 for return of their moneys after they learned from Mr Anderson in September 2004 that the business of the Company failed.  It was only in the plaintiffs’ solicitors’ letters to D2 that the plaintiffs first raised the issue of the Plaintiffs’ Purpose with D2.

186. D2’s counsel submitted that there was never any indication or expression from anyone in D2 that D2 would hold funds to the order of the investors whether for the purposes alleged by the plaintiffs or otherwise.  No letters of acknowledgement or other documentation similar to the 1^st Fundraising were signed by D2 or the investors.  The plaintiffs’ evidence did not say that they had communicated their alleged purpose to D2 before they paid their moneys to D2’s client account.  In September 2004, P2 was expressly told that the Bar had used up the investment moneys and required additional investment funds to be injected. (See p 964 of Bundle 2B)  Yet no immediate action was taken by P2 upon learning this fact.  He submitted that this suggested that the investors were aware that their investment moneys were being used to fund the operation of the Bar. 

187. D2’s counsel referred to the investment moneys from the investors being booked as shareholder’s loans instead of share capital to the Company to show that none of the investors had the plaintiffs’ alleged purpose in mind when making payment of their investment moneys. (See pp 929-936 of Bundle 2B)  With respect, I do not agree.  The fact that the investors’ moneys were treated as shareholder’s loans by the Company only showed the subjective understanding of the Company on the nature of such payments but not the intention of the investors.  Although I have found Quistclose trusts being created between the plaintiffs and D1/the Company, subjectively the Company might not aware of such arrangements.  As discussed in earlier parts of this judgment, this is irrelevant.

188. D2’s counsel also relied on the fact that there was no claim from other investors who had participated in the 1^st Fundraising to submit that the investors knew that there was no condition or restriction on the use of their investment moneys by the Company in this second round of fundraising.  I am unable to reach such conclusion without hearing evidence from these investors.  They might have their own reasons for not to claim.

189. D2’s counsel further contended that objective circumstances and/or documents also showed that D2’s understanding was that moneys paid by the investors into its client account were freely usable by the Company and D2 was not aware of the plaintiffs’ alleged purpose.  There was also no reason for D2 to have any doubt or suspicion as to its aforesaid understanding.

190. He pointed out that even on the plaintiffs’ own evidence, it had not been said that the plaintiffs’ alleged purpose had been communicated by either of them to D2.  In fact P2 had no communication with D2 at all prior to his paying the P2’s Investment to D2’s client account.  When the plaintiffs paid their moneys to D2, neither of them made any request for their moneys to be set aside or kept apart.  After making payments, neither of them asked for acknowledgement from D2 that their moneys were held to their order for their alleged purpose.

191. He submitted that in particular circumstances of these cases where non-client third parties paid moneys into D2’s client account without stated restriction or condition or without any communication at all, the court should be wary and cautious not to easily find the existence of a trust in favour of those non-client third parties unless there were exceptional circumstances justifying it.

192. D2’s counsel further submitted that at the time of the plaintiffs’ making payments, D2 had all along been paying out investors’ moneys according to D1’s instructions to settle the Bar’s operating expenses without complaint from any investors.  There was no reason for D2 to suspect that the arrangements between the plaintiffs and the Company were different.  D2 all along only acted on the instruction of D1.  D2 only acted for D1 and the Company but not for the plaintiffs.  This was made clear to P1 at the 2^nd Meeting as well as in clause 12.4 of the draft shareholders agreement. (See p 864 of Bundle 2B)

193. The plaintiffs relied on the Challinor case (supra) to support their contention that Quistclose trusts had been created in their cases.  In the Challinor case, a trust was held to exist between the solicitors firm and the claimant payers for funds paid into the client account of the solicitors firm and the solicitors firm was held to be in breach of trust because it was then under a duty to inquire.  The Challinor case was similar to the cases before me in the sense that there was also no communication between the investor claimants and the defendant solicitors firm in respect of moneys paid by the investor claimants to the defendant solicitors firm.

194. The claimants in the Challinor case were investors in one of the property investment schemes known as the Albermarle Investment Schemes.  The scheme concerning the Challiner case known as “the Albermarle Fairoaks scheme” was related to a property development in Surrey in England.  In August 2006, the company operating the Albermarle Investment Schemes was purchased by Erinaceous Group Plc (“Erinaceous”).  The defendant solicitors firm started to act for the Albermarle Investment Schemes after the schemes were purchased by Erinaceous and it acted as solicitors in the Albermarle Fairoaks scheme.  Its client account was used to receive money raised from investors in that scheme. The claimants paid their investments into the solicitors firm’s client account.  They claimed against the solicitors firm and the promoter of the scheme after the investment scheme failed.  The claimants contended that their monies were at all material times held subject to escrow conditions and alternatively on a form of Quistclose or resulting trust to them or to their order.  Hildyard J held that the solicitors firm was liable to the claimants’s claim on the ground that the combine effect of the facts that (a) the claimants’ moneys were required to be and were paid into a trust account, and (b) were not objectively or subjectively intended to belong upon receipt to the special purpose vehicle for the investment was that the solicitors firm held such moneys on trust for the claimants.

195. The Albermarle Investment Schemes had certain characteristics in common and were well-documented.  The learned judge found that they followed a pattern, although there were variations from scheme to scheme.  It was a common theme of the Albermarle Investment Schemes prior to the Albermarle Fairoaks scheme and another scheme known as Albermarle Shoreham scheme that the investors would rely on the solicitors advising the scheme both to safeguard their interests as future equity participants and also to ensure that their subscription moneys would not be released unless and until their participation and control of the special purpose vehicle for the investment was safely arranged or in place.  The documents for the Albermarle Investment Schemes expressly referred to payment of investment monies into a solicitor’s account to be held in that account to the investors’ order.  In the Challinor case, all of the investor claimants had previously invested in similar Albermarle Investment Schemes before.  There was an escrow agent appointed or other escrow arrangement established in the previous Albermarle Investment Schemes in which the claimants had invested.  The defendant solicitors firm had recently handled and acted as escrow agent in another Albermarle Investment Scheme a few months before the investor claimants made their payments to the defendant solicitors firm.  The moneys which the claimants sought to recover were paid into the same client account that had specifically been used as an escrow account in the previous Albermarle Investment Scheme.  The defendant solicitors firm also acted for the investor claimants in that previous Albermarle Investment Scheme. In the Albermarle Fairoaks scheme the investors’ understanding was that the defendant solicitors firm was acting for them, particularly in relation to the monies they were instructed to pay into the firm’s client account.  The defendant solicitors firm’s principal, Mrs Bellis, acknowledged that she had a pretty good overall knowledge of the Albermarle structure but maintained that she never assumed or owed any duty to the investors for whom she acted only in a ministerial capacity.  Nevertheless, the learned judge found in para 240 of his judgment that:-

“In the specific context of the Albermarle Fairoaks scheme, Mrs Bellis was aware that the monies were to be held in her firm’s client account pending some future event or instruction. It was never suggested that she was to make immediate payment out of the monies; the dispute was rather as to what event or instruction was to authorise such payment and to whom.”

196. The learned judge found that Mrs Bellis had strong ties to Erinaceous and its group companies.  She and her firm were heavily dependent on Erinaceous which further discouraged any objective consideration on her part of the transactions concerned as well as any inclination to look after the interests of investors separately to those of Erinaceous. (See para 76 of the judgment) The learned judge devoted a section of his judgment (paras 78 to 87) to set out Mrs Bellis’s personal interests and her other family interests.  At the material times, Mrs Bellis’s husband was the Chief Executive and her sister was the Chief Financial Officer of Erinaceous.  They were also the founding members of Erinaceous and between them owned some 17% of Erinaceous, a public company listed on the London Stock Exchange.  Mrs Bellis’s brother worked as a consultant of Erinaceous and was nominally the beneficial owner of all shares in the special purpose vehicle for the Albermarle Fairoaks scheme, Albermarle Fairoaks Ltd (“AFL”).  Her brother played a significant role in the Albermarle Fairoaks transaction.  Mrs Bellis was also company secretary to Erinaceous and its numerous subsidiaries.  Mrs Bellis established the defendant solicitors firm in the same year as Erinaceous was incorporated.  Her firm was retained and acted at all material times thereafter as solicitors of Erinaceous companies.  It had its offices in the same building as Erinaceous.  In a typical year, some 70% of the defendant solicitors firm’s fee income came from Erinaceous and its subsidiaries.  The learned judge accepted Mrs Bellis being described as “Erinaceous’ in-house lawyer.”  He said that: “It is not easy to accept (although she does maintain) that Mrs Bellis was independent.” (See para 85 of the judgment)  Mrs Bellis also had personal interests relating to the Albermarle Fairoaks scheme in that she with her husband and sister owned and control a company which in turn owned a strategic part of the land at Fairoaks airport, subject development of the Albermarle Fairoaks scheme.  The leaned judge concluded in para 87 of his judgment that these family connections and interests meant that Mrs Bellis’s financial position and the future of her firm was very closely tied to Erinaceous and its group.  The learned judge found that Mrs Bellis played multiple roles in transactions related to the Albermarle Fairoaks scheme which the investors were not aware nor gave their informed consent. He said in para 94 of his judgment that:-

“In any case, the point is not really whether or not Mrs Bellis’s multiple roles conflicted; it is the fact that she had them and the extent of her and her immediate family’s interests. I have concluded that Mrs Bellis felt able to act in these multiple capacities as well as the SPV [special purpose vehicle] (AFL) and representing apparently conflicting interests because she considered Erinaceous and its subsidiaries and associated companies in effect to be one entity, and to a large extent, at least until November 2007 when her husband and her sister were removed, a family affair.”

197. It can be seen from the above that the objective circumstances in the Challinor case were very much different from the cases before me.  It was in the factual background specific to that case that the learned judge accepted the following matters and found that a Quistclose trust was established in the Challinor case (See para 560 of the judgment):-

“… In particular, their [the claimants’] Counsel emphasised the following matters (each of which I accept and find accordingly):-

(1) the lack of any sensible explanation in all the circumstances for the requirement for payment into a client account other than (a) to prevent its being available to the ultimate intended recipient pending some further event or instructions and (b) to provide that in the meantime it is to be held under the control of a solicitor for the benefit of the payer;

(2) the marketed and obvious characterisation of the transaction as an Albermarle investment scheme with the basic characteristics common to such schemes, in none of which had the investors ever made unsecured loans without an immediate right to matched equity investment element;

(3) the Claimant’s familiarity with those basic characteristics, and their expectations accordingly that what they would obtain by subscribing money was a combination of a loan and ‘equity’ participation (albeit that the documents to evidence that right might follow after the application of the monies invested);

(4) the arrangements in Albermarle Shoreham, which took place only a few months before, and in which the Defendant Firm was both adviser and escrow agent, and where monies were required to be remitted to the same client account with the Defendant Firm acting as escrow agent on terms set out in a document attached to the Information Memorandum for that transaction and expressly agreed between the investor and the Albermarle Shoreham vehicle, Albermarle (Shoreham) LLP, as a term of the application form required to be subscribed;

(5) the inherent unlikelihood that the Claimants would ever have agreed to lend monies without any security; on terms that were not finalized, without control of the SPV (AFL) and so without any identified right to, or ability to require to be made available to them, some form of ‘equity investment’ in AFL or in a fund above it;

(6) the fact that at the time of the transfer of the Claimant’s monies, Mrs Bellis knew that no formal and final documentation had been provided to them, still less agreed by them;

(7) the fact that in this case (unlike what might be thought the more standard case) the monies to be remitted to the client account came from a number of persons;

(8) all giving rise to the inference that, at the very least pending the agreement of formal documentation and the completion of any steps necessary to ensure there was no impediment to its issue and signature, the monies transferred should be held to the order of the payers;

(9) the fact that, as a solicitor, and in light of her previous experience in respect of the Albermarle Shoreham transaction, Mrs Bellis could be expected to know, and did know, all the above and that (a) it was necessary for AFL’s directors formally to approve borrowing in accordance with specified and formal documentation before accepting money from investors (and the concomitant repayment obligation to them) and (b) it was permissible for her to accept and apply monies received from investors unless and until ‘know your customer’ and Consent to Borrowing (“COBO”) and any other regulatory requirements in Guernsey had been completed.”

198. In the cases before me, the 1^st Fundraising was different from the fundraising concerning the plaintiffs and the plaintiffs were not parties to the 1^st Fundraising.  I have accepted the explanation of IWD for the plaintiffs’ moneys to be paid into D2’s client account.  I do not agree that there was inherent unlikelihood that the plaintiffs would ever have agreed to let D1/the Company to have immediate use of their moneys in view of the fact that they paid their moneys to D2’s account without any caveat or follow-up with D2 despite Ms Lee’s email dated 26 November 2003.  There were only a few investors (about 5) paid their moneys into D2’s client account.  The other common feature between the Challinor case and the cases before me was the incomplete documentation point.  As I have discussed above, this factor along was insufficient to create a Quistclose trust.

199. The special factual background of the Challinor case enable the court to say that, objectively assessed, the mutual intention between the parties had to be for the defendant solicitors firm to hold moneys in the client account to the order of the investor claimants in that case.  The cases before me fall far short of those circumstances.  The Challinor case does not assist the plaintiffs.

200. I find that the objective circumstances of these cases do not support the plaintiffs’ contention that it was the mutual intention of the plaintiffs and D2 that their moneys paid into D2’s client account were to be held by D2 on trust in favour of the plaintiffs.

201. I find that the plaintiffs have failed to prove on balance of probabilities that Quistclose trusts had been created in respect of the P1’s Investment or P2’s Investment under the objective circumstances of these cases between the plaintiffs and D2.

The role of D2 in the Quistclose trusts between the plaintiffs and D1/the Company

202. I have found that Quistclose trusts were created between the plaintiffs and D1/the Company in favour of the plaintiffs but not between the plaintiffs and D2.  When D2 received the plaintiffs’ moneys, it only received them as the agent of D1/the Company without knowledge or notice of the aforesaid Quistclose trust.

Liability of D2 under the breach of trust claim

203. I have found that there was no trust created between the plaintiffs and D2 and D2 that had no knowledge or notice of the Quistclose trust between the plaintiffs and D1/the Company when D2 paid out the plaintiffs’ moneys to the order of D1/the Company.  D2 is not liable to the plaintiffs for breach of trust.

204. In the event that I had concluded that there were Quistclose trusts in favour of the plaintiffs created between D2 and the plaintiffs and D2 acted in breach of the trusts, D2 relied on section 60 of the Trustee Ordinance for relief from sanction.  Section 60 provides that:-

“If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Ordinance, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.”

205. If I were wrong in my conclusion that D2 was not a trustee, I would have found that D2 was entitled to relief under section 60 as D2’s breach of trust would have involved a honest and reasonable mistake by D2 that the moneys paid into its client account by the plaintiffs were immediately at the free disposal of D1/the Company and accordingly section 60 would apply.

206. In the premise, I dismiss the plaintiffs’ breach of trust claims against D2.

Money had and received

207. The plaintiffs’ claims against D2 for money had and received were premised on their alleged total failure of consideration.

208. The plaintiffs’ case was that they paid their moneys to D2 for subscription of shares in the Company pending the finalization and execution of the shareholders agreement.  As no shares had been allotted by the Company to the plaintiffs and the shareholders agreement had not been finalized or signed, there was total failure of consideration for their payments and D2 was liable to return their moneys to them as money had and received.

209. The plaintiffs’ counsel submitted that a total failure of consideration occurred where, from the perspective of the payer, there had been a complete failure of the performance for which the payer had bargained.  It also covered instances where payment was given for a purpose that had failed, such as where a condition had not been fulfilled or a contemplated state of affairs had disappeared. 

210. They further submitted that an agent was immediately enriched at the expense of the payer when he received a benefit in his capacity as an agent. To the extent that it is shown that the agent had passed the benefit on to a second recipient, ie the principal, the agent as the “immediate enrichee” remains susceptible to a claim in restitution by the payer, subject to the defence of ministerial receipt.

211. The plaintiffs’ counsel submitted that D2 was not acting in good faith when making payments out from D2’s client account in accordance with D1’s instructions.  They contended that D2 made payments under D1’s instructions without sufficient certainty as to the basis on which the plaintiffs’ moneys were paid into its client account and D2 failed to make inquiries into it. They also said that there were “tell-tale” signs to alert D2 that D1’s instructions might not be agreeable to the investors.

212. The plaintiffs’ counsel submitted that the concept of dishonesty embraced the situation where the relevant parties’ conducts were “commercially unacceptable”.  A party might also be not acting in good faith if he had grounds to believe that basis of payment made to him was uncertain and yet failed nevertheless to make enquiry with the payer.  The lack of reasonable enquiries with the payer before money was paid away might be a factual foundation for lack of good faith.  The plaintiffs’ counsel submitted that the pro-longed delay in finalizing the shareholders agreement was commercially abnormal and substantial payments were made to D1’s personal expenses or reimbursement for purported expenses on behalf of the Company should have alerted D2 to make enquiries with the plaintiffs before making payments.

213. The plaintiffs contended that P1 had suggested amendment to the shareholders agreement that no directors’ fees were payable and it was within D2’s knowledge that at least it was P1’s intent that the investment moneys should not be used by D1 personally.  The plaintiffs’ counsel criticized D2 for making rental payment for D1’s flat out of the plaintiffs’ moneys.  They also criticized D2 for reimbursing D1 out of the plaintiffs’ moneys for expenses alleged to have been incurred for the Company without first verifying such expenses and board resolutions authorising the payments.

214. The plaintiffs’ counsel submitted that D2 failed to prove that it had acted in good faith in effecting the payments out from the plaintiffs’ moneys and therefore should be liable for the plaintiffs’ restitutionary claims. 

215. D2’s counsel relied on Goff & Jones The Law of Unjust Enrichment (8^th ed) to submit that for a total failure of consideration claim, “[t]he basis of the transfer must be jointly understood as such by both parties.  It must be ascertained objectively, and the parties’ uncommunicated subjective thoughts are irrelevant.  Hence, if only one of the parties has a particular basis in mind, and that basis fails, no claim arises in unjust enrichment.” (at para 13-02)

216. He submitted that both the plaintiffs’ claims for total failure of consideration and for breach of Quistclose trust required an examination of the objective circumstances to ascertain what the parties’ mutual intention were and the two causes of action involved the same consideration.  If, on the evidence, the plaintiffs could not establish mutual intention sufficient to give rise to a Quistclose trust, then it was highly unlikely that the plaintiffs would be able to establish mutual intention as to the basis of transfer of funds which the plaintiffs alleged had failed.

217. D2’s counsel submitted that if the basis for the plaintiffs’ total failure of consideration claim was that the plaintiffs paid moneys in exchange for shares in the Company and rights under a signed shareholders agreement, this was an unpleaded claim but D2 still had defences in change of position and ministerial receipt.

218. D2’s counsel submitted that D2 had further defences of ministerial receipt and change of position to this claim of the plaintiffs in that D2 had never been enriched as it always held the plaintiffs’ moneys subject to the Company’s instructions and that even if D2 had been enriched, it had paid out such enrichment to the Company, acting in good faith on the Company’s instructions. 

219. The plaintiffs paid their moneys into D2’s client account for investing in the Company by acquiring shares in the Company.  No shares in the Company had been allotted to the plaintiffs.  This is a clear case of total failure of consideration.  I do not agree that if the plaintiffs failed in their Quistclose trust claim against D2, it was highly unlikely that they would be able to establish their claim for total failure of consideration.  An essential element for a Quistclose trust claim is a mutual intention that the money is not at the immediate free disposal of the recipient and the beneficial interest of the money remains with the payer until fulfillment of the agreed purpose or occurrence of the specified event.  The plaintiffs fail in their Quistclose trust claim against D2 because they fail to satisfied the court that such mutual intention existed in the transaction between the plaintiff and D2.  Such mutual intention is not required for a claim for total failure of consideration.

220. I also disagree that the plaintiffs had not pleaded their total failure of consideration claim based on no allotment of shares and no signed shareholders agreement.  In their statements of claim, the plaintiffs pleaded that the moneys paid by them into D2’s account were their intended investment in the Company for the purpose and in anticipation of an intended allotment of shares to be procured by D1 from the Company to be issued to the plaintiffs and the execution of the shareholders agreement. (See para 3(b) of the statement of claim in DCCJ 3388/2005 and para 3(a) of the statement of claim in DCCJ 3389/2005)

221. IDW agreed that the plaintiffs’ moneys paid into D2’s client account were for their investment in the Company and he agreed that the plaintiffs’ investment would be by way of acquiring shares of the Company.  I have already found that D1 knew and agreed that the plaintiffs’ moneys were paid for the Plaintiffs’ Purpose.

222. I find that the basis of the transfer of the plaintiffs’ moneys into D2’s client account was for the purpose of investing in the Company by acquiring shares in the Company.  This was jointly understood by the plaintiffs and the defendants.  This basis for the transaction contemplated by the parties wholly failed.  The plaintiffs are entitled to claim back their moneys for total failure of consideration from the defendants subject to defences raised by them.  As I am only concerned with the plaintiffs’ claims against D2, I shall only consider in this judgment the defences advanced by D2 to resist the plaintiffs’ such claim.

223. The defences advanced by D2 were “change of position” and “ministerial receipt”.  Before I go into D2’s defences, I shall state my observation on the plaintiffs’ counsel’s aforesaid criticism on D2’s conduct.  I am of the view that such criticism was not justified.

224. The plaintiffs suggested that D2 acted wrongfully in failing to press for the allotment of shares in the Company to the plaintiffs and for the execution of the shareholders agreement.  As D2 did not act for the plaintiffs and D2 was in no position to issue shares in the Company or to finalize the shareholders agreement without instructions from the Company, such comment was unfair to D2.

225. The plaintiffs criticized D2 for failing to review D1’s requests for paying expenses of the Company from the plaintiffs’ moneys.  The payments requested by D1 were expenses of the Company.  There was simply no basis for D2 to review D1’s payment requests bearing in mind that D2 did not act for the investors and had no power or duty to supervise the operations of the Company. Although D2 had knowledge that P1 had proposed no director’s fee be paid, this was not inconsistent with the Company providing accommodation to D1 when D1 was not receiving remuneration for his services to the Company.  I do not see that by acceding to D1’s payment requests, D2 had been acting in bad faith in paying out the plaintiffs’ money which disentitled it to the defence of change of position. 

226. D2’s counsel submitted that D2 had a complete defence of change of position having paid out all monies received from the plaintiffs in good faith on its client’s instruction.

227. The change of position defence is available to a recipient of moneys whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution.  However, such defence “is not open to one who has changed his position in bad faith as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrong-doer.” (Per Lord Goff in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 580)

228. D2’s counsel relied on Goff & Jones (supra) at para 27-32 to submit that it required conduct amounting to dishonestly or coming close to dishonesty to constitute bad faith or wrong-doing to deprive a defendant of such defence and mere negligence did not amount to bad faith for the purpose of change of position.

229. The learned authors of Goff & Jones (supra) stated in para 27-39 that Lord Goff did not say in the Lipkin Gorman case whether a defendant should be characterized as “wrongdoer” because he had committed a criminal offence, and/or because he had committed a civil wrong, and/or because he had behaved in a morally shabby way.  However, the learned authors pointed out that many of the cases that had considered whether a defendant’s “wrongdoing” should debar him from raising the defence had been concerned with illegality.

230. D2 paid out the plaintiffs’ moneys before it was aware of the plaintiffs’ claims.  I do not see any illegality in D2’s conduct.  I am of the further view that it did not even amount to civil wrong or morally shabby practice.

231. There was no dispute that all the plaintiffs’ moneys had been paid out upon D1’s instructions acting for the Company. (See pp 249-252 of Bundle 3)  I do not think that it can be argued that D2’s payments out were not linked to receipt of the plaintiffs’ moneys.  I am satisfied that the “but for” test was passed.  (See paras 27-25 to 27-26 of Goff & Jones (supra))  As I do not accept that D2 had acted in bad faith in paying out the moneys and I do not consider that D2 was a wrongdoer, I uphold D2’s defence of change of position to the plaintiffs’ claim for restitution.

232. I have found that D2 received the plaintiffs’ moneys as agent for D1/the Company.  The defence of ministerial receipt is available to an agent who acts on a principal’s instructions to protect the agent from being caught in the middle of disputes between his principal and third parties.  An agent will be put into an impossible position if he is sued by a claimant to recover a benefit and is called upon to account for this benefit by his principal.

233. The learned authors of Goff & Jones (supra) had expressed the following view in para 28-02 that:-

“On another view, which we prefer, an agent who receives a benefit for which he must account to his principal should have a defence of ‘ministerial receipt’ to claim in unjust enrichment whether or not he pays the value of the benefit to his principal, and whether or not he takes good title to property which he then uses as his own because his obligation to account means that the agent never takes the value of the benefit for himself, and that the principal alone is enriched by the transaction. On this view, a claim in unjust enrichment lies against the principal, and no claim lies against the agent because the law holds that the principal is enriched at the claimant’s expenses and the agent is not. If this is correct, then the results (though not the reasoning) of the case where the “payment over” defence was allowed can be explained on the basis that the agent came under an immediate accounting duty when he received the benefit and should therefore have had a defence, whether or not he actually paid the value of the benefit over to the principal.”

234. The defence of ministerial receipt is available if an agent receives moneys liable to be accounted to his principal.  However, in these cases, I have found that Quistclose trusts had been created between the plaintiffs and D1 in favour of the plaintiffs.  In such case, between the plaintiffs and D1, the beneficial interest of the moneys in D2’s account remained with the plaintiffs.  Although I have also found that D2 had no knowledge of the Quistclose trusts until the plaintiffs made their claims against D2, D2 did not have an immediate accounting duty in law to account to D1 for the moneys.  If the moneys had not been actually paid out upon instructions of D1/the Company prior to D2 having knowledge of the plaintiffs’ claims, D2 should account to the plaintiffs instead of D1 for the plaintiffs’ moneys in its account.

235. In the circumstances of this case, I find that the defence of ministerial receipt is not available to D2 to resist the plaintiffs’ claims for money had and received.  However, D2 may still rely on its change of position defence which I have upheld.

236. In the premise, I also dismiss the plaintiffs’ restitution claims against D2 based on total failure of consideration.

Conclusion and costs

237. For reasons set out above, I dismiss the plaintiffs’ claims in both DCCJ 3388/2005 and DCCJ 3389/2005 against D2.

238. Costs follow event.  I make a costs order nisi that the plaintiffs do pay D2’s costs for these actions (including costs previously reserved) with counsel certificate.  For hearings when the two actions were heard together, I apportion the times equally between the two actions.

239. The above costs order nisi shall become absolute 14 days after the date of this judgment unless application is received from either party to vary the same within this 14 day period.