RE LEHMAN BROTHERS SECURITIES ASIA LTD (in liquidation)

HCCW 437/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP PROCEEDINGS NO. 437 OF 2008

____________

____________

_________________________

REASONS FOR DECISION

_________________________

INTRODUCTION

Introduction

1.  This is an application by summons taken out by the joint and several liquidators (“Liquidators”) of Lehman Brothers Securities Asia Limited (in liquidation) (“LBSAL”), one of the members of the collapsed Lehman Brothers group of Hong Kong companies (collectively “LBHK”), pursuant to sections 199(1) and 200(3) of the Companies Ordinance.  The Liquidators sought directions or determination relating to the beneficial entitlement to and/or ownership of 10,544,027 shares (“Shares”) in Bangladesh Export Import Company Limited (“Beximco”) listed in the Dhaka Stock Exchange and the Chittagong Stock Exchange and their costs in the administration of those Shares as trustee under the Berkeley Applegate principles. 

2.  The Liquidators accept that the Shares are held by LBSAL as trustee and that the ultimate beneficial owner of the Shares is Goddard Holdings Limited (“Goddard”).  However, they are in doubt as to whether LBSAL held the Shares for Goddard directly or for Lehman Brothers Commercial Corporation Asia Limited (in compulsory liquidation) (“LBCCA”) who in turn held them for Goddard.  Under the former scenario, Goddard is entitled to the return of the Shares.  Under the latter scenario, there would be the possibility that the Shares would be subject to competing third party security interests in the form of security claims by affiliates of LBCCA or LBSAL.  The Liquidators also asked for payment of their costs in the administration of the Shares or security for those costs before the Shares are to be released to Goddard. Those costs were estimated to be in the region of $5.4 million as at the date of the application.

3.  Goddard’s position is that it is the direct beneficial owner of the Shares held by LBSAL on their behalf.  It has obtained an order from the Supreme Court of Bangladesh as the forum where Beximco and its share register are located to have its name entered into the share register as the owner of the Shares.  Goddard is willing to pay a reasonable allowance to the Liquidators as their remuneration, costs and expenses incurred in connection with the administration of the Shares but alleged that the quantum claimed by the Liquidators was excessive.

4.  As an urgent ruling from this Court was required to enable the Liquidators to decide whether to appeal against the decision of the Supreme Court of Bangladesh, I made my decision on 11 April 2011 but reserved my reasons for decision which I now give.

Background

5.  Goddard is a company registered in the Channel Islands.  It was a client of LBSAL.  By a contract note dated 30 June 1999, LBSAL confirmed to Goddard that Goddard had bought 9,060,000 shares in Shinepukur Ceramics Limited (“Shinepukur”) at 10.00 Bangladesh taka per share for settlement on 12 July 1999.  The delivery instruction stated that “the shares will be safekept in our custody on your behalf”.  On 15 July 1999, the Dhaka branch of Standard Chartered Bank (“SCB”) received the share certificate registered in the name of LBSAL for custody.

6.  On 5 July 2005, SCB lodged the said share certificate with Shinepukur for conversion to 3,020,000 shares in Beximco registered in the name of LBSAL.  Those shares were credited to LBSAL’s account with SCB.  In course of time, those shares were augmented by five bonus issues, giving a total holding of 10,544,027 shares, i.e. the Shares in issue.  The Shares are now worth about US$50 million.

7.  On 17 September 2008, the Liquidators were appointed provisional liquidators of LBSAL and LBCCA.  On 6 March 2009, Goddard requested the Liquidators, presumably then as provisional liquidators of LBCCA, to transfer the Shares to Goddard’s account with Barclays Private Bank & Trust.  That letter bore the caption referring to   the winding up of LBCCA, which was the entity identified as “Your investment representative” on the statements of account delivered to Goddard.  It is not disputed that LBSAL, LBCCA and presumably the  other members of LBHK used common letterheads loosely describing themselves as “Lehman Brothers”.  This partly accounted for Goddard’s misunderstanding.  On 20 March 2009, the Liquidators were appointed as such herein.  The Liquidators never replied to that letter, whether in their capacity as liquidators or provisional liquidators of LBSAL or of LBCCA.

8.  On 21 January 2010, Messrs Stevenson, Wong & Co. (“SWC”) on behalf of Goddard wrote to the Liquidators to renew Goddard’s request for transfer of the Shares to Barclays Private Bank & Trust.  The Liquidators responded saying that they were investigating into their request. In the fifteen months that followed, the Liquidators did not reply despite three further demands from SWC.

9.  Then, on 5 May 2010, Messrs Mayer·Brown JSM (“MBJSM”) on behalf of the Liquidators replied saying that LBCCA did not hold the Shares, but LBSAL did and alleged that the position was unclear.  On 20 July 2010, MBJSM informed SWC of the Liquidators’ application for directions enabling them to set a bar date for claims to trust assets.  On     10 September 2010, MBJSM notified SWC that a bar date of 10 December 2010 had been set.  On 9 December 2010, SWC made a formal claim against LBSAL for the Shares on behalf of Goddard supported by a bundle of 53 documents evidencing Goddard’s beneficial entitlement to the Shares.

10.  On 23 December 2010, Messrs Jones Day (“JD”) which replaced SWC as Goddard’s solicitors requested MBJSM to expedite the procedure.  There was no response from MBJSM.  On 7 January 2011, JD warned that unless the Shares were transferred by 16 January 2011, Goddard would take steps in Bangladesh and/or Hong Kong to have its ownership properly reflected in the share register.  On 14 January 2011, MBJSM acknowledged that no competing claims had been received in respect of the Shares, but raised two issues, i.e. that no client agreement with Goddard had been located and that Goddard’s earlier letters suggested LBCCA may be involved in the relationship between LBSAL and Goddard.

11.  On 16 January 2011, Goddard presented a petition in Bangladesh seeking rectification of the share register.  The Registrar of Joint Stock Companies and Firms, Central Depository Bangladesh Limited, Beximco, SCB and the Liquidators were respectively named as the 1^st to 5^th Respondents.

12.  On 19 January 2011, JD offered to take no further steps in     the petition provided that the Liquidators approved Goddard’s claim by    21 January 2011.  The Liquidators did not approve Goddard’s claim by    21 January 2011, but instead requested for further time.  On 27 January 2011, JD confirmed to the Liquidators that Goddard owed no money to any entity of LBHK and was not aware of any dealings with LBCCA.

13.  On 28 January 2011, MBJSM informed JD that the Liquidators were inclined to accede to Goddard’s claim but would     require court approval because the documents suggested that LBCCA     had been “interposed” between Goddard and LBSAL.  MBJSM also sought Goddard’s agreement to pay the Liquidators’ costs against a 5% holdback of the cash proceeds of sale of the Shares equivalent to US$2,500,000, and an indemnity against all future claims and costs.

14.  On 31 January 2011, Goddard’s Bangladeshi petition was served upon the Liquidators by courier, but without the directions order of the Supreme Court of Bangladesh which scheduled a hearing on 2 February 2011.

15.  On 7 February 2011, JD protested that the Liquidators’ proposed conditions were unreasonable.  It gave MBJSM the e-mail address of Goddard’s junior attorney in Bangladesh. 

16.  On 8 February 2011, JD informed MBJSM that the hearing had been relisted for 10 February 2011 for the purpose of considering the transfer of legal title in the Shares to Goddard.

17.  On 11 February 2011, MBJSM provided the Liquidators’ legal advisors in Bangladesh, Messrs Doulah & Doulah (“Doulah”) a draft letter stating that the Liquidators did not oppose the proceedings in Bangladesh, save in respect of the costs sought against the Liquidators.  That letter was placed before the court in Bangladesh on behalf of the Liquidators at the hearing on 15 February 2011.  The court ordered rectification of the share register in respect of the Shares and made no order as to costs against the Liquidators.

18.  On 23 February 2011, the Liquidators issued the present summons.  They also gave formal notice of the summons to LBCCA and certain of its affiliates within LBHK administered by the Liquidators.

The issues

19.  The Liquidators had no dispute that the Shares are trust assets held for the benefit of Goddard.  They seek a determination whether the Shares are held by LBSAL directly for Goddard or for LBCCA on behalf of Goddard.  In either event, they are contented to have the Shares released to Goddard subject to their costs of administration of the Shares being paid or secured against the Shares.  Goddard also had no dispute that under the Berkeley Applegate principles, the Liquidators are entitled to their costs of administration of the trust assets and to be paid out of the trust assets to the extent that the assets of the company to be wound up were insufficient to compensate them.  It disputed the amount claimed or sought to be secured against the Shares by the Liquidators.

20.  This is not the appropriate occasion for me to determine the quantum of the Liquidators’ entitlement.  What I can do is to estimate as best as I could the likely costs of administration of the Shares for the purpose of ordering a security before the disposal of the Shares.  The amount of security to be ordered would depend on my finding whether the Shares are held by LBSAL directly for Goddard or for LBCCA on behalf of Goddard.  The question is defining the scope of work performed by the Liquidators to which the Berkeley Applegate principles apply.  The scope of work would be considerably less under the former than the latter scenario.

BENEFICIAL ENTITLEMENT TO THE SHARES

Factors in favour of Goddard’s direct beneficial interest

21.  I have set out the background of this case in paragraphs 5 to 18 above. These background facts are not in dispute and are well supported by contemporaneous documents.  They are consistent with and supportive of Goddard’s case of direct beneficial interest in the Shares.  The only blemish, as repeatedly emphasized by Mr Burns SC, counsel for the Liquidator, is that for twenty-one months, Goddard had been claiming against LBCCA for the Shares and not LBSAL.  This is suggestive that Goddard was a client of LBCCA and the Shares were held by LBSAL directly for LBCCA and in turn indirectly for Goddard which was the usual LBHK model of security holding.  I now turn to consider the evidence.

22.  Upon purchase of the original 9,060,000 shares in Shinepukur, the shares were transferred from IS Himalayan Fund NV into the name of LBSAL.  This was evidence by a letter of allotment dated 24 December 1997 from Shinepukur to IS Himalayan Fund NV; an instrument of transfer from IS Himalayan Fund NV to LBSAL dated 15 July 1999; SCB’s delivery instruction to Shinepukur dated 15 July 1999 and Shinepukur’s share certificate No. 8.  Those documents are equally consistent with Goddard’s case that LBSAL bought the Shinepukur shares directly on Goddard behalf or the possibility of LBSAL purchasing on behalf LBCCA. 

23.  However, the underlying relationship between Goddard and LBSAL is put beyond doubt by LBSAL’s telefax to Goddard dated 30 June 1999 which read:

“WE HAVE PLEASURE IN CONFIRMING THE FOLLOWING BUSINESS WITH YOU.

TRADE DATE : JUNE 30, 1999

SETT. DATE : JULY 12, 1999

FOR THE ACCOUNT OF : GODDARD HOLDINGS LTD

C.O.D ACCOUNT : 50-51162

YOU BOUHGT : 9,060,000.00

DESCRIPTION : SHINEPUKUR CERAMICS

…

DELIVERY INSTRUCTION :

THE SHARES WILL BE SAFEKEPT IN OUR CUSTODY ON YOUR BEHALF.

THE PURCHASE COST IN USD EQUIVALENT AND THE PAYMENT DETAILS WILL BE FOLLOWED.

PLS ADVISE ANY DISAGREEMENT WITHIN 24 HOURS

OUR REF  :

THANKS AND REGARDS

LEHMAN BROTHERS SECURITIES ASIA”

This telefax is a very important and contemporaneous document.  It was issued on 30 June 1999, two weeks before the transfer of the Shinepukur shares to LBSAL.  It expressly provided that “the shares will be safekept in [LBSAL’s] custody on [Goddard’s] behalf”.  It best reflected the intention of the parties.  When the other documents referred to in paragraph 22 are viewed in the light of this telefax, it is clear beyond doubt that the Shinepukur shares were purchased by LBSAL on behalf of Goddard and safekept by LBSAL on Goddard’s behalf.  The Shinepukur shares were then delivered to SCB in Dhaka for safe custody for the account of LBSAL.

24.  Goddard’s payment for the shares was evidenced by its payment instructions to EFG Private Bank (Channel Island) Limited dated 12 July 1999 in respect of a part payment of US$35,835.70; its bank account statement and the confirmation of payment from Lehman Brothers Asia Limited (“LBAL”) dated 16 July 1999.  Though the payment instructions related to a partial payment of US$35,835.70, Goddard’s bank account statement showed that the total consideration of US$1,877,461.27 had been paid.  It is common ground that LBAL was the agent of both LBSAL and LBCCA.  While it is not entirely clear from LBAL’s confirmation whether the payment was made to LBSAL or LBCCA, Goddard’s payment instructions put it beyond doubt that the recipient was LBSAL.  The payment instructions read:

“Please send by SWIFT to

Citibank NA New York

A/c Lehman Brothers Securities Asia Ltd

No. 40638906

Sub account :  Goddard Holdings Limited

 No. 50/51162”

Therefore, there can be no doubt that the purchase price for the Shares was paid by Goddard to LBSAL.

25.  The Shinepukur shares were subsequently converted into 3,020,000 shares in Beximco, which in course of time after augmentation by five bonus issues became the Shares in issue.  There is no dispute that Goddard had not borrowed any money from LBSAL, LBCCA or any members of LBHK for the purchase of the Shinepukur shares or other purposes. The client statements issued by “Lehman Brothers” show that the Shares were at all material times held in safe custody in an account in the name of Goddard. MBJSM confirmed on 5 May 2010 that LBCCA   did not hold the relevant shares in its possession.  The Liquidators also confirmed that they received no claim in respect of the Shares.

26.  The Liquidators accepted, as a starting point, the proposition that if a broker uses a client’s funds to acquire securities, provided the requisite mutual intention between the parties exists, a resulting trust can arise under which the client becomes the beneficial owner of the securities even though the broker has legal title.  On the above evidence, particularly LBSAL’s telefax of 30 June 1999, Goddard has established a very strong prima facie case that LBSAL held the Shares directly on trust for Goddard.

Factors against Goddard’s direct beneficial interest

27.  The Liquidators put their case no higher than a possibility of competing interests in respect of the Shares in the form of third party security claims by affiliates of LBCCA. 

28.  This possibility would have to be understood in the light of the usual mode of operation of the various Lehman Brothers corporate entities under LBHK.  LBHK tended to act, insofar as third parties were concerned, without strict regard to boundaries between the constituent legal entities.  For the present purposes, LBSAL acted as the Asian regional broker for the global Lehman Brothers group, while LBCCA acted as the group’s interface with the investing public.  Thus, LBSAL had no clients of its own outside Lehman Brothers affiliates and LBCCA did not trade in securities.  The result was that LBSAL would hold securities as sub-custodian on behalf of LBCCA who, in turn, would hold that interest on behalf of LBCCA’s underlying clients.  This is the classic Lehman Brothers model of holding securities. 

29.  Under this classic Lehman Brothers model, the possibility of competing interests in respect of securities held by LBCCA in the form of third party security claims by affiliates of LBCCA may arise by the terms and conditions of LBSAL’s client agreement (“Client Agreement”) which governed the relationship between LBSAL and LBCCA and in particular, clause 3 of the Client Agreement.  This clause is commonly to be found in agreements regulating the relationship and dealings as between the global Lehman Brothers entities.  It is also Mr Burns SC submission that the issue regarding these third party security claims is significant and is one of the prime factors in the global withholding of distribution of assets held on trust by the Lehman Brothers entities around the world. 

30.  The difference between the custodian arrangement relied on by Goddard and the classic Lehman Brothers model becomes immediate apparent.  It is Goddard’s case that Goddard was a client of LBSAL and not of LBCCA and that LBSAL held the securities directly for Goddard and not for LBCCA who in turn held them on behalf of Goddard.  On the other hand, the Liquidators were relying on a possibility of a third party security interest over the Shares arising as a result of LBCCA having interposed between LBSAL and Goddard.  In my view, the Liquidators’ argument is skating on thin ice.  It is dependent on their ability to establish two issues.  Firstly, they have to prove against the overwhelming evidence presented by Goddard that the Shares bought by LBSAL using Goddard’s funds and safekept under express intention for Goddard’s benefit a possibility that the Shares were held by LBSAL on trust for LBCCA in respect of LBCCA’s client, Goddard.  Secondly, they have to establish the validity of clause 3 of the Client Agreement.

31.  In respect of the first hurdle, the Liquidators, despite their having control of the LBSAL, LBCCA and the relevant corporate entities of LBHK, were unable to produce a single document as between LBSAL and Goddard evidencing the nature of their contractual relationship or the common intention as regards the holding of the Shares by LBSAL.  Likewise, they were unable to produce a single document as between LBCCA and Goddard evidencing their contractual relationship in respect of the purchase of the Shinepukur shares and their custody of the shares.  What the Liquidators relied on are inferences to be drawn from the classic Lehman Brothers model of holding securities, Goddard’s initial claim against LBCCA and not LBSAL, and some internal documents of which Goddard was not a party and did not even have knowledge.  I shall deal with these two hurdles in turn.

32.  Mr Burns SC submitted that the existence of a trust relationship between LBSAL and Goddard would not have accorded with the classic Lehman Brothers model of holding securities as BSAL typically acted as the Asian regional broker for the global Lehman Brothers group and did not act directly for external clients while LBCCA acted as the group’s interface with the investing public.  Mr Beresford, counsel for Goddard, replied that the Lehman Brothers model of holding securities was just an allocation of internal function among the group and had no bearing on the true relationship between LBSAL and Goddard.  I concur entirely with that submission.  On the documents submitted by Goddard, which were not disputed by the Liquidators, the Shinepukur shares which were ultimately converted into the Shares, were bought on the instruction of Goddard and paid for by Goddard.  The transaction was acknowledged and confirmed by LBSAL by its telefax on 30 June 1999.  LBSAL expressly stated that the shares would be safekept in its custody on Goddard’s behalf.  The shares were at all material times held in an account in the name of Goddard and there had been no change in the original custodial relationship.  The transaction was fully documented.  The intention of the parties was clearly expressed.  That the transaction did not accord with the Lehman Brothers classic model could not change the nature and effect of the transaction.  Besides, there was no evidence that the Lehaman Brothers model had been in place before the purchase of the Shinepukur shares.    On the other hand, the evidence in favour of Goddard’s case was overwhelming.  In the absence of any credible evidence to the contrary, it is beyond a peradventure that Goddard was and is the beneficial owner of the Shares held by LBSAL directly on Goddard’s behalf.

33.  Mr Burns SC reiterated the fact that initially Goddard made its claim against LBCCA and that remained Goddard’s position for twenty-one months until a bar date was set by the Liquidators.  In this regard, the Liquidators also relied on the reference to LBCCA as Goddard’s investment representative in the monthly statements.  Mr Burns SC submitted that these supported the possibility that Goddard was a client of LBCCA.  Mr Beresford’s reply was that Goddard’s initial demands was explicable on the basis that Goddard was prompted to do so by the fact that LBCCA had been held out by LBSAL or LBHK as the entity authorized to communicate with Goddard.  The title “investment representative” does not carry with it any particular connotation and in the absence of any contractual or trust relationship between Goddard and LBCCA that did not imply that LBCCA was Goddard’s trustee.  Once Goddard’s detour was explained, the true relationship between the relevant parties had to be determined on the basis of documents.  The documents were in favour of Goddard’s case.  That Goddard had barked at the wrong tree is perhaps the strongest argument that could be advanced on behalf of the Liquidators; but that only demonstrates the weakness of the Liquidators’ case of a possibility of third party security interest over the Shares.

34.  LBHK used a computer system to manage its global holdings of client securities identified as the international trading system (“ITS”). The Liquidators sought reliance on the ITS Account Opening Form which was a LBHK pro-forma.  It provided two options to a client: LBIE or LBCCA and the LBCCA box had been ticked.  The form was dated 8 June 1999, a month prior to the purchase of the Shinepukur shares.  The form was an internal document not signed by Goddard.  The Liquidators fairly admitted that they had no knowledge whether Goddard had sight of it.  It was not even an account opening form.  I agree with Mr Beresford that it was unclear how this document against the totality of evidence could suggest LBCCA’s involvement in the purchase of the Shinepukur shares.  It cannot have any effect upon the relationship established by the transactions recorded in the telefax dated 30 June 1999.

35.  The Liquidators referred to Goddard’s account number  “C.O.D. account: 50-51162”.  They said that ITS was used by the global Lehman Brothers group for placing orders, settling trades and recording securities transactions.  The group maintained historical records between inter-companies/street counterparties and stock exchanges or clearing systems. ITS records were widely used by the global Lehman Brothers entities to reconcile stock positions and cash balances prior to the group’s collapse, and ITS continues to be regarded as the definitive statement of intra and extra-group positions by the various insolvency administrators    of the worldwide Lehman Brothers group.  Then, they explained the significance of Goddard’s account number. 

36.  According to the Liquidators, “C.O.D. account” is a reference to a sub-custodian relationship where a custodian holds his client’s shares through a sub-custodian and his obligation to his client is dependent on receipt from the sub-custodian.  They did not explain how those three letters of the alphabet with full stops after each could be a reference to sub-custodian relationship.  Simply by assuming that to be the case, the Liquidators argued that that code might be indicative of the involvement of a sub-custodian arrangement which is supportive of the classic Lehman Brother model.  However, they also fairly admitted that that was equally consistent with LBSAL holding the Shares through its sub-custodian SCB.  On the totality of the evidence, especially the express terms in the telefax dated 30 June 1999, the suggestion that the code indicated that LBSAL was a sub-custodian for LBCCA had no foundation and is contrary to the contemporaneous documents.

37.  Next, the Liquidators said that the prefix “50” was allocated to accounts where the assets were not held for the benefit of an “external client” of LBSAL and for accounts where the assets were held for the benefit of an external client of LBSAL the prefix “57” would have   been used. Hence, they argued that Goddard’s account number being “50-51162” was therefore one in which there was a sub-custodian relationship.  Put at the highest, that might well have been the subjective intention of LBSAL and the intention within LBHK as to how Goddard’s account was to be treated.  Such a sub-custodian relationship involving LBCCA is utterly inconsistent with the contemporaneous documents and inconsistent with such a common intention between LBSAL and Goddard.  On an objective view, the intention that LBSAL was to hold the Shares directly for Goddard could not have been clearer.  Besides, it is impossible to imagine that Goddard would have agreed that its assets which it had paid in full should be held by its trustee subject to a security interest of third parties.  LBSAL could not have so encumbered the trust property without the consent of Goddard either.  Thus, whatever was LBSAL’s or LBCCA’s intention, it was wholly irrelevant. 

38.  In the light of the overwhelming evidence submitted by Goddard and in the absence of credible evidence to the contrary, I find that the Shares were bought with funds provided for by Goddard and held on trust by LBSAL directly for the benefit of Goddard.  The Liquidators have quite failed to overcome the first hurdle.  On the facts, the possibility suggested by the Liquidators that the Shares were held by LBSAL on trust for LBCCA was virtually non-existent.  

39.  The second hurdle turns on the true construction of clause 3 of the Client Agreement.  That clause reads:

“In addition and without prejudice to any general and contractual lien or similar right to which [LBSAL] or its affiliates may be entitled by law or otherwise, [LBCCA] hereby grants, as beneficial owner and with full title guaranteed (or, if applicable, as agent or trustee on behalf of such owner) a security interest in favour of [LBSAL] and each of its affiliates over all [LBCCA’s] rights, title and interests, present and future, in and to: (a) all securities which are or may at any time be delivered to or deposited by [LBCCA] with [LBSAL] or [LBSAL’s] agent or nominee, or which have been purchased by [LBSAL] or [LBSAL’s] agent or nominee for [LBSAL] account and which are held in the name of [LBSAL] or [LBSAL’s] agent or nominee; (b) all dividends or interest…”

40.  The Liquidators argued that the Shares might be the subject of a security interest granted by LBCCA to LBSAL or to other affiliates of LBSAL.  They said that there is currently a great deal of discussion    on-going between the various liquidation office-holders in all the Lehman Brothers liquidations around the world as to the validity and effect of such a clause.  In view of the conclusion reached in respect of the first hurdle,     I do not think I need to deal with this issue.  Even if it is accepted that clause 3 of the Client Agreement has the effect of granting a security interest over the assets of LBCCA, I have the following observations to make, which suggest that the security interest claim based on clause 3 of the Client Agreement would most likely fail.

41.  The most fatal objection to the Liquidators’ argument is that there is no factual basis to raise any argument based on the Client Agreement.  On the above finding of fact, the Shares were held in an account in the name of Goddard and not in an account in the name of LBCCA. They were held by LBSAL directly for Goddard and not by LBCCA or LBSAL for LBCCA who in turn held them for Goddard.  It is also Mr Beresford’s argument that the Client Agreement purported to grant a security interest over “all [LBCCA’s] rights, title and interests, present and future, in and to” the subject matter of the security, but LBCCA just did not and does not have any right, title or interest in the Shares to grant. 

42.  Mr Beresford also raised the following objections.  He submitted that the Client Agreement produced was just a standard form of LBSAL’s client agreement in blank.  There was no evidence that any such agreement was ever concluded between LBSAL and LBCCA.  Mr Burns SC argued that the Client Agreement was consistent with the Lehman Brothers model of holding security and the document evidence the terms  of the Client Agreement.  I do not think that sufficient to overcome Mr Beresford’s objection of lack of evidence of a concluded agreement.

43.  Mr Beresford also objected to the Liquidators’ argument on the basis that even if LBCCA were a trustee of the Shares and had granted a security interest over the Shares in favour of LBSAL, Goddard had given no authority to LBCCA to encumber the Shares.  Hence, such unauthorised dealing would not defeat Goddard’s beneficial interest in the Shares.  He further submitted that such unauthorised dealing would be sufficient to create a proprietary claim in Goddard which Goddard could follow into   the hands of LBSAL and SCB.  Under no circumstances could LBSAL plausibly raise the defence of bona fide purchaser for value without notice of Goddard’s interest. The security interest claim under clause 3 of the Client Agreement is bound to fail.  

Beneficial entitlement to the Shares

44.  Goddard’s claim in respect of the Shares is well supported by contemporaneous documents, including documents issued by LBSAL.  Those documents are incontrovertible.  Whatever was the arrangement among the various members of LBHK as to how securities were to be traded and held, there can hardly be any doubt that LBSAL contracted with Goddard to purchase the Shinepukur shares for Goddard which were ultimately converted into the Shares, that Goddard had paid for the Shinepukur shares and did not owe LBSAL or LBCCA any debt in connection with the purchase or otherwise.  The arrangement entered into by LBSAL and Goddard with respect to the Shares is an exception to and independent of the classic Lehman Brothers model.  It is trite principle that where a broker acquired securities under its own name using a client’s funds, in the absence of a contrary intention, he held the securities under a resulting trust for his client.  The Liquidators’ suggestion that there was a possibility that the Shares were subject to third party security claims by affiliates of LBCCA or LBSAL was extremely flimsy.  It is unsupported by documents signed by Goddard or by any document to which weight could be attached. The Liquidators’ reliance on clause 3 of the Client Agreement lacked factual basis.  Their reliance based on Goddard’s demand to LBCCA was just a fortuitous event which was understandable because LBCCA was held out by LBSAL as Goddard’s investment representative and by reason of the fact that the stationery used by the different members of LBHK did not distinctly identify the particular members but loosely identified themselves as “Lehman Brothers”.  That fortuitous event had been conveniently used by the Liquidators to build their case of third party security interests.  The possibility they suggested was so remote as may be regarded as imaginary.  Neither LBSAL, LBCCA nor any of their affiliates has in fact come forward to make a claim to the Shares or asserted any security interests over the Shares.  I have no difficulties to find that the Shares were held by LBSAL directly for Goddard who was and is the beneficial owner of the Shares.  The trust was terminated, if not by the demand for the return of the Shares made to the Liquidators as provisional liquidators of LBCCA on 6 March 2009, at the latest on 9 December 2010 when the formal claim was made to LBSAL.  It is only right and proper that the Shares should be returned to Goddard.

45.  In their summons, the Liquidators sought sanction for some cumbersome procedures for disposing of or returning the Shares to their beneficial owner.  Those procedures might be appropriate to assets subject to competing claim, but clearly not appropriate in respect of the Shares.   No one other than Goddard has ever claimed the Shares.  I am satisfied that Goddard is their beneficial owner.  Furthermore, now that the Supreme Court of Bangladesh, which is the forum where Beximco and the share register are situated, has ordered the rectification of the share register, the procedures sought by the Liquidators are inappropriate.  Mr Beresford suggested that what was needed was simply for this Court to sanction the Liquidators to give a direction to SCB that the Liquidators do not object    to SCB complying with the order of the Supreme Court of Bangladesh.    Mr Burns SC disagreed. In my view, Mr Beresford was absolutely right.  The procedures sought by the Liquidators would serve no useful purpose except to add to the costs of administration of the Shares.  I shall make order in those terms as suggested by Mr Beresford.

COSTS OF ADMINISTRATION OF THE SHARES

The Berkeley Applegate principles

46.  The parties have no dispute that the Liquidators are entitled under the Berkeley Applegate principles to have their costs of administration of the trust assets paid out of the trust assets, i.e. the Shares.  Their dispute is as to what items of costs are payable.  The Liquidators asked for over $3.6 million in addition to the custody fee paid to SCB.     Mr Beresford said that the amount claimed was exorbitant.  Mr Burns SC submitted that in the course of the Liquidators’ prior management and administration of assets held by LBSAL on trust, the Liquidators had a track record of being awarded their fees and expenses including legal expenses incurred in the administration against the trust assets.  He urged that I should follow that practice which has been endorsed by the courts    in Hong Kong. 

47.  I do not think the fact that the Liquidators had been awarded their costs of administration of trust assets against the trust assets is a matter of track record.  That is a matter of legal principle which has to be followed.  The real question is what work of the Liquidators could fairly be regarded as management and administration of trust assets for which they are entitled to be paid out of the trust assets under the Berkeley Applegate principles.  The answer is fact sensitive.  I do not think Mr Burns SC was submitting that I should rubber-stamp the Liquidators’ claim as to what work amounted to management and administration of trust assets and what not.  What is now before me is not a taxing exercise.  On the evidence before me, I am unable to determine what costs the Liquidators are entitled to be paid out of the Shares.  It is my duty to set, base on my finding of fact, the parameters as to the nature of work which the Liquidators would reasonably be required to perform in respect of the Shares in the discharge of their duties as liquidators and from which to estimate as best as I could the amount of costs which they would be entitled and hence order the amount of security to be paid into court which would be adequate to secure the Liquidators’ costs before ordering the release of the Shares.

48.  In In re Berkeley Applegate (Investment Consultants Ltd (in Liquidation) [1989] Ch 32, a company was in the business of placing funds on behalf of investors on the security of first mortgages of freehold property which were taken in the company’s name.  It had money held in clients’ accounts awaiting investment and the benefit of mortgages held on trust by the company for its investors.  The company went into voluntary liquidation.  The expenses and remuneration of the liquidator were very considerable and likely to greatly exceed the company’s free assets. The liquidator took out an application for determination of the question whether any part of his expenses and remuneration could be paid out of the trust assets either directly or by way of payment to the company.  Deputy Judge Nugee QC held that the court had jurisdiction to enforce the investors’ equitable interests in the trust assets and, in doing so, had a discretion to require an allowance to be made for costs incurred and skill and labour expended in the administration of the assets to be paid out of the trust assets.  His lordship held at 50: 

“It is true that the legal title to the mortgages and to the clients’ accounts is not vested in the liquidator but remains in the company; but the investors still need the assistance of a court of equity to secure their rights. … As a condition of giving effect to their equitable rights, the court has in my judgment a discretion to ensure that a proper allowance is made to the liquidator. His skill and labour may not have added directly to the value of the underlying assets in which the investors have equitable interests; but he has added to the estate in the sense of carrying out work which was necessary before the estate could be realised for the benefit of the investors. As was the case in Scott v Nesbitt, 14 Ves. Jun. 438, if the liquidator had not done this work, it is inevitable that the work, or at all events a great deal of it, would have had to be done by someone else, and on an application to the court a receiver would have been appointed whose expenses and fees would necessarily have had to be borne by the trust assets. On the evidence before me, the beneficial interests of the investors could not have been established without some such investigation as has been carried out by the liquidator.

The allowance of fair compensation to the liquidator is in my judgment a proper application of the rule that he who seeks equity must do equity.

…

The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property.  It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in In re Marine Mansions Co., L.R. 4 Eq. 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v Nesbitt, 14 Ves. Jun. 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v Boardman [1964] 1 WLR 993).  In my judgment this is a case in which the jurisdiction can properly be exercised.”

The Berkeley Applegate principles were built on the equitable principle that he who seeks equity has to do equity.  If work has been done by the trustee in respect of the trust property, without which work it would be impossible for the beneficiary to actualise or claim the trust property and that work has to be done either by the beneficiary or a receiver appointed by the court, the beneficiary has to give recognition to the skill and labour of the trustee incurred in making his claim possible. In other words, the question is whether the work done by the trustee is reasonably necessary to enable the beneficiary to claim his beneficial interest over the trust property.  If yes, the court has jurisdiction to award an allowance to the trustee for his skill and labour and to order it be paid out of the trust property.

49.  However, on the facts, the present case is quite distinguishable from In re Berkeley Applegate.  In that case, the trust assets were the benefits of mortgages held on trust by the company  for its investors.  Much work had to be done to restore the beneficial interest to the beneficiaries.  The liquidator had to perform substantial functions in relation to the trust assets and incurred substantial costs, such as costs in enforcing the mortgages.  Those functions had to be performed, if not by the liquidator, by a receiver appointed by the court.  The liquidator managed, preserved and collected the trust assets.  His work was necessary and of benefit to the beneficiaries.  Naturally, he was entitled to have his costs of administration of the trust assets paid out of the trust assets.  

50.  In the present case, the trust assets are the Shares, or the share certificates.  They were held by SCB as the custodian. The Liquidators were required to do virtually nothing in the administration or management of the Shares other than the very minimal work of “keeping an eye” on the Shares, maintain a record of the Shares, receive dividends, notices and the like.  They were not required to attend annual general meetings or extraordinary general meetings of Beximco or vote at the meetings.  They were not required to participate in management decisions of Beximco or to discharge any executive functions of Beximco or its board of directors.  They were not required to trade in the Shares.  The Liquidators simply held the Shares as a passive investment.  If there were more substantial duties to discharge in respect of the Shares, I have not been told.

51.  From what I can perceive, the substantial part of the Liquidators’ work in respect of the Shares and for which costs were incurred was not in verifying Goddard’s entitlement, but in establishing their non-entitlement.  Instead of just verifying the 53 documents submitted by Goddard to substantiate its beneficial ownership of the Shares against LBSAL’s own record, the Liquidators put on their thinking caps as liquidators of other members of LBHK, particularly LBSAL and LBCCA, to look for “possibilities” of a third party security interest over those Shares owned by other members of LBHK.  It is a fine line to be drawn between verifying Goddard’s beneficial ownership and the search for possibilities of third party security interest over the Shares.  On my analysis and finding of fact, the possibility of a third party security interest over the Shares as suggested by the Liquidators was so flimsy and so lacking in credible supporting evidence that, it seems to me, they have crossed the line of acting in the interest of Goddard in the administration of the Shares but in the interest of the general creditors of LBSAL, LBCCA and LBHK in attempting to bring the Shares into the asset pools of those companies for general distribution.  It even seems to me that the Liquidators themselves did not entertain any real conviction in the possibility of third party security interest they were asserting.  On 28 January 2011, they indicated through MBJSM that they were inclined to accede to Goddard’s claim against   a 5% holdback of the cash proceeds of sale.  In their draft letter dated  11 February 2011 which their Bangladeshi lawyers gave to Goddard’s counsel during the Bangladeshi proceedings, they stated that they did not oppose the proceedings in Bangladesh save in respect of costs sought against the Liquidators.  Mr Burns SC made the point that the letter was only a draft.  But in my view, for the present purpose, that did not matter.  The Liquidators saw it fit to give it to their lawyers to show to the Bangladeshi court.  That letter indicated that they had no intention to oppose the proceedings.  These two incidents showed that the Liquidators had no real conviction about that possibility which they had been asserting.

52.  Nothing that the Liquidators did which they claimed to be in the interest of Goddard had anything to do with preserving if not enhancing the value of the Shares.  They were trying to claim an adverse interest over the Shares, although they put it mildly as a “possibility of a third party security interest”.  But as the two incidents showed, they did not even have a conviction of that possibility they were asserting.  They were clearly acting in the interest of LBSAL, LBCCA and possibly other members of LBHK, which of course was their duty.  But, as Mr Beresford rightly put it, the Liquidators were acting adverse to the interest of Goddard.  Can they then claim all their costs against the Shares in respect of anything they did in connection with the Shares?  The answer must be an emphatic “no”!  I am not saying that they may not be remunerated for any of their efforts.  What I am saying is that they may only look to the Shares for their remuneration in respect of their work which was reasonably and necessarily performed in the interest of Goddard as the beneficial owner of the Shares.  This includes work which was reasonably and necessarily executed in verifying Goddard’s claim against LBSAL’s documents and records, in attending to matters relating to the Shares as shareholder and performing any duty which had to be performed by LBSAL as shareholder of the Shares.  This excludes work done in search of the possibility asserted by the Liquidators.  That work was done adverse to Goddard’s interest.  It was not done in the interest of Goddard but in the interest of LBSAL, LBCCA or the other members of LBHK.  The Liquidators should look to those entities for those aspects of their costs.  On the facts of the present case, while the Liquidators are entitled to have their costs of managing and administration of the Shares paid out of the Shares under the Berkeley Applegate principles, the scope of work to which the principles may apply is considerably reduced. 

53.  My conclusion drawn above is fortified by the case of Elliot Green (Trustees in Bankruptcy of Geoffrey Alan Tranckle) v Timothy Bramston (Liquidator of Kingshouse Developments Ltd), Kingshouse Developments Ltd [2010] EWHC 3106 (Ch).  In that case, the trustee in bankruptcy sought an order for an indemnity for his remuneration, costs and expenses of the realisation of three properties out of their net proceeds of sale.  The properties were held on trust by the bankrupt for Kingshouse Developments Ltd. The court held that it was inappropriate to make any allowance in respect of the work of the trustee in the investigation and negotiations in relation to the beneficial ownership of the properties as between the bankrupt and the company.  This is because the effect of such an award is to subject the interests of the beneficiaries to the costs of advancing, or considering whether to advance, an interest adverse to their own, as distinct from matters involved in, or for the purpose of enforcing and giving effect to their own beneficial interest.  What the trustee did in that case was precisely what the Liquidators did in the present case.  The Liquidators spent time and costs in advancing an adverse interest against Goddard in favour of LBSAL, LBCCA and other members of LBHK.  They should not be awarded those costs against the Shares.

54.  Having so defined the scope of the Liquidators’ work in respect of which they may have a claim against the Shares, I now turn to assess the amount of security for their remuneration required.  For that purpose, the nature of the trust property is important.  It is the Shares or share certificates.  The Shares were held by SCB as the custodian.  It seems to me that there were few functions for the Liquidators to perform in the proper administration of the Shares.  They have been relieved of much of their duties in respect of the Shares by SCB as the custodian.  Apart from the custodian fees paid to SCB and the costs of verifying Goddard’s claim, I am unable to think of any substantial costs that could have been reasonably and necessarily incurred in respect of the Shares.  I think a provision of HK$1,500,000 would be more than ample.  This amount was assessed generously out of an abundance of caution in view of the fact that Goddard is a company out of the jurisdiction and also out of respect for   the value of the Shares.  

55.  As for the custodian fees paid to SCB, Mr Beresford said that  it was excessive and some of which could have been saved had the Liquidators promptly returned the Shares to Goddard.  In reply, Mr Burns SC argued that the custodian arrangement and fees had been agreed between Goddard and LBSAL prior to the liquidation.  The parties must have regarded those fees as appropriate or reasonable.  I would not differ from that view. Those fees were reasonably and necessarily incurred and should be paid out of the Shares.  The actual amount of fees incurred up to March 2011 was US$224,907.21.  I consider a security in the amount of US$250,000 adequate. That amount would provide for the fees for April and May 2011 with a small margin so as to allow additional time for the Liquidators to terminate the custody arrangement with SCB and return the Shares to Goddard. 

CONCLUSION

56.  For the above reasons, I consider it appropriate that the Shares should be returned to Goddard.  I adopt the mechanism suggested by  Mr Beresford.  I consider a security of HK$1,500,000 and US$250,000 sufficient to secure the allowance to be paid to the Liquidators for their work and to reimburse LBSAL of the custodian fees it paid to SCB. 

57.  Both parties asked for costs of this application.  Though I find in favour of Goddard and do not agree with the Liquidators’ stance on the possibility of a third party security over the Shares, the application is nevertheless one in respect of which it was prudent for the Liquidators to seek the Court’s sanction as to the disposal of the Shares.  It would be inappropriate to order the Liquidators to pay Goddard’s costs.  As Goddard is the successful party, it would also be unreasonable to order Goddard to pay the Liquidators’ costs.  In the circumstances, it would be appropriate to make no order as to costs.

58.  Accordingly, I make the following order:

(1)   Upon Goddard Holdings Limited making the following payments into Court:

(a)   the sum of US$250,000 as security for the outstanding fees charged by Standard Chartered Bank for its custody services in respect of the 10,544,027 shares in Bangladesh Export Import Company Limited paid and to be paid by the Liquidators; and

(b)   the sum of HK$1,500,000 as security for the Liquidators’ allowance in respect of remuneration, costs and expenses reasonably and necessarily incurred in connection with  the administration of the Shares (“Allowance”) as may be allowed by the Court;

the Liquidators shall, within three days of the payments into Court, inform Standard Chartered Bank that the Liquidators do not object to Standard Chartered Bank complying with the order of the Supreme Court of Bangladesh made on 15 February 2011 in Company Matter No. 12 of 2011 without waiting for time to appeal to expire;

(2)  Upon fourteen days after the Liquidators complying with item (1) above, the Liquidators do have liberty to apply for payment out from the funds paid into Court pursuant to item (1) to reimburse themselves of any part of the Allowance and custody fees paid to Standard Chartered Bank, such application to be determined by assessment by the Court sitting with an assessor;

(3)   The Liquidators and Goddard Holdings Limited do have liberty to apply with respect to this application generally;

(4)   Parties other than the Liquidators, who claim to be interested in and/or affected by this Order do have liberty to apply on giving 48 hours written notice to the Liquidators; and

(5)   A costs order nisi that there be no order as to costs of this application.