HERBERT SMITH FREEHILLS (a firm) v. CHRIS AU AND ANOTHER

HCA 3030/2015

[2018] HKCFI 2297

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 3030 OF 2015

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J U D G M E N T

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Introduction

1.  This is an application to make absolute a charging order over funds in court.  It raises two issues.  The first, and the more general one, is whether a charging order may be imposed on money paid into court by the judgment debtor as security for the costs of a defendant in a different action.  The second issue is whether, on the facts of this case, the judgment debtor has any beneficial interest in the funds in court.

Background

2.  The relevant primary facts are not in dispute. The plaintiff is a firm of solicitors who had been retained by the defendants to conduct litigation on their behalf.  There were legal fees due to the plaintiff which the defendants failed to pay, and to recover them the plaintiff commenced the present action (HCA 3030/2015).  On 30 May 2016, the plaintiff obtained default judgement against the 2^nd defendant (Retribution Ltd).  On 12 August 2016, the plaintiff obtained summary judgment against the 1^st defendant (Chris Au).  Certain recovery has been made by the plaintiff through garnishee proceedings, as a result of which the total outstanding judgment debt of the 1^st defendant, including various costs orders and interest, stands at about $2.2 million. 

3.  Chris Au is himself the plaintiff in another action in the High Court, namely, HCA 1285/2014, which he brought against one Mr Steve Yoon Soo Kim (“Kim”).  On 22 April 2016, Registrar KW Lung ordered Chris Au to pay $2 million into court in that action as security for Kim’s costs pursuant to RHC O 23 r 1(1)(a) on the ground that Chris Au was ordinarily resident outside Hong Kong.  On 25 November 2016, Chris Au’s appeal against that order was dismissed.  The money was subsequently paid into court on 9 February 2017. On 4 October 2017, on the plaintiff’s application in the present action, Registrar Ho granted a charging order nisi over those funds in court. 

4.  It appears that pursuant to a consent order between Chris Au and Kim in HCA 1285/2014, a sum of $368,000 had been paid out to Kim in satisfaction of various costs orders in that action.  The plaintiff accepts that Kim has a first claim on the funds remaining in court to satisfy any further costs order in his favour in that action.  By the charging order sought, the plaintiff hopes to be able to obtain partial satisfaction of their judgment from the funds in court if there turns out to be a surplus, for example, because that action is concluded without any adverse costs order against Chris Au.  I have been informed that the trial of that action is scheduled to take place in 2019.

5.  The question now before me is whether the charging order nisi should be made absolute.  Two points have been raised both of which focus upon the jurisdictional question of whether Chris Au holds any beneficial interest in the funds in court capable of being charged.

Whether charging order may be made over funds paid into court as security for costs

6.  S 20A(1) and (2) of the High Court Ordinance (Cap 4) provides:

“(1) Subject to subsection (3), a charge may be imposed by a charging order only on—

(a) an interest held by the debtor beneficially—

(i) in any asset of a kind mentioned in subsection (2) or

(ii) under any trust; or

…

(2) The assets referred to in subsection (1) are—

(a) …

(b) …

(c)  funds in court.”

7.  S 20B(3) provides that the charge imposed by a charging order has the like effect as an equitable charge created by the debtor by writing under his hand.  RHC O 50 r 6 makes provision for service on the Registrar of the High Court of a charging order made in relation to funds in court.

8.  Ms Astina Au, who appeared for Chris Au, accepted that funds paid into court as security for costs fall within the description of “funds in court” in s 20A(2)(c) so that they are in principle assets of a kind on which a charging order may be imposed under s 20A(1)(a).  She argued, however, that a person who has deposited funds in court pursuant to an order for security for costs has no further beneficial interest in the money.  Since a charging order may only be imposed on “an interest held by the debtor beneficially” in the asset (see s 20A(1)(a)), no charging order may be imposed on funds paid as security for costs.

9.  RHC O 23 r 1(1) empowers the court to order a plaintiff to give such security for the defendant’s costs of the action as it thinks just.  A usual mode of giving security is payment into court of money in the required amount.  A successful plaintiff is generally entitled, at any rate where there is no pending appeal (see Stabilad Ltd v Stephens & Carter Ltd [1999] 1 WLR 1201), to have the money paid in by them as security for costs paid out to them.  In that sense at least, a plaintiff may be said to have some interest, albeit contingent, in the funds in court.  No previous reasoned decision has however been cited to me in which a charging order such as the one sought here has been made.

10.  Ms Elizabeth Cheung, who appeared for the plaintiff, referred to Shahina Paracha v Paracha Azhar Javed [2015] 3 HKLRD 283, where there was apparently a charging order made over money paid in as security for costs.  That, however, was a different case from the present.  There money had been paid into court by the wife as security for the husband’s costs.  It appears that a charging order over the funds was granted on the strength of costs orders made in favour of the husband (see paragraphs 15, 24, 26 to 27).  It was therefore not a case of a charging order over security given by the judgment debtor in a different action for the costs of a third party.  There was no discussion of the point in question.

11.  There are, however, authorities which shed light on the status of funds in court generally and the nature of the interest the respective parties have in such funds.  In Halvanon Insurance Co Ltd v Central Reinsurance Corporation [1988] 1 WLR 1122, as a condition for obtaining leave to defend the action, monies had been paid by the defendants into a bank account held in the names of the parties’ solicitors “to abide the event of the action”.  After a change of solicitors, an application was made to have the new solicitors for the plaintiffs to be substituted as joint custodians of the account.  One of the questions that arose was whether the plaintiffs’ former solicitors had a lien over the fund for unpaid fees.  Hobhouse J, referring to In re Ford [1900] 2 QB 211, a case in which a defendant became bankrupt after paying money into court as a condition for obtaining leave to defend an action, said (at p 1127G‑H) that

“ The money in court has not ceased to be the property of the bankrupt but the plaintiff in the action has acquired the right to treat it as security for his claim. The right of the plaintiff is thus analogous to having an equitable charge on the money.”

More generally, in relation to the facts of the case before him, his Lordship stated (at p 1128E):

“ Therefore if this money had been paid into court to the credit of the present actions the position in my judgment would be that the money remained the general property of the defendants but was charged with whatever may be found to be the liability of the defendants to the plaintiffs. When the money is in court it is not necessary or profitable to consider the relationship of the court or its officials to that fund. The fund can only be dealt with in accordance with orders or authorisations of the court.”

His Lordship went on to hold that the fact that the money in that case had not been paid into court but into a joint solicitors’ account was merely a ministerial difference which did not alter the substantive position.

12.  In Emmott v Michael Wilson & Partners Ltd (No 2) [2017] 1 WLR 4330, monies had been paid into court byMichael Wilson & Partners Ltd (“MWP”) as security for the costs of the Assaubayev parties with whom MWP was in litigation, and by the Assaubayev parties as a condition for a stay of execution of MWP’s judgment pending appeal.  On 2 December 2014, having dismissed the Assaubayev parties’ appeal, the Court of Appeal made orders for payment out of these monies, but the monies remained in court because of a freezing order against MWP.  In November 2015, Mr Emmott, a judgment creditor of MWP, applied for an order under CPR r 72.10 (broadly the equivalent of O 49 r 9 of the Rules of the High Court (Cap 4A)) that the monies be paid out to him in partial satisfaction of his judgment against MWP.  The English Court of Appeal held:

“ 32. Mr Samek submitted that where money has been paid into court it is still the defendant’s money although the claimant is entitled to treat it as security, see Halvanon Insurance Co. Lt v. Central Reinsurance Corporation [1988] 1 WLR 1122 at 1126H and 1127H, per Hobhouse J. Thus the sum of £150,000 paid into court by MWP was MWP’s property, subject to the Assaubayev parties’ security interest, and the sum of £166,000 representing the sum paid into court by the Assaubayev parties remained their property, subject to MWP’s security interest. Once the Court of Appeal made the order for payment out, MWP retained the interest in the fund it had paid in and acquired an interest in the sum paid in by the Assaubayevs.

33. We accept this submission. As at 2 December 2014 (the date of the Court of Appeal’s order for payment out to MWP of the money in court), MWP became entitled to that money. It became an asset of MWP or, to use the words of Part 72.10, it became money ‘standing to the credit of the judgment debtor in court.’ ” [1]

13.  In Re Peak Hotels and Resorts Ltd (in liquidation) [2017] EWHC 1511 (Ch), a company had, for the purposes of actions it brought, paid money into court (a) to fortify a cross-undertaking in damages for interim relief, and (b) to provide security for the defendants’ costs.  The company was subsequently placed into liquidation.  The liquidators did not continue the actions and settled them.  One of the terms of settlement was that the sums paid into court should be returned to the company.  The question that arose was whether a charge granted by the company to secure the fees due to its former solicitors extended to the money returned from the court.  The liquidators argued that it did not, because the company had no relevant interest in the monies until they were ordered to be paid out of court back to the company, and that at that stage the monies represented the fruits of the labours of the liquidators and as such not subject to the charge.  Judge Davis‑White QC held that the company did have an interest in the funds in court which fell into the scope of the charge and stated, after a detailed review of the relevant authorities:

“ 94. If a plaintiff pays money into court, as in this case, to secure the costs of the defendant or to fortify, and thus provide security for the defendant, as regards the plaintiff’s cross undertaking in damages, the court will at the very least treat the plaintiff as having an interest in the fund in court. That interest will entitle the plaintiff to apply for the proper administration of the fund. Further, when the question of payment out arises, subject to the deemed security interest of the defendant in the fund, the plaintiff will be treated as the owner of the fund in question and entitled to receive the same. …

95. That interest in administration, or deemed interest in the fund, is one that the courts recognise and that (in the example under consideration) the plaintiff can charge. … While it may be the case that the plaintiff does not have a property interest in the fund in specie, so that it cannot technically charge a property right in funds in court but only charge future property, that is what it ultimately receives if and when funds are ordered to be paid out of court to it, the entitlement to proper administration and to what it is treated by the court as owning is something that the court recognises. The court will also recognise a charge in relation to such rights and interest. …” (original underlining; italics added)

14.  These authorities suggest that a party who has paid money into court as security for costs, as a condition for defence or as fortification for an undertaking as to damages, may be treated as the “owner” of the funds subject to the other party’s security interest therein.  Applying that reasoning, after a plaintiff such as Chris Au has paid money into court as security for the defendant’s costs, while the funds become subject to the control of the court and may be paid out only in accordance with a court order, the plaintiff nevertheless in a limited sense retains a beneficial interest in the money.  It is not necessary to decide whether it amounts to ownership or a proprietory interest as opposed to a mere equity.  Nor is it profitable, as observed by Hobhouse J in Halvanon, to analyse whether the court or the Registrar stands in the position of trustee in relation to such funds.  It is sufficient to say, and in my view it does no violence to the language of s 20A to do so, that such a plaintiff holds an interest in the funds in court beneficially, albeit subject to the security interest of the defendant which it is the purpose of the order for security for costs to confer on him.  The word “beneficially” in this context simply means, in my view, that the interest is held for one’s own benefit, rather than for or on behalf of another.  There is nothing in the authorities, nor any reason in principle or policy, to mandate the view, which Ms Au urges upon me, that such a plaintiff has at most a future interest insufficient for the purposes of s 20A.  Indeed, in the case of funds paid by a defendant into court as an offer to settle under O 22, Ms Au accepts that the defendant retains a beneficial interest sufficient to found a charging order.

15.  In support of her submissions Ms Au referred to Nativivat v Nativivat (No 2) [2013] 5 HKLRD 145, in particular the following passage in §6 of Lam VP’s judgment:

“ … Order 49 Rule 9 refers to money standing to the credit of a judgment debtor. After a sum of money is paid into court as security for a particular purpose, it is no longer the payer’s money as such. It has already been designated as security for that particular purpose. It is doubtful if such a sum so encumbered can be regarded as money standing to the credit of the payer.”

16.  In my respectful opinion the passage does not assist Chris Au at all.  First, the application there was for payment out under O 49 r 9 which applies only where “money is standing to the credit of the judgment debtor in court”.  Generally speaking, pending determination of the parties’ entitlement, money paid into court is money standing to the credit of the action, rather than to the credit of one party or another.  It is readily understandable, if I may respectfully say so, that Lam VP doubted that the money in that case could be set to be standing to the credit of the payer.  As the English Court of Appeal held in Emmott, it was only when the order for payment out was made that the judgment debtor became entitled to the money and the funds became money “standing to the credit of the judgment debtor in court”.  Secondly, an order for payment out is quite different from a charging order: whereas a prior security interest of a third party should of course prevent payment out to a judgment creditor, it is not an impediment to the imposition of a lower ranking charge by way of a charging order in favour of the judgment creditor.  This is why Lam VP said in §9 of his judgment that if a judgment creditor could obtain payment out in his favour notwithstanding the uncertainty as to extent of liability under the designated security, it could defeat the purpose of ordering such security.  By contrast, as accepted by Ms Au, the imposition of the charging order sought here would not defeat the purpose for which security for costs was ordered in favour of Kim.  The plaintiff accepts that its charging order is subject to Kim’s security interest.  Indeed, Kim, who was notified of this application, has not opposed it.  Thirdly, in §9 of his judgment Lam VP expressly refrained from expressing a concluded view on whether a sum paid into court as security could be regarded as money standing to the credit of the payer when it was still uncertain whether there would be any balance after the security had been met. Fourthly, none of the decisions in In re Ford, Halvanon, Emmott and Peak Hotels (the last two of which were indeed decided subsequently) was apparently cited to his Lordship.  Fifthly, Lam VP’s observation that the money paid into court “is no longer the payer’s money as such” can readily be understood as meaning that it was not money free for the payer to dispose of.  In my respectful opinion, the comment was not intended to lay down a rule that the payer could hold no further interest beneficially in the funds whatsoever.  Sixthly, the application in that case was in any event procedurally defective as it did not fall within the jurisdiction of the Court of Appeal and should have been made instead to the Court of First Instance (see §11).

Whether on the facts Chris Au has any beneficial interest in the funds

17.  Secondly, Ms Au argued that a charging order cannot be imposed on the funds in this case because they are subject to a Quistclose trust between Chris Au and his brother, Casey Au.  This issue depends on the particular facts of the present case which it is necessary to describe in slightly greater detail.  According to the affirmations filed, the $2 million paid into court originated in these circumstances.  On 6 February 2017, Chris Au spoke to his brother, Casey Au, and told him that he required a sum of $2 million urgently in order to preserve his Hong Kong proceedings HCA 1285/2014. Chris Au requested that the money be transferred directly to Messrs Lo & Lo, his solicitors in HCA 1285/2014.  Casey Au agreed.  The arrangement was that the money was to be paid from RIOT Group Ltd (“RGL”), a company wholly beneficially owned by him.  He instructed Ms Elsa Ho, an employee who worked for the Au’s family, to prepare the relevant documents. Accordingly, on 8 February 2017, RGL entered into a loan agreement with Chris Au.  On the same day, the sum of $2 million was transferred from the bank account of RGL at HSBC to the bank account of Lo & Lo also at HSBC, via HSBC’s online banking system.

18.  The loan agreement, signed by Chris Au and Elsa Ho for RGL, was a very short one and stated:

“ Chris Au (borrower)

Riot Group Limited (lender)

Original Loan Date: February 8, 2017

Entire Repayment Due: February 8, 2019

Total Amount of Loan: HK$2,000,000.00

Interest Rate: 4% annually

TERMS OF LOAN AGREEMENT LETTER:

I, Chris Au, borrowed HK$2,000,000.00 from Riot Group Limited on February 8, 2017. The Riot Group Limited and I both agree that the loan will be repaid in one lump sum including interest on February 8, 2019.

Both parties agree to the terms surrounding the said loan.”

19.  The written resolution of the sole director of RGL, Elsa Ho, of the same date was to the same effect, whereby it was resolved:

“1. Chris Au borrowed HK$2,000,000.00 from Riot Group Limited on February 8, 2017.

2. The Riot Group Limited and I [sic] both agree that the loan will be repaid in one lump sum including interest (interest rate: 4% annually) on February 8 2019.”

20.  Since the money was lent to Chris Au, it was prime facie his to dispose of.  It is up to Chris Au who opposes the present application by asserting that the money is subject to a Quistclose trust to establish it.  On the facts, I do not think the assertion has been made out.

21.  First, the money came from RGL.  Although it is said that RGL was wholly owned by Casey Au, it is a separate legal person and the money in its bank account was its own money, there being no suggestion that it held the funds as nominee for Casey Au.  On that basis, the transaction was one between RGL and Chris Au and it is the objective intention of these parties that is material.  It follows that Casey Au’s and Chris Au’s protestations in their affirmations that the money paid into court does not “belong” to Chris Au but to Casey Au or that he is “the ultimate beneficial owner” of the money, are irrelevant as representing their submissions or at most their subjective states of mind at the time.

22.  Moreover, since the terms of the transaction here are contained in a written agreement, namely, the loan agreement letter, the intention of the parties is a matter of construction of that document, to which the usual principles apply: Lewin on Trusts (19^th ed), §8‑048.  There is in my view nothing in the agreement, construed in the light of the factual background, to suggest any intention that the money lent had to be applied exclusively for the purpose of payment of security for costs in HCA 1285/2014.

23.  There is no evidence at all that Elsa Ho, the sole director of RGL, had any notice of the purpose for which Chris Au had asked for the loan.  There is nothing to indicate that it was of significance to RGL that the money lent to Chris Au should be used by him to give security for costs in HCA 1285/2014.

24.  Secondly, and in any event, even if one takes into account, at face value, the communications between Chris Au and Casey Au that led to the loan, no Quistclose trust in my view arose.  The mere fact that money is borrowed with a certain object or motive as to its use on the part of the borrower does not impress upon it any trust.  Nor does a Quistclose trust necessarily arise merely because money is paid for a particular purpose in the mind of the payer or lender.  As Lord Millett said in Twinsectra Ltd v Yardley [2002] 2 AC 164 at §73:

“ A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower.”

The question in every case is whether the parties intended the money to be at the free disposal of the recipient: Twinsectra, §74.

25.  Although the money was arranged to be paid by RGL directly to Lo & Lo, this was not a requirement imposed by RGL or Casey Au, nor a term of the loan agreement.  Since there was a Mareva injunction on foot in this action against Chris Au at the time (granted ex parte on 18 November 2016 and continued inter partes on 25 November 2016), it was not surprising that he would not wish any money to pass through his own bank account.  In any event, there was nothing in the arrangement to prevent Chris Au from withdrawing the money from Lo & Lo, or directing the solicitors to apply the money for some other purpose.  Furthermore, the loan had a term of two years ending on 8 February 2019, prior to the trial of HCA 1285/2014.  The agreement makes no connection whatever between the repayment of the loan and the outcome of that action.

26.  Accordingly the second point raised by Chris Au is also rejected.

27.  Ms Cheung raised a further argument that even if a Quistclose trust did arise in the first place, once the funds were paid into court, the designated purpose of the payment was carried out and any remedy RGL and Casey Au had would be the ordinary one in debt: Twinsectra, §69.  Ms Au responded that where money is borrowed specifically and exclusively for the purpose of giving security for costs in legal proceedings, giving rise to a Quistclose trust, such a trust does not necessarily vanish when the money is paid into court.  In Common Professional Examination Board ex parte Mealing‑McCleod [2000] All ER (D) 588, money was borrowed by the applicant from a bank for the exclusive purpose of giving security for costs in her litigation against the Board.  After the applicant had won the litigation and obtained a favourable costs order, the Board applied for the money to be paid out to satisfy costs orders made in other proceedings against the applicant.  The English Court of Appeal held that it was impermissible, because on the facts the money was subject to a Quistclose trust when borrowed and, by necessary implication or as a matter of construction, it was a condition that if the applicant was successful in the litigation, the money would go back to the bank, and the applicant was therefore bound as trustee to return the money to the bank.  As it is unnecessary for my decision, however, I do not express any view on this argument.

Conclusion

28.  No submission has been made as to why the court should not make absolute the charging order if the two points raised are rejected.  For the above reasons, I am satisfied that a charging order can be imposed on the funds in court standing to the credit of the action HCA 1285/2014, for the payment of the judgment debts owed by Chris Au to the plaintiff herein, subject to the deemed security interest of Kim.  I am also satisfied that it is appropriate in all the circumstances to make absolute the charging order and there will therefore be an order in terms of the draft placed before me.

29.  There will be an order that Chris Au do pay the plaintiff’s costs of the application, to be assessed in a gross sum.  The plaintiff shall forthwith provide its statement of costs to Chris Au; a statement of objections, if any, shall be lodged by Chris Au within 14 days thereafter, and a reply by the plaintiff within 7 days thereafter.