BANK OF COMMUNICATIONS TRUSTEE LTD v. CHINA ENERGY RESERVE AND CHEMICALS GROUP OVERSEAS CO LTD AND ANOTHER

HCA 146/2020

[2022] HKCFI 795

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 146 OF 2020

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D E C I S I O N

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Contents Paragraph

A.      INTRODUCTION

B.      ISSUES IN DISPUTE

C.      BACKGROUND

D.      JOINDER APPLICATION

E.     GARNISHEE APPLICATION

F.      SETTING ASIDE APPLICATION

G.      CONCLUSION

A.    INTRODUCTION

1.  There are 3 applications before this Court:

(1)  The summons of China Life Trustees Ltd (“China Life”) to be joined as a party and to substitute its trustee, the Plaintiff (“BOCOM Trustee”) (“Joinder Application”);

(2)  The application by China Life for the garnishee order nisi to be made absolute (“Garnishee Application”); and

(3)  The application by D1 to set aside the garnishee order nisi on the ground of material non-disclosure (“Setting Aside Application”).

2.  BOCOM Trustee commenced this action as a trustee of guaranteed bonds due 2022 (“2022 Bonds”), issued by D1 and guaranteed by D2.  China Life is the sole bondholder.

3.  BOCOM Trustee obtained summary judgment against the Defendants on 29 October 2020 (“Judgment”) for a sum of HK$2,000,000,000 with interest and costs.  The appeal against the Judgment has been dismissed by consent.

4.  On 9 March 2021, BOCOM Trustee obtained a garnishee order nisi in respect of a debt of approximately US$121,323,000 (“Funds”) due from Bank of Communications (Hong Kong) Ltd (“BOCOM”) to D1 and held in D1’s account no. 382-xxxxx157xxx with BOCOM (“Account”).  This is the hearing to show cause on the Garnishee Application. 

5.  Meanwhile, some bondholders of guaranteed bonds due 2018 (“2018 Bonds”) issued by an entity within the CERC Group complained about the conflict of interest that the BOCOM Trustee placed itself.  Those bondholders formed an Ad Hoc Committee.  Judgment has been obtained against the 2018 Bond Issuer and D2 (guarantor) on 19 March 2021 in HCA 1607/2020.  The Ad Hoc Committee and D1 seek to set aside the garnishee order nisi on the ground that the Funds are held by D1 on trust and that BOCOM Trustee obtained the garnishee order nisi by material non-disclosure, hence the Set Aside Application.

6.  China Life therefore applies to be substituted as the plaintiff in the present proceedings and for BOCOM Trustee to be an interested party, hence the Joinder Application.

B.    ISSUES IN DISPUTE

7.  In respect of the Joinder Application, it is virtually unopposed, save that BOCOM wants to be joined as an “interested party” instead of as 3^rd Defendant.

8.  In respect of the Garnishee Application, the core contentions are as follows:

(1)  Whether the Ad Hoc Committee has locus standi to oppose the Garnishee Application: the Ad Hoc Committee says yes, as it has commercial interest in the Funds.  China Life says no, as the Ad Hoc Committee does not claim to be legal or beneficial owner of the Funds.  Its members are not creditors of D1, in that the 2018 Bonds were not issued by D1.  Any guarantee that D2 provided in respect of the 2018 Bonds is held by BOCOM of the 2018 Bonds and not by the Ad Hoc Committee members. 

(2)  Whether the Funds are held on trust for CERC Trading, a third party: CERC Trading and the Defendants (“CERC Parties”) and the Ad Hoc Committee say yes, there being an express trust, Quistclose Trust or resulting trust.  China Life denies.

(3)  Whether there was material non-disclosure when BOCOM Trustee applied for the garnishee order nisi and when the proceedings remained in ex parte stage.  The CERC Parties say that the BOCOM failed to disclose its position of conflict and that the Funds were held on trust. China Life says no, because the conflict has not arisen at the time the garnishee order nisi was applied for.  Besides, BOCOM Trustee has disclosed the purported defence of trust.

9.  In respect of the Setting Aside Application, the same grounds in sub-paragraphs (2) and (3) in the preceding paragraph apply. 

10.  The CERC Parties had not appeared at this hearing.  Their then solicitor, who had an application to cease to act for the CERC Parties to be heard 2 days after this hearing, had no instructions and did not advance any submission on behalf of the CERC Parties.

11.  The CERC Parties, who had not obtained leave to act in person, wrote to the Court stating that they were in financial distress and sought an adjournment to engage a law firm in substitution.  Without prejudice to their position, the CERC Parties adopted the written submission of the Ad Hoc Committee for this hearing.  The CERC Parties were willing to give their creditors (including China Life and the Ad Hoc Committee) an undertaking, in the event the Court was to discharge the garnishee order nisi, that they and all other China Energy Group companies would not dispose of or remove the Funds except with leave of the Court.

12.  The Ad Hoc Committee advances its case based, in part, on the evidence of the CERC Parties.

13.  I have at the hearing declined to grant the adjournment sought by the CERC Parties.  Last minute change of legal representation is not, in itself, a ground to adjourn.  The parties have had time to put in their evidence and submissions.  China Life has been kept out of money due from the Defendants for about 3 years since the first default.  The matter should not be delayed any further.

C.    BACKGROUND

14.  The primary facts are not in dispute and I adopt the summary of Mr Dawes SC (leading Mr Joshua Chan).

C(1).  Issuing of Bonds

15.  Between April 2015 and May 2018, D2’s indirect BVI subsidiaries issued a series of 8 bonds (collectively, “CERCG Bonds”) as a debt financing mechanism to finance the operations of D2 and its subsidiaries.

16.  The CERCG Bonds include the following bonds:

(1)  HK$2 billion 6.30% guaranteed bonds due 2022 issued by D1 (ie the 2022 Bonds); China Life is the sole bondholder of the 2022 Bonds.

(2)  US$350 million 5.25% guaranteed bonds due 2018 issued by CERCG Overseas Capital Co Ltd (ie the 2018 Bonds); major holders of the 2018 Bonds include:

(a)  The Export-Import Bank of China;

(b)  CMB Wing Lung Bank Ltd;

(c)  CWB Wing Lung Insurance Co Ltd;

(d)  Television Broadcasts Ltd; and

(e)  Luso International Banking Ltd

(ie the Ad Hoc Committee).

(3)  US$150 million 5.55% guaranteed bonds due 2018 issued by CERCG Capital Ltd (“Project Energy 2 Bonds”).

(4)  BOCOM Trustee is the common trustee of all of the CERCG Bonds, while D2 is the common guarantor or keepwell provider.

17.  The relationship between these parties can be broadly described as follows:

(1)  The issuers of the CERCG Bonds agreed with BOCOM Trustee under a Trust Deed that, amongst others, it would pay BOCOM Trustee the principal and interest in respect of the relevant bonds.

(2)  As trustee, BOCOM Trustee held the benefit of each issuer’s promise or covenant to pay the principal and interest, as well as D2 and each issuer’s promise to comply with the relevant trust deed, on trust for the relevant bondholders.

(3)  D2, pursuant to a Deed of Guarantee, agreed with BOCOM Trustee to guarantee the payment obligations of the relevant issuer.

18.  The 2022 Bonds were issued on 27 April 2015 and were the first of the 8 CERCG Bonds to be issued but last to mature.

19.  The second of the CERCG Bonds, were the 2018 Bonds issued on 11 May 2015 and redeemable on 11 May 2018.

C(2).  Cross-default in 2018

20.  On 25 May 2018, the issuer of the 2018 Bonds and D2 issued an announcement on the HKEx website to the effect that the issuer had defaulted on the principal and interest under the 2018 Bonds.

21.  This then triggered cross-defaults of other bonds, including the 2022 Bonds (“Cross-Default”).

C(3). Failure to repay amounts due under the 2022 Bonds

22.  On 25 October 2018, BOCOM Trustee issued a notice to the Defendants confirming that cross-defaults had occurred in relation to the 2022 Bonds.

23.  On 29 October 2018, a further event of default occurred, in that the Defendants failed to pay BOCOM Trustee the accrued interest in respect of the 2022 Bonds.

24.  On 25 January 2019, BOCOM Trustee issued a letter to the Defendants to demand and accelerate payment under the 2022 Bonds (“Acceleration Notice”).

25.  Save for a partial payment for accrued interest on 20 December 2018, the Defendants have failed to pay the outstanding principal and interest under the 2022 Bonds, as well as the legal expenses and remuneration which BOCOM Trustee is entitled to.

26.  Up to this day, the Defendants have remained in default.

C(4).  The Judgment

27.  BOCOM Trustee commenced the present proceedings in December 2019, ie more than a year after the Cross-Default and almost a year after the Acceleration Notice.

28.  On 8 May 2020, BOCOM Trustee applied for summary judgment.  At that time, BOCOM Trustee had not received any objection or opposition to the commencement of these proceedings or the application for summary judgment from the other bondholders of the CERCG Bonds.

29.  On 29 October 2020, Master Rebecca Lee handed down summary judgment in favour of BOCOM Trustee and ordered the Defendants to pay to BOCOM Trustee the sum of HK$2 billion plus interest and remuneration and expenses incurred (ie the Judgment).

C(5).  Applications for stay of execution

30.  On 30 October 2020, the Defendants filed a notice of appeal and summons for stay of execution pending appeal (“Stay Application”).

31.  On 21 December 2020, Master Rebecca Lee dismissed the Stay Application but granted the Defendants time to renew the application.

32.  On 30 December 2020, the Defendants took out a renewed stay application (“Renewed Stay Application”) and also applied for leave to adduce and rely upon Lin 4^th and 5^th [1](“New Evidence Application”).

33.  In Lin 4^th, Mr Norman Lin alleged that the Funds were not beneficially owned by D1 because the Funds were kept in the Account purely for convenience and to obtain a more favourable interest rate.  It is noteworthy that:

(1)  Mr Lin did not identify the entity for whom the Funds were alleged to be held on trust.

(2)  Mr Lin did not identify the type of trust or the basis on which the Funds were said to be held on trust.

(3)  Contrary to the Defendants’ current contentions, Mr Lin suggested that “the [Funds] is and was at all material times intended to be funds available for the use of the Group” depending on the general corporate needs at the time.

34.  On 26 February 2021, this Court allowed the New Evidence Application but dismissed the Renewed Stay Application on the grounds that:

(1)  The Defendants had failed to show strong grounds for appeal; and

(2)  It could not be said that the appeal would be rendered nugatory in the light of the stay. In particular, the claim that execution would disrupt ongoing restructuring negotiations was both irrelevant and unrealistic in the light of the fact that no restructuring agreement, or even a standstill agreement or interim moratorium, had been reached after 2½ years of negotiations.

C(6).  Injunction and Garnishee Application

35.  Shortly before this Court dismissed the Renewed Stay Application, on 22 February 2021, BOCOM Trustee took out an inter partes application for a Mareva injunction against D1 to restrain it from, amongst others, disposing of assets up to the value of HK$2 billion or its equivalent until 14 days after the final determination of the Renewed Stay Application (“Injunction Application”).

36.  At the hearing of the Injunction Application on 26 February 2021, Coleman J granted the interim injunction sought until the final determination of the Injunction Application or the day on which garnishee proceedings to be commenced by BOCOM Trustee were finally determined (“Injunction Order”).  Coleman J also gave directions for D1 and BOCOM Trustee to serve affirmation evidence in relation to the Injunction Application.

37.  Pursuant to this direction, D1 filed and served Lin 7^th.  In this affirmation, Mr Lin contended for the first time that the Funds was held by D1 on trust for CERC Trading on a number of grounds discussed below.

38.  The substantive hearing of the Injunction Application was adjourned to 7 April 2021.

39.  On 2 March 2021, BOCOM Trustee took out the Garnishee Application, Master Kot granted the subject garnishee order nisi on 9 March 2021. 

40.  Up to this point, BOCOM Trustee still had not received any objection or opposition to the commencement or prosecution of these proceedings from the other bondholders of the CERCG Bonds.

41.  The grant of the garnishee order nisi made it unnecessary for BOCOM Trustee to apply for an injunction against D1. Accordingly, on 29 March 2021, Coleman J made an order by consent which (a) gave BOCOM Trustee leave to withdraw the Injunction Application; (b) discharged the Injunction Order, and (c) vacated the hearing on 7 April.

C(7).  Subsequent events

42.  The hearing to show cause in respect of the Garnishee Application was fixed for hearing before Master Phoebe Man on 16 April 2021.

43.  On 29 March 2021, BOCOM Trustee received for the first time instructions from other bondholders of the CERCG Bonds to oppose the Garnishee Application.

44.  BOCOM Trustee did not consider such instructions to be binding given that, pursuant to the relevant trust deeds, it was not bound to enforce those bondholders’ rights unless (a) it had been so requested in writing by holders of at least 25% of the aggregate principal amount of the relevant bonds or directed by extraordinary resolution, and (b) it has been indemnified, provided with security or prefunded to its satisfaction.

45.  On 9 April 2021, BOCOM Trustee received for the first time (a) instructions from the holders of more than 25% of the aggregate principal amount of the 2018 Bonds (namely the members of the Ad Hoc Committee) to oppose the Garnishee Application, and (b) an indemnity provided by the Ad Hoc Committee.

46.  On 13 April 2021, D1 filed and served the Setting Aside Application.

47.  At the first hearing before Master Phoebe Man on 16 April 2021, the parties agreed for the matter to be adjourned to 3 June 2021 in the light of BOCOM Trustee’s indication that it was unable to proceed due to a conflict of interest.

48.  In order to provide a solution to the conflict issue, China Life took out the Joinder Application on 2 June 2021.

49.  At the second hearing before her on 3 June 2021, Master Phoebe Man adjourned the 3 current Applications for hearing.

D.   JOINDER APPLICATION

50.  The application for China Life to be substituted as the plaintiff arose out of BOCOM Trustee being in a position of conflict.  There is no opposition from the CERC Parties and the Ad Hoc Committee, subject to BOCOM Trustee showing to the Court the proper legal basis.

51.  Under Order 15, rule 6(2)(b) of the Rules of the High Court (“RHC”), the Court does have power to substitute parties at any stage of the proceedings, including after judgment:  Mercer Alloys Corporation v Rolls Royce Corporation Ltd [1971] 1 WLR 1520 at 1524C-D and 1526F per Davies LJ.

52.  The Court should apply a liberal approach to O.15 r.6(2)(b) and allow joinder of plaintiffs to ensure that, as far as possible, all matters in dispute between the parties are completely and finally determined and all multiplicity of legal proceedings with respect to any of those matters is avoided: Chen Hongqing v Liu Yiu Keung Stephen[2021] HKCFI 440 at §26(a), Keith Yeung J; Hong Kong Civil Procedure 2022, at §15/6/1.

53.  In the context of claims by a trustee on behalf of a trust, beneficiaries may bring a derivative action on behalf of the trust where there are special circumstances making it difficult or inconvenient for the trustee to sue, such as where the trustee is in a position of conflict: Fung Oi Ha v Fung Pui On (unrep, HCA 17/2012, 6 Jun 2016) at §114.

54.  In such a derivative action, the trustee is usually joined as a party for the purpose of ensuring that the trustee is bound by any order made:  Roberts v Gill [2011] 1 AC 240 at §§56-57.

55.  Accordingly, the Court does have power to substitute China Life for BOCOM Trustee.  As the Judgment was obtained by BOCOM Trustee as trustee on behalf of China Life and China Life was and is the sole bondholder of the 2022 Bonds, China Life is the obvious party to be substituted as the plaintiff.

56.  BOCOM Trustee, however, asked that it does remain as an “interested party” rather than as 3^rd Defendant.

57.  I consider that BOCOM Trustee does have interest in the present proceedings and it is necessary for it to remain as a party for the following reasons:

(1)  Its continuous role as a common trustee under the 2022 Bonds and 2018 Bonds has not changed, although it may play a different role in view of the position of conflict.

(2)  BOCOM Trustee is “interested” in the Setting Aside Application to refute the allegation of material non-disclosure against it whilst maintaining a neutral position on the Garnishee Application.

58.  Mr Lam SC (leading Ms Astina Au) cite Sanju Environment Protection (Hong Kong) Ltd v Wang Lishan [2021] HKCFI 1503 at §7(1) to show that the Court has power to join a person as an interested party as opposed to a defendant, but that authority does not lay down principles as to the circumstances under which such designation should apply.

59.  Anyhow, I accept BOCOM Trustee’s explanation that it should not be named as a 3^rd Defendant because:

(1)  No relief is sought against BOCOM Trustee.  Designating it as an interested party will more appropriately reflect its “indirect involvement”: see eg R v Secretary of State for the Home Department and Anor[2017] 1 WLR 2595 at §59.

(2)  Being named as a defendant will trigger onerous reporting obligations on BOCOM Trustee’s part and creates the impression that it is being “sued”.

(3)  It makes no material difference to any party how BOCOM Trustee is to be named as a party because it will be bound by any court order that shall be made.

60.  In the premises, I make an order for BOCOM Trustee to be joined as an interested party.

E.    GARNISHEE APPLICATION

E(1).  Legal principles on garnishee applications

61.  The Court has discretion under O.49 r.1, RHC, to make a garnishee order where a person has obtained a judgment or order for the payment by some other person of a sum of money amounting in value to at least HK$1,000, and another person within the jurisdiction is indebted to the judgment debtor.

62.  If the abovementioned conditions are satisfied, the Court has jurisdiction to make a garnishee order absolute even if the judgment debtor is not the beneficial owner of the debt and is holding it as trustee for some third party: see United Kesvick Ltd v Tsang Wing Fai [2020] HKCFI 2922 at §§19-20.

63.  A garnishee order nisi will normally be made absolute unless the judgment debtor or the garnishee is able to show reasonable grounds to the contrary: Rooke v HV Construction Services Ltd [1998] 2 HKLRD 319 at 322J-323C, CA.

64.  The fact that the garnishee order absolute would result in some creditors before others is generally not a valid ground for opposition. Unless a pari passu distribution will follow from a refusal to make the garnishee order absolute, eg because winding up proceedings have already been commenced or because their equivalent in the form of some scheme of arrangement is imminent, the Court cannot deny a garnishee order absolute on this ground: see Rooke at 323D-F.

65.  Under Order 49, r.6, where a person other than the judgment debtor claims to be entitled to the debt sought to be attached, the Court may order that person to attend before the Court and state the nature of his claim with particulars thereof; and summarily determine the questions at issue between the claimants or make such other order as it thinks just, including an order that any question or issue necessary for determining the validity of the claim of the third party be tried in any manner in which any question or issue in an action may be tried.

66.  If it transpires that the debtor is holding the money on trust for a third party, the court will discharge the order nisi.  Put simply, the Court will not allow the judgment debtor to use monies not really belonging to him to satisfy the judgment debt.

67.   The ownership of assets transferred from one person to another is normally determined by reference to the relevant party’s state of mind at the time of the transfer: Tang Lui Leo v Wong Elaine [2020] HKCFI 3087, at §22, DHCJ Burns SC.

68.  There is no dispute that the conditions for the grant of a garnishee order nisi have been met.  The burden is on the CERC Parties to satisfy the Court that the garnishee order should not be made absolute.

E(2).  Locus of Ad Hoc Committee

69.  In the race for the Funds from the Defendants, China Life has got the garnishee order nisi faster.  The Ad Hoc Committee does not claim to be entitled to the Funds. Its position is just that the Funds do not beneficially belong to D1.  The Ad Hoc Committee does have locus to show cause as it has economic interest in the Funds as a judgment creditor.  Its presence is of assistance to the Court in the exercise of its discretion, especially since the CERC Parties are in distress and have little ability to contest the Garnishee Application.  I accept the Ad Hoc Committee’s submission.

E(3).  The case on trust

70.  Mr Laurence Li, SC, counsel for the Ad Hoc Committee, bases his case on express trust, Quistclose trust and resulting trust.  The bases for asserting that the Funds are held by D1 as bare trustee are as follows:

(1)  The Funds were kept in the Account for administrative convenience and in order to benefit from a higher interest rate.  In practical terms, in receiving and holding the Deposit, the Account was not even being used by D1 but by the affiliates.

(2)  The money deposited in the Account (including the Funds) were not for D1’s own use, since D1 has no business of its own and repayment of interest under the 2022 Bonds were made using funds deposited in another bank account.

(3)  The Funds represent the proceeds of the Project Energy 2 Bonds rather than the proceeds of the 2022 Bonds.  Funds had never been owned by D1 but CERC Trading.

(4)  The Funds were transferred to D1 by CERC Trading, which was and is the treasury of the CERC Group of companies.

(5)  The Funds were remitted to D1 initially for the purpose of repaying the outstanding principal and interest under the 2018 Bonds.  After Cross-Default, the Defendants decided to use the Funds for the purpose of restructuring and as a source of payment to all bondholders.  The Funds were to be returned to the transferor and was never meant for D1 or for D1 to deal with.

71.  China Life denies the existence of any trust.

E(4).  Express trust

72.  Three certainties must be found in a declaration of trust: certainty of words, certainty of subject matter and certainty of objects.  In respect of the first certainty, the words of a declaration of trust must show an intention on the part of the settlor that a trust should be created.  See Lewin on Trusts, 20^th ed, at §§5.003-5.004.

73.  A trust clearly ought to be declared by means of express words, though it need not use words like “trust” or confidence.  Equity has regard to the substance and not the form.  There must simply be a sufficiently clear manifestation of an intention to create such a trust.  The law requires that the donor should have evinced by acts which admit of no other interpretation, that he himself had ceased to be, and that some other person had become, the beneficial owner of the subject of the gift or transfer, and that such legal right to it, if any, as he retained was held by him in trust for the donee.  See Thomas and Hudson, The Law of Trusts, 2^nd ed, at §2.03.

74.  Mr Li, SC propounds that an express trust is created when the settlor evinces an intention to do so, even if there is no written or oral agreement.  The intention is to be determined objectively.  The trust can arise out of the settlor’s conduct.  See Twinsectra Limited v Yardley[2002] 2 AC 164 at §71, where Lord Millett stated:

“… A settlor 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.”

75.  Further, Mr Li SC relies on Snell’s Equity, 34^th ed, §22.013 which states that “the settlor need not even understand that his words or conduct have created a trust if they have this effect on their proper legal construction”.

76.  With respect to Mr Li SC, those passages he cites only stand for the proposition that no particular form of expression is necessary for the creation of the trust, and that the court should construe the substance and effect of the words used.  However, they are far from suggesting that the Court can create a trust out of nothing, where no intention was expressed, or no words or conduct was used to create a trust.

77.  In the present case, the Funds were transferred from the corporate treasury to an entity within the CERC Group.  There was nothing to show that CERC Trading had used words or conduct close to an express trust. The transfer was equally capable of being interpreted as an intra-Group loan or funds to meet the debt of a Group member.  Applying Thomas and Hudson, the situation is not one that admits of no other interpretation than a trust.

E(5).  Quistclose Trust

78.  In Chen Kam Nga v Lee Ho Yin [2021] HKCFI 1352, at §59, this Court summarized the principles on Quistclose Trust:

(a)  Where a loan is made to a borrower for a specific purpose and the borrower is not free to apply the money for any other purpose, that arrangement gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce.

(b)  For such a trust to arise, a settlor must possess the necessary intention to create the trust but his subjective intentions are irrelevant.  If he entered into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.

(c)  The question in every case is whether the parties intended the money to be at the free disposal of the recipient. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose.

(d)  Where a Quistclose trust arises, the money remains the property of the lender unless and until it is applied in accordance with his directions and insofar as it is not so applied, it must be returned to him.

(e)  A duty to keep the money separate is an incident of a Quistclose trust, should one arise from the circumstances, rather than a pre-condition for the existence of such a trust. 

(f)  The same applies to transfers which are not loans.  There is a wide range of situations where the parties enter into a commercial arrangement which permits one party to have a limited use of the other’s money for a specific purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out.

79.  The fact that money was transferred for a specific purpose was not sufficient.  The key is whether the money has to be used exclusively for a purpose and whether the recipient of the money has the power to freely dispose of it.  As explained in Twinsectra at §§69, 73-74.

“73. A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. 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. Similarly, payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.

74. The question in every case is whether the parties intended the money to be at the free disposal of the recipient. … His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose…” (emphasis in original text)

80.  Mr Li SC submits that D1 has always been understood to be a special purpose financial vehicle.  Its function is to act as the issuer of the 2022 Bonds.  There was no intention to let D1 use the Funds.  The contemporaneous documents (internal application, approval and vouchers) all made clear that the intention was to use the Deposit to pay the 2018 Bonds.

81.  The accounting treatment by D1 reflected the same.  D1 has not treated the Deposit by CERC Trading as in any way belonging to it.  If the Deposit were for D1, the amount would have gone to reduce the debit position with CERC Trading. 

82.  The transfer was first to pay the 2018 Bonds and later kept for restructuring.  The purposes were not overlapping.  There was exclusivity at any one time.  The Quistclose trust arises from D1’s lack of power to dispose of the Funds or to change the purpose of the Deposit.

83.  For 3 reasons, I reject Mr Li SC’s arguments.

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

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

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

87.  The issue of security arose on 17 May 2018 when China Life became aware that BOCOM Trustee had issued a notice of default for the 2018 Bonds, which triggered Cross-Default under the 2022 Bonds and 2021 Bonds.  Its investment manager, China Life Franklin, thus emailed Mr Lin asking for documents about the CERC Group’s assets and liabilities with a view to assessing the repayment prospects of the 2022 and 2021 Bonds. 

88.  In the course of the emails, Dr He of China Life requested Norman Lin for security:

“我们提出此要求主要用于衡量贵公司资产质量，保障我司利益。我们有权要求公司提供相应的抵押品作为增信以维护我们作为债权人的利益。若公司未能在上述时间内给予我方反馈且提供相应文件，我司有权宣布我司持有的两只债券（ISINXS1376566714，HK0000241288) 交叉违约即立刻偿还本金。由此造成的一切后果由贵司承担。” (underline added)

The CERC Parties responded by depositing US$70 million into the Account.  (At that time, another US$50 million was already in the Account.)

89.  William Chow of China Life acknowledged in his affirmation in reply filed on 4 November 2021 that at least US$70 million, which formed part of the Deposit, was transferred to D1’s Account upon the express request of China Life for security of its interest under the 2022 and 2021 Bonds.

90.  Mr Li SC points out that:

(i)  The alleged request for security is a new piece of evidence appearing only in the affirmation in reply filed on behalf of China Life, to which the Ad Hoc Committee or CERC Parties have not had a chance to respond.

(ii)  Lin never stated that the US$70 million was security. All that he said was that normal internal approval was already in progress and that a transfer would be made on the following Monday.  That indicated that the transfer was already on foot, independent of China Life’s request.

(iii)  China Life Franklin’s records show that it was not regarding the transfer of the Deposit into the Account as security. Its email to Mr Lin on Friday 18 May 2018 noted that there would be a transfer by Monday, and asked the CERC Group to provide “security proposals”for it to consider by Tuesday.

(iv)  Mr Li SC submits that holding the Deposit as security meant that D1 did not have free disposal.

(v)  Even if at one point in time D1 had power to pay China Life, the Group, including D1, clearly revoked the power (a) when it informed China Life on 14 August 2018 that it would use the cash balances in the Account, ie, the Deposit, to fund repayments to all creditors; (b) when it issued a “Frequently Asked Questions” to bondholders on 9 October 2018 stating that it would treat all bondholders equally; and/or (c) when it instructed BOCOM on 4 December 2019 to transfer the Deposit to CERC Trading’s account at China Construction Bank.

(vi)  A Quistclose trust is not an express trust where parties intend the beneficial interest to vest in a specific person.  It is a resulting result: Twinsectra at §100. As Lord Millett put it in §92:

“[The resulting trust] responds to the absence of an intention on the party of the transferor to pass the entire beneficial interest, not to a positive intention to retain it. Insofar as the transfer does not exhaust the entire beneficial interest, the resulting trust is a default trust which fills the gap and leaves no room for any part to be in suspense.”

In other words, the focus is on the recipient not being the beneficial owner, rather than on positively showing who else is intended to be the owner.

91.  With regard to (i), even without this piece of evidence, the evidence is sufficient to reject the suggestion of a Quistclose Trust.

92.  With regard to sub-paragraph (ii), whether the transfer of US$70 million was already in progress or was only a response to China Life’s request was not material.  What is material is that if it could be said that Lin never stated the purpose of the US$70 million, one should equally not overlook the fact that Lin never stated that D1 was forbidden from using it for any other purpose.  No Quistclose Trust arose.

93.  With regard to (iii), I am unable to agree with Mr Li SC.  The fact that US$70 million had been provided to China Life as security would not bar China Life from asking for more security.

94.  With regard to (iv), I agree D1 did not have free disposal of the US70 million, but D1 would have to apply the security according to the directions of China Life to reduce the debt under the 2022 and 2021 Bonds.

95.  With regard to (v), this was just the CERC Group’s unilateral wish to benefit all creditors generally without acceptance by China Life.  Even if there was a stated purpose of the Deposit then, there was nothing to suggest that the Deposit could not be used for any other purpose.

96.  With regard to (vi), without disrespect, Mr Li SC has misread Lord Millett’s dicta.  The pre-conditions are an exclusive purpose and that the holder of funds is not at liberty to freely dispose of it. It is under such circumstances that when the purpose was not fulfilled that the resulting trust arises.  In the present case, the pre-conditions did not exist.

97.  For all the reasons given in section E(5), I reject the contention of Quistclose trust.

E(6).  Presumption of resulting trust

98.  Mr Li SC relies on the proposition that where A makes a voluntary payment to B, there is a presumption that A did not intend to make a gift to B; the money is held on trust for A: Westdeutsche Bank v Islington L.B.C. [1996] AC 669 at 708A, Lord Browne-Wilkinson.

99.  China Life disagrees and submits that the transfer of funds does not give rise to any presumed obligation to repay, still less a presumption of resulting trust: Big Island (HK) Ltd v Wu Yi Development Co Ltd (2015) 18 HKCFAR 364 at §§91-98 and 106, Sir Anthony Mason NPJ.  The Court of Final Appeal held (at §108) that the English authority of Seldon v Davidson [1968] 1 WLR 1083 which held that such transfers could give rise to a presumed obligation to repay (ie a debt rather than a trust) should not be followed.

100.  There is good reason behind these principles. Fund transfers between entities, especially those within the same corporate group, are commonplace occurrences in commercial life. If every such payment gives rise to an unwritten presumed debt or worse still, a presumed trust that would entitle the “true owner” to trace the money and profits arising therefrom, then it would be highly difficult for commercial parties to properly understand their mutual obligations and property rights. 

101.  Applying Big Island, I reject the Ad Hoc Committee’s case on resulting trust. 

E(7).  Exercise of discretion

102.  The CERC Parties/Ad Hoc Committee have failed to show that D1 does not have beneficial interest in the Funds.  Restructuring has been going on for over 3 years without progress.  The restructuring has no real prospect of success since China Life’s participation is the key to success but China Life has no intention of taking part in it.  The Funds are unlikely to be distributed equally amongst the bondholders of the CERCG Bonds without any winding-up proceedings in place.

103.  Subject to the question of quantum, this is an appropriate case for the Court to make absolute the garnishee order. 

104.  On quantum, it is clear that even on China Life’s case, US$70 million of the Deposit was to be security for the 2022 and 2021 Bonds.  The 2021 Bonds do not form the subject matter of the Judgment and those bondholders were not represented at this hearing. 

105.  I have raised requisition by a letter dated 2 March 2022 as to how the US$70 million should be dealt with if no trust is established.  I have considered all the responses, but the CERC Parties have not responded substantively.

106.  China Life submits that BOCOM Trustee, in its capacity as trustee of the 2021 Bonds is not even an unsecured creditor of D1 because those Bonds were not issued by D1.  The 2021 Bondholders simply have no interest in the Funds.  They have been informed of the Garnishee Application and could have taken steps to assert their interest in the Funds just as the Ad Hoc Committee has done, but they had not.

107.  I agree with Mr Li SC that such submission is extraordinary.  China Life cannot blow hot and cold.  If money is, on its own case, security for 2 sets of Bonds, China Life cannot appropriate the Funds to the exclusion of the 2021 Bondholders.  It is up to China Life to keep its house in order by informing the Court of the conditions for realizing the security and how to apportion the Funds between 2 sets of Bondholders.

108.  However, I do not agree with Mr Li SC that the extraordinary position taken by China Life would support a finding that D1 is a trustee.  Rather, it would make China Life a trustee of the US$70 million, if it can get hold of the money, for the 2022 and 2021 Bondholders.

109.  Accordingly, I will only make absolute the garnishee order nisi to the extent of the sum specified therein less US$70 million.

110.  The CERC Parties have given an undertaking set out in paragraph 11 above.  I accept the undertaking for 14 days to the extent of US$70 million because plainly part of that sum could be garnisheed by China Life.  In the absence of an application by any interested party within 14 days, the undertaking will be discharged.

F.    SETTING ASIDE APPLICATION

F(1). Legal principles

111.  BOCOM Trustee adopts a neutral position in the Garnishee Application and Set-Aside Summons, but it has filed an affirmation to deal with the allegation of material non-disclosure.

112.  The CERC Parties have not appeared and are thus taken to have abandoned this application.  I deal with it for the sake of completeness.

113.  As a matter of law, an applicant in an ex parte application (of which a garnishee order nisi is one) has a duty to make full and frank disclosure of all material facts.  Material facts cover all facts relevant to the Court’s weighing exercise in deciding whether or not to grant the ex parte order.  The test is an objective one.  The applicant must identify any potential defence which can reasonably be raised in due course by the respondent and cannot be dismissed as without substance.  The applicant should inform the Court as soon as he becomes aware that the Court has been mis-informed or has been given incomplete or misleading information. See Hong Kong Civil Procedure 2022, Volume 1, §29/1/51.

114.  On the other hand, when applying these principles, care must be taken to “make sure that the court does not get itself in a position of what might be called ‘counter-abuse’: where this sort of point is regarded by litigants as ‘a very present help in trouble’; and where problems arise on the substance to resort to attack as the best method of defence.”  See Fong Chak Kwan v Ascentic Ltd [2021] HKCA 1138 at §69, CA.

115.  Put differently:

“…in laying down principles concerning disclosure of all material facts, the courts have not intended to give active encouragement to undeserving defendants to search ingeniously for facts which a plaintiff might innocently have failed to disclose, in the hope that a judge may consider them material and so discharge the injunction; common sense must prevail; and the heavy burden cast on a plaintiff must not be allowed to become so onerous as to be intolerable.”

See Xie Li Xin v Law Ka Yan Thompson [2018] HKCFI 1096 at §60, DHCJ R Ismail SC.

116.  There will be degrees of relevance and a due sense of proportion must be kept. Sensible limits have to be drawn, particularly in complex and heavy commercial cases. The question is not whether the evidence in support could have been improved (or one to be approached with the benefit of hindsight), but whether in all the circumstances the effect of the non-disclosure was such as to mislead the Court in any material respect: see Tugushev v Orlov [2019] EWHC 2031 (Comm) at §7(vi), Carr J.

117.  The extent of the duty and the gravity of any lack of frankness will depend in any given case on the character of the application. As Hobhouse J pointed out in Payabi v Armstel Shipping Corp [1992] QB 907 at 918B-D:

“At one end of the scale there are Anton Piller orders and Mareva injunctions where the consequences of the order may be unpredictable and irremediable and very possibly most serious for the proposed defendant: there the very fullest disclosure must be made so as to ensure as far as possible that no injustice is done to the defendant. At the other end of the scale are minor procedural applications where there may be no risk at all of prejudice, or at least none that cannot be fully made good by an order in costs.”

118.  Where the allegation of non-disclosure is based on failure to disclose potential defences or arguments:

(a)  The Court should adopt a sensible and realistic approach. The applicant is not required to posit and canvass every conceivable argument which a creative respondent might conjure up, particularly if they are based on bare allegations: Sky Motion Holdings Ltd v China Create Capital Ltd [2019] HKCFI 2408 at §88, Coleman J.

(b)  The duty of making full and frank disclosure does not only cover facts but also matters of law: Hong Kong Civil Procedure 2022, Vol 1,§29/1/51, p807.

F(2).  Alleged non-disclosure

119.  D1 claims that the BOCOM Trustee ought to have disclosed the following matters but failed to do so:

(1)  At the time of the ex parte application, the alleged conflict between its roles as trustee of the 2022 Bonds and trustee of the other CERCG Bonds (“1^st non-disclosure”).

(2)  At the time of the ex parte application,

(i)  that the Funds were not beneficially owned by D1;

(a)  that D1 has since August 2018 intended to use the Funds for the purpose of the intended restructuring; and

(b)  that funds in the Account have previously been used to make payments to holders of the 2018 Bonds;

(“2^nd non-disclosure”)

(3)  After the ex parte application, the new matters relied upon in Lin 7^th in support of the contention that the Funds were held on trust for CERC Trading (“3^rd non-disclosure”).

F(3).  1^st non-disclosure

120.  At the time when the application for a garnishee order nisi was sought on 2 March 2021, BOCOM Trustee was not in a position of conflict of interest as there was no dispute between them and other holders of the CERCG Bonds.  The latter had no right to prevent BOCOM Trustee from seeking the garnishee order nisi on behalf of China Life.  In the race for the Funds, BOCOM Trustee was just faster than other bondholders.

121.  The earliest point in time at which BOCOM Trustee could possibly have fallen into a conflict of interest position was when it was instructed by the Ad Hoc Committee to actively take steps to oppose the Garnishee Application on 9 April 2021.  That was already a month after the garnishee order nisi was made.

122.  Further, any conflict of interest would not have affected the substance of the ex parte application.  This is because BOCOM Trustee could be replaced by a new trustee or the beneficiary as the applicant, but it would not have affected that applicant’s entitlement to seek a garnishee order nisi or the exercise of the Master’s decision. 

123.  I find that there was no failure of disclosure and in any case the 1^st non-disclosure was not material.

F(4).  2^nd non-disclosure

124.  BOCOM Trustee did disclose D1’s contention that D1 was not the beneficial owner of the Funds: §20.7 of Ng Ping Kwong 5^th. It was stated that D1 was the first issuer of the CERCG Bonds to open a bank account in Hong Kong.  The Funds were kept in the Account purely for convenience.  The Funds were transferred into the Account by CERC Trading. CERC Trading typically received funds available for use of the CERC Group prior to disbursement to other companies within the CERC Group.  D1 had requested the transfer of the Funds to another account.  The fact that the funds in the Account had been used to pay the outstanding interest on another CERCG Bond was evidence that the Funds were not intended or meant to be owned or used by D1.

125.  D1 claims that BOCOM Trustee ought to have gone further:

(a)  by disclosing the fact that the BOCOM Trustee has known of D1’s intended use of the Deposit since at least 2018; and

(b)  by disclosing letters and public announcements which evidenced its intention to use the Funds for the purpose of the intended restructuring, to which BOCOM Trustee was privy; but

(c)  omitting to set out the clear evidence as to how the Funds came to be deposited in D1’s Account (which China Life was fully aware of) and the source of such funds and presenting the CERC Parties’ argument in a way which made it clear that it was not relying solely on the intended use of the Funds.

126.  With respect, one cannot expect an applicant to speculate the case for a respondent and present every conceivable piece of evidence which the respondent would potentially rely on.  The facts summarized in paragraph 124 above were within sensible bounds and would have given the Master a fair view of D1’s potential defence.  The further matters which D1 says BOCOM Trustee ought to have disclosed would not, in my view, have added to the substance of what was already disclosed to the Master. 

127.  Further, at the time of the ex parte application, D1 has not yet disclosed who the alleged beneficial owner of the Deposit was.  Lin 4^th merely suggested that the Funds were held on trust for an entity other than D1.  The claim of trust and which type of trust was completely unclear.  As analysed above, a transfer of funds would not normally give rise to a trust.

128.  Still further, none of the letters or public announcements which D1 now says BOCOM Trustee ought to have disclosed were referred to in Lin 4^th, the only affirmation dealing with D1’s beneficial ownership of the Funds filed before the ex parte application. BOCOM Trustee’s evidence is that it was not even aware of some of those communications (which were not sent to them but to China Life) until Lin 7^th was filed on 15 March 2021, after the garnishee order nisi was made.

129.  Mr Dawes SC further submits that D1’s contentions of trust are simply incorrect as a matter of law.  BOCOM Trustee is not required to disclose incorrect submissions even if they had any duty of disclosure.  With respect, I am unable to say that at the ex parte stage, D1’s contentions of trust would have appeared to be blatantly wrong.  However, this matter in itself, would not have affected my conclusion on the 2^nd non-disclosure.

130.  For the reasons given in this sub-section, I find the 2^nd non-disclosure to be the type of “counter-abuse” which the Courts reject: Fong Chak Kwan.

F(5).  3^rd non-disclosure

131.  Lin 7^th was filed before BOCOM Trustees served the garnishee order nisi on D1.  The CERC Parties assert that BOCOM Trustees’ statement that D1 has failed to give particulars as to the alleged beneficial ownership of the Funds became untrue after receipt of Lin 7^th. The Plaintiff thus breached its continuing duty of full and frank disclosure.

132.  This contention is not acceptable.  D1 was all along aware that BOCOM Trustees intended to apply for a garnishee order nisi. BOCOM Trustees likewise expected D1 to challenge it.  That was why the Injunction Order was discharged upon the grant of the garnishee order nisi (paragraphs 41-47 above).  Lin 7^th was plainly filed with inter parte hearing to show cause in mind.  In the premises, it was unnecessary for BOCOM Trustees to disclose any facts or submission which the CERC Parties intended to rely upon to the Master.

133.  In any case, any failure of the BOCOM Trustee to disclose Lin 7^th to the Master did not result in prejudice to anyone.  Even if BOCOM Trustee had drawn the Court’s attention to Lin 7^th, it was most unlikely that the matter would have been dealt with at the inter partes hearing. 

134.  For the reasons given in this sub-section, the 3^rd non-disclosure is not established.

G.   CONCLUSION

135.  For the reasons given above, I am not satisfied that any trust is established or that there was material non-disclosure when BOCOM Trustee applied for the garnishee order nisi.  I therefore order as follows:

(1)  In respect of the Joinder Application,

(a)  China Life Trustees Limited be substituted as the Plaintiff in these proceedings;

(b)  BOCOM Trustee be joined as an interested party in these proceedings;

(2)  Upon the undertaking given by the CERC Parties to the Court and to the creditors as per letter dated 31 December 2021, and the Court’s acceptance of that undertaking for 14 days, the garnishee order nisi be made absolute save as to US$70 million; and

(3)  The Setting Aside Application be dismissed.

136.  On a nisi basis, costs of all 3 Applications should be borne by D1 and the Ad Hoc Committee with certificates for 2 counsel.  In terms of proportion, the Joinder Summons has taken up 10% of the hearing time, whereas the 2 other Summonses have each taken up 45%.

137.  I express my gratitude to all counsel for their able assistance.

Mr Paul Lam SC leading Ms Astina Au, instructed by King & Wood Mallesons, for the Plaintiff

The 1^st and 2^nd Defendants were not represented and did not appear

Mr Victor Dawes SC and Mr Joshua Chan, instructed by DLA Piper Hong Kong, for China Life Trustees Limited

Mr Laurence Li SC, instructed by Kirkland & Ellis, for the Ad Hoc Committee

The Garnishee, Bank of Communications (Hong Kong) Limited was not represented and did not appear