CHINA LIFE TRUSTEE LTD v. CHINA ENERGY RESERVE AND CHEMICALS GROUP OVERSEAS CO LTD AND ANOTHER

HCA 146/2020

[2022] HKCFI 2523

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 146 OF 2020

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D E C I S I O N

( L E A V E    T O    A P P E A L )

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Introduction

1.  At a hearing on 4 January 2022 (“Hearing”), this Court heard, amongst others, China Life’s Garnishee Application. By a Decision dated 18 March 2022 (“March Decision”), this court gave an order in favour of China Life that the garnishee order nisi be made absolute in the sum of US$121 million less US$70 million. All 3 parties, ie China Life, D1 and the Ad Hoc Committee, on different grounds, seek leave to appeal against the March Decision. D1 additionally seeks stay of execution pending appeal. Whilst the applications are taken out also by D2, in fact, the garnishee order absolute was never directed at D2 and it is unclear what D2 intends to appeal against.

2.  A preliminary issue is whether leave to appeal is required. The Ad Hoc Committee says “no” and seeks a direction to that effect pursuant to Order 59, rule 21(3). China Life says “yes”. The Defendants’ stance is dubious, merely “reserving their rights to argue before the Court of Appeal that no leave is required”.

3.  This decision adopts all the abbreviations in the March Decision. Numbers in brackets refer to paragraph numbers in the March Decision.

Whether leave to appeal is required

4.  No leave to appeal is required if the relevant order determines in a summary way the substantive rights of a party to an action: Order 59, rule 21(1)(a). The test for whether leave is required is the “application test”, namely, that the determination of the relevant application finally disposes of the action or finally determines the relevant issue, whichever party succeeds on the application: Hong Kong Civil Procedure 2022, Vol 1, §59/21/4.

5.  A broad common sense approach should be adopted. If the issue dealt with is a substantive part of the final trial, or a crucial issue in the case, or a point that goes to the root of a case, or a dominant feature of the case, then even if the order does not finally dispose of the whole action, it should be regarded as a final order and no leave is required: Hong Kong Civil Procedure 2022, Vol 1, §59/21/4, citing Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co. Ltd (2003) 6 HKCFAR 222, §31.

6.  Leave to appeal is required in respect of an appeal against a garnishee order absolute. This is because the substantive rights of the parties to an action (ie the judgment creditor and the judgment debtor) have already been determined by a judgment. The garnishee proceeding is a statutory proceeding, for the purpose, not of establishing any liability of the garnishee to the person who obtains the order, but of attaching a debt due by the garnishee to the judgment debtor: Yerrid Law Firm v Qiansbaizi Trading Ltd [2021] HKCFI 1578, 10 June 2021, §§10-11, DHCJ Paul Lam SC.

7.  The Ad Hoc Committee submits that the dominant issue in the Garnishee Application was that of beneficial ownership of the Funds over which the garnishee order was sought. The March Decision substantively decided that issue which was not determined in any other judgment between the parties. He points out that China Life itself refers (in §8 of its submission) to the March Decision, using the wording of Order 49, rule 6, as having “summarily determined the questions at issue between the claimants”.

8.  I am unable to agree. Using a broad common sense approach, that determination was not over the substantive rights of D1 as a party to the action but over whether an attachable debt existed to facilitate enforcement. Accordingly, leave to appeal is required.

Legal principles for the grant of leave to appeal

9.  Leave to appeal will not be granted unless the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard. Reasonable prospect of success means that the prospects of success are more than fanciful but do not have to be shown to be probable. The threshold is not a high one: Astro v First Media [2016] 1 HKLRD 591, §§10-11, Chow J (as he then was).

10.  Each party’s application for leave should be considered independently. The contention that leave should be granted, no matter how bad the grounds of appeal are, because there will be a separate appeal to the Court of Appeal on a separate application is wrong as a matter of law: Lo Kai Shui v HSBC International Trustee Ltd [2022] HKCFI 1109, at §41(1), Wilson Chan J.

The March Decision

11.  The March Decision decided 4 matters relevant to the intended appeals, ie there was (i) no express trust; (ii) no Quistclose Trust; (iii) no resulting trust; but (iv) a “security interest” held by China Life as security for the 2022 Bond holders and 2021 Bond holders (“Security Interest”).

12.  China Life’s application for leave to appeal is targeted at only item (iv), whereas the Ad Hoc Committee and the Defendants’ applications are targeted at all 4. China Life and the Defendants additionally allege that this Court has failed to summarily determine or direct a trial to determine any competing claims.

China Life’s application for leave to appeal

13.  The grounds of appeal of China Life is that this Court erred in:

(1)  Finding that the US$70 million was a Security Interest when the Plaintiff’s true request for a deposit of funds was for “the sole benefit of the Plaintiff” and not for all the benefit of all holders of the 2022 Bonds and 2021 Bonds.

(2)  Finding that that deposit created the Security Interest when, for various reasons, no security was or could have been created.

(3)  Not ordering (even if there was the Security Interest) either the trustee or the holders of the 2021 Bonds to attend before the Court, state the nature of their claims to the US$70 million and summarily determine or order a trial to determine the competing claims.

14.  As shown in their written submissions, all 3 parties dispute the finding that the US$70 million was held as a legally recognizable security.

15.  With respect, it was China Life’s own position that:

“… in reality, at least the US$70 million Fund, which remains part of the Deposit up to today’s date, was transferred to the D1 Account upon the express request of China Life Franklin/China Life for security for its interest under the 2022 Bonds and the 2021 Bonds” (§16 of William Chow’s 2^nd affirmation filed on 3 November 2021, emphases added).

16.  Further, it was the case of China Life that §§14-15 of William Chow’s evidence showed that:

“… at least part of the Funds were (sic) actually deposited in the Account for the purpose of satisfying China Life’s demands for security. The Ad Hoc Committee’s submission that China Life merely asked for the transfer of US$70 million to be made, but not as security, is clearly contrived.” (§§102-103 of Mr Dawes SC’s written submission for the Hearing, emphases added)

17.  The reasons stated in the March Decision for not subjecting the US$70 million to a garnishee order absolute were that (i) China Life’s own house was not in order and (ii) the extraordinary position taken by China Life would have made it a trustee of the US$70 million if it could get hold of that sum (§§107 and 108). For either reason, a garnishee application, which is an enforcement procedure for a person who has obtained a “judgment”, would not have been the proper channel to lay hands on a “security”.

18.  D1 was a judgment debtor to only the 2022 Bonds. D1 was not even an issuer of the 2021 Bonds. Even if China Life was the “sole beneficiary” of the security (as it now contends), Ground 3.3 of China Life’s grounds illustrates that it was not possible for the Court to apply the US$70 million to reduce the debt due to China Life under the 2022 Bonds to the exclusion of the 2021 Bonds.

19.  It was thus not for this Court to find which type of security (such as floating charge, fixed charge, pledge or mortgage) the US$70 million was subject to and how the US$70 million should be apportioned between the Bond holders or between the Bonds held by itself. It was for China Life to put its own house in order.

20.  Further, as there was no dispute of facts surrounding the US$70 million, China Life did not seek a trial of ownership of the Funds at the Hearing. This Court summarily decided the disposal of that sum.

21.  China Life’s stance is a little contradictory now – contending on the one hand that this Court erred in not ordering a trial of competing claims, but submitting on the other that this Court was justified in determining the issue of ownership of the Funds summarily. China Life even contends that adopting the summary procedure was a case management decision which would not be disturbed on appeal unless shown to be plainly wrong and that it lies ill for the Defendants to contend that there should be a trial when they did not seek directions for a trial at the Hearing.

22.  D1 opposes China Life’s leave application on the ground, amongst others, that even in the scenario that the US$70 million was transferred as a response to China Life’s demands for security, that would not assist China Life at all because, in that scenario, the crucial fact was that D1 did not have free disposal of the US$70 million. Thus, the US$70 million was subject to an express trust, Quistclose Trust or resulting trust when the purpose failed as the Funds did not become, even on China Life’s own case, a security of any kind.

23.  I am unable to agree with D1. The March Decision did not find that the Security Interest had “failed”. If D1 did not have free disposal of that sum, that was because of the Security Interest asserted by China Life and not because of any of the 3 types of trust advanced by D1.

24.  China Life points out that, as sole holder of the 2022 Bonds and majority holder of the 2021 Bonds, it should be entitled to a substantial portion of the US$70 million in any event. However, there is simply no lawful basis to apportion the US$70 million. Accordingly, China Life points out the US$70 million is effectively frozen in the Account as a result of the March Decision and that indirectly facilitated D1’s continuing attempt to avoid paying the judgment debt.

25.  In the light of the above analyses, whilst not satisfied that China Life’s grounds of appeal have reasonable prospect of success, I grant leave to appeal to China Life on basis that there is some other reason in the interests of justice why the appeal should be heard. This would enable the issue of disposal of the US$70 million to be holistically considered by the Court of Appeal after deciding on the question of Quistclose Trust (see under next Section below).

Leave to appeal sought by Ad Hoc Committee

26.  The facts in support of express trust and resulting trust have been canvassed in §§72-77 and §§98-101 of the March Decision. There was plainly no evidence which could have supported an express trust or resulting trust and it cannot be shown that this Court’s view of the facts was contrary to the true and only reasonable conclusion. Grounds 1 and 3 have no reasonable prospect of success.

27.  Ground 2 challenges the finding of there being no Quistclose Trust, and as part of that ground, challenges the finding as to the Security Interest. It raises various issues as to the relevant time when a Quistclose Trust was formed, the relevance of any subsequent conduct and whether a recipient of funds who could not freely decide what to do could be said to beneficially own the funds. It also raises an issue on whether the essence of a Quistclose Trust is an intention that “the payer should retain some been interest in the funds” instead of exclusivity of purpose in the light of the Privy Council decision of Prickly Bay Waterside Ltd v British American Insurance Company Ltd [2022] UKPC 8, §§31 & 37. The finding of facts by this Court in §84 of the March Decision may have to be reconsidered in the light of these legal arguments.

28.  Having considered the submissions of all 3 parties, I am of the view that Ground 2 has reasonable prospect of success and leave to appeal should be given to the Ad Hoc Committee.

Leave to appeal sought by the Defendants

29.  The Defendants did not attend the Hearing but adopted the written submission of the Ad Hoc Committee for the Hearing.

30.  Ground 1 is effectively an appeal against the finding of no express trust and Ground 3 is effectively an appeal against the finding of no resulting trust. For the reasons given in paragraph 26 above, I decline to give leave to appeal.

31.  Ground 2 is effectively an appeal against the finding of no Quistclose Trust. For the reasons given in paragraph 27 above, I grant leave to appeal to D1.

32.  Ground 4 is effectively an appeal against the finding as regards the US$70 million. It states, “if the Judge, on available evidence, had doubts as to who owns the Funds in the Account, the Judge should have either (a) declined to make the garnishee order absolute or (b) ordered that there should be a trial of the issue of ownership of the fund…”.

33.  I have done (a). The US$70 million is not subject to the garnishee order absolute. Why D1 has to appeal against an order that does not prejudice it is incomprehensible. There is no reasonable prospect of success in Ground 4 and I decline to grant leave to appeal.

Stay of execution of the garnishee order absolute sought by the Defendants

34.  The Defendants, seem not to pursue the stay now because on 6 May 2022, BOC (Hong Kong) Limited has transferred the Funds away from the Account and deposited US$70 million into another savings account of D1 pursuant to the March Decision, making the stay application futile. What the Defendants are seeking, instead, is costs of the application for stay to be borne by China Life.

35.  The Defendants say that without a stay the appeal would be rendered nugatory as enforcement of the March Decision would lead to serious financial consequences of the Defendants which are irreversible. The Defendants’ Group expected to present a further revised proposal for restructuring on 30 April 2022.

36.  I see no bases for asking China Life to bear costs. There was and is no reason to stay the garnishee order when execution of the Judgment itself has not been stayed. Whilst there are arguable grounds of appeal in respect of the Quistclose Trust, those grounds cannot be viewed as strong grounds. The Funds have been subject to an Injunction Order since 26 February 2021 and/or a garnishee order nisi since 9 March 2021. It cannot be said that payment over to China Life as a result of the garnishee order absolute would cause any serious financial consequences to the Defendants which have not already been “suffered” since imposition of the injunction. Further, proposals for restructuring have constantly been used by D1 as an excuse for stay of execution but, till now, no restructuring agreement has been reached with the judgment creditor.

37.  For all the reasons given in the preceding paragraph, the stay application, if pursued, would have no merits. It is the Defendants who ought to bear China Life’s costs, with certificate for one junior counsel.

Conclusion

38.  In summary, I give leave to appeal to the Ad Hoc Committee and D1 as regards existence/non-existence of a Quistclose Trust over the Funds; and to China Life as regards the finding and disposal of the US$70 million. I order as follows:

(1)  There be leave to appeal to China Life on the draft grounds of appeal.

(2)  There be no direction under Order 59, rule 21(3), but there be leave to the Ad Hoc Committee to appeal on Ground 2.

(3)  There be leave to appeal to D1 on Ground 2.

(4)  On a nisi basis, costs of each leave application shall be in the cause of the corresponding appeal, with certificate for one senior counsel. To save argument on apportionment in taxation, costs of 3 sets of leave applications shall be treated as one set of costs, to be apportioned equally among the three.

(5)  There be no stay of execution of the garnishee order absolute as sought by D1.

(6)  On a nisi basis, costs of the application for stay of execution of the garnishee order absolute shall be borne by D1.

39.  I thank counsel for their assistance.