MSR CAPITAL LTD v. KTH RECOVERY FUND II LTD AND OTHERS

HCA 2381/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2381 OF 2004

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J U DG M E N T

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Introduction

1.  The 5^th and 6^th Defendants have applied to interplead in this action.  The 5^th Defendant is a Hong Kong trust company and the 6^th Defendant is a Cayman Islands trust company.  Both are subsidiaries of the Bank of Bermuda which in turn is a wholly owned subsidiary of HSBC Holdings Plc.

2.  These Defendants have applied to interplead the assets that are held by them under two custodian agreements being the BBC Custodian Agreement dated 8 November 2000 relating to assets in the sub-Fund Account (No. 530220) and the BTFE Custodian Agreement dated 12 December 2000 relating to assets in the Ironwood Account (No. 530196).  The 5^th and 6^th Defendants, as custodian, have applied to pay these funds into court.

3.  By agreement of the parties the court made a number of orders on 23 December 2004.  The order included the adjournment of the 5^th and 6^th Defendants’ application to have the assets paid into court, upon which I have now heard argument and which this judgment relates to.  Additionally, the following orders were made;

“	(1)	the proceedings against the 5th and 6th Defendants were stayed,
	(2)	the issues as to the ownership of the assets should be stated as between the Plaintiff, the 1st, 3rd and 4th Defendants (“the KTH defendants’ ”) and the 2nd, 7th and 8th Defendants (“the Ironwood defendants”), and that
	(3)	the parties should proceed to trial on these issues.”

The Application

4.  The following is not in dispute but I ought to set it out as briefly as I can in order to explain how the application comes about.

5.  Under the BBC Custodian Agreement governing the sub-Fund Account nine separate matters should be noted.

(1)	the 4th Defendant appointed the 6th Defendant as custodian “until its appointment shall be terminated” [clause 2];
(2)	the 3rd Defendant, being the Investment Manager has the duty to certify to the custodian the persons authorized to give proper instructions to the custodian [clause 3];
(3)	the custodian’s duties regarding the cash received by it appear in clause 5;
(4)	its duties regarding securities held by it appear in clauses 6 to 11;
(5)	the custodian is to be paid the agreed fees for its services, clause 15.1;
(6)	additionally, the 4th Defendant is required to reimburse the custodian all of its out-of-pocket expenses properly incurred by it in carrying out its duties, clause 15.2;
(7)	the 4th Defendant must indemnify the custodian from and against, inter alia, all liabilities, losses, actions, costs, expenses or disbursements of any kind incurred by the custodian in performing its obligation and duties, clause 16.7;
(8)	the agreement may be terminated by either party giving three months’ notice in writing, clause 21.1; and
(9)	upon termination, the custodian must deliver the assets in its custody to such person as the 4th Defendant may nominate, but will not be required to make such delivery until full payment has been made by the 4th Defendant of all liabilities constituting a charge against the assets or against the custodian, and until full payment to the custodian of all its fees, compensation, costs and expenses due to it. [clause 21.2].

6.  There is also an Administration Agreement dated 8 November 2000.  Under this agreement the 4^th Defendant has appointed the 6^th Defendant as its administrator.  As administrator, the 6^th Defendant has agreed under the Agreement to provide the share issue, redemption and transfer and other administrative services [clause 2].  The 6^th Defendant as administrator is to be paid agreed fees for its services [clause 6] and the 4^th Defendant has to indemnify the 6^th Defendant from and against, inter alia, all liabilities, losses, actions, costs, expenses and so forth incurred by it in performing its obligation or duties under the Administration Agreement [clause 9.3].  The Administration Agreement is determinable by either party giving three months’ notice in writing [clause 12.1].

7.  Lastly, there is a Delegation Agreement also dated 8 November 2000 under which the 6^th Defendant has appointed the 5^th Defendant its sub-custodian and Administrator’s Agent in relation to the sub-Fund Account.

8.  The other agreement concerns the 5^th Defendant’s Custodian Agreement which governs the Ironwood Account, the mechanics of which can also be considered under nine short sub-paragraphs.

(1)	the 3rd Defendant has appointed the 5th Defendant as custodian of the investments in the Ironwood Account (“the Investments”), [clause 2];
(2)	the 3rd Defendant certifies to the custodian the persons authorized to give it instructions, [clause 3];
(3)	the custodian’s duties as regards cash received appear in clause 4;
(4)	its duties regarding the Investments appear in clauses 5 to 10;
(5)	the custodian is to be paid agreed fees for its services, [clause 14.1];
(6)	in addition, the 3rd Defendant has to reimburse the custodian all out-of-pocket expenses properly incurred by it in performing its duties, [clause 14.2];
(7)	the 3rd Defendant provides an indemnity to the custodian from and against, inter alia, all liabilities, losses, actions, costs, expenses etc. incurred by the custodian in the performance of its obligations and duties, [clause 15.10];
(8)	the Agreement is determinable by either party giving 30 days’ notice in writing, [clause 17.1];
(9)	upon termination, the custodian is required to deliver the assets in its custody to such person as the 3rd Defendant may nominate, but it shall not be required to make such delivery until it has received full payment of all liabilities which would constitute a charge against the assets or against the custodian and until full payment to the custodian of all its fees, compensation, costs and expenses due to it, [clause 17.2].

9.  The 6^th Defendant has terminated the BBC Custodian Agreement as well as the Administration Agreement and resigned as custodian of the sub-Fund Account as from 15 October 2004.

10.  As at 1 November 2004, only cash in the amount of US$5,272,661.12 was in the possession and custody of the 5^th Defendant as sub-custodian of BBC under the BBC Custodian Agreement.

11.  The 5^th Defendant has terminated the BTFE Custodian Agreement and resigned as the custodian for the Ironwood Account as from 30 June 2004.  As at 1 November 2004 the assets held comprise two bonds issued by Greater Beijing First Expressway held in the 5^th Defendant’s account with Euroclear as well as cash in the sum of US$3,737,185.67 in the possession and custody of the 5^th Defendant under the BTFE Custodian Agreement.

The reasons why these two Defendants wish to interplead

12.  Put shortly, the 5^th and 6^th Defendants say that they have continued to be harassed by the claims and actions of either the Plaintiff and/or the other Defendants.  A perusal of the writ issued by the Plaintiff on 14 October 2004 shows how the case is put against the 5^th and 6^th Defendants sued in their capacity as custodians of the sub-Fund Account and the Ironwood Account.  They were parties to an injunction obtained by the Plaintiff subsequently discharged by Mayo, Deputy High Court Judge on 21 October 2004.  It is also clear from the correspondence starting from that date immediately following the discharge of the ex parte injunction that the 5^th and 6^th Defendants have been subjected to a number of “suggestions” as to how the assets in their custody should be dealt with, together with the number of threats should they deal with those assets in the way that did not appeal to a particular party in the case.  Letters in the latter part of November 2004 have been written, in the strongest possible terms, threatening claims for damages should these assets be disposed contrary to some of the parties wishes.  Nevertheless, by the end of November and into early December 2004 the stance of the contesting parties had mellowed and suggestions were then made to the effect that the 5^th and 6^th Defendant should apply to the court for the assets to be dealt with in accordance with the court’s instructions, including paying in those assets into court.

13.  On 6December 2004 this interpleader summons was issued and it is not seriously suggested that the 5^th and 6^th Defendants are not entitled to interpleader relief.  The only question now before the court and which I am required to resolve is whether the assets should in fact be paid into court and if so on what terms should that payment be.

The 5^th and 6^th Defendants’ case

14.  The principle ground is that the Custodian Agreements have been terminated and because of that there is no longer any contractual basis for the 5^th or 6^th Defendants to continue to hold onto the assets.  This is supported by the case of Leung Ho Yiu v Winner Godown (1994) 1 HKC 503 at 508 where Woo J.  (as he then was) observed that the court would not impose on any party a duty which it does not have by any contractual or other legal requirements.  On behalf of the 5^th and 6^th Defendants it is submitted by Mr Mok that the only reason why the 5^th and 6^th Defendants cannot deliver the assets in accordance with clause 21.2 and 17.2 of the BBC Custodian Agreement and the BTFE Custodian Agreement respectively, upon their termination is because of the adverse claims and threats of legal action made by all of the other parties against them should they not comply with the other parties wishes.  That in my judgment is a correct analysis of the situation by Mr Mok and unquestionably to my mind this is the “usual interpleader situation” where assets in dispute are paid in to court to abide the result of the action.  See for example Hickie v Alternative Software Limited, unreported Lexis transcript, 28 February 1996 per Evans L J.

15.  There is no doubt that as long as the 5^th and 6^th Defendants continue to hold these assets they will have to put up with onerous obligations of an administrative type such as dealing with correspondence and any requests or demands made to them by the parties, as well as having to monitor the progress of the action and, in so doing, incur both legal and other costs relating to the administration of the assets as well as costs to be incurred in the action itself.  The way that Mr Mok puts the matter is to say that; “It is unjust that innocent parties should continue to be subjected to such unnecessary intrusion and the wastage of time and costs when they are not contractually or otherwise obliged to do so.”

16.  Fortunately, the position now is that all the parties say for the KTH Defendants do not object to the payment of the assets into court.

The Plaintiff’s position

17.  Whilst the costs of course preserving its position in respect of the rights and liabilities of the other Defendants and itself, the Plaintiff is content that the money should be paid into the court and I need not say anything further as to their position on this application.

The position of the KTH Defendants

18.  Mr Stokes, who represents them submits that there is no need for a payment into court and that the funds should either remain in account no. 530220 or should be transferred to the new custodian, appointed by the KTH Defendants, Standard Bank Asia Limited (“Standard Bank”).  The way that the matter is put by Mr Stokes is in view of the fact that the action against the 5^th and 6^th Defendants has been stayed and that the other parties were ordered to file and serve affidavits stating the nature and particulars of their respective claims to the assets held by these two Defendants all that the 5^th and 6^th Defendants need to do is to retain the funds that they currently hold, pending resolution of the issues arising between the other parties to the action.  In such circumstances, Mr Stokes submits a payment into court is unnecessary.

19.  The other aspect of the matter is that the KTH Defendants are concerned that if the funds in the sub-Fund Account are paid into court, the Cayman Islands Monetary Authority (“CIMA”) may be prompted to take regulatory action against the 3^rd and 4^th Defendants which would adversely affect their business and hamper their defence of these proceedings.  In support of that submission, Mr Stokes draws attention to a letter from Appleby Spurling Hunter dated 22 December 2004 [B2:16:595-596].

20.  Another matter raised by Mr Stokes concerns clause 21.2 of the custodian agreement in respect of the sub-Fund Account which requires the custodian on termination to deliver the funds and assets in its custody to “such person as the 3^rd Defendant may nominate” subject to payment of all charges and the fees and expenses.  In this regard, the KTH Fund defendants have entered into custodian agreements with Standard Bank and propose that the funds in the sub-Fund Account should be paid to this bank on the basis that it would be instructed that no payments should be made from the transferred account without consent from all concerned or without an order of the court.

21.  I propose to deal with each of these matters in turn, which have provided the main points of controversy in the application before me.

22.  Firstly, as to the question of whether it is necessary for the 5^th and 6^th Defendants to interplead I would have thought that given the history of dispute which is evidenced in the correspondence that I have drawn attention to, as well as the fact of the issue of the writ naming the 5^th and 6^th Defendants as parties provides sufficient justification for the application to be made.  This, in my judgment, is a classic interpleader situation now that the custodian agreements have been terminated whereby the 5^th and 6^th Defendants should be relieved of the unwanted pressures which would undoubtedly bear upon them should they be required to continue to hold onto the funds pending the outcome with the action.  The Plaintiffs are in agreement as are the Ironwood defendants, whose position I will consider in little more detail presently.

23.  The KTH defendants concern about CIMA’s possible regulatory action needs to be addressed.  In answer to Appleby, Spurling Hunter’s letter, to which I have already made reference, the 5^th and 6^th Defendants have sought the opinion of Nelson & Company dated 21 February 2005 [B2:762-773].  This is a very detailed and well considered response to the concerns raised on behalf of the KTH defendants.  It is unnecessary for me to go into the detail of the letter save to observe that CIMA are, in my judgment, unlikely in the circumstances of this case to take any draconian action against the KTH defendants should I order a payment into court.  The opinion by Nelson & Company has satisfied me that the parties have very little to fear by an order that requires the 5^th and 6^th Defendants to pay the fund assets into court and subject to the question of whether the payment should be to the Standard Bank, that is what I would propose to do.

24.  Lastly, I turn to whether the payment should be into court or to the KTH defendants nominated new custodian, the Standard Bank.  This issue has occupied a significant part of the hearing and much of it has centred on the suitability of this bank to deal with these funds.  As a result, I have had to look at a very substantial affidavit from Ms. Susan Clay dated 3 March 2005 which, amongst other things, seeks to establish the Standard Bank’s credentials in this regard.  Having looked at the content of her evidence, I am satisfied that they possess both the experience and financial standing to take on such a responsibility.  Nevertheless, that is not of itself determinative of the outcome in this matter.  I also need to have regard to the wishes and concerns of the other Defendants as well as of the Plaintiff.  Their position is that they object to the appointment of Standard Bank.  Those concerns are perfectly understandable and have been summarized from paragraphs 25 to 33 of Mr Mok’s submission.  In any event, it seems to me that it would not be right to transfer these funds, in the absence of agreement between the parties, to a custodian nominated on behalf of some of the parties but not of the others.  These funds would be best kept in “neutral” hands until such time as the action is resolved either by agreement or following its trial.  Concerns have been expressed to the effect that the funds would lie fallow in court, but in any event it seems to me that would in effect be the position even if they were held with the Standard Bank given the constraints imposed on the parties having regard to the very fact of this litigation.

The Ironwood Defendans’t position

25.  Mr Ling, who appears for them, does not have any strong reservations as to the payment of the assets into court.  Objection is made as to payment of them to Standard Bank or to any other new custodian.  The real contest between him and Mr Mok has centred on various items of costs, in relation to the operation of the funds, the costs of the action including the costs of the “Mareva” injunction and indeed of the interpleader costs themselves.  Insofar, as these matters are concerned it seems to me that the 5^th and 6^th Defendants are very much in the clear in this regard and it is only right when one considers the terms of the custodian agreements that they should have their costs paid to them.  Their position is an entirely innocent one and any disputes between the other parties as to who should ultimately bear the 5^th and 6^th Defendants’ costs and expenses will need to be dealt with by the trial judge.  In this regard, I uphold Mr Mok’s submission.

The result

26.  In the circumstances, the 5^th and 6^th Defendants must therefore have the orders which they seek a based on their amended summons which appears in bundle A pages 20-21 of the main feature of which will be the payment of the funds into court pending the outcome of the resolution of the issues in controversy between the remaining parties in the action.  Additionally, I propose to make an order that the 5^th and 6^th Defendants be indemnified as to their costs of this action including the interpleader application, out of the assets held by them, respectively under the BBC Custodian Agreement and the BTFE Custodian Agreement.  The question as to whether any of the other parties are entitled to be indemnified as to the 5^th and 6^th Defendants fees, charges, costs and expenses and, if so, against whom, will be reserved to the trial judge.  There will also be liberty to apply to the parties both as to the terms and implementation of this order and so far as the terms of the order are concerned, I will leave it to the 5^th and 6^th Defendants’ solicitors who have the carriage of this matter to draw up the order for approval by the court.  In the event of any dispute, the matter will be referred back to me under the liberty to apply provisions.