WILLIAM THOMSON v. ROLAND JOHN JEANS AND ANOTHER

DCCJ 3388/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3388 OF 2005

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DECISION

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Introduction

1. In this action, the plaintiff (“P”) claimed against the defendants for $500,000 (the “P’s Investment”).  This was money which P had agreed with the 1^st defendant (“D1”) to invest in a company called Wanchai Bierkeller Ltd (the “Company”).

2. At the request of D1, P paid in January 2004 the P’s Investment to the 2^nd defendant (“D2”), a firm of solicitors acting for D1 and the Company at the material times.

3. There were no disputes that D2 had received the payment and had released the P’s Investment to D1 or the Company.

4. No shares in the Company had been issued to P.  The Company was put into liquidation by a resolution passed in an extraordinary general meeting of the Company held on 4 January 2005.  P lost the P’s Investment.

5. P claimed against the defendants for return of the P’s Investment on the grounds of total failure of consideration, money had and received, conversion and breach of trust.

6. Judgment had been entered against D1 on 20 April 2012.  P’s remaining claims at the trial were against D2 only.

7. On 19 September 2014, I handed down my judgment dismissing P’s claims against D2 (the “Judgment”).

8. By a summons dated 16 October 2014 (the “Summons”), P seeks leave to appeal from the Judgment.

9. Section 63A(2) of the District Court Ordinance (Cap 336) provides that:

“(2) Leave to appeal shall not be granted unless the judge, the master or the Court of Appeal hearing the application for leave is satisfied that ─

(a) the appeal has a reasonable prospect of success; or

(b)   there is some other reason in the interests of justice why the appeal should be heard.” 

10. The threshold for granting leave to appeal is the “reasonable prospect of success” test or the “interests of justice” test.  In SMSE v KL [2009] 4 HKLRD 125 at 129 Le Pichon JA stated that:-

“Reasonable prospects of success involves the notion that the prospects of succeeding must be “reasonable” and therefore more than “fanciful”, without having to be “probable”.”

11. Chu J (as she then was) stated in Wynn Resorts (Macau) SA v Mong Henry (unrep, HCA 192/2009, 10 August 2009) that:-

“19.  To meet the “reasonable prospect of success” test, an applicant is required to show more than just an arguable case, but an appeal that has merits and ought to be heard, although he does not have to demonstrate that the appeal will probably succeed.”

12. Bearing in mind the aforesaid principles, I shall consider below the proposed grounds of appeal put forward by P.

Grounds of appeal

13. The grounds of appeal set out in the proposed notice of appeal can be grouped into four grounds.

14. The first ground is that in considering the circumstances to determine whether it was mutually intended by P and D2 that P would retain the beneficial interest in the P’s Investment until it was being applied to purchase shares in the Company, the court should not take into account matters which were only known to D2 but unknown to P at the material times.

15. The second ground is that the court had not placed sufficient regards to the only admissible objective circumstances known to both P and D2, ie P had proposed amendments to the draft shareholders’ agreement before paying the P’s Investment to D2 and the draft shareholders’ agreement had not been finalised and executed.  D2 could not have been certain as to the terms upon which the P’s Investment was being held in D2’s client account (the “Uncertainty Contention”).

16. I shall refer to the aforesaid first and second grounds as “objective circumstances grounds” below.

17. The third ground is that the court had erred in analysing and placing weight on the evidence in considering the difference in arrangements between the “1^st Fundraising” and the transaction in this case.  The “1^st Fundraising” was another capital fundraising exercise undertook by the Company in December 2002 when the investment funds of the investors were held in D2’s client account in escrow and were returned to the investors when the escrow event did not occur (see paras 76-80 of the Judgment).  I shall refer to this ground as “the 1^st Fundraising ground” below.

18. The fourth ground is that when fund was paid into the client account of a solicitors’ firm by a non-client third party, the court when considering the duty of inquiry of the solicitors’ firm should not have adopted the starting point that the fund was held on trust for the solicitors’ firm’s client.  I shall refer to this ground as “the non-client payment ground” below.

The objective circumstances grounds

19. The first two grounds of P’s intended appeal can be dealt with together as they both relate to what are the objective circumstances which the court should take into account in determining whether there existed a Quistclose trust.

20. Miss Chan representing the plaintiff referred to Twinsectra Ltd v Yardley and others [2002] 2 AC 164 to submit that the subjective intentions of the parties were irrelevant in determining whether a Quistclose trust had been created.  When the parties entered into arrangements which had the effect of creating a trust, it was not necessary that they should appreciate that they did so; it was sufficient that they intended to enter into them.

21. Miss Chan further referred to Bieber v Teathers Ltd [2013] 1 BCLC 248 when the English court held that to ascertain whether the parties intended to enter a Quistclose trust arrangement, it had to be clear from the express terms of the transaction (properly construed) or had to be objectively ascertained from the circumstances of the transaction that the mutual intention of the parties was that the fund transferred should not be part of the general assets of the recipient but should be used exclusively for a particular purpose and if the money could not be so used then it should be returned to the payer.

22. Miss Chan submitted that to determine whether there was a Quistclose trust in place, the circumstances of the arrangement had to be examined objectively and the circumstances had to show that the parties intended to enter into a trust arrangement.  However, it was not necessary that the parties intended to create a trust and/or appreciate that the arrangement that they had entered into had the effect of creating a trust.  Subjective intentions were irrelevant.

23. Miss Chan contended that in coming to the conclusion of what were the objective circumstances of the transaction between P and D2, the court had taken into account matters which upon proper analysis only go to the subjective intentions of D2 and were irrelevant to the analysis of the objective circumstances of the transaction between P and D2.

24. Miss Chan submitted that the court should not have relied on the findings that moneys paid by investors (other than P) into D2’s client account in the same fund raising exercising of the Company were used to defray the Company’s expenses to come to the conclusion that one of the objective circumstances when P paid his money into D2’s client account was that the fund were to be used by the Company to pay its operation expenses (para 157 of the Judgment). Miss Chan contended that P had no knowledge of such payments by other investors.  As such, D2’s knowledge of the payments by other investors only went to D2’s subjective intentions and was not relevant to the analysis of the objective circumstances of the arrangement between P and D2.

25. Miss Chan further submitted that the court should not take into consideration the alleged “Old China Hand transaction” (paras 75, 77 and 164 of the Judgment).  That transaction involved arrangements adopted by D1 and D2 in respect of another bar business established by D1 on a previous occasion to which P was not privy to and had no knowledge of such transaction.  Miss Chan argued that D2’s belief derived from the “Old China Hand transaction” was merely a matter of D2’s subjective intentions and not a relevant consideration for determination of the existence of a Quistclose trust.

26. Miss Chan submitted that it was not necessary for either P or D2 to intend to create a trust in the first place.  It was therefore not necessary for the court to make any findings as to whether D2 received any instructions from D1 to impose a trust over the P’s Investment (para 168 of the Judgment).

27. Miss Chan contended that the circumstances which could be objectively ascertained in P’s case were as follows:

(1)   on 6 January 2004, P met Mr Ian de Witt (“IDW”) of D2 to discuss investment in the Company’s business and was given a draft shareholders’ agreement;

(2)   on 21 January 2004, P attended the office of D2 when P proposed certain amendments to the draft shareholders’ agreement which, if implemented would affect fundamental aspects of the relationship between the Company and its shareholders; and

(3)   subsequent to the meeting on 21 January 2004, Mr Eddie Look of D2 had sent a revised draft shareholders’ agreement to IDW and D1.

28. Miss Chan said that the aforesaid circumstances disclosed that P and D2 did intend to enter into an agreement whereby P was offered a provisional shareholders’ agreement.  She submitted that this was entirely consistent with P’s case that the P’s Investment was intended for the purchase of the Company’s shares, and that pending the finalisation and execution of the shareholders’ agreement, the P’s Investment was advanced by P to D2 without any indication that it was for the immediate use of D1 and/or the Company (the “Plaintiff’s Purpose”).

29. Mr Chain representing D2 submitted that the existence of a Quistclose trust depended upon whether there was the relevant mutual intention objectively ascertained from the circumstances of the transaction.  In ascertaining what was the relevant mutual intention of the parties, the court had to consider, in the objective circumstances, what D2 subjectively knew and what D2’s subjective intentions were.  The court would consider all circumstances and factors to objectively determine what the respective subjective intentions of the parties were to ascertain whether they shared the mutual intention for a Quistclose trust to be created in substance.

30. Mr Chain submitted that P had never communicated the Plaintiff’s Purpose to D2.  In the absence of such communications, the court had examined all the circumstances surrounding the transaction to see whether D2 would otherwise have obtained knowledge of the Plaintiff’s Purpose including those circumstances contended by Miss Chan as irrelevant consideration.

31. Mr Chain submitted that Miss Chan cited no authority to support her contention that objective circumstances of the transaction should be limited to those known to both parties.

32. I have no disputes with Miss Chan that in determining whether the arrangement entered into between P and D2 amounted to a Quistclose trust, the court should look into the objective circumstances.  The parties’ subjective intentions were irrelevant (see paras 121-122, 125-127 and 137 of the Judgment).  However, the subjective intentions of the parties were about whether the parties subjectively intended to create a trust.  If the mutual intention of the parties was to enter into an arrangement which amounted to a Quistclose trust, the fact that none of them subjectively intended to create a trust was irrelevant.

33. An intention is “mutual” only when it is shared by both parties to the transaction.  If an intention is privy to one party but not shared by the other party, it is not “mutual” but “unilateral”.

34. Ascertaining the mutual intention of the parties is a two stages exercise.  The court has to firstly ascertain the intention of each party and then see whether the parties share the same intention.  The intention of each party is ascertained through investigating the objective circumstances.  With respect, I do not agree with Miss Chan that the objective circumstances could only be confined to matters known to both parties.  The court has to look into all circumstances but not only circumstances known to both parties.  The experience and knowledge acquired by a party in previous transactions and other transactions might affect his understanding on the arrangement for this transaction.  The fact that one party had no knowledge of these previous or other transactions did not prevent them from affecting the intentions of the other party for this transaction.  These are also objective circumstances which the court has to take into consideration in ascertaining that party’s intentions for this particular transaction.

35. I accepted that the P’s Investment was paid into D2’s client account for the purpose of investing in the Company by subscribing for shares in the Company.  However, the finding of such facts alone was insufficient for the court to find a Quistclose trust (see para 124 of the Judgment).

36. In finding that P and D2 did not share a mutual intention to enable the creation of a Quistclose trust, the court had considered the evidence adduced at the trial that P had proposed amendments to the draft shareholders’ agreement and the fact that the shareholders’ agreement had not been finalized or signed by the parties.  I had discussed the Uncertainty Contention raised in various parts of the Judgment (see paras 26-31, 83-85, 138, 140-146, 152, 158-162 and 166-169 of the Judgment).  However, I did not accept that the evidence adduced before me at the trial had established the Uncertainty Contention advanced by Miss Chan.  Upon the objective circumstances found in the Judgment, I accepted IDW’s evidence that D2 had no uncertainty as to on whose behalf the P’s Investment was held (see paras 164-165 and 168 of the Judgment).

37. None of the authorities produced by Miss Chan supports her contention that only matters known to both parties should be taken into account as objective circumstances to ascertain the mutual intention of the parties concerned.  I do not consider that P has reasonable prospects of success on these intended grounds of appeal.

The 1^st Fundraising ground

38. Miss Chan submitted that D2 had failed to give credible explanations for different arrangements in respect of funds received into D2’s client account for the “1^st Fundraising” and for this transaction when D2’s client account was used as an escrow account in the “1^st Fundraising”.  She reiterated her contention advanced at the trial that the “1^st Fundraising” was well-documented.  The complete lack of documentary evidence for this transaction raised serious questions over the veracity of D2’s claim that there was a change in the instruction from D1 acting for the Company that the moneys paid into D2’s client account in this transaction were not held in escrow but at the free disposal of D1 and/or the Company.

39. I had analysed the evidence relating to the “1^st Fundraising” in paras 147 to 154 of the Judgment.

40. This is a breach of trust claim of P.  It was P’s case that D2’s client account was used as an escrow account for this transaction.  The burden was on P to prove his case.  P referred to the arrangements in the “1^st Fundraising” to support his case.  My analysis of the differences in documentation between the “1^st Fundraising” and this transaction only showed that the arrangements for the “1^st Fundraising” simply did not assist P to show that D2’s client account was an escrow account for this transaction.

41. I do not see that P has demonstrated reasonable prospects of success on appeal relying on this intended ground.

The non-client payment ground

42. Miss Chan submitted that D2 had the burden of proving its case in relation to the terms upon which the P’s Investment was paid into its client account.  She contended that it was prima facie incorrect to hold that the starting point was that moneys in a solicitor’s client account were held by the solicitors in favour of his client and that there had to be objective circumstances showing a mutual intention for such moneys to be held on trust in favour of a non-client third party (para 172 of the Judgment).  She relied on Lord Hoffmann’s comment made in the Twinsectra case (supra) at 168F to submit that the proper legal position was that money in a solicitor’s client account was held on trust and the question in every case was what were the terms of that trust.

43. She submitted that once the P’s Investment was paid to D2’s client account, D2 as the solicitor-trustee would immediately come under a duty to independently ensure that it was certain of the terms of the trust and the burden was on D2 to seek instructions or clarification if there was any uncertainty.  She contended that D2 had full knowledge of the existence of the draft shareholders’ agreement and of P having proposed certain amendments. These matters gave rise to uncertainty over whether the P’s Investment paid into D2’s client account was at the free disposal of D1 and/or the Company and D2 ought to have made enquiries as to the terms upon which the P’s Investment was paid into its client account.

44. Miss Chan submitted that the court had failed to take into account the aforesaid uncertainty in coming to the conclusion that in the event D2 was a trustee of the P’s Investment, D2’s breach of trust would have involved a honest and reasonable mistake by D2 that the P’s Investment paid into its client account by P was immediately at the free disposal of D1/the Company (para 205 of the Judgment).  She contended that the aforesaid uncertainty necessitated D2 either to seek clarification from P or to return the P’s Investment to P.  I have dealt with the Uncertainty Contention above and shall not repeat myself here.  Suffice it to say that I had rejected Miss Chan’s Uncertainty Contention. 

45. Miss Chan accepted that money paid by a solicitor’s client into the solicitor’s client account was held on trust by the solicitor for the client but tried to distinguish that from payment made by a non-client third party into the solicitor’s client account.  I cannot agree that whenever a solicitor received payment into his client account from a non-client third party, the solicitor has to clarify with the third party directly or return the money to the third party.  If a client of a solicitor brings a cheque issued by his parents to the solicitor to pay for deposit to purchase a property and tells the solicitor that this is financial assistance from his parents for his home purchase, should the solicitor insist to talk to the client’s parents directly to ascertain the terms of their payment to the solicitor’s client account? Does the solicitor not entitle to rely on instructions from his client?  I do not think so.

46. Miss Chan argued that the uncertainties as to the terms upon which the P’s Investment was paid to D2’s client account in this case ought to have necessitated D2 to make inquiries with P directly.  As I had rejected the Uncertainty Contention, this argument of Miss Chan simply did not take off the ground.  In fact Miss Chan submitted in her supplemental skeleton for this application that the solicitor could not operate on the presumption that the money is held to the order of his client unless there was certainty of the terms upon which the money was being held in the client account.  I had found such certainty in the Judgment.

47. Miss Chan referred to para 568A of the judgment of Hildyard J in Challinor v Juliet Bellis & Co [2013] EWHC 347 (Ch) which echoed the comment of Lord Hoffmann made in the Twinsectra case (supra) at 168F  to support her non-client payment ground.  I had considered in para 137 of the Judgment the comment of Lord Hoffmann referred to by Miss Chan.  I had no disagreement with his Lordship.  I had also analysed the Challinor case in some details in the Judgment including para 568A of that judgment (see paras 162, 166, 170-171 and 193-199 of the Judgment).  I did not find the Challinor case assisting P’s case.

48. Again, I see no reasonable prospects of success on appeal relying on this intended ground.

Conclusion

49. I do not accept that any of the intended grounds of appeal put forward by P has satisfied the “reasonable prospects of success” threshold or the “interests of justice” test for grant of leave to appeal.

50. In the premise, I dismiss the Summons.

Costs

51. Costs follow event.  I make an order nisi that P shall pay D2’s costs for the Summons with counsel certificate.  Such costs will be assessed by summary assessment and payable forthwith after the assessment.  Mr Chain asked for costs on indemnity basis in his skeleton.  I do not see any improper conduct or ulterior motive on the part of P in taking out the Summons (see para 62/App/12 of the Hong Kong Civil Procedure 2015, Vol 1 at 1207-1208).  This is not a case attracting consideration for indemnity costs.  P shall only be liable to pay D2’s costs for the Summons on party-and-party basis.

52. The costs order nisi shall become absolute after 14 days from the date of this decision unless application for variation is received from either party within these 14 days.

53. I direct D2 to submit its statement of costs for the Summons to the court within seven days after the costs order shall become absolute with copy to P and P to submit his comments thereon to the court within seven days thereafter with copy to D2.  Costs payable by P to D2 for the Summons will be assessed by the court by way of paper disposal.