KENNETH SIT (a firm) v. PACIFIC BULK LOGISTICS LTD AND ANOTHER

HCMP 510/2020

[2021] HKCFI 1373

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 510 OF 2020

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DECISION

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1.  By a Notice of Appeal filed on 27 November 2020, the 1^st Claimant (“C1”) appeals against the Order of Master Martin Wong dated 19 November 2020 granting interpleader relief in favour of the Applicant in respect of a sum of US$700,000 (“Sum”) which was stakeheld by the Applicant. The Sum was paid into court on 4 September 2020.

2.  Essentially, two issues have been raised by C1 in this appeal, namely, (i) whether there was a tripartite agreement between itself, the 2^nd Claimant (“C2”) and the Applicant in respect of the stakeholding of the Sum; and (ii) whether interpleader relief should be declined because the Applicant had taken side and put itself into a difficult position where it faced two alleged claims.

Background

3.  The background facts can be stated briefly.  The underlying dispute between the Claimants arose from a particularly bitter business divorce, which started in 2014, between Mr Lau Wing Yan and Mr Chu Kong who used to own a successful shipping and logistics business under the Pacific Bulk Group of companies. 

4.  Mr Chu was a director of C1 and Mr Lau was a director of C2.  The dispute between the Claimants concerned a Debt (management fees) allegedly owed to C2 by C1 in the amount of US$700,000 which was repayable by agreement.  On 3 July 2014, the former issued a Statutory Demand against the latter for payment of the debt.  C2’s position was that if the Debt was not repaid, it would issue a petition to wind-up C1. 

5.  Shortly after receipt of the Statutory Demand, C1 engaged the Applicant as its solicitors.  C1 denied both the Debt and the repayment agreement.  The Applicant was instructed to commence proceedings to restrain C2 from presenting a winding-up petition.

6.  To try to obviate the need to seek an injunction against C2, on 16 July 2014 C1 deposited the Sum with the Applicant.  On instructions, the Applicant wrote to C2’s solicitors, Messrs DLA Piper Hong Kong (“DLA”), on the same day denying liability for the Debt and proposed that they would stakehold the Sum on the following terms (“Stakeholder Arrangement”):

“(1) [C1] does not believe that there has been any overpayment of management fee but is ready and willing to meet the alleged claim of US$700,000 if [C2] is able to provide and prove, by proper documentation, that there was an overpayment of US$700,000 of management fees from [C2] to [C1]; and

(2)  As proof of their good faith, and to secure the alleged debt of US$700,000, [C1] has deposited a sum of US$700,000 with us.  We confirm that we are now holding as stakeholders in escrow the said sum, to release to [C2] upon the alleged debt being proved by proper documentation to be produced by [C2] to [C1] …”

7.  On 21 July 2014, in response to the Applicant’s letter, DLA (a) asserted that adequate evidence of the debt had been provided[1]; and (b) agreed to withhold the presentation of a winding up petition:

“In view of the above, we believe that [C2] has provided compelling evidence in relation to [C1’s] liability to pay the sum of US$700,000 to [C2]. We therefore look forward to receiving the sum of US$700,000 held by you in escrow within the next 7 days. In view of fact that [C1] has already paid you the sum of US$700,000 in escrow, we would agree, on behalf of [C2], not to present any winding-up petition against [C1].”

8.  On 24 July 2014, C1 commenced proceedings against C2 (HCA 1413/2014) for a declaration that no debt was due and owing from it to the latter.

9.  In response to DLA’s request to pay over the money, the Applicant informed DLA by letter dated 25 July 2014 that it would not release the Sum as C2 had failed to provide sufficient evidence of the Debt.

10.  DLA then asked the Applicant on 4 August 2014 for an undertaking to maintain and not to diminish the Sum save with the written consent of both C1 and C2 or pursuant to an order of the court.

11.  By their letter dated 8 August 2014, the Applicant did not give the undertaking in the terms sought by DLA, but instead undertook to notify DLA if the Sum was to be released to any party other than C2 (“Undertaking to Notify”).  The Stakeholder Arrangement was reiterated in the letter.

12.  Pleadings were filed in HCA 1413/2014 and the action reached the discovery stage in early 2015, but there had been no further progress since.

13.  Apparently, the matters went into hibernation until 2020.  By a letter dated 8 April 2020, Messrs SSW & Associates (“SSW”) informed the Applicant that SSW had replaced it as C1’s solicitors in HCA 1412/2014 and requested that the Applicant transfer the Sum to them.

14.  In accordance with the Undertaking to Notify, by letter dated 14 April 2020 to DLA, the Applicant enclosed a copy of SSW’s said letter and inquired about C2’s position to the request.

15.  By their letter dated 17 April 2020, DLA required the Applicant to confirm, under threat of “urgent injunctive relief from the Court against [them] … as stakeholder/ escrow agent”, that it would not release the Sum to SSW in the absence of a corresponding undertaking from SSW that it would (a) release the Sum to C2 upon receipt of proper documentation to prove the Debt; and (b) inform C2 of the release of the same to any other party.

16.  Correspondence then ensued between the parties, much of which were acrimonious in nature.  In particular, legal proceedings were threatened by SSW (letter dated 17 April 2020) against the Applicant unless the Sum was paid over to them.  Similar demand was made by DLA (letter dated 20 April 2020) on the basis that C2 had provided “uncontroversial and credible evidence” of the Debt and legal action against the Applicant was also threatened. 

17.  The Applicant indicated by letter on 20 April 2020 that in light of the conflicting claims to the Sum and the threat of litigation against them, they would have to review the matter urgently with external legal advisors and that pending such review, they would not be releasing the Sum to SSW.  The prospect of interpleader proceedings was also indicated.

18.  On 21 April 2020, Statutory Demand was issued by C1 against the partners of the Applicant in respect of an alleged debt of US$700,000 incurred on 8 April 2014 as “money on account”.  

19.  The Applicant took out the present Interpleader Proceedings on 8 May 2020.  Pursuant to the Order of Master Dick Ho dated 3 September 2020 made upon a Consent Summons of the parties, the Applicant paid the Sum into Court on 4 September 2020.

Applicable principles

20.  Order 17 of the RHC governs interpleader proceedings.  Pursuant to the provisions thereunder interpleader relief will only lie if the following conditions are fulfilled :

(1)     A party is under a liability in respect, inter alia, of money;

(2)     He is, or expects to be, sued in respect of that money by two or more persons with adverse claims thereto;

(3)     He claims no interest in the said money;

(4)     He does not collude with any of the competing claimants; and

(5)     He is willing to pay the money into court or dispose of the same in accordance with the directions of the court.

21.  Whilst interpleader relief is discretionary, an order will normally be made where the aforementioned conditions are met: HKCP 2021, Vol 1, [17/1/11]. 

22.  Where an applicant expects to be sued by competing claimants, there must be a real foundation for such an expectation: DLA Piper Hong Kong v China Property Development (Holdings) Ltd [2010] 1 HKLRD 903 (CA), at §22.

23.  Collusion (O 17, r 4(b)) does not necessarily entail moral wrongdoing.  Rather, it means that the applicant for interpleader relief must not have “played the same game” as one of the competing claimants: Famous Zone Electronics Ltd v HSBC Ltd [1998] 3 HKC 723, at 727G.

24.  The legal rights and obligations of a stakeholder had been set out in Manzanilla Ltd v Corton Property and Investments Ltd, unrep, English Court of Appeal (Civil Decision), 13 November 1996, [1996] Lexis Citation 3767, pgs 5-6, per Millett LJ (as he then was) :

“Where a stakeholder is involved, there are normally two separate contracts to be considered. There is first the bilateral contract between the two principals which contemplates two possible alternative future events and by which the parties agree to pay a sum of money to a stakeholder to abide the happening of one or other of them. In the present case it consisted of a series of written contracts for the sale of land, and the relevant events were the failure of the contracts by the repudiatory breach of one party or the other. The second contract is the tripartite contract which results from the deposit of the money with the stakeholder on terms that he is to keep it until one or other of the relevant events happens and then pay it to one or other of the parties accordingly. The stakeholder is a party to the second contract but not the first. His rights and obligations are not normally expressly spelled out. They are implicit in the transaction itself, and must be discovered, not by implying terms, but by analysing the relationship of the parties which arises from the deposit of the money.

The following propositions emerge from the authorities:

(1). The relationship between the stakeholder and the depositors is contractual, not fiduciary. The money is not trust money; the stakeholder is not a trustee or agent; he is a principal who owes contractual obligations to the depositors: … The underlying relationship is that of debtor and creditor, and is closely analogous to the relationship between a banker and his customer.

(2). Until the specified event occurs, the stakeholder is entitled to retain the interest on the money. This is usually described as his reward for holding the money: … This right may be excluded by special arrangement, and was excluded in the present case.

(3). Until the event happens the stakeholder holds the money to the order of both depositors and is bound to pay it (strictly speaking an equivalent sum) to them or as they may jointly direct: …

(4). Subject to the above, the stakeholder is bound to await the happening of the event and then to pay the money to one or other of the parties according to the event. The money is payable to the party entitled on demand, and if the stakeholder fails to pay in accordance with a proper demand he is liable for interest from the date of the demand: …

(5). If the occurrence of the event is disputed, the stakeholder cannot safely pay either party, for if he mistakenly pays the party not entitled the payment will not discharge his liability to the other. In these circumstances he may (i) interplead and pay the money into Court; (ii) retain the money pending the resolution of the dispute; or (iii) take the risk of paying one party. The choice is entirely his.

(6). If he takes the second course, he may notify the parties that he is content to abide the outcome of the dispute. There is then no need to join him in any proceedings which are taken to resolve it. If he is not joined, the Court cannot order the money to be paid to the successful party. All it can do is to declare that the successful party is entitled to give a good receipt for the money: …

(7). If the stakeholder is not content to abide the outcome of the proceedings, he may be joined in order to bind him. This was done in the present case, albeit on the application of the stakeholder.”

Analysis

25.  The material facts spoke for them.  There was plainly a tripartite stakeholder agreement between the two Claimants and the Applicant by which the Sum was held by the Applicant pending proper documentary proof of the Debt.  In the context of litigation, such arrangement was hardly unusual.  If not for the Stakeholder Arrangement offered on 16 July 2014, C2 might have petitioned for C1’s winding-up[2]. It is very difficult to understand C1’s contention that there was no tripartite stakeholder agreement.

26.  Most of the arguments advanced on behalf of C1 to contend that there was no tripartite agreement are without merit, eg, the suggestion that it was inconceivable that the Applicant could on one hand act as the solicitors for C1 and on the other hand as the stakeholder.  It is plainly a bad point.  Solicitors frequently wear 2 hats acting (a) for one of the parties to a transaction and (b) as the stakeholder for a payment in the transaction. 

27.  However, I shall deal with 2 points advanced by C1 to argue that the tripartite agreement in this case was uncertain.  Firstly, the absence of time limit for C2 to provide proper documentation to prove the Debt. Secondly, the arbiter of whether the Debt was proved was not agreed upon. 

28.  As to the first point, the law normally deals with it by way of an implied term that the evidence should be produced within a reasonable time.  I see no reason why this case should be treated differently. In fact, C2’s position was that proper documentation had indeed been provided to C1.  The obstacle to the resolution of the matter was not delay in the provision of documentary proof but C1’s disagreement with what was provided. 

29.  In respect of the lack of agreed mechanism by which the adequacy of the proof could be determined, oversight of such kind is not surprising in the absence of a detailed stakeholder agreement.  However, if the adequacy of proof was disputed, no doubt the parties would expect the court to be the arbiter.  That was what transpired in this case – C1 duly took out HCA 1413/2014 for the matter to be resolved.  

30.  I respectfully agree with the following dicta of Millet LJ in Manzanilla Ltd, p 8 :

“In my judgment the Purchaser’s first proposition is contrary to the ordinary understanding on which deposits are paid to stakeholders and on which the Court acts when resolving subsequent disputes as to the entitlement to the money. The parties do not foresee the existence of any dispute; they intend the money to abide the happening of an event; if there is a dispute whether the event has happened they expect the Court to resolve it; and the question for the Court will be whether the event has happened or not, because that is the determinative event.”

31.  Further, in this case it may be said that the dispute by the Claimants over the adequacy of the proper documentation for proving the Debt was overtaken by the proceedings initiated by C1.

32.  For completeness, I do not agree with C1 that the Applicant had assumed the role of the arbiter under the Stakeholding Arrangement.  That submission was based on over-reading the letters of the Applicant.  In my view, they were merely putting forward the position of their lay client.

33.  In the premises, there is no merit in first issue in this appeal (see para 2 above).

34.  With respect, the second issue is even more difficult to understand.  The allegation of collusion between the Applicant and C1[3] itself was based apparently on the proposition that the Applicant was advancing C1’s position on whether the Debt was sufficiently proved.  Plainly, the Applicant was discharging their duties as C1’s solicitors.  There is nothing in the point. 

35.  As for the alleged collusion with C2, it was based on nothing but the fact that the Applicant had informed C2 of SSW’s request to have the Sum transferred to them and had refused to comply with SSW’s request in the face of C2’s objection.  Pursuant to the Undertaking to Notify, the Applicant was obliged to notify C2 in respect of the requested transfer.

36.  Given the dispute between the Claimants over the transfer to the Sum of SSW, the Applicant’s position was governed under the 5^th proposition stated in Manzanilla Ltd (see para 24 above).  If the Applicant did not elicit C2’s consent to the transfer, it would run the risk of being sued by C2. I see no basis for any accusation of collusion between the Applicant and C2.

37.  For completeness, I see no inexplicable delay in this case, save that of the Claimants over the resolution of HCA 1413/2014.  As stakeholder, it was proper for the Applicant to wait for the determination of the court in respect of the dispute over the Debt (see the 5^th proposition). 

Disposition

38.  For these reasons, this appeal is dismissed with costs to the Applicant and C2.