XCHRX ROE INVESTMENT LTD. v. PRINCE GOOD LTD. AND ANOHTER

HCMP326/97 & HCA1034/97

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H E A D N O T E

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1. P and K both claimed to be the sole beneficial shareholder of U, a limited company.

2. U had agreed previously with R for the transfer of R's shares and loan in another company T to U.

3. U sued R for the specific performance of the transfer agreement.

4. R interpleaded for the Court to decide on P and K's claims for the shares of U first.

5. Court decided in favour of P.

6. Both P and U asked for costs from R and vice versa.

Held :

R is entitled to costs from K failing which from P since R's interplead pursuant to O.17 is right and proper. R is under a liability in respect of any chattels (which included shares) and it is, or expects to be, sued in respect of that chattels by P and K making adverse claims thereto.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.326 OF 1997 and

ACTION NO.1034 OF 1997

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HCMP326/97

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(Heard together)

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J U D G M E N T

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Background

1. The Plaintiff in HCMP326/97 ("MP326"), Roe Investment Limited ("Roe") was the 80% beneficial owner of the shares in the company Team Base Development Limited ("Team Base"). The other 20% shareholding was owned by the 3rd Defendant, Unionix Development Limited ("Unionix"). Team Base owned a property known as Block B, Repulse Bay Mansion, Hong Kong.

2. By a Shareholders Agreement dated 7 October 1996, various loans were agreed to be advanced by the two shareholders (Roe and Unionix) to Team Base.

3. Roe granted an option to Unionix to purchase the whole of Roe's shareholdings of 80% in Team Base ("the Option Shares") and Roe's shareholder loan to Team Base ("Roe's loan"). This option was exercisable by Unionix at any time within 12 months from the date of the Shareholders Agreement upon service of a written notice on Roe. Upon service of the aforesaid Option Notice, Roe was bound to sell and Unionix was bound to purchase the option shares and Roe's loan. Completion was to take place at 12 noon on the seventh business day following the service of the Option Notice.

4. Unionix was wholly owned by the 2nd Defendant, Ko Fei ("Ko"). By a Memorandum of Agreement in writing dated 28th December 1996, Ko agreed with the 1st Defendant, Prince Good Limited ("Prince") to sell his entire shareholding in Unionix to Prince. Completion of the sale and purchase was to take place on 20 January 1997, as a result of which Prince would become the owner of all the issued shares of Unionix.

5. By a letter dated 20 January 1997, Unionix, through its solicitors, Messrs Siao, Wen and Leung ("SWL"), gave notice in writing to Roe to exercise the aforesaid option. The effect was that Roe became bound to sell the Option Shares and Roe's loan to Unionix on 28 January 1997.

6. On 28 January 1997, Unionix's representative, accompanied by its solicitor, attended the office of Roe at 12 noon with a Cashier Order for $249 million odd, being the consideration payable to Roe for the exercise of the option in completing the purchase of the Option Shares and Roe's loan.

7. However, Roe refused to complete the sale of the Option Shares and Roe's loan and contended that Ko had disputed the validity of the transfer of the shareholding in Unionix to Prince. By then there were conflicting claims made by Ko and Prince over the shares of Unionix which in turn would cast doubt on the validity of the Option Notice.

8. Previously on 13 January 1997 there were two meetings in Shanghai. According to Ko, he said that in the course of the morning meeting, Prince agreed to accept that the whole transaction under the Memorandum of Agreement (i.e. for the sale of the Unionix shares to Prince) would become null and void if Ko could, before 27 January 1997, pay off the debts owed to two subsidiary or related companies of Prince. Ko contended that by 27 January he had been put in funds by others to enable him to do so and that accordingly he was able to pay off those debts.

9. Ko also contended that Prince had not performed its obligation to assume and discharge those debts payable to the two aforesaid creditor companies.

The Actions

10. HCA1034/97 ("A1034") was instituted on 29 January 1997 by Unionix against Roe and Kowloon Development Company Limited, being the holding company of Roe and the guarantor under the aforesaid Shareholders Agreement. Unionix claimed specific performance of the Shareholders Agreement.

11. On the next day, 30 January 1997, Roe instituted MP326 against Prince, Ko, and Unionix by way of a interpleader Originating Summons and asked for an order that Prince and Ko do state the nature of their claim. Alternatively, Roe asked for a declaration that it should be indemnified in its performance of the Shareholders Agreement with Unionix, by Prince and Ko.

12. On 20 February, Prince instituted CL33/97 ("CL33") against Ko and its holding company, Asia Corporate Services Limited ("ACS"). It was claiming for a declaration that Ko had irrevocably transferred Unionix's shares to Prince; an order that Ko do pay the balance due and owing to Prince; and an order that ACS do deliver the books and accounts of Unionix to Prince. This action was discontinued on 27 March 1997 as parties were hopeful of a settlement agreement. However, the settlement agreement was aborted and Prince reinstituted CL63/97 ("CL63") against Ko and ACS for the same reliefs.

The Directions

13. The aforesaid three actions came before Cheung J. on 28 May 1997.

14. In respect of CL63, direction was given leading to the trial of this action.

15. In respect of MP326, the following directions were given :-

"1. Leave be granted to Roe to withdraw paragraphs 1 and 2 of its Originating Summons dated 30th January 1997;

2. The following directions be given (pursuant to O.28 r.4(4), O.25 r.1(1)(b) and O.33 r.3) for the further conduct of the proceedings :-

(a) The following issues be stated and tried as between Prince Good and Ko ('the Issues'), namely :-

(i) as to who of Prince Good and Ko should be held entitled to represent Unionix Development Limited in connection with the exercise of purported exercise of an option ('the Option') to acquire from the Plaintiff its shares in Team Base Development Limited ('Team Base') under the Shareholders Agreement dated 7th October 1996;

(ii) as to whether the Option in favour of Unionix Development Limited to acquire the Plaintiff's said shares in Team Base had been validly exercised by the letter of Messrs. Siao, Wen and Leung dated 20th January 1997.

(b) The Issues be tried at the same time as CL63;

(c) All parties to MP326 be bound by the outcome of the trial of the Issues;

(d) Roe be relieved and be excused from any further participation in the proceedings in MP326 for the determination of the Issues set out above;

(e) Costs be reserved and, for the avoidance of doubts, there be liberty to all parties to apply for such costs orders and/or other consequential declaratory orders against any other parties in the action notwithstanding (d) above."

16. In respect of A1034, all proceedings in that action were stayed pending the outcome of the trial of CL63 and those issues as stated under MP326 with costs reserved.

The Trial

17. CL63 and those issues stated were tried by Godfrey J.A. sitting as an additional Judge of the Court of First Instance on 25 to 28 August 1997 and judgment was delivered ex tempore on 28 August 1997.

18. Godfrey J.A. rejected both contentions of Ko as stated before. The further point as amended at the trial by the defence that in equity the Memorandum of Agreement amounted to a mortgage by Ko of the shares in Unionix and of the debt mentioned in the Memorandum of Agreement, was also rejected. Judgment was given in favour of Prince against Ko and ACS. In other words, Prince was the new shareholder of Unionix as Ko had irrevocably transferred all his shareholdings to Prince.

The Application for Costs herein

19. Before me, there are four applications arising out of the aforesaid three actions, namely :-

1. Prince and Unionix applied under MP326 that Roe, alternatively Ko, shall pay to them their costs of these proceedings, including the costs of the hearing on 28 May 1997, with certificate for two Counsel and the application herein;

2. Roe applied under MP326, pursuant to those costs reserved by Cheung J. as aforesaid, that those costs in MP326 should be paid by Ko, failing which by Prince;

3. Unionix applied under A1034 that Unionix should be given leave to amend the Writ of Summons to include a claim for damages under the Shareholders Agreement against Roe and Kowloon Development for breach of the Shareholders Agreement; and

4. Unionix applied to lift the stay of their proceedings in A1034 and for judgment to be entered in favour of Unionix against Roe and Kowloon Development for damages for breach of the Shareholders Agreement and for the guarantee of Roe's obligation under the same Shareholders Agreement with costs to Unionix.

The Interpleader Summons

20. The first issue to be decided is whether Roe was right and proper to take out an Interpleader Summons pursuant to Order 17.

21. Order 17, r.1 provides :-

"Where -

a person is under a liability in respect of a debt or in respect of any ..... chattels and he is, or expects to be, sued for or in respect of that debt or .... chattels by two or more persons making adverse claims thereto, .........

the person under liability as mentioned in sub-paragraph (a) ...... may apply to the Court for relief by way of interpleader." (emphasis added)

22. Both Prince and Ko claimed at the same time that each one of them was the sole beneficial shareholder of Unionix. The word "Chattels" is -:

"One of the widest words known to the law in its relation to personal property ..., it includes shares in a company."

See the White Book Vol.1 para 17/1/3.

23. Thus Roe is under a liability in respect of any chattels (i.e. shares in Unionix) and he is sued for or in respect of those shares by Unionix or he is expected to be sued for or in respect of those shares by Prince or Ko, as both Prince and Ko were making adverse claims thereto.

24. Both Unionix and Prince upon hearing of the Summons before Cheung, J. did not argue that the Interpleader Summons should be dismissed or summarily determined in their favour but eventually agreed to a consent order whereby issues between Prince and Ko were stated and directions were given for such issues to be tried.

25. Counsel for Prince argued that Roe voluntarily applied for deletion of the first two paragraphs of their Originating Summons which amounted to a claim for determination between the two adverse claimants, namely Prince and Ko in the Interpleader Summons. However, the directions eventually given by consent in paragraphs 2(a), (b) and (c) are in substance and in truth interpleader reliefs. They included :-

(a) stating the issues to be tried between the two adverse claimants, namely Prince and Ko, directly without the participation of Roe;

(b) the reliefing or excusing of Roe's further involvement in the proceedings for the trial of the issues;

(c) the staying of Action A1034 pending the final determination of the trial of the issues.

26. Although paragraph 2 of the direction obtained by consent did not say that those directions were given pursuant to O.17, they are in substance given in an Interpleader Summons and therefore is not, in my view, material.

27. On the other hand, the parties by agreeing to the Consent Order, including Prince and Ko, had agreed and accepted that there were competing claims which should be tried between Prince and Ko. They are, therefore, estopped from denying that the Interpleader Summons had been properly taken out.

Consequential Order for Costs

28. Upon determination of the issues, Roe as the Plaintiff in the Interpleader Summons is entitled to costs against both the winning (i.e. Prince) and the losing parties (i.e. Ko). There is no justification for Prince or Unionix to look to Roe rather than the losing party, Ko, for costs or other reliefs whether in MP326 or A1034.

29. The position is similar to the case of Leung Ho Yiu v. Winner Godown Ltd [1994] 1 HKC503. The Headnote said :-

" This action was started by writ whereby the plaintiff claimed against the defendant for, inter alia, the delivery of certain goods on the ground of conversion. The plaintiff had earlier obtained an interim injunction to restrain the defendant from parting with the goods, which had been deposited with the defendant by the claimant. The defendant interpleaded. Master V Bokhary ordered that all further proceedings in this action against the defendant be stayed. She further ordered the interpleader issue to be tried before a judge in court.

On the interpleader issue between the plaintiff and the claimant, the court held that the goods in question belonged to the plaintiff. The defendant then sought the costs of the proceedings incurred by it and the storage charge of the goods at its warehouse.

Held, allowing the defendant's claim:

(1) In interpleader proceedings, the powers of the court to make such order as to costs or any other matters as it thinks just under O 17 r 8 of the Rules of the Supreme Court are wide and may be exercised notwithstanding that the order may interfere with property rights. BP Benzin und Petroleum AG v European-American Banking Corp. [1978] 1 Lloyd's Rep 364 applied.

(2) In normal circumstances, it will be just that the custodian's costs and charges be protected by the court. Since the defendant had not acted wrongly or improperly in any way, it should have the storage charges as a charge on the goods.

(3) The defendant's costs of this action and the interpleader proceedings should also be a first charge on the goods."

Woo J. said at pages 506 and 507 that :-

" On behalf of the defendant, Mr Lo submitted that there has been a long established practice of the court, under O 17 or its predecessor enactment or rule with similar effect, to order the payment of the costs and charges of a custodian of goods or a fund in dispute out of the goods or fund as a first charge. Here, I use the neutral term 'custodian', whether he be a bailee, warehouseman, auctioneer or stakeholder, etc. Mr Lo directed my attention to the cases cited in the Supreme Court Practice, starting from 1833 to as recently as 1983, namely, Cotter v Bank of England (1833) 2 Dowl 728, Duear v Mackintosh (1833) 2 Dowl 730, Symes v Magnay (1855) 20 Beav 47, Attenborough v London & St Katherine's Dock Co (1878) 3 CPD 450, 466, and The Lycaon; Elder Dempster Lines v Zaki Ishag [1983] 2 Lloyd's Rep 548, 550. Despite attempts by Mr Chan to explain and distinguish those cases, I accept that a practice has been well established in England that, in interpleader proceedings, the custodian of a fund or goods who interpleads and who has acted fairly will normally have his costs and charges paid out of the fund or goods as a first charge. Although the reasons for this practice have not been expressly stated in the authorities, I am of the view that in normal circumstances, it is just that the position of the custodian should be protected in such a way. He is almost always an innocent party with whom one of the claimants has deposited the fund or goods. The only substantive dispute involving the fund or goods is one between rival claimants and the custodian will upon interpleading simply abide by the decision of the court in the resolution of the dispute. He comes to the court for relief so that he can take a neutral and fair stance regarding the fund or goods and he can seek protection from the court regarding his costs and charges. The other parties, namely, the claimants or either of them, could always seek a reasonable disposal of the fund or goods (for example, by asking for a court order to sell perishable goods with proceeds to be paid into court or to pay a fund into court and to abide by the event of the determination of the dispute between the claimants) thereby avoiding expenses like storage charges from accruing further. In all these circumstances, it will be just that the custodian's costs and charges should be protected by the court. The dispute to be resolved by the court is one which arose by the rival claims and cannot in any way be attributed as being caused by the custodian."

30. Similarly in our case, the dispute to be resolved by the Court is one which arose by the rival claims of Prince and Ko to be the sole shareholder of Unionix. It cannot in any way be attributed to or caused by Roe.

31. From the evidence, Roe had put Prince and Ko on notice as to costs and had expressly offered, subject to its right to be properly paid the option price, to execute the relevant Instruments of Transfer in favour of Unionix and had the same deposited with the Court.

32. By agreeing to a stay of the action and failing to take up Roe's offer to place the executed Instruments of Transfer in Court, I agree with Counsel for Roe that Prince and Unionix had clearly accepted that their dispute with Ko had to be resolved first before Roe could be required to complete the transfer of the loan and the shares.

33. Upon the issues determined by Godfrey, J.A., those Option Shares and Roe's loan had duly been transferred by Roe to Unionix. It cannot be said Roe had a proprietory interest on those shares and loan. Although Roe could, according to decided authorities, insisted to have a first charge on those shares, it did not. In any event Roe did not have any interest in the shares of Unionix which is the subject of the rivalry claims of Prince and Ko.

34. In the circumstances, I also agree with Counsel for Roe that it is wholly unjust for Prince and Unionix now seeking to recover costs or other reliefs against Roe.

Conclusion

35. In conclusion, Roe is entitled to the following order :-

(a) In respect of the Summons of Prince and Unionix dated 13 May 1998 under MP326, it is dismissed with costs to Roe against Prince and Unionix.

(b) In respect of the Interpleader Summons under MP326, Roe's costs shall be paid by Ko, failing which by Prince.

(c) In respect of A1034, no further order is required, but for the avoidance of doubts, this action shall be stayed permanently since no further issue would arise therefrom. Consequently the applications of Unionix to amend the Writ of Summons and to lift the stay of the proceedings in A1034 are also dismissed with costs to Roe.

(d) All costs of and liable to be paid by Prince and/or Unionix in MP326 and A1034 shall be indemnified by Ko.

36. There shall also be a certificate for two Counsel.

37. It goes without saying that I am grateful for the assistance of all Counsel in this case.

(D. Yam)

Judge of the Court of First Instance,
High Court