ROE INVESTMENT LTD. v. PRINCE GOOD LTD. AND ANOTHER

CACV 231/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 231 OF 1998

(ON APPEAL FROM HIGH COURT ACTION NO. A1034 OF 1997)

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J U D G M E N T

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Liu, JA:

1. The dramatis personae are: Roe Investment Limited (Roe), Unionix Development Limited (Unionix), Team Base Development Limited (Team Base), Kowloon Development Company Limited (Kowloon Development), Ko Fei (Ko), Asia Corporate Services Limited (ACS) and Prince Good Limited (Prince Good).

2. These corporate disputes arose from two transactions. The first was an agreement by a co-owner (Roe) to transfer its 80% interest in another company (Team Base) to the remaining 20% co-owner (Unionix) upon the exercise of an option. Should the other co-owner (Unionix) decide to acquire the 80% interest of Roe by exercising its option, it (Unionix) would take over Team Base which owned Block B, Repulse Bay Mansions. The interest to be sold by the co-owner (Roe) to the 20% co-owner (Unionix) comprised 80% shareholdings of and 80% of the shareholders' loan to Team Base. The second transaction was an agreement for sale by an individual (Ko) and his nominee (ACS) of all the issued shares of the said 20% co-owner of Team Base (Unionix) to a company (Prince Good).

3. In the first transaction, the 20% co-owner of Team Base (Unionix) was desirous of exercising its option to acquire the remaining 80% of Team Base so that Unionix would wholly own Block B, Repulse Bay Mansions. But a discord arose in the agreement to transfer all the issued shares of Unionix in the second transaction. Finally, on 20 January 1997, the share transfer in the second transaction was completed with Prince Good holding all the issued shares of Unionix which was the 20% co-owner of Team Base. Immediately following on the same day, 20 January 1997, by a letter of even date, the 20% co-owner of Team Base (Unionix), through its solicitors, exercised the acquisition option in the first transaction. The 80% co-owner of Team Base (Roe) declined to honour its obligation to sell in the first transaction when the other 20% co-owner of Team Base (Unionix) tendered a cashier order for $249,678,325 on 28 January 1997. It transpired that the 80% co-owner of Team Base (Roe) expressed doubt as to the identity of the true beneficial owner of Unionix which had exercised the option in the first transaction. Thus, Roe was not satisfied that the option in the first transaction was validly exercised.

4. As a result, in the first transaction, the 20% co-owner of Team Base (Unionix) commenced a High Court Action A1034 of 1997 (HCA A1034) against the 80% co-owner of Team Base (Roe) for specific performance and/or damages. Kowloon Development was the guarantor of Roe in the first transaction. The guarantor was also joined in HCA A1034. On the following day, the 80% co-owner of Team Base (Roe) took out an Interpleader Summons in Miscellaneous Proceedings 326 of 1997 (MP 326) against the parties to both transactions, seeking under Order 17 of the Rules of Supreme Court (now RHC) a determination as to who had a right to represent the 20% co-owner of Team Base (Unionix) in the first transaction and a further determination as to whether the option to acquire the remaining 80% of Team Base in the first transaction had been validly exercised by Unionix.

5. Lastly, three weeks later, on 20 February 1997, Prince Good instituted a Commercial List Action 63 of 1997 (CL 63) against Ko and his nominee, ACS, for a declaration that shares in the 20% co-owner of Team Base (Unionix) had irrevocably been transferred to Prince Good in the second transaction.

6. From these two transactions, the aforesaid three sets of proceedings were instituted, HCA A1034, the Interpleader Summons in MP 326 and CL 63. The parties to these three sets of proceedings appeared before Cheung, J. for case management with the view to resolving all the disputes among the parties involved. HCA A1034 was ordered to be stayed pending such a resolution. Two issues were framed in MP 326. They were ordered to be tried with CL 63. As set out earlier, these two issues were: (1) who was entitled to represent the 20% co-owner of Team Base (Unionix) in the first transaction, and (2) whether in that transaction the option to acquire the remaining 80% of Team Base had been validly exercised by Unionix. The right of Roe to interplead was not conceded. It was left as an open question so that costs of the Interpleader Summons in MP 326 were specifically reserved and "for the avoidance of doubt, there be liberty to all parties to apply for such (Interpleader Summons) costs, orders and/or other consequential declaratory orders against any other parties in (MP 326) notwithstanding" the dropping out of the 80% co-owner of Team Base (Roe) from the trial of the issues. Roe was nevertheless bound by the outcome.

7. The trial of the issues in MP 326 and CL 63 was before Godfrey, J.A. sitting as an additional judge of the Court of First Instance. The conclusions reached by Godfrey, J.A. were adverse against the 80% co-owner of Team Base (Roe) in the first transaction. In CL 63, it was held that Ko had irrevocably transferred to Prince Good all the issued shares of Unionix in the second transaction. In MP 326, Godfrey J.A. declared that Prince Good was on 20 January 1997 and had since that date been entitled to represent Unionix with respect to the exercise of the option in the first transaction and that the option was validly exercised by Unionix on the same day. There was no appeal from the determinations of Godfrey, J.A.

8. The parties returned to Yam, J. for costs in MP 326 and the lifting of the stay of HCA A1034, which was ordered "pending the outcome of the trial of (CL 63) and the issues as stated to be tried under (MP 326)". However, Yam, J. put an end to HCA A1034 by granting a permanent stay and dismissed the applications of Unionix with costs to Roe. The judge also ordered costs in MP 326 to be paid by Unionix and/or Prince Good to Roe and costs of the Interpleader Summons in MP 326 to be paid by Ko or Prince to Roe. Ko was to indemnify all the costs awarded against Prince Good and Unionix in MP 326 and HCA A1034.

9. From the orders of Yam, J., Unionix appeals in HCA A1034 against Roe and its guarantor, Kowloon Development. Unionix seeks a lifting of the stay, leave to amend its Writ of Summons to include a claim for further damages, dispensation with re-service of the amended Writ of Summons and summary judgment against Roe and Kowloon Development as guarantor with damages to be assessed, costs of the action including cost reserved by Chueng, J. on 28 May 1997 and of Unionix's two summonses before Yam, J. dated 9 April 1998 and 13 July 1998, and costs of this appeal as well as those below before Yam, J.

10. In MP 326, Prince Good and Unionix appeal against Roe for an order setting aside the orders of Yam, J. made on 20 August 1998. Insofar as these orders affected the appellants, this court is asked to award against Roe in favour of Prince Good and Unionix costs of the action, including cost of the hearing on 28 May 1997 before Cheung, J. as well as costs of and occasioned by the summons issued by Prince Good and Unionix dated 13 May 1998, and costs of the appeal and those below before Yam, J.

11. The question that lies at the heart of these appeals is whether Roe was entitled to interplead.

12. The order made by Cheung, J. was one for case management albeit that references were from time to time made to O. 17 in the proceedings and the headings of formal court orders and documents. After the decisions of Godfrey J.A., share transfers were effected in the second transaction. Thereupon Unionix gained full control of Team Base in the first transaction but at a much later time. The property market was volatile and Block B, Repulse Mansions, now wholly owned by Unionix through Team Base, is said to have depreciated in value. That led to the claim made for further damages in Unionix's proposed amendment to the Writ of Summons in HCA A1034.

13. An account of the true nature of interpleader proceedings given by Greene, L.J. in De La Rue v. Hernu, Peron & Stockwell Ltd, [1936] 2 KB 164 at pp 170-173 is worth repeating in full:

"The argument for the appellant in this case is, in my judgment, founded upon what is really a misconception as to the true nature of interpleader proceedings. Interpleader proceedings originated in Courts of equity, and the appropriate procedure where a person found himself harassed by claims made on behalf of two or more persons was by way of a Bill of Interpleader. It is interesting to observe what the nature of that proceeding was. I read a passage from the Fourth Edition of Daniell's Chancery Practice, vol. ii., p. 1418, published in 1867, because it is from this practice in equity that the whole modern law of interpleader is ultimately derived. The learned author says this: 'Where two or more persons claim the same thing, by different or separate interests, and another person, not knowing to which of the claimants he ought of right to render a debt or duty, or to deliver property in his custody, fears he may be hurt by some of them, he may exhibit a Bill of Interpleader against them.' Then he says on p. 1419: 'the sole ground on which the jurisdiction of the Court, in this case, is supported, is the danger of injury to the plaintiff'- that is the person who exhibits the bill- 'from the doubtful title of the defendants.' Now, it is to be observed that under the old equitable procedure, the person desiring to interplead exhibits a Bill of Interpleader, to which he makes both claimants defendants; and the way the matter then proceeded under the old equitable procedure, is set out on p. 1422 in these words: 'If, at the hearing, the question between the defendants is ripe for decision, the Court will make a decree. If that is not the case, proper inquiries, or trials of questions of fact, either before the Court itself or a Court of common law, will be directed, in order to bring the matter to a determination.' Accordingly, under that practice, there was not necessarily any question of the two claimants suing one another either upon a real or a feigned issue. The plaintiff was the person against whom the claim was made; he came to a Court of equity to obtain relief, and to meet the two claimants themselves; and the matter was then decided, either summarily by the Court, or by the usual machinery of directing inquiries, with a consequential order on further consideration, or by remitting the matter to the Courts of law. I venture to think that it could not be suggested that two defendants to a Bill of Interpleader of that kind could be said to be engaged in an action of tort against one another. They were not.

Before the Interpleader Act, 1831, where the person in possession of the goods was sued at law his only remedy, apparently, was to exhibit a Bill of Interpleader in a Court of equity, asking, among other things, that the action at law might be stayed pending the decision of the matters raised by the Bill; and the Courts of equity had jurisdiction to stay actions at law in those circumstances.

The next step was the passing of the Interpleader Act, 1831, and it is rather important to see exactly what it says. It says this: 'Whereas it often happens that a person sued at law for the recovery of money or goods wherein he has no interest, and which are also claimed of him by some third party, has no means of relieving himself from such adverse claims but by a suit in equity against the plaintiff and such third party, usually called a Bill of Intepleader, which is attended with expense and delay; for remedy thereof be it enacted'; and then the Act proceeds to make provision for the determination of interpleader issues in Court of law, one of the pieces of machinery for the decision of those matters being the directing of a trial on one or more feigned issues.

Now, in substance, this appears to be a mere matter of machinery. Both claimants were defendants to the Bill, and under the Interpleader Act, 1831, the machinery could be used of directing a feigned issue, and that is the type of machinery which is embodied in the rules relating to interpleader contained in Order LVII.; but it is machinery and nothing more, in my opinion.

What, in substance, all along, both under the old equitable procedure and under the modern procedure, is being decided, is claims by two claimants against the person interpleading. What really happens is, that whereas there are two claimants who are harassing a person desirous of interpleading that person is by the interpleader proceedings calling upon the claimants to come out into the open and formulate their claims against him.

In substance, when an interpleader issue is tried, two actions against the person interpleading are being dealt with. Interpleader proceedings are the method of compelling the parties - either one, or both, or neither of whom may have actually issued a writ - to prosecute their claims. As it is the essence of interpleader proceedings that the person who has interpleaded has no title himself he naturally drops out of the suit. But in effect the entire matter is tried out in the presence of all the parties concerned, and the real claimants are compelled to put forward their claims and have them adjudicated upon. The reason for that is not their own benefit, it is for the relief of the person interpleading." (Emphasis supplied).

14. Interpleader was dealt with under O. 57 of the Old Rules of the Supreme Court of England. It was revoked in 1962 and superseded by O. 17. Both at p. 1632 of volume 1 of the 1962 Annual Practice for O. 57 and p. 346 of volume 1 of the 1965 Annual Practice for O. 17, an identical explanatory note was given for the respective clauses "where the person seeking relief ...... is under liability for any debt." in O. 57 and "where a person is under liability in respect of a debt" in O. 17. Therefore, it would appear that the substitution of the words "in respect of" in O. 17 for the word "for" in O. 57 envisaged no change.

15. For the same words "that the applicant claims no interest in the subject-matter" in both O. 57, r 2 (see p. 1635 vol. 1, 1962 Annual Practice) and O. 17, r 3 (see p. 350 vol. 1, 1965 Annual Practice), the 1962 and 1965 editions carried an identical passage:

"A party may have an interest in the subject-matter, even though he claims no right of property, if he has a financial stake in the result of the proceedings (Murietta v. South Africa Company (1893), 62 LJ QB 396 at pp. 397, 398)".

These very words appear again in the current O. 17, r 3 with a repeated passage at p. 301 of volume 1 of the 1999 Supreme Court Practice, 17/3/7. See also vol. 22(1), Atkin's Court Forms, 2nd edn. p. 429.

16. Stauart VC spoke of absence of title or interest in Diplock v. Hammond, (1854) 23 LJCH 550 at p.552 in these terms:

"The meaning of interpleader is, that the holder of a fund which is claimed by different individuals shall not be exposed to harassing litigation; he himself claiming no interest in the fund, and the other persons claiming it not proceeding to litigation with a view to the settlement of their claims. It is so-called because it is a bill by a stakeholder who cannot get the claimants to settle the question between themselves, and who, apprehending that he may be exposed to attack from one or the other of them, comes to this court to subject them to interpleader. If they were allowed to proceed against him separately, of course it would be vexatious. The first thing essential in interpleader is, that the plaintiff should be a mere stakeholder, and have no interest of his own in the fund." (Emphasis supplied).

17. In Murietta supra, at p. 397, Wills, J. extended the scope of "interest" to include a financial stake in the result of the dispute between the claimants:

"The rule provides that the applicant must satisfy the Court that he has no claim or no interest in the subject-matter in dispute ........... In one sense it may be said that here the applicant has no interest in the subject-matter in dispute, because he lays no claim to any specific portion of it; but he does possess this very substantial interest in it, that if one party succeed, he will have to pay ￡10,000, and ultimately nearly ￡100,000; whilst if the other party succeed, he will have to pay very much less, perhaps ￡8,000 and ￡80,000. Therefore, to the extent of the difference between these two larger sums, he is very much interested in the subject-matter, because in the event of one party succeeding he is entitled to a large amount which he may keep for himself." (Emphasis supplied).

Charles, J. concurred at p. 398.

18. In an interpleader, the stakeholder must be willing to pay or transfer the subject-matter into court or to dispose of it as the court may direct. See O. 17, r 3(4)(c). Obviously he must be able and ready to do so or, so to speak, in possession of the subject-matter in dispute to do so. See also vol. 25 Halsbury's Law of England, 4th edn. Reissue, p. 568, para. 1008.

19. In Robinson v. Jenkins, (1890), 24 QBD 275 at p. 279, Fry, LJ had this to say for a chose in action:

"In the first place, the argument that there can be no interpleader in respect of chose in action is untenable because a first rule of Order 57 gives relief not only in respect of any debt, money, or goods, but also in respect of chattels. This is one of the widest words known to the law in its relation to personal property. Then rule 2(c) provides that the applicant must satisfy the Court or a judge that he is willing to pay or transfer the subject-matter into Court or dispose of it as a Court or the judge may direct. The disposition of a chose in action is equivalent to payment in a case of money or transfer in a case of good or of a chattel to which that process is applicable."

20. Reference is made to the nature of interpleader proceedings and the different editions of the White Book for meeting the caution sounded by Mr Chan, leading counsel for the respondents, that the law to-day might have been at variance with that affecting interpleader when it was first developed. But what have been consistently retained as the pre-requisites to interplead are the absence of an interest in the subject-matter, and the ability and willingness to dispose of it as the court may direct in terms of delivery of property or render of a duty. On these aspects, there has been no variation.

21. In the first transaction, Roe agreed to sell 80% of Team Base to Unionix upon the exercise of an option. Roe's 80% interest in the shareholdings and shareholders' loan was to be sold to Unionix by a transfer. Before the transfer was completed, Roe clearly retained an interest in the subject-matter. Further, as in Murietta, Roe had a financial stake in the result of the dispute between Ko and Prince Good as to the ownership of Unionix, which triggered Roe's concern about the validity of the exercise of the option and ultimately a delay of the transfer of the 80% of Team Base. An exercised option set the time for sale. In the volatile property market, Roe would be paid for its share of Team Base according to the current value of Block B, Repulse Bay Mansions. That would not be constant. Roe would also be affected in the amount of the shareholders' loan with running interests. The payment Roe was to receive varied with the time of the actual sale. Roe was thus interested in the subject-matter of its refusal to transfer to Unionix either in its very 80% share of Team Base or its financial stake in the same 80% on the pretext of its anxiety about the dispute between Ko and Prince Good over the proprietorship of Unionix. Imbued with interest in different forms, Roe could not take advantage of O. 17 and must be left on its own to litigate on the stand it took subject to the usual incidence of costs.

22. Insofar as it is or may be contended that the real subject-matter in the O. 17 interpleader procedure was the validity or otherwise of the exercised option, Roe had no role to play in the making of the decision to exercise that option, which was a matter exclusively for Unionix. It was sought to fasten the right to exercise the option elusively on the identity of the true proprietor of Unionix, viz either Ko or Prince Good. As a corporate entity, Unionix was different "altogether from the subscribers". See Salomon v. Salomon & Company [1897] AC 22 at p. 51, per Lord MacNaghten. The separation of a limited company from its members has never since Salomon been doubted. Roe dealt with Unionix, not with its beneficial ownership at that given point of time. Roe should have focused instead on whether the option was exercised with the authority of the Board of Unionix. In fact, there was a single claim from Unionix for the transfer of 80% of Team Base. Roe had no competing claims to meet. Apart from Unionix, there was no other claimant.

23. Besides, Roe was not a party to the agreement to sell all the issued shares of Unionix, which was to bring about an ownership change in the second transaction. Insofar as the issued shares of Unionix or their transfer could affect Roe, Roe did not have any locus standi or even a bare right with respect to them and was not in a position to take any steps envisaged by O. 17 r 3(4)(c) in any related choses in action. Roe had also no control over the exercise of the acquisition option in the second transaction. However analysed, Roe was not "in possession" of the subject-matter. So considered, Roe could not satisfy O. 17 r 3(4)(c) and had no right to interplead.

24. On the finding of Godfrey, J.A. Roe was legally obliged to sell the 80% shareholdings of and shareholders' loan to Unionix as at 20 January 1997. It declined to discharge its obligation and must take the consequence. O. 17 was not open to Roe which could not evade liabilities. For all the reasons I have endeavoured to give, Roe could not interplead as it purportedly did.

25. The option was exercised on 20 January 1997 but the transfer was not effected until 7 October 1997 after the judgment of Godfrey, J.A., which was delivered on 28 August 1997.

26. Mr Chan, leading counsel for the respondents, confines the plea of estoppel to the claim for damages, including further damages for the delayed transfer. Roe is said to be an innocent bystander in the dispute between Ko and Prince Good over Unionix . It is also pressed upon us that the case management devised for resolving the various issues was endorsed by all and that pending the trial of the issues, delay in transferring the shareholdings of and shareholders' loan to Team Base by Roe was inevitable. Further, no evidence of damages or further damages for delay was placed before Yam, J. It is true that no decree of specific performance needed to be considered or granted in HCA A1034 simply because the transfer had been made pursuant to the declaration made by Godfrey, J.A. For the circumstances isolated by leading counsel for the respondents and the estoppel they are said to have raised, Mr Chan submits that the judge was right in granting a permanent stay of HCA A1034 because a decree for specific performance was no longer necessary and that in reality Roe could not be held responsible for the delayed transfer. Was Roe's liability for the delayed transfer deflected by any actus interveniens? Was the quantum of damages in any way varied? Neither of these issues seemed to have been decided. However, Mr Fung, leading counsel for the appellant, moves for summary judgment under O. 86 which, he submits, would require no pleading of damages but enables the court to give directions for their assessment.

27. Yam, J. ordered a permanent stay of HCA A1034 with an order for costs against Roe. No reason was given. What would appear to be reasonably clear is that the judge made no finding on Roe's liability for the delayed transfer nor on quantum of damages. Perhaps, these issues fell away in his determination on O. 17 in favour of Roe, but the judge did not proceed to make alternative findings. In any case, no damages were specified for the judge who was not assisted as to what, if any, damages in lieu of or in addition to specific performance had been sustained. The claim made against Roe is not insubstantial. Moreover, the judge's approach was made on entirely different premises: first, Roe's interpleader pursuant to O. 17 was held to be proper, but the view taken on appeal is that the O. 17 interpleader proceedings were misconceived. Further, in Roe's interpleader before the judge the subject-matter was probably taken to be the 80% shareholdings of and shareholders' loan to Team Base, but on appeal the subject-matter of the respondents' interpleader is identified as the validity or otherwise of the option exercised. In these circumstances, liability and quantum call for a close examination in the proper context and, more importantly, there is no good reason why the parties to these appeals should be deprived of the benefit of determinations at first instance and their statutory right of appeal therefrom to this court.

28. In conclusion, Roe was not entitled to invoke O. 17. In effect, Roe failed in its resistance to the claim of Unionix for the transfer of shareholdings of and shareholders' loan to Team Base and must be visited by the usual incidence of costs. Subject to what I am about to say, I would allow both appeals. The orders sought in both appeals should, therefore, be granted except for the prayer for Summary Judgment under O. 86 in HCA A1034. Roe's liability for damages and the claimed further damages should be first resolved by Yam, J. to whom these issues are remitted. I would dispose of these appeals accordingly and make an order nisi for 9/10ths of the costs prayed for in the two Notices of Appeal; the remaining 1/10 is intended to represent the costs for determining Roe's liability for damages and quantum, such costs to be reserved to Yam, J.

Mortimer, V-P:

29. I have had the opportunity of considering both judgments in draft. I agree for the reasons given that this appeal must be allowed. I also agree with the orders proposed by Liu JA.

Nazareth, V-P:

30. I agree with Liu JA. By way of emphasis, I add the following, adopting Liu JA's abbreviated designations.

31. I reject the submission made on behalf of Roe that the consent order made by Cheung J constituted or embodied consent or acceptance by Unionix (and Prince Good) that Roe's interpleader summons was properly brought and met the requirements of O17 of the Rules of the High Court; and also the further submission (which rests upon the former) that Unionix and Prince Good are estopped from contending that Roe's interpleader application was other than proper. Consent was not demonstrated and, on the material before this Court, does not appear to have been given. That Cheung J only stayed HCA 1034 pending the determination of the other two proceedings (MP 326 and CL 63) and moreover did not relieve or absolve Roe from liability thereafter to the appellants, shows that he did not regard them as having so consented.

32. As to whether Roe's interpleader summons met the requirements of O17, for the reasons given by Liu JA, I am satisfied that Roe did have the substantial interest in the transfer of the shareholding in Team Base and its loan to Team Base that has been described by Liu JA, and that this disentitled it from reliance upon O17 upon the basis set out in the judgment of Liu JA. Moreover, a misconceived and thus unfounded fear or expectation that one might be sued cannot meet the relevant criterion in O17 r(1)(a) so as to give rise to an entitlement in that respect to apply under that rule for interpleader relief.

33. The appeal is accordingly allowed and there will be orders to the effect indicated in the judgment of Liu JA.