YINGGAO RESOURCES LTD v. ECO METAL (HONG KONG) LTD AND ANOTHER

HCA 964/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 964 OF 2012

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BETWEEN

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D E C I S I O N

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1.  This is the 2^nd defendant’s interpleader summons seeking an order that the sum of HK$26 million standing in credit in Account A and the sum of US$2,240,000 standing in credit in Account B both in the name of the 1^st defendant with the 2^nd defendant, after deducting therefrom the 2^nd defendant’s costs be paid by the 2^nd defendant, be paid into court, with consequential orders and directions.

2.  The background circumstances leading to this application is largely not in dispute.  They are summarized as follow.

A.  BACKGROUND

A1.  The disputes

3.  The 2^nd defendant is a bank licensed to carry on banking business in Hong Kong.  The 1^st defendant is a customer of the 2^nd defendant holding Accounts A and B.

4.  By an agreement dated 6 January 2012, the 1^st defendant agreed to sell to the plaintiff 800 tons of copper scrap at a provisional price of US$7,155 per ton (“the Agreement”).  On or about 10 January 2012, the 1^st defendant informed the plaintiff that the goods were ready for delivery and requested the plaintiff to make advance payment before delivery.  On 17 January 2012, the plaintiff transferred HK$26 million into Account A and US$2,240,000 into Account B.

5.  On 18 January 2012, the 2^nd defendant was notified by the Customs and Excise Department (“C&E”) that it was conducting investigation in relation to the 2 sums in the Accounts.  The 2^nd defendant then froze the Accounts.

6.  On 20 January 2012, the C&E notified the 2^nd defendant that:

(1) it could not without the C&E’s consent to further deal with any of the funds in the Accounts;

(2) if any person approached the 2^nd defendant and attempted a transaction involving the Accounts, it should immediately contact the officer-in-charge of the C&E; and

(3) if the 1^st defendant or a third party questioned the 2^nd defendant as to why he could not access the funds in the Accounts, he should be directed to the officer-in-charge of the C&E without any further information being revealed (“the C&E Directions collectively).

7.  It is the case of the plaintiff and the 1^st defendant that on or about 3 February 2012 they agreed to terminate the Agreement (“the Termination Agreement”).

8.  The former solicitors of the plaintiff then wrote to the 2^nd defendant on 14 February 2012 :

“On or about 30 January 2012, [the 1^st defendant] informed [the plaintiff] that [the Accounts have been suspended by your bank or alternatively frozen by [the C&E]. [The 1^st defendant] therefore could not complete the contract. The contract has been terminated by mutual agreement of the parties on about 3 February 2012. After the termination, [the 1^st defendant] failed to repay the [2 sums] to [the plaintiff] as your bank has suspended [the Accounts], or alternatively [the C&E] has taken action to freeze the said accounts. However, there is absence of a Court Order or any written notice from either your bank or [the C&E] evidencing and providing a reason for the freezing of the funds in [the Accounts].

As [the plaintiff] has paid the amounts directly into your bank in the course of normal commercial and banking transaction, you owe a duty to [the plaintiff] to ensure the amounts are released and used by the account-holder, namely, [the 1^st defendant].  Alternatively, the amounts should be returned to [the plaintiff] forthwith if [the Accounts] are not operative by [the 1^st defendant] for any reason. ...”

9.  The plaintiff’s former solicitors then demanded the 2^nd defendant to pay the 2 sums back to the plaintiff’s accounts with HSBC within 7 days, failing which the plaintiff would take legal action against the 2^nd defendant.

10.  The 2^nd defendant’s case is that because of the C&E Directions and sections 25(1) and 25(A)(5) of the Organized and Serious Crimes Ordinance, Cap 455, it did not and could not comply with the plaintiff’s demand.  By an email dated 20 February 2012, the 2^nd defendant requested the plaintiff’s former solicitors to contact a senior inspector of the C&E for details.

11.  By another letter dated 24 May 2012 to the 2^nd defendant.  The plaintiff’s current solicitors asserted that, by reason of the matters stated in the letter, in particular, the fact that the designated purpose of the 2 sums having failed as a result of the Termination Agreement, the 1^st defendant has constituted itself as a trustee of the 2 sums for the plaintiff.  The plaintiff’s solicitors demanded :

“As you are presently in possession of the Trust Money, we hereby demand that you expressly acknowledge [the plaintiff’s] beneficial interest in the Trust Money and to account to [the plaintiff] by restoring the Trust Money to them. Pending repayment and restoration of the Trust Money to [the plaintiff], your client is required to safe keep the Trust Money (together with the interests earned thereon) for the sole purpose of ultimate repayment to our client. In particular, you must ensure that the Trust Money (together with the interests earned thereon) is not to be paid out, transferred or otherwise dealt with by [the 1^st defendant] or in accordance with [the 1^st defendant] instruction, and that the same would be returned or restored by you to our client.

We also demand you to acknowledge the aforesaid obligations within 7 days from the date hereof, failing which legal proceedings may be instituted against you without further notice.”

12.  It is the 2^nd defendant’s case that for the same reasons stated above it did not and could not comply with the demand.

A2. The plaintiff’s claims against the defendants

13.  On 6 June 2012, the plaintiff commenced the present proceedings.  For present purposes, it is not necessary to detail the pleas.  Suffice it to say that the plaintiff is suing (a) the 1^st defendant for, inter alia, return of the 2 sums and damages; and (b) the 2^nd defendant for a declaration that the 2 sums are trust money of which the plaintiff is the beneficiary and that the 2^nd defendant is obliged to return or restore the same to the plaintiff; and for return of the same to the plaintiff.

14.  The 2^nd defendant’s solicitors then notified the C&E of the proceedings.  In the ensuing correspondence, the C&E simply stated that the investigation was still going on and they had no comment or view on or active role to play in the proceedings.

15.  By letter dated 31 July 2012, the 2^nd defendant’s solicitors asked the 1^st defendant’s solicitors if the 1^st defendant would (1) defend the plaintiff’s claim for repayment of the 2 sums and (2) claim against the 2 sums.  The 1^st defendant’s solicitors swiftly replied on the following day that they would defend the plaintiff’s claim.

A3. The 1^st defendant’s defence

16.  The 1^st defendant then filed its defence on 1 September 2012.  Among other things, it pleaded that the Agreement was frustrated and the plaintiff has not yet been entitled to the return of the 2 sums.  It went to plead in para 24 that however in the spirit of the Termination Agreement, the 1^st defendant has no objection to the 2^nd defendant remitting back the 2 sums to the plaintiff.

A4. The 1^st defendant’s claim against the 2^nd defendant

17.  On 26 September 2012, the 2^nd defendant’s solicitors wrote to the 1^st defendant’s solicitors seeking clarification if the 1^st defendant claimed against the 2 sums.  Referring to its plea in para 24 of its defence, the 2^nd defendant’s solicitors sought confirmation as to whether :

“1. [The 1^st defendant] agrees and would give to the Bank irrevocable instructions and absolute authority, without being liable to [the 1^st defendant] for any loss or damages, to transfer, remit and pay back the [2 sums] directly to the plaintiff, and into the plaintiff’s bank account ... , once C&E unfreezes the Accounts and withdraws the C&E directions. (if and when this should arise)

2. [The 1^st defendant] agrees with the plaintiff and accepts the plaintiff’s prayer for relief no 1 against the Bank in the plaintiff’s Statement of Claim dated 6 June 2012 that the [2 sums are] trust money for which the plaintiff is the beneficiary (in other words, the Bank is holding [the 2 sums] on trust for the plaintiff).”

18.  The 1^st defendant’s solicitors replied on 10 October 2012.  They first stated that the 1^st defendant’s position has been made clear in its defence and it was unnecessary to state if the 1^st defendant would have a claim to the 2 sums.  They went on to state the 1^st defendant’s position thus :

“1. [The 2^nd defendant] has wrongfully renounced its obligation and has been in breach or anticipatory breach of its contractual duty to repay the Funds in the Accounts to [the 1^st defendant] or to [the 1^st defendant’s] order since 18 January 2012 or alternatively since 20 January 2012. As such, [the 2^nd defendant] is obliged to pay the balance in the Accounts to [the 1^st defendant] and/or to its order in such sum(s) as [the 1^st defendant] may from time to time demand;

2. [The 1^st defendant] does not admit that the [2 sums] was held by [the 1^st defendant] upon trust for the plaintiff (see paragraphs 7, 14 and 21 of the Defence). [The 1^st defendant] further denies that [the 2^nd defendant] is bound by any trust and any right of the plaintiff as the beneficiary thereof (see paragraphs 22 and 23 of the Defence).

3. However, without prejudice to [the 1^st defendant’s] rights in consequence of [the 2^nd defendant’s] previous failure to honour [the 2^nd defendant’s] duty to repay [the 1^st defendant] or to its order, and pursuant to [the 2^nd defendant’s] continuing duty to pay the Funds to [the 1^st defendant] or to is order, our client do hereby order and demand [the 2^nd defendant] to pay the Funds to the plaintiff.”

19.  On the following day, the 1^st defendant issued a contribution notice against the 2^nd defendant.  It alleged that the 2^nd defendant had since 18 or 20 January 2012 wrongfully renounced and had been in breach of its contractual obligations owed to the 1^st defendant as its banker, which prevented the 1^st defendant from using the funds in the Accounts.  The 1^st defendant was thus compelled to enter into the Termination Agreement with the plaintiff.  The 1^st defendant is entitled to the repayment of the balance in the accounts to itself or its order/nominee in such sums as the 1^st defendant may from time to time demand.  It then sought a declaration that the 2^nd defendant had wrongfully renounced its obligations as pleaded and that the 2^nd defendant is obliged to pay the balance in the Accounts to the 1^st defendant and/or to its order in such sums as the 1^st defendant may from time to time demand.

20.  The 2^nd defendant’s solicitors then notified the C&E of the contribution notice and sought the C&E’s consent to allow the 2^nd defendant to disclose the letter dated 20 January 2012 (containing the C&E Directions) for the purpose of the proceedings.   By a letter dated 18 October 2012, the C&E repeated that its investigation was still going on, that it did not have an active role in the proceedings, and that it was not in a position to give the consent to disclose the said letter.

A5. The Order 85 application

21.  The 2^nd defendant then applied to the court on 20 December 2012 under Order 85, Rules of the High Court, for directions.  On 28 March 2013, Deputy Judge Burrell granted an order that the 2^nd defendant may commence the present interpleader proceedings.

A6. C&E’s stance

22.  The C&E has been notified of the interpleader proceedings.  By letter dated 3 June 2013, the Department of Justice, acting for C&E, informed the 2^nd defendant that :

“You are at liberty to disclose to the Court that you do not receive any opposing opposition by our client department to pay the subject fund into court or deal with it in any other way that the Court may consider appropriate.”

B. DISCUSSION

B1. The general principles

23.  Order 17, rule 1(1) of the Rules of the High Court, Cap 4A, provides :

“(1) Where-

(a) a person is under a liability in respect of a debt or in respect of any money, goods or chattels and he is, or expects to be, sued for or in respect of that debt or money or those goods or chattels by two or more persons making adverse claims thereto, or

(b) claim is made to any money, goods or chattels taken or intended to be taken by a bailiff in execution under any process, or to the proceeds or value of any such goods or chattels, by a person other than the person against whom the process is issued,

the person under liability as mentioned in sub-paragraph (a), or (subject to rule 2) the bailiff, may apply to the Court for relief by way of interpleader.”

24.  The general principles on interpleader have been helpfully summarized by Fung J in China Dragon International Ltd v Pang Hong [2007] 2 HKLRD 655 at para 29 and DLA Piper Hong Kong v China Property Development (Holdings) Ltd [2009] 4 HKLRD 333 at para 20, approved by the Court of Appeal on appeal in [2010] 3 HKLRD 903 per Tang VP at para 22 :

“(1) Where 2 or more persons claim the same thing or fund, the holder of the thing or fund does not claim any interest in the property, and not knowing to which of the claimants he ought to deliver the property, and he is sued or fears that he may be sued by some of them, he may apply for interpleader relief against the claimants.

(2) The relief is discretionay and it will not be granted unless there appears to be some real foundation that the applicant may be sued.

(3) The applicant does not in any manner collude with any claimant, or has not voluntarily put himself into the situation from which he calls on the court to extricate him.

(4) He is ready to bring into court, or to pay or dispose of the subject matter of the action in such manner as the court may direct.”

25.  It will be sufficient if each of the rival claimants has a prima facie case against the interpleading party, but not whether the adverse claimant has a claim against each other : DLA Piper Hong Kong, supra, per Fung J at para 22.

B2. Adverse claims

26.  The first and foremost objection raised by the plaintiff and the 1^st defendant against the interpleading 2^nd defendant is that there are no adverse claims within the meaning of Order 17, rule 1.  Referring to the general principle summarized by Fung J, they argued that two conditions have to be met in order to constitute the claims raised by the competing claimants “adverse claims” within the meaning of Order 17, rule 1, namely :

(1) each of the claimants claim the same thing or fund;

(2) the holder of the thing or fund does not know to which of the claimants he ought to deliver the property.

27.  While the plaintiff and the 1^st defendant have claimed the 2 sums respectively, there is no dispute between them that the 2^nd defendant should pay the 2 sums to the plaintiff.  The second condition is therefore not met.  So there are no adverse claims based upon which Order 17, rule 1 can apply.  With respect, I disagree.

28.  The interpleader jurisdiction under Order 17 is a protective one.  It aims at relieving the innocent interpleading party, who has no interest in the subject property or fund, of any further unnecessary involvement in the disputes between the rival claimants.  Here, the plaintiff asserts that the 2 sums are trust moneys and it is the beneficial owner, which is denied by the 1^st defendant.  On the evidence before me, faced with the rival claims by the plaintiff and the 1^st defendant, the 2^nd defendant cannot deal with the 2 sums, thereby relieving them of further involvement in the proceedings, in the absence of a proper instruction from the 1^st defendant or failing which, a court order.  In demanding by letter dated 10 October 2012 the 2^nd defendant to pay the 2 sums to the plaintiff and issuing the contribution notice on the following day, the 1^st defendant is effectively asserting that it is the rightful and beneficial owner of the 2 sums and is entitled to direct the plaintiff to pay the same to its order.  If the 2^nd defendant were to accede to the 1^st defendant’s demand, it could be reasonably arguable that the 2^nd defendant had agreed with the 1^st defendant’s assertion.  The 2^nd defendant would practically be left with no valid defence to the 1^st defendant’s claim by way of the contribution notice.  The 2^nd defendant might also be seen as having sided with the 1^st defendant in its defence to the plaintiff’s claim namely, the 2 sums were not trust moneys.  Adverse costs consequences against the 2^nd defendant might follow if the plaintiff were to win on this question at the end of the day.  In the circumstances, the instruction given by the 1^st defendant to pay the 2 sums to the plaintiff is something which the 2^nd defendant cannot possibly comply with.  The only other option open to the 2^nd defendant is to come to court to seek an order under Order 17.

29.  Because of the very special circumstances as explained above, I hold that the objection raised by the plaintiff and the 1^st defendant is not a valid one.

B3. Collusion

30.  This is a point relied on by the plaintiff, which can be disposed of shortly.

31.  It is well established that interpleader relief may be declined if the applicant colludes with any claimant in the sense that he is playing the same game as, or has taken side with, a claimant : China Dragon International Ltd v Pang Hong, supra.  Here, the plaintiff relied on three matters.

32.  First, the 2^nd defendant did not immediately take out the present interpleader proceedings but took out an application to strike out or stay or proceedings in August 2012, which was subsequently withdrawn.  But a careful look of the supporting affirmation filed by Lee Tak Sing, Senior Vice President of the Risk Management Department of the 2^nd defendant clearly showed that what the 2^nd defendant sought to do was no more than protecting its position.  That is hardly any evidence of collusion with the 1^st defendant.

33.  Second, the 2^nd defendant adopted a positive litigation stance in respect of the 2 sums which was openly hostile and adverse to the plaintiff.  I do not think this complaint is borne out by evidence.  The 2^nd defendant has all along wished to get out of the proceedings as soon as possible.  That is no evidence of collusion.

34.  Finally, the 2^nd defendant refused to disclose the C&E Directions.  But the 2^nd defendant was at the time prevented from doing so by the C&E.  This is not a valid complaint at all.

35.  I hold that there is no collusion as alleged.

B4. Delay

36.  Both the plaintiff and the 1^st defendant complained that the 2^nd defendant had been guilty of unreasonably delay in bringing the present interpleader proceedings.  They argued that it was not necessary for the 2^nd defendant to seek directions from the court under Order 85 before doing so.  I disagree.  I think it was perfectly proper to do so.

B5. Change of stance

37.  The 1^st defendant complained that in said affirmation of Mr Lee filed in support of the striking out application, the 2^nd defendant said that there was no adverse claims between the plaintiff and the 1^st defendant.  The 2^nd defendant has now adopted a completely different stance.  Mr Lee filed his affirmation in August 2012.  The matter had since been overtaken by subsequent events.  And as I have demonstrated above, the 2^nd defendant’s current stance that there are adverse claims within the meaning of Order 17 is wholly justified.

C. DEPOSITIONS

38.  For the above reasons, I allow the 2^nd defendant’s application with a costs order nisi that the plaintiff and the 1^st defendant do jointly and severally pay the 2^nd defendant costs of the interpleader proceedings, to be taxed if not agreed.

39.  As my decision will impact on the future conduct of the proceedings, I will direct the 2^nd defendant to lodge with the court a draft order for (a) the disposal of the interpleader proceedings and (b) the future conduct of the case within 14 days from the date of this Decision, copied to the plaintiff and the 1^st defendant, who are at liberty to write to the court to state their views on the draft order, if so advised, within 14 days thereafter.  I will then deal with the draft order on paper.