CONNAUGHT WEST LTD v. GLOBAL FIDUCIARY SOLUTIONS LTD AND OTHERS

HCA 525/2017

[2019] HKCFI 40

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 525 OF 2017

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D E C I S I O N

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1.  By summons dated 29 May 2018 (the “Summons”), the Plaintiff, Connaught West Limited, applies for a preservation order that the 1^st, 2^nd and 3^rd Defendants do pay into court or otherwise secured as the court considers just pursuant to Rule of High Court, Cap 4A, Order 29, rule 2(3) and/or the inherent jurisdiction of the court:

(1)  The sums of US$686,496 and GBP1,107,000 transferred on 19 and 20 December 2016 respectively from the GFS Superannuation Scheme 2 (the “Scheme”) to an ICBC bank account in the name of Churchill Nominees (Hong Kong) Limited; and

(2)  A sum of GBP531,458.02 transferred from the Scheme to an account of Interactive Brokers in the name of Brite Advisors Pty Ltd.

MATERIAL FACTS

2.  On 2 July  2013, by a trust deed signed between the 1^st Defendant as principal employer and the 2^nd Defendant as trustee (the “Deed of Trust”), the Scheme was established.

3.  The Scheme is an occupation retirement scheme registered with the Mandatory Provident Fund Scheme Authority (“MPFA”) under Scheme No R028832(1) in accordance with the Occupational Retirement Schemes Ordinance, Cap 426 (the “Ordinance”).

4.  The 1^st Defendant is a limited liability company incorporated in Hong Kong on 31 May 2012. It was and is still the principal employer under the Scheme and the holder of a multicurrency saving account (Account Number: 701 530 024 389) (the “Trust Account”) with Industrial and Commercial Bank of China (Asia) Limited (“ICBC”). The Trust Account has been used to hold contributions and accrued benefits of the Scheme.

5.  The Plaintiff’s case is that the 2^nd Defendant was the original trustee of the Scheme from 31 May 2015 until his resignation on 28 June 2016.

6.  The 3^rd Defendant is a limited liability company incorporated in Hong Kong on 27 November 2014 and is wholly owned by Churchill Nominees (Hong Kong) Limited (“Churchill”), which in turn is and was wholly owned by the 2^nd Defendant.

7.  It is the Plaintiff’s case that pursuant to the Deed of Retirement and Appointment signed between the Plaintiff, the 1^st Defendant and the 2^nd Defendant dated 29 June 2016 (the “DRA”), the 2^nd Defendant retired as a trustee of the Scheme and the Plaintiff was appointed and registered as the sole trustee thereof from 30 June 2016 to date.

8.  The DRA was duly signed and executed by the Plaintiff, defined as the “New Trustee”, the 1^st Defendant, defined as the “Principal Employer” and the 2^nd Defendant, defined as the “Retiring Trustee”.

9.  The DRA provides:

“Whereas:

(i) This Deed is supplemental to the Deed of Trust made between the Principal Employer and the Retiring Trustee on 2^nd July 2013, establishing the GFS Superannuation Scheme 2, an Occupational Retirement Scheme with Mandatory Fund Schemes Authority ORSO Schemes Section reference R028832(1).

(ii) The Retiring Trustee hereby declares that it is desirous of retirement from and being discharged as trustee of the Trust.

(iii) The Principal Employer hereby consents to the retirement of the Retiring Trustee.

Now this deed witnesses:

(i) In exercise of the power conferred upon it by the Trust Deed and of every other power so enabling it, the Principal Employer HEREBY APPOINTS the New Trustee as trustee of the Trust in place of the Retiring Trustee who HEREBY RETIRES and is discharged as trustee of the Trust with immediate effect.

(ii) By executing this Deed, the New Trustee HEREBY ACCEPTS the appointment as a trustee of the Trust as at the date hereof and DECLARES that it shall henceforth hold as the trustee of the Trust all such of the trust property transferred to it upon the trusts of and subject to the terms and conditions of and with the powers contained in or arising from the Trust Deed.

(iii) The Trust assets in their entirety shall vest in the New Trustee at the date hereof and on and after such date and the Retiring Trustee HEREBY COVENANTS with the New Trustee to take all and any such further action as may be reasonably necessary or desirable to vest the Trust assets in their entirety in the New Trustee.” (Emphasis added.)

10.  The Deed of Trust provides, inter alia, that:

“6. COVENANTS OF THE PRINCIPAL EMPLOYER

The Principal Employer covenants with the Trustee as follows:

(d) The Principal Employer will co-operate with the Trustee (and will procure the co-operation of any Participating Employer) to any extent necessary to enable the Trustee to discharge the functions of the “designated person” and the “administrator” (within the meaning of ORSO) in relation to the Scheme to the extent that such functions are applicable to the Scheme.

8. COVENANTS OF THE TRUSTEE

(e) to cause the Trust Fund to be kept separate and distinct from and not to form part of the assets of the Principal Employer or the assets of the Trustee.

9. REMOVAL AND RESIGNATION OF INDVIDUAL TRUSTEE

(g) Any person who acts as Trustee shall on ceasing to be a Trustee pursuant to this clause do everything necessary to vest the assets of the Scheme in the remaining or new Trustee and shall deliver all records and other books to the remaining or new Trustee.”

11.  The Plaintiff’s case is that:

(1)  In breach of Clause 9(g) of the Deed of Trust, the 2^nd Defendant failed to vest all the trust assets of the Scheme in the Plaintiff. As a result of the said breach, the Plaintiff cannot discharge its duties and functions as the trustee of the Scheme.

(2)  On 8 December 2016, the 1^st Defendant, despite having no power to do so, appointed two additional co-trustees, namely, (i) the 2^nd Defendant; and (ii) the 3^rd Defendant to the Scheme without the prior knowledge and approval of the Plaintiff as the sole trustee. As such the 2^nd and the 3^rd Defendants are currently wrongfully registered in the MPFA website as designated agents/trustees of the Scheme along with the Plaintiff.

(3)  Under the Deed of Trust, after the appointment of the Plaintiff as trustee to the Scheme pursuant to the DRA, the 1^st Defendant had no power to appoint any other trustee to the Scheme, thus the purported appointments of the 2^nd Defendant and the 3^rd Defendant as additional trustees of the Scheme are null and void.

(4)  Importantly, on 19and 20 December 2016, without prior knowledge and approval of the Plaintiff, the Defendants, in breach of trust and not in the usual course of the business of the Scheme, transferred the following sums of money out of the Trust Account:

(a) US$686,496 and GBP1,107,000 to the ICBC bank account of Churchill, the company wholly owned by the 2^nd Defendant; and

(b) GBP531,458.02 to Interactive Brokers LLC’s account in the United States of America (collectively, the “Trust Monies”).

12.  The Plaintiff, qua trustee, therefore claims against the Defendants for intermeddling with trust property. It also prays for an entitlement both at common law and in equity to trace and recover from the Defendants the Trust Monies or assets acquired directly or indirectly with such Trust Monies.

13.  It is against such background that the Plaintiff took out the Summons for a preservation order in terms as outlined in paragraph 1 above.

14.  The Defendants filed their Defence and Counterclaim on 4 September 2018. In essence, the Defendants pleaded that:

(1)  The DRA has no legal effect and is not binding on the 1^st Defendant because:

(a)  Pursuant to a Heads of Agreement entered into by Mr Christopher John Beale of the 1^st Defendant and Mr David Wilkinson (“Mr Wilkinson”) of the Plaintiff, the purported intent of which was the transfer of the whole business of the 1^st Defendant to Mr Wilkinson and his nominees. With effect from the date of the execution of the Heads of Agreement, Mr Wilkinson became a de facto director of the 1^st Defendant with access to the bank accounts of the 1^st Defendant and the Scheme in his capacity as an authorised signatory of those accounts.

(b)Pursuant to section 25 of the Ordinance, where a registered scheme is governed by a trust, the sole trustee shall not be an employer trustee where employer trustee is defined to include an associate of such employer. Given Mr Wilkinson’s common control of the 1^st Defendant and the Plaintiff, the 1^st Defendant and the Plaintiff were at all material times associate companies and given further Mr Wilkinson’s control as an authorised signatory of the assets of the Scheme, the Plaintiff could not be appointed as a trustee of the Scheme. As such, the DRA is void as being in breach of the mandatory provisions of the Ordinance. (paragraph 9 of the Defendants’ Defence and Counterclaim)

(2)  The Plaintiff was not entitled to and has wrongly charged and received the sums of HK$63,941.96 and GBP116,000 purportedly in settlement of fees incurred by the Plaintiff.

15.  This court notes that the Statement of Truth of the Defendants’ Defence and Counterclaim was signed by Mr Peter David Manktelow (“Mr Manktelow”), as director of the 1^st Defendant and Mr Michael John Foggo for himself and as a director of the 3^rd Defendant.

16.  The real issue in contention in this action is the validity of the DRA, the validity of the appointment of the Plaintiff as the new trustee, in other words, who is or are the properly appointed trustee(s) of the Scheme, a MPFA recognised ORSO Registered Scheme named GFS Superannuation Scheme 2.

APPLICABLE LEGAL PRINCIPLES

17.  The principles relating to the granting of a preservation order are well established. In Sum Mun Kid Frederick v Auto Italia Limited and Others HCA60/2017, unrep, 16 May 2018, Deputy High Court Judge Saunders at paragraph 20 said:

“The principles relating to the granting of a preservation order are set out in Samtani v Samtani [2012] 4 HKLRD 872 at §§75-79. First, there must be property which is bona fide the subject matter of the cause or proceedings, and secondsomething ought to be done for the security of the property. The enquiry on the second issue will usually involve showing that damages may not be an adequate remedy. A detailed enquiry into the relative merits of rival claims is not necessary as in respect of merits, the party seeking the preservation order need only show that there is a serious issue to be tried on normal American Cyanamid issues.”

18.  In Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd and Others HCA 3023/2016, unrep, 2 May 2017, Deputy High Court Judge Douglas Lam S. C., at paragraph 37 said:

“For an interim injunction to protect a claim for trust property, the principles in American Cyanamid Co v Ethicon Ltd [1975] AC 396 apply, although irremediable damage need not necessarily be shown and the court will readily find that the balance of convenience favours the preservation of the fund pending trial. See eg Lewin (supra) at §38-14; A v C [1981] QB 956; CY Foundation Group v Cheng Chee Tock & Ors [2012] 1 HKLRD 532 at §§14, 37.”

19.  There is no need for the applicant to show risk of dissipation of assets in an application for a preservation order.

ANALYSIS

20.  In the Defendants’ Skeleton Submissions, Mr Hunsworth for the Defendants submitted that the Plaintiff’s Summons is opposed on three grounds:

(1)  The Plaintiff has not established any locus standi to bring this action;

(2)  As a matter of law, the application is misconceived;

(3)  On the evidence filed no conceivable basis has been made out to support the application.

Locus Standi

21.  Basically, the Defendants’ argument is that as the Plaintiff’s appointment as the new trustee under the DRA is null and void, it does not have the relevant locus standi to make this application. Mr Lynn, for the Plaintiff, submitted that the Plaintiff has the relevant locus standi as the DRA was properly signed and executed by the Plaintiff as the New Trustee, the 1^st Defendant as the Principal Employer and the 2^nd Defendant as the Retiring Trustee. There is no challenge as to the authenticity of the DRA.

22.  As to the alleged breach of section 25 of the Ordinance is concerned, Mr Lynn, for the Plaintiff, submitted that first, the factual allegations as set out in paragraph 9 of the Defendants’ Defence and Counterclaim are denied. It is denied that:

(1)  there is common control of the 1^st Defendant and the Plaintiff;

(2)  Mr Wilkinson is a de facto director of the 1^st Defendant;

(3)  Mr Wilkinson is an authorized signatory of the assets of the Scheme.

23.  Paragraphs 6 and 7 of the Plaintiff’s Reply to Defence of the 1^st to 3^rd Defendants and Defence to Counterclaim of the 1^st Defendant read as follows:

“paragraph 8 is denied. Wilkinson was at no time ever a director (de facto or otherwise) or employee of the 1^st Defendant. Furthermore, it is denied that Wilkinson ever had “access to the bank accounts of the 1^st Defendant and the Scheme in his capacity as an authorised signatory of those accounts” as alleged. In fact, Beale was at the material times director and authorized signatory of the 1^st Defendant and signed all cheques on its behalf or instructed Mariz Morales (who was employed by the 1^st Defendant) to do so.

As to paragraph 9:

(1)  It is denied that Wilkinson had “common control of the 1^st Defendant and the Plaintiff” whether as alleged or at all.

(2)  It is denied that the 1^st Defendant and the Plaintiff were at the material time or times (or at any time) “associate companies” within the meaning of sections 2 and/or 25(1)(b) of ORSO or otherwise.

(3)  It is denied that Wilkinson had “control as an authorised signatory of the assets of the Scheme”.

(4)  In any event, even if (which is denied) there had been a breach of the mandatory provisions of the ORSO, this would in no way render the DRA void, unenforceable, or otherwise legally ineffective.

(5)  In the premises, it is averred that the DRA was (and is) valid, of full legal effect and binding upon the 1^st and 2^nd Defendants.”

24.  I am of the view that there are serious issues to be tried in relation to the issues of locus standi and the validity of the DRA. The Defendants have not applied for the action to be struck out. The key issue as to who is or are the validly appointed trustee(s) is to be resolved at the trial of this action. Hence, the Plaintiff has shown that there is a serious issue to be tried in the normal American Cyanamid sense.

25.  I am not convinced that until the Plaintiff makes good its claim that it is the lawful and properly appointed trustee of the Scheme, it has no locus standi to collect, deal or to have anything to do with the Trust Monies of the Scheme. If that is right, then any party can raise a challenge to the locus standi of an applicant and pending the resolution of that very issue, no judicial protection can be granted to trust assets. That cannot be right.

26.  Indeed, Mr Hunsworth for the Defendants fairly agreed that there are issues to be tried in relation to the locus standi of the Plaintiff and the validity of the DRA. He submitted that if there has been a breach of section 25 of the Ordinance, then the DRA is a deed tainted with illegality. An illegal contract is, by the operation of law, unenforceable. However, whether there has been a breach of section 25 of the Ordinance is very much a live issue to be resolved at trial. For instance, it appears that the 1^st Defendant is now under the control of Mr Manktelow rather than Mr Wilkinson.

27.  Mr Hunsworth also referred to paragraphs 16 and 17 of the original Statement of Claim which has since been amended with the relevant parts being struck through. Mr Hunsworth’s point was that from those paragraphs, there was a purported intention for Mr Wilkinson to acquire the whole business of the 1^st Defendant. However, it seems to me that the real questions are whether the sale actually took place and whether Mr Wilkinson and/or his nominees and/or associates are presently in control of the 1^st Defendant. Again these pertinent issues are to be resolved at trial.

28.  Hence, I am of the view that the locus standi point is not a ground for resisting the grant of a preservation order. 

No readily identifiable and distinct property

29.  Mr Hunsworth submitted that the property to be preserved must be the actual property which is the subject matter of the proceedings and still in existence at the time of the application. This suggests that the property must be readily identifiable and distinct and would preclude in most cases a preservation order in respect of a sum of money. Mr Hunsworth relied on the case of Sum Mun Kid Frederick v Auto Italia Ltd (supra) at paragraph 32 where Deputy High Court Judge Saunders held:

“In circumstances where money has been paid over and has become intermingled with other money, for example in a recipient’s general bank account, a preservation order over the money simply cannot be made, as the money (the property) cannot be separately identified. In such circumstances the appropriate application is for a Mareva injunction.”

30.  I am of the view that as a matter of law, the case of Sum Mun Kid Frederick v Auto Italia Ltd (supra) is distinguishable and not applicable to the facts of the present case. In that case, the plaintiff sought a preservation order over money being deposits paid by him to the defendant for the purchase of specific cars. It was a common law claim. The present case concerns a claim of breach of trust by a trustee for misappropriating trust fund. It is long and well established that equity allows tracing into mixed funds. In the classic case of Re Diplock [1948] Ch 465, the English Court of Appeal, at p. 521, said:

“The equitable form of relief whether it takes the form of an order to restore an unmixed sum of money (or property acquired by means of such a sum) or a declaration of charge upon a mixed fund (or upon property acquired by means of such a fund) is, of course, personal in the sense that its efficacy is founded upon the jurisdiction of equity to enforce its rules by acting upon the individual. But it is not personal in the sense that the person against whom an order of this nature is sought can be made personally liable to repay the amount claimed to have belonged to the claimant. The equitable remedies pre-suppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself. If the fund, mixed or unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, of course, award damages but specific relief would be out of the question. It is, therefore, a necessary matter for consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief.” (Emphasis added.)

31.  Mr Lynn, for the Plaintiff, submitted that there is no evidence that the Trust Monies have been intermingled with other funds. In Messrs Mayer Brown JSM’s letter dated 23 June 2017, it is stated that:

“Our clients confirm that all the assets of the GFS Superannuation Scheme 2 (the “Scheme”) which are currently held by our clients are intact and secure. Specifically, our clients confirm that:-

1.  the sums of US$686,496 and GBP1,107,000 which were transferred on 19 and 20 December 2016 respectively to an ICBC bank account in the name of Churchill Nominees (Hong Kong) Limited remain in such account in full as of the date of this letter; and

2.  the sum of GBP531,458.02 which was transferred on 19 December 2016 to an account with Interactive Brokers LLC in the name of Brite Advisors Pty Ltd remain in such account in full as of the date of this letter.”

32.  In another letter dated 12 June 2018 from Messrs Mayer Brown JSM, it is also stated, inter alia, that:

“Our clients have already assured your client that they have no intention of dissipating the Alleged Diverted Monies (other than for the proper administration of the Scheme). If your client sees a risk of dissipation of the Alleged Diverted Monies by our clients (in which case our clients cannot hand over the Scheme assets including the Alleged Diverted Moneys should your client prevail at trial), the appropriate application is for a Mareva injunction instead of a preservation order.”

33.  The same message was repeated in a letter dated 19 July 2018 also from Messrs Mayer Brown JSM. Hence, there is no positive evidence that the Trust Monies have been mixed with other funds in the designated accounts.

34.  Indeed, Mr Lynn further submitted that as a matter of law, trustees have a duty to keep trust monies in separate accounts. First, section 21(1)(a) of the Ordinance provides:

“(1) The assets of a registered scheme –

(a) subject to subsections (4)(b) and (4A), shall, except where the Registrar is satisfied as regards the scheme in the manner described in section 18(4)(b)(ii), be kept separate and distinct from and shall not form part of the assets of the relevant employer of the scheme or the assets of the administrator of the scheme which are not vested in him in his capacity as such.”

35.  Second, Clause 8(g) of the Deed of Trust also mandates the trustee to cause the trust fund to be kept separate and distinct from and not to form part of the assets of the Principal Employer or the assets of the trustee. There is no admission of any breach of trustee’s duties on the part of the Defendants. Hence, Mr Lynn submitted that there is no evidence that the Trust Monies have gone into any mixed funds.

36.  In any event, even if the Trust Monies have gone into mixed funds, there is no bar against tracing into those mixed funds and for the Plaintiff to seek a preservation order so as to protect the Trust Monies. Mr Hunsworth also fairly agreed that a trustee is entitled to trace into a mixed fund and to seek preservation orders from court if the circumstances so warranted.

37.  Mr Hunsworth also ran the point that the present application is misconceived as the parties who are allegedly holding the Trust Monies, namely, Churchill and Brite Advisors Pty Ltd are not named as defendants and hence not parties to this action. If the property is the subject matter of the cause of action and yet the person who is holding the property is not a party to the action then it is conceptually impossible for the preconditions of a preservation order to be met.

38.  I am not convinced that the above analysis is correct. Of course, the Plaintiff could have joined Churchill and Brite Advisors Pty Ltd as knowing recipients but it is really up to the Plaintiff to decide which parties to join as defendants. The Plaintiff’s case is that the Defendants have sufficient control over Churchill and Brite Advisors Pty Ltd. In the case of Churchill, 100% control, and in any event it will not be difficult for the Defendants to comply with a court order to cause and/or procure Churchill and Brite Advisors Pty Ltd to transfer the Trust Monies back to the Plaintiff and/or to pay the same into court.

39.  Mr Lynn referred this court to paragraph 19 of the Affidavit of Peter David Manketlow which stated:

“…To the extent those members give instructions as to how their money will be invested then GFS will carry out those instructions and with the concurrence of the independentTrustees, Mr Foggo and Tribune Limited, the 3^rd Defendant, the money will be paid to the investment destination instructed by the Scheme member.”

40.  I agree that the above does shows that the Defendants have control over the Trust Monies and they are in a position to procure and/or cause Churchill and Brite Advisors Pty Ltd to transfer the Trust Monies to the Plaintiff or to pay them into court.

41.  If it turns out that, contrary to the filed evidence, the Defendants somehow were not able to procure Churchill and Brite Advisors Pty Ltd to transfer the Trust Monies to the Plaintiff or to pay the same into court, it is then up to the Plaintiff to decide what steps it would take. But not joining Churchill and Brite Advisors Pty Ltd as parties to the action is not a valid basis for saying that it is conceptually impossible for a preservation order to be made against the Defendants. The court has jurisdiction and power to order the Defendants to do what they could for the protection of the Trust Monies. Whether that is sufficient protection for the Plaintiff or not, it is up to the Plaintiff.

Risk of Dissipation of Assets

42.  In relation to the Defendants’ third ground, namely, there is no evidence put forward which suggest that the court should accede to the Plaintiff’s application, I am of the view that there is no need for this court to undergo an assessment on whether in view of the alleged conducts of the Defendants, there is a risk of dissipation of assets of the Scheme. Mr Hunsworth also agreed that as a matter of law, there is no need for the Plaintiff to establish any risk of dissipation of assets.

Adequacy of Damages and Balance of Convenience

43.  Mr Lynn, for the Plaintiff, submitted that damages are not likely to be an adequate remedy because while there may be subsequent legal measures that could be taken against the Defendants for repayment, these would be expensive and time-consuming. Unless proprietary relief can be obtained, the trustee of the Scheme may be left with a claim for an account or equitable compensation of uncertain practical value against the Defendants.

44.  Whilst it is true that those risks are the necessary uncertainties of any claim and litigation, on the special facts of this case, I am of the view that a preservation order should be made when there is no certainty that damages will be adequate at the end of the day so as to safeguard the best interest of the beneficiaries of the Scheme. First and foremost, it cannot be argued that the Trust Monies should be diverted and/or transferred out of accounts controlled by the Scheme and deposited into the bank accounts of Churchill and Brite Advisors Pty Ltd. Mr Manktelow at paragraph 17 of his affidavit said:

“With regard to the sums of money identified in paragraph 2 of the Plaintiff’s summons, it is correct these sums were transferred from out of accounts controlled by GFS. This was done purely as a preventative measure to stop Mr Wilkinson, who had after June 2016 control over these GFSaccounts, from helping himself to client money purportedly as payment of trustee fees owed to CWL.” (Emphasis added.)

45.  If the Defendants had any concerns about overcharging of fees by Mr Wilkinson, the proper cause of action would be for them to take out an application for injunction against Mr Wilkinson but not to resort to the self-help remedy of transferring trust assets out of the accounts of the Scheme. It is only right that the Trust Monies should be transferred back to the accounts controlled by the Scheme.

46.  Secondly, Mr Lynn for the Plaintiff also submitted that the 2^nd Defendant should not have allowed the 1^st Defendant to hold on to the Trust Monies. He also submitted that the Defendants are not properly registered and/or licensed for handling trust assets.

Interest of Beneficiaries

47.  During the course of oral submissions, Mr Hunsworth, for the first time, raised an overarching point that the Scheme simply cannot operate and carry out members’ instructions if the court orders that any liquid assets such as cash, whether now or being generated in the future after a member realises an investment, should be paid into court. The Trust Monies are presently managed and invested according to the instructions of beneficiaries, and the court should take into consideration the best interest of the beneficiaries of the Scheme.

48.  Mr Hunsworth also submitted that a better course is for the court to appoint an independent third party to manage the Trust Monies in the interim period. I agree that the court has to take into consideration the best interest of the beneficiaries of the Scheme. Accordingly, I directed the parties to file further evidence and submissions on the present status of the Trust Monies and their respective proposed orders for preservation of the Trust Monies.

49.  After the filing of supplemental affidavit evidence, what is significant is that it now transpires that the Defendants are not properly licensed to manage the Trust Monies. Mr Lynn for the Plaintiff submitted that pursuant to section 53ZQ of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Cap 615, it is necessary for any party in Hong Kong who wishes to carry on a trust or company service business in Hong Kong to apply for a “Trust or Company Service Provider Licence” (“TCSP Licence”) before expiry of the transitional period on 28 June 2018.

50.  The Defendants accepted that a TCSP Licence is necessary for them to act as trustees. It is not suggested that the 1^st Defendant can act as a trustee. The same applies to the 3^rd Defendant. As far as the 2^nd Defendant is concerned, there is no dispute that he does not have a TCSP License. Mr Hunsworth submitted that the 2^nd Defendant is licensed through Churchill Corporate Secretaries Hong Kong Limited and Churchill Fiduciaries Limited. I am not sure that is correct. From the publicity statement of the Companies Registry, it appears that if the 2^nd Defendant is employed by a TCSP License holder, then he is not required to apply for a TCSP Licence. However, Mr Lynn for the Plaintiff is right that there is no evidence that the 2^nd Defendant is an employee (as opposed to shareholder or director) of either Churchill Corporate Secretaries Hong Kong Limited or Churchill Fiduciaries Limited.

51.  Further, Mr Wilkinson of the Plaintiff deposed that if the 2^nd Defendant is taking fees personally, then he does need to be separately licensed and obtain his own business registration. There is evidence to show that professional fees were paid to the 2^nd Defendant personally rather than to Churchill Corporate Secretaries Hong Kong Limited or Churchill Fiduciaries Limited.

52.  I am of the view that this is a serious matter. If the Defendants have no proper TCSP Licence, then they should not have been managing the Trust Monies at all. Given that, at the very least, there are serious concerns about whether the Defendants are properly licensed and there are no good reasons why the Trust Monies should be transferred out of the Scheme, I am of the view that it is in the best interest of the beneficiaries of the Scheme that the Trust Monies be transferred back to the accounts of the Scheme subject to undertakings from the Plaintiff.

53.  The Defendants’ case is that they transferred the Trust Monies out of the Scheme purely as a preventative measure to stop Mr Wilkinson, who had after June 2016 control over the Scheme accounts, from helping himself to client money purportedly as payment of trustee fees owed to the Plaintiff. This concern can be taken care of by a proper undertaking from the Plaintiff not to charge any fees without further order of the court.

Undertaking as to damages

54.  Mr Lynn for the Plaintiff submitted that there is no rule or requirement in the authorities for any undertaking as to damages where the court makes a preservation order under Order 29, rule 2, although the court may require an undertaking as to damages where the circumstances warrant (See Samtani v Samtani [2012] 4 HKLRD 872 at §92, per Deputy High Court Judge Q. Au Yeung (as she then was).

55.  Mr Lynn submitted that no undertaking as to damages in favour of the Defendants is necessary in the circumstances since the Defendants have no beneficial interest in the subject matter of the preservation order or the assets of the Scheme.

56.  Further, as none of the Defendants are trustees licensed under the TCSP regime, they are not able to carry on a trust business in Hong Kong, and could not be entitled to any fees in respect of services said to be rendered to the Scheme. Any damages claim or loss of fees must fail.

57.  Mr Hunsworth submitted that although a trustee has no beneficial interest in the trust assets, it does not mean the trustee is not exposed to liability to the beneficiaries if the trust assets are dissipated. It was submitted that if members of the Scheme come forward and ask the 1^st Defendant for their money, it is no answer for the 1^st Defendant to say that the money was paid to the Plaintiff who then lost it.

58.  Although I am of the view that it is most unlikely that the Defendants would be liable to members of the Scheme for transferring the Trust Monies to the Plaintiff pursuant to an order of the court, given that the issue of the locus standi of the Plaintiff as a trustee is yet to be resolved and it is uncertain as to whether any third parties including members of the Scheme might have any claims against trustees of the Scheme whoever that may be, I am of the view that the Plaintiff do have to give the usual undertaking as to damages.

59.  Accordingly, I direct the Plaintiff to give the usual undertaking to court in the following form:

“If the Court later finds this Order has caused loss to the Defendants or any other party and decides that the Defendants or other party should be compensated for that loss, the Plaintiff will comply with any Order the Court may make.”

60.  Mr Hunsworth submitted that the usual undertaking is inadequate as there is no evidence that the Plaintiff will be good for any undertaking as to damages. However, there is no application for fortification for damages before me. There is no evidence as to the likely quantum of damages to be suffered by the Defendants if they are being ordered by the court to transfer the Trust Monies back to the Scheme under the control and custody of the Plaintiff.

61.  As to Mr Hunsworth’s suggestion of the appointment of independent trustees. I agree with Mr Lynn that it is likely to be very costly and to the detriment of members of the Scheme. Also, any independent trustees appointed are likely to be drawn into this ongoing litigation and incur even more costs.

62.  I also have reservations about the suitability of the proposed independent trustees, namely, Six Degrees Consulting Limited and Sprout Trust (Asia) Limited. They are all newly incorporated companies with no track records on administering trust funds of this nature. The former also appears to be connected with the Defendants.

63.  Finally, Mr Hunsworth also expressed the concern that Scheme members deal with the 1^st Defendant and not the trustee. The 1^st Defendant carries out the instructions of Scheme members and requests the trustee to make the necessary investments as the Scheme members directs. It was submitted that the court will not order people to work together because the court recognises the impracticality of forcing lions to lie down with lambs. However, I am of the view that, in the circumstances of this case, the best course is not to order the Defendants to make payment into court as Mr Hunsworth pointed out, the Trust Monies need to be invested in the meantime according to the members’ instructions.  The Plaintiff has a duty to properly manage the Trust Monies according to the law and its contractual and fiduciary obligations. Other than the allegation of excessive fees, there has been no allegations that the Plaintiff cannot properly perform its function as a trustee pending the resolution of this case. If there are any difficulties in relation to the administration of the Scheme, parties can always seek further directions from the court.

DISPOSITION

64.  For all the reasons set out above, I make an order that subject to (1) the Plaintiff’s undertaking as to damages and (2) the undertakings as given by the Plaintiff as set out in paragraph 5(c)(i) of the 5^th Affidavit of David Wayne Wilkinson, the Trust Monies and the investments acquired from them, save those which had been returned to Scheme members, be transferred to the Plaintiff’s control and custody within 14 days from the date of this order with all necessary documentation.

65.  For the avoidance of doubt, I also grant the ancillary relief sought by the Plaintiff, i.e., the necessary documentation includes the following:

(1)  Bank statements, cheque books and stubs, bank-in slips, bank credit and debit advices for the bank transactions of the client funds;

(2)  Accounting vouchers including suppliers and service providers’ invoices, debit notes and general ledger record of the payments;

(3)  Monthly financial statements for the assets purchased;

(4)  The legal documents (for example prospectus) which have been purchased on behalf of the Scheme;

(5)  Copies of all members or clients files notes; and

(6)  Copies of basis of decisions of investments made, and if confirmed by members, copies of their instructions.

COSTS

66.  Mr Lynn submitted that the Plaintiff’s costs of and occasioned by this application should be paid forthwith by the Defendants on an indemnity basis. He submitted that there is no reason why the Scheme itself should bear the costs incurred by this application, which has been necessitated by the unreasonable stance taken by the Defendants.

67.  I am of the view that the Trust Monies should not have been transferred out of the Scheme in the first place and be managed by someone without a proper license. The Defendants’ concern about the Plaintiff’s excessive fees, if made out, could be addressed by a proper application for injunction rather than by the self-help remedy of transferring the Trust Monies out of the Scheme.

68.  Having said that, as the key issue as to who is or are the validly appointed trustee(s) has yet to be resolved and it might well turn out at trial that the Plaintiff does not have the locus standi to make this application, I am of the view that the proper costs order should be costs in the cause.

69.  Accordingly I make a costs order nisi that:-

(1)  the costs of and occasioned by this application, save and except the costs of and occasioned by the adjournment on 12 September 2018, be costs in the cause.

(2)  The costs of and occasioned by the adjournment on 12 September 2018 be reserved.

70.  Unless the parties take out an application to vary the above costs order nisi within 14 days from the date hereof the above costs order nisi will be made absolute after expiry of the 14-day period. 

PROCEDURAL EPISODE  

71.  I should also mention a procedural episode where the Plaintiff complained that Mr Manketlow has attempted to pervert the course of justice by interfering with a witness, namely, Mr Robert Ikin, the deponent of an affidavit in these proceedings. This matter came before Deputy High Court Judge C M Leung on 12 September 2018 on which occasion leave was granted to the Plaintiff to file and serve the 1^st Affidavit of Roderick Miller which deposed that Mr Robert Ikin was coerced or induced by Mr Manketlow to withdraw his affidavit.

72.  The learned Deputy High Court Judge then directed Mr Manketlow to file an affidavit in reply within 7 days and adjourned the application with costs of that day reserved. Mr Manketlow did file an affidavit but Mr Lynn for the Plaintiff submitted that the said affidavit did not provide for the explanation that the learned Judge asked for. In a letter from the Plaintiff’s solicitors dated 7 December 2018, it is stated that:

“In the absence of any credible excuse, the judge, as he suggested he would, should consider any reply in this situation and if none, refer the matter to the Department of Justice.

It must be remembered that the judge specifically refused to hear the matter on the last occasion solely because of your client’s conduct for which he required an explanation.” 

73.  I have told the parties that I am not privy to the conduct of the hearing on 12 September 2018 and I do not consider that this procedural episode will affect the determination of the substantive issues in this application. Accordingly, I adjourned the Plaintiff’s application on this particular aspect including costs occasioned by the last adjournment. It is up to the Plaintiff to make whatever applications it sees fit in view of the evidence filed by Mr Manketlow.

74.  Further, on 21 December 2018, the Plaintiff’s solicitors wrote to the court and stated, inter alia, that:

“We understood from his lordship that upon discussing the matter with the previous judge DHCJ C.M. Leung, both were collectively of the view that the request for an explanation had not properly been given.

We are unclear, and would wish clarification, whether the court then either directed or suggested that Mr Manketlow file a further affidavit it then being left in our own hands whether to fix a hearing before DHCJ C.M. Leung todetermine whether a referral to the Department of Justice should be made.

We would also draw the Court’s attention that on their own admissions, the 2^nd and 3^rd Defendants are currently in breach of section 53F(1) and (2) of the Anti-Money Laundering and Counter Terrorist Financing Ordinance (AMLO) and have been since 28^th June 2018.

They are continuing to commit a criminal offence and therefore have no locus to hold themselves out as Trustees in this litigation or at all. This offence is one of strict liability, aggravated by their ongoing assertion they are properly appointed Trustees.

The likely penalty upon conviction is a $50,000 fine and a 6 months disqualification (please see enclosed Companies Registry extract).

The Court may consider it appropriate that all the above matters be considered at the same time and an early date be fixed. If the 2^nd and 3^rd Defendants are disqualified pursuant to the AMLO there will be no need to carry on with the substantive action, as it will in effect have been determined by the legislation, thereby saving substantial costs which will in any event will come from the pensioners pockets.”

75.  First, I would like to clarify that both Deputy High Court Judge C M Leung and I have not expressed any views on whether the request for an explanation had been properly given by Mr Manketlow. Deputy High Court Judge C M Leung certainly has not read the relevant affidavit filed by Mr Manketlow. I have expressly told the parties that I do not find it necessary to determine this issue in order to make a proper adjudication of the Summons before this court. Though I have expressed a preliminary observation, without the benefit of full arguments, that the explanation so far offered by Mr Manketlow does not appear to me to be adequate.  

76.  Secondly, I am of the view that if the Plaintiff wishes to take this matter further, it is up to the Plaintiff to take out a proper application, if so advised, and fix a hearing before Deputy High Court Judge C M Leung to determine:

(a)  Whether a referral to the Department of Justice should be made;

(b)  Whether costs of and occasioned by the adjournment on 12 September 2018 should be paid by the Defendants to the Plaintiff forthwith on an indemnity basis to be taxed if not agreed.

77.  Finally, it remains for me to thank Mr Lynn and Mr Hunsworth for their helpful written and oral submissions.