SACMI COOPERATIVE MECCANICI IMOLA v. GABRIEL CHI KOK TAM AND ANOTHER

HCMP 1942/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1942 OF 2002

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J U D G M E N T

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The proceedings

1.  By these proceedings, the Applicant, SACMI Cooperative Meccanici Imola (“SACMI”) appeals against the decision of the Respondents, Messrs. Gabriel Chi Kok Tam and Jacky Chung Wing Muk, the Joint and Several Liquidators of Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Limited (“the Liquidators” and “GITIC HK” respectively), dated 28 March 2002, to reject SACMI’s amended proof of debt (“the proof of debt”) submitted to them on 11 February 2002.

The factual background

2.  SACMI is an Italian company.  It produces industrial machinery for the manufacture of (amongst other things) ceramic tiles.  GITIC HK was a “window company” operated by the Guangdong provincial authorities, through which trading and investment activities with the outside world were carried on.  Apart from SACMI and GITIC HK, three other entities were involved in the events which led to these proceedings.  They were IGER Machinery Limited (“IGER”), formerly known as China Wealth Group International Limited, a company which was involved in, inter alia, the business of selling such industrial machinery to factories in China; Guangdong International Trust and Investment Corporation (“GITIC PRC”), the ultimate controlling shareholder of, GITIC HK, also a “window company” operated by the Guangdong provincial authorities; and Banca Commerciale Italiana (“BCI”), an Italian bank, which had a branch in Hong Kong.

3.  GITIC and GITIC HK are now in liquidation in the PRC and Hong Kong respectively.  GITIC HK went into creditor’s voluntary liquidation on 12 October 1998 with estimated debts of around HK$3 billion.

4.  On about 31 January 1997, SACMI entered into a Non-Exclusive Distributorship Agreement (“the NEDA”) with IGER, by which IGER undertook to purchase various models of machinery to be manufactured by SACMI, with a total value of US$103,200,000, 31 January 1997 and 31 December 1998, with a view to reselling such machinery to manufacturers of ceramic tiles in China.  A delivery schedule annexed to the NEDA set out the quantities of various types of machinery that were to be ordered in each quarter of 1997 and during the course of 1998.  Clause 7 provided, in effect, for payment for the machinery to be effected by promissory notes to be drawn by SACMI on IGER, which were to be guaranteed for payment by GITIC’s Shenzhen and/or Hong Kong branch.

5.  This payment mechanism was not in fact utilised.  On 19 April 1997, SACMI, IGER, GITIC HK and BCI entered into a Financing Agreement to make alternative arrangements for the financing of IGER’s purchase of machinery from SACMI pursuant to the NEDA.  This involved a syndicated loan facility in favour of IGER to be arranged by BCI in three tranches.  The first two tranches were to be of US$32,710,250 each, and the final tranche was to be for US$37,779,500, totalling US$103,200,000.  IGER’s obligations under the loans so arranged were to be guaranteed by GITIC HK, which was also to obtain letters of comfort in an agreed format from GITIC PRC in respect of its obligations as guarantor.  The proceeds of the syndicated loans were to be used to pay for the machinery to be purchased by IGER from SACMI under the NEDA.  In effect, the machinery to be ordered was also divided into three batches, with values matching each tranche of the syndicated loan facility.

6.  The first batch of machinery was eventually delivered, and the first tranche of the syndicated loan drawn down.  However, this was not an entirely smooth process.  It is evident from the documentation which was placed before me that there was substantial delay in the making available of the first tranche of the syndicated loan facility and the delivery of the first batch of machinery.  Alternative short term financing had to be arranged for IGER, with BCI making available a bridging loan facility of slightly over US$7 million, to enable part of the first batch of machinery to be shipped and paid for towards the latter part of 1997.  The balance of the first batch of machinery was not shipped until around March or April 1998.

7.  As at 5 December 1997, although the first tranche of the syndicated loan facility had been arranged, it had not been drawn down.  A letter from BCI to IGER, GITIC HK and GITIC PRC of that date indicates that the reason for this was that GITIC HK had not yet provided BCI with its guarantee or GITIC PRC’s letter of comfort in respect of that tranche.

8.  In the same letter, BCI complained that it had had to suspend its efforts to syndicate the second tranche because IGER had not provided cash flow projections which had been requested.  BCI also complained of an alleged breach by GITIC HK of the Financing Agreement by having recently raised funds in the capital markets, an action which Mr da Rosa, the manager of BCI’s Hong Kong branch, said, in his evidence at the hearing, made it more difficult to syndicate the loan as such syndication was dependent on GITIC HK’s credit, which was affected by its existing financial commitments.  BCI made it clear in the letter that because of this, when it proceeded to attempt to syndicate the second and third tranches of the loan facility, it would only do so on a best efforts basis.

9.  Following the shipment of the first batch of machinery, part of the second batch of machinery was manufactured by SACMI and was ready for delivery by early April 1998.  However, at this time, the second tranche of the syndicated loan had still not been arranged.  SACMI were anxious to obtain an assurance that this machinery would be shipped and paid for, and entered into discussions with IGER with a view to finding a way in which such an assurance could be provided.

10.  On 24 April 1998, SACMI and IGER signed an agreement (“the April/May 1998 Agreement”) that was apparently intended to achieve this objective.  This was drafted as a tripartite agreement between SACMI, IGER and GITIC HK.  GITIC HK, however, only signed the agreement some time later, on 13 May 1998.  Prior to this, there had been a number of draft agreements and communications relating to alternative means of financing for the first and second tranches of the machinery, but it seems that nothing came of these.

11.  The April/May 1998 Agreement is of central importance to these proceedings, and I therefore set it out in full.  It reads as follows:

“The Parties met in Hong Kong at CWG offices on April 24th 1998 and the following has been agreed:
STATED THAT
1.	A Non-Exclusive Distributorship Agreement has been signed on January 31st, 1997 between SACMI and [IGER] for US$103,200,000;
2.	For the financing of the a.m. Agreement BCI Hong Kong has organised a Syndicate Loan to CWG to be drawn down as follows:
	- First tranche         US$32,710,250
	- Second tranche    US$32,710,250
	- Third tranche       US$37,779,500
3.	The first tranche has already been syndicated,; for the further 2 tranches BCI Hong Kong will proceed with the syndication in coming months;
4.	BCI Hong Kong branch has already paid SACMI against shipments of machines for an amount of US$7,255,600 by means of an especially made Bridge Loan and will pay SACMI against shipments of other machines for an amount of US$25,454,650 (US$15,161,720 + US$10,292,930), to be considered as settlement of the first tranche, in the current month of April.
5.	SACMI has manufactured and get ready other machines for a total amount of US$20,086,900 (a first lot for US$10,307,280 and a second lot for US$9,779,620), that are available at its factory, to be considered as part of the second tranche of US$32,710,250.
6.	SACMI has the necessity to cash the amount relevant to the machinery already manufactured for a total amount of US$20,086,900 and therefore it is necessary to define a financial “Bridge” operation which allows SACMI to obtain the payment, awaiting that the second tranche as per the above points 2) and 3) is syndicated and performed by BCI Hong Kong.
7.	On March 18th, 1998 Commerzbank A.G. Hong Kong has declared herself available to act as a “Trustee Bank”
THE PARTIES AGREE WHAT FOLLOWS:
A)	To enable SACMI to cash the amount relevant to the machines ready at its factory, CWG, in accordance with what stated at point 6) in its premises, authorizes SACMI to issue Bills of Exchange totalling to US$20,086,900 with maturity twelve months from issuing date plus interest at a rate of 9% per annum:
	1)	Instalment for Dollars 10,307,280 in capital plus interests for 12 months equivalent to US$927,655: total amount of B.E. 11,234,935.
	2)	Instalment for Dollars 9,779,620 in capital plus interests for 12 months equivalent to US$880,165: total amount of B.E. 10,659,785.
	The above mentioned Bills of Exchange will be accepted by [IGER], signed “per aval” by [GITIC HK] and supported by a letter of comfort issued by [GITIC PRC] as per wording acceptable to SACMI.  SACMI is authorized to discount the above mentioned Bills of Exchange in the international financial market on without recourse basis.  At time of discounting any difference between the market rates and the interest rate applied, will be settled between the parties.
B)	Said Bills of Exchange must be sent to Commerzbank Hong Kong in trustee deposit with instructions to deliver them to SACMI against:
	a)	Payment by SACMI to Commerzbank Hong Kong of the principal (capital) of the a.m. amounts as guarantee deposit of the shipments of machinery that SACMI shall make to [IGER] as per above mentioned point 5) and whose total amount is of US$20,086,900.
	b)	Commerzbank Hong Kong will complete the a.m. Bills of Exchange with the issuing date being the same of the payment date as per above point a).
C)	[IGER], in the meantime, shall provide Commerzbank with copy of the taking in charge of the machines as per the above point 5) of the premises by appointed forwarding agent.
D)	The amount indicated at point B a) will be returned by [IGER] to SACMI through the use, from SACMI’s side, at due time and for the same amount, of the Syndicate Loan (second tranche) as per previous point 2) and 3) of the premises.
E)	It is obviously understood that the delivery of the machines concerning the documents as per above point C) can be required by [IGER] to SACMI only after BCI Hong Kong confirmation to SACMI that the second tranche has been syndicated and positively performed and that the same bank is therefore ready and available to the relevant “draw-down”.
	It is however understood that the existing Agreements (Non Exclusive Distributorship Agreement of January 31, 1997, Amendment Agreement of April 19,1997 and Financing Agreement of April 19, 1997) shall remain in full force and effect.”

12.  On 14 April 1998, before the April/May 1998 Agreement was signed by SACMI and IGER, SACMI had received from the Hong Kong branch of Commerzbank AG (“Commerzbank”), a draft letter of appointment setting out the terms on which Commerzbank was to be appointed to act as “trustee bank”, as envisaged by that agreement.  Although the April/May 1998 Agreement refers to Commerzbank as having indicated its availability to act as a “trustee bank”, no such appointment had been made as at 24 April 1998.  Moreover, the draft letter of appointment describes Commerzbank not as a “trustee bank” but as a “settlement bank”.  The letter of instructions stated that SACMI would issue bills of exchange drawn on IGER, which, if accepted by IGER, would be signed by IGER  by way of acceptance, and by GITIC HK per aval by way of guarantee of payment of the bill if for any reason IGER should fail to do so.  On receipt of a set of bills completed in this way, Commerzbank was to notify SACMI, whereupon SACMI was to remit the principal amount of the bill to Commerzbank.  On receipt of such payment (and the fee payable to Commerzbank under the letter of appointment), Commerzbank was to issue authorisation requests to SACMI, IGER and GITIC HK in a specified form and, on such requests being returned duly signed, was to credit the payment received from SACMI to such of GITIC HK’s accounts with Commerzbank as GITIC HK might direct, and make the completed bills of exchange available for collection by SACMI.  No interest was to be payable to any of SACMI, IGER or GITIC HK on the amounts to be remitted by SACMI while such funds were held by Commerzbank.  Provision was also made for Commerzbank to be paid a fee of not less than US$20,000 for such services (at the trial, I was told by Mr Valentino Pischedda, SACMI’s principal witness, that the fee would in fact have come to some US$53,000).

13.  It seems to be common ground that SACMI and IGER considered Commerzbank’s charges to be too high, and as a result it was decided to dispense with Commerzbank’s services as settlement bank.

14.  On 13 May 1998, GITIC HK signed the April/May 1998 Agreement.  The same day, it wrote to SACMI requesting SACMI to remit the amount of US$20,086,900 on 18 May 1998 to an account of GITIC PRC with Bankamerica International in New York.

15.  On 15 May 1998, IGER wrote to SACMI to inform SACMI that it was in possession of two comfort letters issued by GITIC PRC, one in respect of each of the bills of exchange that were to be drawn pursuant to the April/May 1998 Agreement, and that the comfort letters would be released to SACMI’s Hong Kong office on receipt of a remittance advice evidencing payment of the US$20,086,900 by SACMI to GITIC HK’s account on 18 May 1998.  The comfort letters referred to the NEDA, and stated that following an agreement between the parties, payment for machinery and parts to be supplied was to be effected by bills of exchange falling due one year from the date of issue, signed for acceptance by IGER and avalled or guaranteed by GITIC HK, and “assisted” by the comfort letter, by which GITIC PRC confirmed that it was the ultimate controlling shareholder of GITIC HK, undertook not to dispose of any of its interests in GITIC HK and not to resolve to put it into liquidation, and confirmed that it would monitor GITIC HK’s perfomance and ensure that it was in a position to meet its liabilities under the guarantee of the bill in question.

16.  On 18 May 1998, SACMI instructed its bankers, Banca di Imola, to make the remittance to GITIC PRC requested by GITIC HK.  The letter of instructions (which was in Italian) stated that the following description of payment should be provided: “Deposito a garanzia come da agreement del 13/05/1998".  It was common ground at the hearing that this should be translated as “Guarantee Deposit as per agreement of 13/05/1998".  The remittance was duly effected by Banca di Imola.  However, it appears from a computer print out of Banca di Imola’s records in relation to the transfer that the description of the payment was stated in English as “trust money as per agreement dated 13.05.1998", apparently due to a mistranslation by Banca di Imola (no other explanation was suggested).  The description of the payment in these terms was repeated in computer print outs from the records of Bank of America, GITIC PRC’s bankers in New York.

17.  Two bills of exchange, both dated 18 May 1998, were also drawn by SACMI on IGER, in the amounts envisaged by the April/May 1998 Agreement.  These were to mature on 18 May 1999, and were signed by way of acceptance by IGER.  They were also, as envisaged by the April/May 1998 Agreement, signed on behalf of GITIC HK.  The signature on behalf of GITIC HK appears under the words : “Per aval for account of the drawee: (We hereby irrevocably and unconditionally guarantee the payment of this bill of exchange at maturity)”.  The bills were also endorsed on their reverse by SACMI.

18.  Also on 18 May 1998, Mr Pischedda of SACMI wrote to BCI, referring to “the talks relating to the intention of [BCI] to renegotiate the second tranche of the USD103,200,000 loan towards [IGER]” and stating that in expectation of the second tranche being completed, SACMI would “organise a bridging operation aimed at the supply of presses for the ceramic industry, with deferred payment by means of bills of exchange”.  He sought confirmation that the form of the bills of exchange was valid in Hong Kong, and indicated that SACMI might be willing to provide some support for the syndicated loan by supporting part of the higher interest spread that BCI had indicated that it would be seeking.

19.  On 19 May 1998, BCI responded to Mr Pischedda, giving the confirmation sought.  However, the letter went on to state that IGER had been informed in December 1997 that, in the light of changed market conditions, BCI no longer considered itself bound by the Financing Agreement, and that it was not possible to “foresee when or if the said operation may be completed by [BCI]”.

20.  On 20 May 1998, the US$20,086,900 which had been received by GITIC PRC was transferred by GITIC PRC to GITIC HK.  GITIC HK placed the funds on a one day fixed deposit, which it extended for a further period of one day, and then a period of one week.  GITIC PRC’s records indicate that the payment to GITIC HK was treated as a return of funds received from GITIC HK.  On 29 May 1998, at the request of GITIC PRC, GITIC HK paid a sum of US$20,000,000 to ABN Amro Bank to reduce or settle a debt owing by another related company, Guang Xin Enterprises Ltd (“Guang Xin”) to that bank.  Although there was an inter-company account between GITIC HK and Guang Xin, this payment was not recorded as having had any effect on that account.  It would therefore appear that the payment was treated as a payment made on behalf of GITIC PRC, rather than a payment made by GITIC HK for its own account.  Such treatment is consistent with the fact that the payment was made at the request of GITIC PRC.  On this basis, although not affecting the state of GITIC HK’s overall accounts with Guang Xin, there would have been an impact on the overall accounts with GITIC PRC.  The balance of US$86,900, together with the accrued interest while the funds had been on fixed deposit were, according to the Liquidators’ investigations, apparently used for the purposes of GITIC HK.

21.  Thus, although it is clear that GITIC HK received the US$20,086,900 remitted by SACMI on 18 May 1998, it is also clear that it did not retain the funds in its possession, and disposed of them a short time after their receipt.

22.  There are a number of documents and items of correspondence thereafter, mainly involving IGER and SACMI, which refer to the transfer of the US$20,086,900 on 18 May 1998 by SACMI to GITIC PRC at the request of GITIC HK.  These include the following:

(1)	A letter dated 20 May 1998 from an apparently associated company of IGER, China Wealth Group (Hong Kong) Limited, to SACMI, expressing appreciation on behalf of GITIC PRC for the provision of the funds.
(2)	An internal note of SACMI dated 25 May 1998, prepared by Mr Valerio Guenzi, in which reference was made to the “operation carried out on last 18 May”, and stating that this “might turn out to be a simple financial transaction (transfer of a guarantee deposit against release of bills of exchange)”.
(3)	A letter dated 8 September 1998 from IGER to SACMI confirming that IGER had checked that the guarantee deposit had not been used by GITIC as collateral for other loans on the international financial market.  This letter described the transfer as having been made in favour of GITIC HK, so that the reference to “GITIC” may have been intended as a reference to GITIC HK rather than GITIC PRC.
(4)	A letter dated 18 September 1998, also from IGER to SACMI, advising that it had not been possible to finalise the second tranche of the syndicated loan, alternative means of payment would be sought to enable the machinery to be shipped.  It was stated that in the event that this could not be arranged by 18 May 1999, the sums transferred to GITIC would be repaid by IGER with interest at 9%, and that IGER would provide for the payment of the bills of exchange.  In this letter, the funds transferred by SACMI to GITIC were described as “trust money” which had been paid by SACMI to GITIC on behalf of IGER.
(5)	A further letter from IGER to SACMI dated 5 November 1998, in which IGER stated that it was no longer in a position to import the machinery because of changes in financial market conditions which had made it impossible to raise the necessary funding, and going on to say that the funds which had been transferred (again described as “trust money”) would be reimbursed to SACMI through the bills of exchange.
(6)	A letter dated 11 January 1999, from Mr Pischedda to IGER, mentioning the fact that GITIC PRC had been placed into liquidation, and reminding IGER that it was the principal debtor under the bills of exchange.
(7)	An agreement dated 28 January 1999 between SACMI and IGER, referred to the payment of the guarantee deposit pursuant to the April/May 1998 Agreement by SACMI on behalf of IGER, and the receipt by SACMI of the bills of exchange under that agreement.  It was stated that IGER was the party liable on the bills, and on payment would become a creditor of GITIC HK and GITIC PRC for the amount of the guarantee deposit.  The agreement provided for IGER to provide, as soon as possible, a guarantee by its parent company of its liability to SACMI.

23.  The bills of exchange were presented for payment through Banca Nazionale del Lavoro, but were not honoured.  Banca Nazionale del Lavoro sought the protest of the unpaid bills on 19 May 1999.

24.  On 8 October 1998, GITIC PRC was placed into liquidation in China.  Thereafter, GITIC HK went into creditor’s voluntary liquidation on 12 October 1998.  On 16 June 1999, IGER was placed into compulsory liquidation.

The claims advanced by SACMI

25.  Initially, SACMI made a claim in the liquidation of GITIC PRC in respect of the funds which it had transferred to GITIC PRC on 18 May 1998.  This claim was rejected by the Liquidation Committee of GITIC PRC.  Although SACMI appealed against the rejection of the claim, its appeal was unsuccessful.

26.  On 12 August 1999, SACMI submitted a proof of debt in GITIC HK’s liquidation.  This claimed that SACMI was a creditor of GITIC HK in the amount of US$21,894,720 under the two bills of exchange dated 18 May 1998, which had been signed “per aval” by GITIC HK, whereby GITIC HK irrevocably and unconditionally guaranteed the payment of the bills of exchange.  On 11 February 2002, SACMI submitted its amended proof of debt to the Liquidators.  The amended proof of debt put SACMI’s claim in a number of different ways.  Although the claim for US$21,894,720 under the bills of exchange was maintained, alternative claims (both proprietary and personal) for the sum of US$20,086,900 and interest thereon were advanced on various bases.

27.  At the beginning of the hearing, Mr Whitehead S.C., appearing for SACMI, suggested that the following questions arose for consideration (I set them out below in the order in which I propose to deal with them in this judgment):

(1)	Whether the transfer of the US$20,086,900 to GITIC PRC gave rise to a trust over the funds in the hands of GITIC PRC.  It was suggested that the circumstances of the transfer, and other evidence, led to the conclusion that GITIC PRC was a trustee of such funds, either on the basis of an express trust, or on the basis of a trust analogous to a Quistclose trust (in which funds are transferred to a recipient on terms whereby they are not to be at the free disposal of the recipient, but are to be used only for a specific purpose or purposes).
(2)	If so, whether the transfer by GITIC PRC to GITIC HK was effected in breach of trust, in circumstances in which GITIC HK became liable as a constructive trustee, either on the basis that it received the funds from GITIC PRC knowing that the transfer of the funds to it was in breach of the trust imposed on GITIC PRC, or on the basis that it dishonestly assisted GITIC PRC to dissipate the funds in breach of trust.
(3)	Alternatively, whether the transfer of the funds to GITIC PRC was made to it as agent for GITIC HK so as to give rise to a trust over the funds in the hands of GITIC HK, on substantially the same bases as indicated in sub-paragraph (1) above.
(4)	Whether SACMI was entitled to an equitable charge over the assets of GITIC HK, so as to entitle it to assert a claim to GITIC HK’s assets in priority to GITIC HK’s unsecured creditors.
(5)	Whether GITIC HK was liable to SACMI as a guarantor of the bills of exchange.
(6)	Whether it was an implied term of the April/May 1998 Agreement that the funds transferred as a guarantee deposit would be returned by GITIC HK to SACMI in the event that the second tranche of the syndicated loan did not come into existence and IGER failed to pay SACMI for the machinery which it had manufactured.
(7)	Whether GITIC HK was liable to return such funds to SACMI on the basis that not to do so would result in the unjust enrichment of GITIC HK at the expense of SACMI.
(8)	Whether GITIC HK was liable to SACMI on the bills of exchange themselves, independently of its liability as a guarantor, by virtue of its having endorsed the bills per aval.

Whether GITIC PRC was a trustee and GITIC HK a constructive trustee

28.  Although the first two questions were raised by SACMI’s amended proof of debt, and Mr Pischedda, in both his affidavit and oral evidence, suggested that GITIC PRC had stepped into the position of Commerzbank when it was decided that Commerzbank’s charges for acting as “trustee” (or, more accurately, settlement) bank were too high, so as to become itself an express trustee (at least in the sense that the funds transferred to it were not available to it to use as its own), it does not seem to me that this was what in fact happened.

29.  To my mind, the evidence indicates simply that the services of Commerzbank were dispensed with, without any other entity stepping in to perform its functions.  GITIC PRC did not, in fact, perform all the functions that Commerzbank were to perform.  In particular, although it received the transfer of US$20,086,900 from SACMI, it did not, it seems, receive the completed bills of exchange prior to doing so, and does not appear to have been involved in the transmission of such bills of exchange to SACMI.  GITIC HK’s request to SACMI that the US$20,086,900 should be paid to an account of GITIC PRC appears to be an instruction or request on the basis that GITIC HK was to be the recipient of the funds, and in that capacity was indicating where they should be sent, as it was entitled to do.  The internal documentation of GITIC PRC also indicates that this was the position.  The funds received are described as having been received on behalf of GITIC HK, and were transferred on to GITIC HK immediately after their receipt. 

30.  In these circumstances, it does not seem to me that GITIC PRC can really be said to have stepped into the position that was intended to have been occupied by Commerzbank, and the payment to it should, I think, be regarded simply as a payment to GITIC HK.  That being so, there would not appear to be any room (or need) for the suggestion that GITIC PRC was in any sense a trustee of the funds received from SACMI.  On this basis, the real question is whether GITIC HK, on receipt of the funds (whether itself or through GITIC PRC) was a trustee in respect of them.

Whether GITIC HK was a trustee in relation to the guarantee deposit

31.  As to this, in my view, if GITIC HK were a trustee at all in respect of such funds, they could only be a trustee of the sort that was recognised in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.  There is nothing in the evidence, whether documentary or oral, to suggest that there was an express agreement, in terms, that GITIC HK should act as a trustee of the funds.  It seems to me that putting Mr Whitehead’s case at its best, it might be argued (as it was) that GITIC HK had received the funds in circumstances where it was under an obligation to ensure that they were not used for any purpose other than as a guarantee deposit as agreed between SACMI and IGER, to be disbursed to one or other of them depending on whether or not the machinery was in fact shipped.

32.  In order to determine whether or not this was the case, it is necessary first to look briefly at some of the authorities on trusts of this type, and then to consider the nature and circumstances of the transaction entered into in this case, to see whether or not it did give rise to such a trust.

33.  In the Quistclose case itself, it was found that the respondent, Quistclose Investments Ltd (“Quistclose”), had made a loan to a company subject to an agreed condition that it would be used to pay a dividend to be declared by the company.  It was paid into an account with Barclays Bank opened specially for the purpose of receiving the loan, and Barclays Bank had agreed with the company that the account would only be used to pay the dividend.  The company having gone into voluntary liquidation before the dividend had been paid, the question arose whether the funds in the account were held by it on trust for the purpose of paying the dividend, so that that trust having failed, they were held on resulting trust for Quistclose.

34.  The House of Lords held that the terms of the loan by Quistclose to the company were such as to impress on the proceeds of the loan a trust in favour of Quistclose in the event of the dividend not being paid.  As to this, Lord Wilberforce said, at p.269H-270D:

“... There is no doubt that the loan was made specifically in order to enable [the company] to pay the dividend.  There is equally, in my opinion, no doubt that the loan was made only so as to enable [the company] to pay the dividend and for no other purpose.  This follows quite clearly from the terms of the letter of [the company] to the bank ,,,, which letter, before transmission to the bank, was sent to [Quistclose] under open cover ...  The mutual intention of [Quistclose] and [the company], and the essence of the bargain, was that the sum advanced should not become part of the assets of [the company], but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend.  A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to [Quistclose]: the word “only” or “exclusively” can have no other meaning or effect.

That arrangements of this character for the payment of a person’s creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.”

35.  The nature of the trust arising in this sort of situation was the subject of analysis by Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164.  There, a lender was only prepared to make a loan to a company for the purpose of purchasing property if repayment of the loan was secured by a solicitors’ personal undertaking to repay it.  The company’s own solicitor being unwilling to give such an undertaking, a second solicitor was approached, who received the loan proceeds after giving an undertaking, which was in the following terms:

“	(1)	The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client.
	(2)	The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purposes.
	(3)	We will repay to you the said sum of £1 million together with interest.”

On receipt of the loan proceeds, the second solicitor released the money to the first solicitor, in accordance with the company’s instructions.  The money was then applied substantially for purposes other than the acquisition of property, the loan was not repaid, and the second solicitor’s undertaking proved worthless, he having gone bankrupt.  The lender brought a claim against (among others) the first solicitor, on the basis that the arrangement created a trust in respect of the loan proceeds in the hands of the second solicitor, which had been breached with the alleged dishonest assistance of the first solicitor.  The first solicitor was ultimately successful in contending that he had not been guilty of any dishonest assistance, but the House of Lords unanimously agreed that the arrangement did give rise to a trust.

36.  In analysing the trust that arose as a result of the arrangement, Lord Millett said (in paragraph 67 of his judgment):

“... it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce ...”

and (in paragraphs 73 and 74 of his judgment):

“A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose.  A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it.  He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower.  Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust.  The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow.  Commercial life would be impossible if this were not the case.

The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill.  His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose ...”

He then went on to say (in paragraph 75 of his judgment) that the terms of the second solicitor’s undertaking were “crystal clear”, emphasising (as he had already done in paragraph 58 of his judgment) the words “solely” and “for no other purpose” in paragraph (2) of that undertaking, and concluding (in paragraph 76 of his judgment) that:

“It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it ... The duty is not contractual but fiduciary.  It may exist despite the absence of any contract at all between the parties ... and it binds third parties ... The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied.  This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.”

37.  Lord Millett went on to state that in trusts of this type, the beneficiary is, throughout, the lender or person making the money available subject to the restriction, under a resulting trust which arises because he has not parted with the entire beneficial interest in the money.  The position of the borrower or payee is that he has no beneficial interest in the money, but is subject to a fiduciary power to apply it in accordance with the lender or payor’s instructions, so that if the purpose fails, the money is returnable to the latter because the resulting trust is no longer subject to any power on the part of the former to make use of the money (see paragraph 100 of his judgment).  Any uncertainty as to the extent of the power would not mean that the trust would fail for uncertainty of object, since the object of the trust (i.e. its beneficiary) would be the lender or payor.  The effect of uncertainty or lack of clarity as to the extent of the power (that is, the purpose for which the money was provided) would mean simply that the recipient of the money had no power to use it for any purpose, so that the money would simply have to be returned to the lender under the resulting trust which arose for his benefit (see paragraph 101 of the judgment).

38.  Turning to the arrangement in the present case, the evidence in relation to it consisted of the documents to which I have referred above, and the affidavit and oral evidence of Mr Pischedda.  Although he was not the only employee of SACMI who was involved in the making of such arrangement, and it was clear that he was not the author of several of the relevant documents, was not present at every meeting with IGER (although he was present at some meetings with them), and attended no meetings at which representatives of GITIC HK were present, he was the only person available to give evidence as to the nature of the arrangement on behalf of SACMI.

39.  I have set out the terms of the April/May 1998 Agreement in paragraph 11 above.  Although the document is not particularly well-drafted (Mr Whitehead variously described it as “home-made” and “badly drafted”), it appears to me that it sets out an arrangement between SACMI, IGER and GITIC HK with the following structure:

(1)	In order to enable SACMI to obtain payment for the machinery already manufactured and awaiting shipment as part of the second tranche of the order under the NEDA prior to the finalisation of the second tranche of the syndicated loan, payment was to be effected by the bills of exchange to be accepted by IGER and guaranteed by GITIC HK.  It was expressly agreed that SACMI was entitled to discount such bills of exchange on a without recourse basis, and in the event that the discounting was the basis of an interest rate less favourable to SACMI than the interest payable on the bills, an adjustment would be made between SACMI and IGER so that SACMI was not out of pocket.
(2)	It was agreed that shipment of the machinery would not take place until the syndicated loan was available for draw down.
(3)	In order to ensure that the machinery was in fact shipped, SACMI would provide the guarantee deposit of US$20,086,900.  The guarantee deposit served in effect as security for the performance by SACMI of its obligation to ship the machinery when the syndicated loan became available.
(4)	Under the terms of the April/May 1998 Agreement, the guarantee deposit was to be paid by SACMI to Commerzbank, although in the event this did not happen.
(5)	The April/May 1998 Agreement did not specify in terms what was to be done with the guarantee deposit by Commerzbank or by GITIC HK.
(6)	On the syndicated loan becoming available, it would be drawn down against shipping documents, and the proceeds used to repay the guarantee deposit (which would no longer be required, the machinery having been shipped to IGER) to SACMI, without interest.

40.  It is perhaps a little surprising that SACMI should have agreed to put up a guarantee deposit when the delays that had arisen were not apparently due to any act or failure to act on SACMI’s part, and when there was no obvious reason to think that SACMI would not ship the machinery for which it had been paid by way of the bills of exchange when the time came to do so.  However, there can be no doubt that SACMI did agree to this course being taken.

41.  In his oral evidence, Mr Pischedda said that the bills of exchange were not regarded by SACMI as the source of payment for the machinery, and that it was always the intention that payment for the machinery should be made out of the proceeds of the syndicated loan, when that was eventually in place.  In saying this, Mr Pischedda had to say, and did say, that the April/May 1998 Agreement was poorly drafted and did not set out the true agreement between SACMI and IGER entirely clearly or effectively.  Mr Pischedda suggested that the April/May 1998 Agreement, and the bills of exchange obtained thereunder were no more than an indication by both SACMI and IGER of their mutual commitment to proceed with the transaction as originally agreed.  He went on to suggest that it was SACMI’s intention, assuming that the syndicated loan came through, simply to return the bills of exchange in exchange for the guarantee deposit.

42.  I am afraid that I am unable to accept this evidence.  Although Mr Pischedda was no doubt doing his best to explain the agreement which had been reached, he was doing so against the background of the events as they turned out, with GITIC HK having unexpectedly gone into liquidation having received and made use (for its own purposes so far as SACMI and IGER were concerned) of the guarantee deposit provided by SACMI.  In such circumstances, it is not surprising that his evidence might, perhaps unconsciously, lean towards an interpretation or view of the matter which might be more favourable to SACMI.  As against this, the contemporaneous document does, to my mind, clearly suggest that the parties, and in particular SACMI, did regard the bills of exchange as the source of payment for the machinery.  In my view, the contemporaneous documents are deserving of more weight than Mr Pischedda’s ex post facto interpretation of them, and are to be preferred as indicators of SACMI’s intentions.

43.  That SACMI regarded the bills of exchange as the source of payment for the machinery is, I think, evident from the following:

(1)	The terms of the recitals to the April/May 1998 Agreement, paragraph 6 of which makes it clear that SACMI wished to obtain payment in respect of the machinery which it had already manufactured.
(2)	The provision in clause 1 of the April/May 1998 Agreement which expressly authorised SACMI to discount the bills of exchange on the financial market on a without recourse basis.
(3)	The provision in the same clause that any interest differential arising out of such discounting should be adjusted for as between SACMI and IGER so that SACMI would be no worse off than it would have been had it held the bills to maturity.
(4)	The recitals in the comfort letters issued by GITIC PRC, which are framed on the basis that the bills of exchange were intended to be an effective means of payment for the machinery.
(5)	Mr Pischedda’s own letter of 18 May 1998 to BCI, in which he referred to a bridging operation organised by SACMI pending the completion of the syndicated loan, with “deferred payment by means of bills of exchange”.
(6)	The documents to which I have referred in paragraph 22(4) to (7) above, all of which proceed on the basis that the bills of exchange were intended to be held to maturity as an effective means of payment to SACMI.

44.  Against this arrangement, it is necessary to consider the role of GITIC HK, and whether this role involved GITIC HK in holding the funds transferred to it by SACMI as a trustee for SACMI, with power to apply such funds only for a purpose specified by SACMI.

45.  The first difficulty for SACMI is that there is nothing in the April/May 1998 Agreement itself to indicate expressly that GITIC was to hold the funds only for a specified purpose and was not to use them for any other purpose.  The April/May 1998 Agreement is wholly silent as to the status of the guarantee deposit in GITIC HK’s hands.  No assistance in this respect is provided by the draft letter of instructions to Commerzbank, which simply deals with the position of Commerzbank, and provides for the funds, when released to GITIC HK, to be paid into an or any account of GITIC HK maintained with Commerzbank, with no indication that the funds so released are to be used by GITIC for any specified purpose, let alone one that is to be pursued to the exclusion of all others.  Nor was there any evidence of any other communications as to this.  This is to be contrasted with the situation in cases such as Quistclose and Twinsectra, in which it was clear from the terms on which the monies were paid over that they were paid over for a restricted purpose, and not to be regarded as being at the free disposal of the recipient.

46.  It would, I think, be appropriate to infer that the funds were to be held by GITIC with power to release them to IGER in the event that the syndicated loan came to fruition and was drawn down and thus available to be used to repay the guarantee deposit to SACMI.  However, this inference says nothing about the status of the funds while they remained with GITIC HK.  On the face of it, GITIC HK would simply be a stakeholder in respect of the funds.  But this does not, I think, imply that as a stakeholder, GITIC HK must have held the funds on trust (see Potters v Loppert [1973] 1 Ch 399, from which it would appear that a deposit paid to a stakeholder is not necessarily held by him on trust for the payor, but only under a contractual (or perhaps quasi-contractual) obligation to pay it to one or other party depending on the outcome of the event in respect of which the deposit was paid.

47.  Even though it might be possible to infer, in the absence of an express restriction on the use of the funds, that it was nonetheless the intention of SACMI and GITIC HK (who would, in my view, be the relevant parties for this purpose) that GITIC HK was to hold them on trust with power to apply them only for the purpose of releasing them to IGER in the appropriate circumstances, it seems to me that there must be some material on which such an inference could be based.

48.  Such material might consist of matters such as the payment of the funds into a segregated or specially designated account maintained by GITIC HK for the purpose of receiving the funds.  However, there was no such account - the original arrangement with Commerzbank simply envisaged payment into any account which GITIC HK might maintain with Commerzbank, with GITIC HK to have the power to direct Commerzbank as to the account into which the funds were to be paid, failing which Commerzbank was to be at liberty to pay the funds into any of GITIC HK’s accounts with it.  In the event, the funds were simply paid by SACMI in accordance with the directions or request of GITIC HK, without any apparent concern as to the nature or status of the account into which the funds were to be paid.

49.  Alternatively, such material might consist of evidence that it was agreed that any interest accruing on the deposit was to accrue for the benefit of SACMI, but there is no such evidence either.  Indeed, clause D of the April/May 1998 Agreement indicates that the arrangement was that the guarantee deposit was to be repaid without interest.

50.  Mr Pischedda was also cross-examined as to his and SACMI’s view of GITIC HK’s financial standing.  His evidence was that SACMI had no doubts at all as to this, and regarded GITIC HK as financially solid, and virtually the equivalent of a bank.  He said that SACMI believed that there was no possibility of GITIC HK going under, or being allowed by the Chinese authorities to go under, because it was such a major “window company” that it was unthinkable, for political reasons, that this would be allowed to happen, whatever the economic position might be.  This view is, I think, confirmed by the surprise which Mr Pischedda expressed as to GITIC HK’s liquidation in his letter to IGER of 11 January 1999.

51.  Mr Whitehead suggested that this view of GITIC HK’s financial position simply indicated that SACMI regarded it as an entirely suitable candidate for the position of a trustee in respect of the guarantee deposit, since an organisation of such financial solidity would have no need for so relatively small an amount of money as SACMI’s US$20,086,900.  With respect, it seems to me that the point goes further than that, and that Mr Scott was right in saying (and I so find) that the reality was that SACMI had no concerns about GITIC HK’s financial position, that in these circumstances, the question of whether or not any restrictions should be placed on GITIC HK in relation to what it could or could not do in respect of the guarantee deposit was simply not considered, and that there was therefore no actual intention on SACMI’s part, let alone that of both SACMI and GITIC HK, that the deposit monies should be treated as trust funds in GITIC HK’s hands.

52.  This finding alone would, I think, be sufficient to dispose of this point in the Liquidators’ favour.  However, in case I am wrong as to this, I deal with Mr Whitehead’s other points below.

53.  Mr Whitehead submitted that while the case was not clear cut, the evidence as a whole suggested that the deposit monies should be regarded as having been held by GITIC HK on trust, to be applied only in accordance with whatever outcome arose as a result of the progress of the second tranche of the syndicated loan and the ultimate delivery (or non-delivery) of the machinery manufactured by SACMI.

54.  He relied first on a submission that this was clearly the commercially realistic way to regard the transaction, so far as GITIC HK was concerned, and made the point that from both SACMI and IGER’s points of view, it was clearly preferable that GITIC HK should hold the guarantee deposit as a Quistclose trustee.  With respect, it seems to me that to put the matter that way begs the question.  There can be little doubt that, with the benefit of hindsight, knowing as one now does that GITIC HK has gone into liquidation, it would be preferable, from SACMI’s point of view, for the funds to have been held by GITIC HK as a trustee.  However, the question is whether or not this was what in fact the arrangement amounted to.  It does not seem to me to be necessary for a stakeholder ipso facto to be regarded as a trustee.  It might be said, in every case, that it would be desirable from the point of view of the parties putting up the stake that the stakeholder should be so regarded, but it seems to me that whether or not this is to happen must depend on the actual terms on which the stake is paid over.  In this case, there is, as I have pointed out, nothing to indicate that the stake (the guarantee deposit) was paid over on the basis that it was not to be at the free disposal of GITIC HK, with SACMI and IGER having only a contractual claim against GITIC HK to be repaid it.  Further, as I have found, SACMI had no concerns about the financial standing of GITIC HK.  Moreover, from SACMI’s point of view, it was in possession of the bills of exchange.  It could have discounted them, and if it had done so successfully on a without recourse basis (as was envisaged by the April/May 1998 Agreement), there could be no suggestion that it should be entitled to the return of the guarantee deposit.  Given the existence of the bills of exchange, it does not seem to me to be necessary to regard the guarantee deposit as having been held on resulting trust for SACMI, the payor.

55.  Mr Whitehead relied also on the fact that the guarantee deposit was not simply paid over to GITIC HK (or at its direction) without more - he pointed to the fact that SACMI attached a “tag” to the payment, describing it to it bankers, Banca di Imola, as a “guarantee deposit” which was somehow translated by Banca di Imola as “trust money”.  I am afraid that I cannot see that this point can carry any real weight.  While some weight might be attached to a designation of the funds by SACMI, communicated or made known to GITIC HK, as “trust money”, I can see little basis for treating what appears to have been a mistranslation by SACMI’s bankers as being somehow indicative of SACMI’s intentions, contrary to that which I have found on the basis of the evidence surrounding the transfer.  Mr Whitehead also relied on the description “trust money” in the records disclosed by GITIC PRC’s bankers, Bank of America.  However, that description must have been taken from Banca di Imola’s initial wire transfer to Bank of America, and I do not see how Bank of America’s repetition of Banca di Imola’s mistranslation can take matters any further.  Even if it could, there is no evidence that this mistranslation came to the attention of GITIC HK, which was the recipient of the funds, so as to arguably make it unconscionable for GITIC HK to regard itself, as it apparently did, as being free to make use of the moneys subject only to a personal (and not proprietary) obligation to pay them over to the appropriate payee, whether IGER or SACMI, in due course.

56.  Similarly, I do not think that the later correspondence from IGER in September and November 1998, in which IGER used the term “trust money” is of much assistance in establishing the intentions of SACMI and GITIC HK at the time the money was paid over.

57.  Mr Whitehead also relied on IGER’s apparent enquiries in September 1998 as to whether or not the funds had been used as security for other loans obtained by GITIC.  This appears to have happened one month before GITIC PRC went into voluntary liquidation, and just over one month before GITIC HK did the same.  Mr Whitehead submitted that this pointed to the money being kept for a purpose.  I would accept that the enquiry might point to the fact that the money was paid over for a purpose, but that does not seem to me to be sufficient.  The question is whether the purpose was one for which the money was to be used, to the exclusion of any other use being made of it by GITIC HK, and I do not think that the fact of the enquiry is of itself sufficient to make out a case that GITIC HK held the guarantee deposit as a trustee.

58.  Mr Whitehead candidly accepted that none of the factors on which he relied were, taken individually, likely to suffice to justify a conclusion that GITIC HK was a trustee of the guarantee deposit.  He submitted, however, that taken together, these factors did justify such a conclusion being drawn.  However, I do not think that whether taken singly or cumulatively, these factors are sufficient to justify the conclusion which he contends for, particularly having regard to matters which I have referred to in paragraphs 39 to 51 above.

59.  I should just add that, for his part, Mr Scott relied on the letter dated 20 May 1998 to which I have referred at paragraph 22(1) above.  He suggested that this letter indicated that the funds were intended to be at the free disposal of GITIC HK.  However, this letter is somewhat curious, coming as it does from an entity that was not involved in the transaction, and the terms of the letter bear little relationship to the background to the transfer as disclosed by the April/May 1998 Agreement.  In these circumstances, I do not consider it appropriate to place any weight on it.

60.  I therefore conclude that GITIC HK did not receive the guarantee deposit on terms which prevented it from making use of such funds as its own property.  It follows that GITIC HK was not a trustee of such funds, and that SACMI is not entitled to claim such funds in priority to GITIC HK’s creditors.

Whether SACMI is entitled to a charge over GITIC HK’s assets

61.  This conclusion also disposes of the sixth question raised by Mr Whitehead - whether SACMI is entitled to an equitable charge over the assets of GITIC HK, so as to entitle it to assert a claim to GITIC HK’s assets in priority to GITIC HK’s unsecured creditors.  Given that I have concluded that SACMI does not have a trust claim in respect of the guarantee deposit, it follows that it cannot assert such a charge over GITIC HK’s assets, as such a charge would only arise in order to protect its interests in the event that it were entitled to a proprietary claim in respect of which it was unable to identify in GITIC HK’s hands any assets representing the trust asset which had been wrongly applied.

The other bases of claim

62.  I turn now to consider the various other bases on which SACMI seeks to assert a claim to be a creditor of GITIC HK.  Although there was initially some doubt as to whether or not it was suggested that the unjust enrichment basis gave rise to a proprietary as opposed to a merely personal claim, so as to put SACMI in a better position than the general body of GITIC HK’s creditors, I did not understand Mr Whitehead to press this submission.  Had he done so, I would in any event have rejected it, since the claim for unjust enrichment is, to my mind, one which (if justified) could only give rise to a personal liability on the part of GITIC HK to SACMI.  It was not suggested that any of the other bases relied upon could give rise to anything other than a personal claim on SACMI’s part.

GITIC HK’s liability as guarantor of the bills of exchange

63.  I deal first with the claim on the basis that GITIC HK was a guarantor of the liability of IGER on the bills of exchange.  As to this, Mr Scott accepted that subject to being able to put forward a defence to this claim, GITIC HK would be liable to SACMI as a guarantor on this basis.  Mr Scott submitted, however, that GITIC HK had two defences to the claim on this guarantee.  These were:

(1)	The guarantee had been procured by a misrepresentation, in that it had been represented in the recitals to the April/May 1998 Agreement that the syndicated loan was already in place, when that was not in fact the case; and
(2)	That there had subsequently been a change to the nature of the underlying transaction guaranteed when the syndicated loan fell through.  This, it was said, made the transaction significantly different from the one which had originally been agreed, in which the syndicated loan was expected to be available to IGER to repay the bills or to serve as a source of repayment for the guarantee deposit.

64.  As to the first of these points, the relevant part of the recitals to the April/May 1998 Agreement read as follows:

“for the further 2 tranches BCI Hong Kong will proceed with the syndication in coming months”

65.  For my part, I am unable to read this as a representation that the second tranche of the syndicated loan was already in place.  It is clear that what was being said was that the syndication would be proceeded with in the months to come.  That would seem to be inconsistent with a suggestion that the loan in question was already in place, or in any sense confirmed.

66.  Even if, contrary to my view, the statement could be so understood, it seems to me that on the evidence of Mr da Rosa, which I have no hesitation in accepting, GITIC HK was well aware of the fact that BCI did not regard itself as bound to provide the second tranche of the syndicated loan on anything other than a best efforts basis, having regard to the letter from BCI to IGER and GITIC HK dated 5 December 1997, and further, that as at around April or May 1998, GITIC HK was aware that the syndicated loan was not in fact in place, Mr Wu Man Li of GITIC HK having been told this by Mr da Rosa in a meeting which took place in the spring of 1998.  GITIC HK was to be the guarantor of IGER in respect of IGER’s obligations under the syndicated loan, and I accept that it was involved in the continuing negotiations in respect thereof, and was informed by Mr da Rosa of the current position at this time.  That being so, I do not see that GITIC HK could have relied on the alleged representation, knowing as it did the true status of the syndicated loan at that point.

67.  As to the second point, it seems to me that if GITIC HK knew of the true position as to the second tranche of the syndicated loan at the time it undertook liability as guarantor of the bills of exchange, the position was that it was aware that the loan was not in place, and that even if it were hoped that it would eventually be put in place, BCI was proceeding with the syndication on a best efforts basis only.  There was therefore a risk that the loan would not materialise, and that being so, the fact that the risk eventuated does not to my mind make the transaction guaranteed any different.  While it is true that the degree of risk to GITIC HK as guarantor was greater in the absence of the syndicated loan, this increased risk was something that was a possibility at the time that the guarantee was given.  I therefore reject this submission.

68.  In these circumstances, it seems to me that SACMI is entitled to claim the amount of the bills of exchange from GITIC HK on the basis that GITIC HK guaranteed the obligations of IGER under the bills of exchange.

69.  Having come to this conclusion, it is not strictly necessary for me to consider the other bases on which SACMI claimed to be entitled to prove in GITIC HK’s liquidation as an unsecured creditor.  However, for completeness, I shall briefly indicate my views in relation to them.

Implied term

70.  So far as the alleged implied term is concerned, Mr Scott submitted that it was not a term that arose as a matter of necessary implication, whether from the express terms of the arrangement, or as a matter necessary to give business efficacy to the arrangement.  I agree with this submission.  As I have explained above, it seems to me that as SACMI was in possession of the bills of exchange which gave it the means to obtain payment (either by discounting them, or by holding them to maturity), and would still be in possession of the bills (accepted by IGER and guaranteed by GITIC HK), the term is not one which could be said to be necessary on either of these bases.

Unjust enrichment

71.  So far as the claim on the basis of unjust enrichment is concerned, Mr Scott submitted that there had in this case been no failure of consideration, since SACMI had obtained the consideration for the payment of the guarantee deposit when it received the bills which it had drawn, accepted by IGER and guaranteed by GITIC HK.  That may be so, but it is well established that for purposes of unjust enrichment, the consideration in the context of a failure of consideration is not the promise which is received, but the performance of that promise.  In this case, neither IGER’s nor GITIC HK’s liability under the bills was performed.  Even if delivery of the bills could be regarded as performance for this purpose, it seems to me that the fact is that GITIC HK has received SACMI’s money in the form of the guarantee deposit, in circumstances in which it cannot have been intended that it should be entitled to retain such moneys in the events which have happened (as opposed to having the use of them in the meantime), and that for GITIC HK to have had the use of the money (as it has done, as the money was used by itself for its own purposes, if only to increase the debt owed to it by GITIC PRC or reduce the debt owed by it to GITIC PRC) has resulted in its enrichment at the expense of SACMI, in circumstances in which it would clearly be just to order GITIC HK to repay the amount of that enrichment to SACMI.  If necessary, therefore, I would have found in favour of SACMI on this basis also.

GITIC HK’s liability on the bills of exchange

72.  Finally, as for the argument that GITIC HK is liable on the bills of exchange as an indorser, I accept Mr Pischedda’s unchallenged evidence that the intention of the parties was that GITIC HK should, by indorsing the bills, itself become liable on the bills themselves, and accept Mr Whitehead’s submission that, for the reasons explained in Chalmers on Bills of Exchange at page 452, SACMI as drawer of the bills having the implied authority to complete the bills (as it did), GITIC HK is liable to SACMI as an indorser having signed the bills intending to make itself liable in the event of non-payment by the acceptor of the bills, IGER, and that this liability arises notwithstanding that the concept of an “aval” is not apparently recognised by Hong Kong or English law.

Interest and costs

73.  As the parties were agreed that I should not make any orders nisi in relation to costs, and requested that the question of interest be left open for the parties to try to agree if possible, in the light of my decision, I do not make any award of interest or costs at this stage, and will leave it to the parties to try to agree the terms of the appropriate order, including questions of interest and costs, if they are able to.  If terms cannot be agreed, the matter should be restored to me for argument and determination.