NONGHYUP BANK (AS TRUSTEE OF PACIFICBRIDGE GOLD INCOME FUND 1) v. UNIVERSE INCOME BUILDER FUND VI LLC AND OTHERS

HCA 2089/2020

[2021] HKCFI 3519

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2089 OF 2020

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D E C I S I O N

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A.  Introduction

1.  By summons dated 31 March 2021 (amended on 16 November 2021 to correct a currency denomination), the 7^th defendant (“D7”)  sought, amongst other relief: (1) to be allowed to interplead, and to pay into Court the sum of US$5,024,144.16 (less the amount of D7’s fees, charges and/or agreed, taxed or assessed legal costs); and (2) that the plaintiff’s claim against D7 be stayed.

2.  By his order dated 7 May 2021, DHCJ Maurellet SC allowed D7 to interplead by paying the sum of US$5,024,144.16 into Court (without deductions, or any decision on what deductions might be made later), and gave directions for substantive argument on the remaining aspects of the summons.  The paragraph of the order allowing D7 to interplead was made by consent (of the plaintiff and D7).  The sum was paid into Court on 14 May 2021.

3.  The 1^st to 6^th defendants (“D1-D6”)  have taken no part in this aspect of the case, and did not appear at the hearing.

4.  There are now said to be two remaining issues to be determined: (1) the amount of the costs, fees and charges which D7 is entitled to deduct from the sum paid into Court; and (2) whether, and the extent to which, the proceedings against D7 should be stayed.

5.  Mr Raymond Chu, Counsel for D7, asks me to approach these two issues discretely.  Mr Roger Phang (with Mr Adrian TY Wong), Counsel for the plaintiff, says the two issues are overlapping and the answer to the second question is informed by the answer to the first.

6.  Though it is correct that there may be some overlap between the issues relating to (a) the extent of the stay and (b) the costs and charges to which D7 is entitled, it is of course convenient to deal with the two matters under two separate headings.

B.  The Context

7.  But first, those two remaining issues need to be addressed in proper context.  The starting point is the plaintiff’s pleaded case vis-a-vis D7, which describes D7 as a public company incorporated in Hong Kong on 30 June 1992 providing professional trustee and custodian services to institutions, advisers and high net-worth individuals.

8.  The plaintiff asserts that it was the victim of a fraudulent investment Ponzi scheme orchestrated by the 1^st to 6^th defendants, to an amount of its investment of approximately US$32.8 million.  From the pleading in the statement of claim, it is clear that the claim against D7 is based only on constructive trust.  Essentially, the plaintiff asserts (§§45-46)  that certain sums, or the traceable proceeds and/or substitutes of them, were held by D7 on constructive trust, since D7 was put on notice that the proceeds and/or substitutes received by it were transferred in breach of trust.  In the prayer for relief, the plaintiff seeks a declaration that D7 holds the sum of US$32.8 million received into D7’s bank account and/or any proceeds, fruits, benefits, interests or assets derived from any part of such total sum on constructive trust in favour of the plaintiff, as well as an account of the various sums received as constructive trustee.

9.  In its defence, filed after the interpleader summons, D7 made clear that it claimed no interest as regards the sum still held by it, totalling the US$5,024,144.16.  D7 also pleaded that it was a bona fide innocent third party without notice, and that the sum still held was the maximum amount held by D7 traceable back to the original investment amount and/or subject to the alleged constructive trust pleaded by the plaintiff.  The plaintiff has not filed any reply to that defence (although it has filed a reply in response to the defences filed by the other defendants).

10.  The plaintiff sought and obtained interlocutory injunctive relief.  In the affirmation of Lee Sang Boon dated 10 December 2020, leading the original application, reference was made to the prior Norwich Pharmacal application made against D7, by which the plaintiff obtained the numerous documentary disclosures from D7, later used to produce a Fund Flow Tracing Report.  The affirmation also specifically stated:

As regards [D7], I have previously filed an affirmation in support of the Originating Summons for the Norwich Pharmacal order the posting to my belief that [D7] is an innocent third party which was mixed up in the wrongdoing of the Chang Camp.  I wish to point out that NB’s naming of [D7] as the 7^th Defendant in the intended action does not undermine or contradict that belief.  As the draft Writ of Summons and Statement of Claim shows, NB’s claim against [D7] is merely as a constructive trustee of the balance of the Senior Note Amount.  No wrongdoing is alleged against [D7].

11.  Nevertheless, the plaintiff now says that the claim against D7 should be stayed, if at all, only to the extent of the interpleader amount paid into Court.  In the affirmation of the plaintiff’s solicitor, this is explained to be because the plaintiff’s proprietary claim as pleaded against D7 is not confined to the interpleader amount, and D7 may interplead as to so much of the debt as it admits, the dispute as to the residue being settled separately.

12.  In that context, it is also appropriate to be reminded of the decision of DHCJ William Wong SC dated 11 January 2021, [2021] HKCFI 107, by which he acceded to D7’s application to discharge the proprietary injunction previously obtained against D7, when D7 had undertaken not to dissipate the remaining sum held by it.  As the Deputy Judge noted (§4), it is not alleged that D7 is a party to the alleged fraudulent scheme, but is rather an innocent party fixed up with the alleged wrongdoings.  It is further not disputed that D7 only (then)  had the sum of approximately US$4.88 million in its account which could be said to be traceable back to the plaintiff’s investments through the alleged fraudulent scheme.  He also referenced (§5)  the above passage from the Lee affirmation.  In those circumstances, the Deputy Judge expressed (§6)  some surprise that the ex-party proprietary injunction was granted against D7 for the total US$32.8 million, when (§9)  it was relatively clear to him that the plaintiff should never have applied for a sum exceeding the remaining balance of the Senior Note Amount against D7, an innocent party.  He noted (§17)  that on a practical level, even on the plaintiff’s own case, the dissipative funds are unlikely to return to the accounts of D7, and (§25)  that there is no evidence of any plausible chance that some other sums would be returned to D7.

C.  Applicable Principles

13.  There is no dispute as to the applicable principles, by reference to RHC Order 17 rules 7 and 8.  Where a defendant to an action applies for interpleader relief, the Court may order a stay of all further proceedings in the action, and the Court may make such orders as to costs or any other matter as it thinks just.

14.  It is also correct that a successful interpleader is normally entitled to his costs and charges.  Further, there is wide discretion as to the form of payment of interpleader costs and charges.  In this particular case, D7 seeks to obtain payment out of the interpleaded sum. But it is common ground that there is an unfettered discretion as to what costs or charges might be permitted.

D.  Extent of Stay

15.  Mr Chu makes the straightforward submission that though the plaintiff’s claim is to the US$32.8 million, it is indisputable or uncontested that (a) the funds have since moved on, (b) D7 is an innocent party without notice at all material times, and (c) the plaintiff’s tracing claim is subsumed in the interpleaded amount.  Therefore, he submits, there is simply no reasonable basis for any wider proprietary claim (in particular on an alleged constructive trust)  against D7.

16.  In response, Mr Phang emphasises that the plaintiff’s claim by way of final relief is to the declaration that D7 holds the sum of US$32.8 million or its traceable proceeds on constructive trust for the plaintiff, and an account of that sum.  So, he says, it must be indisputable that to the extent that there is or may be any further traceable proceeds in D7’s possession, P is entitled to claim by way of final relief.

17.  Mr Phang also points to aspects of the evidence which he says raise questions about previous fees and charges, which he says amount to suspicious circumstances warranting further discovery up to trial regarding whether there are any further traceable proceeds and regarding D7’s obligations under the Guarantee Agreement, as defined.  So, he says, in the exercise of the Court’ as discretion, the action should be stayed (if at all)  only to the extent of the interpleaded amount.  The rest of the dispute should be settled separately.

18.  Mr Phang took me through the various contractual documents surrounding the underlying allegedly fraudulent investment scheme, the custodian ship and administration arrangements, the guarantee agreement and the fund flows shown in the Fund Flow Report.  Much of that was more by way of background, and in particular to emphasise that the envisaged investment period was one of no more than six months commencing from the date of the initial investment, so that, for example, there would be obvious difficulties in seeking to raise administration fees for any period after the investment was supposed to have matured.  Mr Phang also took me to the documents which showed a casual approach to D7 seeking approval for payment of its fees, and the casual and rapid response giving approval (rather than the more formal invoicing procedure which the contractual documents identify, and by which D7 now seeks to justify the additional charges it wishes to deduct from the interpleaded amount).

19.  Mr Phang also submitted that whilst the plaintiff has previously described D7 as being an innocent party caught up in the alleged fraud, that does not mean that the plaintiff might not change its mind upon further investigation or consideration.  As he put it, even if there was no proper basis to allege any fraud on the part of D7, there might be the possibility of saying that D7 has acted recklessly or negligently, or perhaps in breach of contract.  Mr Phang emphasises that, despite the passage of nearly one year since the action began, it is really in its early stages, pleadings are not closed, and no discovery has taken place.  Mr Phang submits that, from the plaintiff’s point of view, it is becoming increasingly obvious that there is more to D7’s involvement than originally met the eye.  As an example, he points to the transfer by D7 of approximately US$1.2 million from D7’s custodian account relating to the plaintiff’s investment, UBF VI, to its customers account for another investment fund, UBF IV (where that is difficult to explain, except perhaps evidencing the movement of funds within a Ponzi scheme).

20.  However, in my view, it does not seem to me that there is any such wider dispute (as is now suggested)  remaining on the pleadings as currently drawn.  It is trite that the Court will determine the issues which arise on the pleadings, and that it is those issues which will define the ordinary interlocutory process, and in particular the process of discovery.

21.  That may – absent some ‘out-of-the-box’ thinking – produce the kind of conundrum which from time to time arises.  The plaintiff no doubt wishes to keep the proceedings against D7 alive, not least for the benefit of obtaining discovery, and in circumstances where there must be some doubt as to whether proper disclosure would be obtained from the other defendants.  But where it is the pleaded issues which define the scope of discovery, discovery is not a tool to fish for more information as might permit the pleading of a different claim.

22.  D7 has already been allowed to interplead by paying the interpleaded amount into Court.  The usual consequence of an interpleader is that the proceedings are then stayed as against the person interpleading.  Indeed, it might be thought that the whole point of interpleading is for the interpleading party to drop out of the proceedings from that point.  That is why Order 17 rule 7 specifically empowers the Court to order a stay of all further proceedings in an action, where it is a defendant to that action who applies for interpleader relief.  Therefore, subject to the points relating to fees and charges, I do not think the stay should be limited only to the interpleaded amount.

E.  Costs, Fees and Charges

E.1  Costs

23.  The plaintiff accepts that D7 is entitled to deduct taxed costs of the action and any reasonable charges it has incurred from the interpleader amount, up to the payment into Court of that amount.  But the plaintiff takes exception as to the amount which D7 wishes to deduct.

24.  Mr Phang submits that, whilst the plaintiff does not object to D7 being entitled to deduct from the interpleaded amount its costs up to the payment in date, on a party and party basis, to be taxed if not agreed, there is simply no foundation for any award of costs on the indemnity basis.  As Mr Phang submits, D7 was the fund administrator whose accounts and business platforms enable the fraudulent or Ponzi scheme to be carried out.  D7 must have received significant fees, and has already received from the plaintiff’s investment and amount of almost US$538,000 (though the plaintiff doubts the correctness of at least some of that sum), and is seeking by this summons another nearly US$655,000.  In those circumstances, Mr Phang submits that it would not be correct to penalised the plaintiff, a victim, by awarding costs to D7 on the indemnity basis.

25.  In his skeleton submissions, Mr Chu did not really explain why costs should be awarded on a higher basis, except that some of the cases referred to in the skeleton speak of an interpleading innocent party being indemnified.  Of course, I also acknowledge the argument that an innocent party should not be out of pocket.  But, in his oral submissions, Mr Chu also referred to the plaintiff’s conduct in this litigation, including in its response/opposition to the current summons.  For example, he says that there ought not to have been any real opposition to the interpleader, and that significant costs were expended by D7 in explaining the basis of its intended fees and charges, where opposition to specific aspects has now been dropped in light of that explanation (see below).

26.  However, in the exercise of my discretion, I consider that the appropriate basis for costs in this case is the party and party basis.

E.2  Fees and Charges

27.  Mr Chu submits that the plaintiff in effect asked D7 simply to prove the charges it wished to deduct.  So, Mr Chu says, D7 has explained in detail as regards its fees and charges, and he points to the various invoices and the explanation offered in the affirmation of Vincent Chok, CEO and director of D7, filed to provide that explanation.  Most of the explanation went to the apparent challenge to charging on a regressive fee basis and on a monthly basis, but that challenge has now been dropped.

28.  Indeed, the main focus of Mr Phang’s challenge now is to charging (a) custodian fees on sums which have since April 2020 not been in D7’s custody, and (b) administration fees long after the supposed maturity date of the investment.

29.  Mr Phang says the fees and charges claimed by D7 are highly problematic, as either they lack a proper basis or are unreasonably calculated.  He makes a number of specific criticisms, which he says show that there is a need critically to review D7’s charges, and that the Court should refrain from accepting them without question.  I agree, and of course would not allow them without scrutinising them.  So I reject Mr Chu’s submission that I should simply accept Mr Chok’s evidence on the basis that it is uncontested.

30.  Looking at the custodian fees, I note that approaching US$30 million of the US$32.8 million had been transferred from D7 by mid-April 2020.  A significant proportion of the sum transferred was in relation to an alleged loan of US$28,544,000 to KH UAM (ie. D2). Under the fee schedule and agreement, it was provided that:

Custodian fees are based on monthly average nominal value of assets held in the account for Client.  These average amounts are converted into USD at the exchange rate prevailing at the end of the month and aggregated to obtain the monthly average value.  Fees are calculated on an actual/365-day basis and expressed in basis points per annum (1bps = 0.01%)  and will be charged in US dollar.  AUC fees will be automatically charged to client account every month.

31.  By its invoices, D7 seeks to charge on the basis that AUC had consistently exceeded the value of US$30 million from April 2020 to March 2021.  Mr Chok asserts that “according to accepted industry standard practice (and/or even fundamental accounting principles), the loans advanced to [D2] were treated as a current asset on the balance sheet of [D1]”.  He also specifically emphasises the fact that the custodian fees are based on monthly average nominal value of assets (his emphasis). However, first, I do not think this is a matter of ‘accepted industry standard practice’ (where I would, in any event, be at least cautious about accepting a mere assertion from the party standing to benefit as to what is ‘accepted industry standard practice’); really, this is simply a matter of contractual construction of the fee agreement.  Secondly, I agree with Mr Phang’s submission that “nominal” in context probably means “numerical”, that is a specific numbered figure given to a value of assets, which may or may not all be held in cash.

32.  But, to my mind more importantly, focus should be on the words “held in the account for Client”.  If an asset is not held in the account for the client, because it has been passed to another person or entity, it is difficult to see how there is custody of that asset.  Indeed, if there were custody of the asset, D7 would be able to return it; but clearly that is not what is said in this case.  On that basis, I reject the claimed custodian fees in the amounts now put forward.

33.  The question then arises as to whether I should: (a) simply reject any claim to these particular fees because D7 has failed to make good its own case; or (b) ask for the fees to be re-calculated on a different basis; or (c) exercise the broad discretion which arises on the interpleader/stay, so as to deal with the matter in a broad brush fashion.

34.  As to the administration fees, the relevant Administration Agreement identifies that fees are payable for the provision of administration services comprising fund accounting and valuation, investor relations services, financial statements and audit, and anti-money laundering services and duties.  The schedule identifies that fees are paid semi-annually and are agreed as follows:

(1)  Fund Administration fees per fund:

•  A semi-annual payment of one per cent (1%)  of the cumulative Capital Contributions of the Fund to be paid within seven (7)  days of the Capital Contributions being received by the Fund

…

Fees are invoiced within the first 10 Business Days upon the commencement of the Term of the Fund and any subsequent Terms of the Fund.

35.  I accept Mr Phang’s submission that, against the various other documents which identify the investment term as a period of six months, the phrase “A semi-annual payment” simply means a payment for the period of six months, rather than a payment every six months (unless the term of the relevant fund has been extended).  On that basis, where one such payment has already been made, and where the term of the relevant fund has not been extended, I do not think D7 can claim or is entitled to payment of “another” 1%, for any period after 26 September 2020.

36.  Having considered matters overall, and in the exercise of my discretion, I refuse permission for D7 to deduct from the interpleaded amount anything other than its costs.

F.  A ‘Wrinkle’

37.  However, a ‘wrinkle’ arises as follows.  On my view that D7 could only claim one payment of 1% for the administration charge, it is at least arguable that D7 has previously overcharged.  This is because after D7 charged a 1% fee of US$358,500 on 3 April 2020, it charged a further 0.5% fee of US$179,251.63 on 30 June 2020.  The payment of the latter amount is one of the aspects where Mr Phang says it was sought and approved in a casual manner, raising some suspicion, at least as to negligence.  He points specifically to an email from Eva Chau (the deponent of the affirmation leading the interpleaded summons)  to Jack Chang (D4)  at 15:13 on 26 June 2020, in which it was said that Fund 6 (ie. D1)  had an outstanding amount due of 0.5% of the fund, being US$179,251.62 (one cent difference in the figure from what was later paid and received).  Just six minutes later, at 15:19, D4 replied simply “Approved”.  There was no invoice, no explanation as to why 0.5% of the fund was then “an outstanding amount due”, no request for such an application, yet immediate approval.

38.  When the US$179,251.63 was paid a few days later, it was of course withdrawn from the fund.  Therefore, Mr Phang submits, it is at least arguable that D7 has received fees to which it is not entitled, which means that it now holds a sum which is traceable back to the plaintiff’s original investment.  He then says that, if the claim against D7 is fully stayed following the interpleader, at least that traceable part of the investment fund is not subsumed within the interpleader amount, yet the plaintiff will be prevented from pursuing it.

39.  Mr Phang also submits that Mr Chu and D7 have failed to answer this point.  However, as Mr Chu says, this point was first raised by the plaintiff only in Mr Phang’s skeleton filed for this hearing; it was not presaged by any affidavit evidence, and D7 has not had the chance to file any evidence responding to the point.  Obviously, the particular point relating to the 0.5% is either something only recently occurring to the plaintiff and its advisers, or a point which was for some other reason not previously deployed.

40.  But the main problem for the plaintiff is that it consented to the interpleader order.  It did so knowing the requirements of the rules, including what D7 had to include in the evidence supporting its interpleader application.  Order 17 rule 3(5)  requires an interpleader summons to be supported by evidence that the applicant (a) claims no interest in the subject-matter in dispute other than for charges or costs, (b) does not collude with any of the claimants to that subject-matter, and (c) is willing to pay or transfer that subject-matter into court or to dispose of it as the Court may direct.  It also did so in the face of D7’s pleaded case that the maximum amount held by D7 traceable back to the original investment amount and/or subject to the alleged constructive trust pleaded by the plaintiff was the sum later paid into court.  I have already noted that the plaintiff did not file any reply to that defence.  It also did so in the light of the decision of DHCJ William Wong SC, which was predicated on the same basis, and from which there was no appeal (though I note that the subject-matter of an injunction and the subject-matter of the underlying proceedings may not necessarily be coterminous).  Further, if proportionality comes into account, this particular argument by definition relates to but 0.5% of the plaintiff’s claim.

41.  In light of these various matters, I do not think it right to exercise my discretion not to grant the stay of the proceedings against D7, following the interpleader order made by consent, and following the payment into Court of the interpleader amount (from which there will be no deductions other than some costs).  As I have indicated, the point of interpleader proceedings is to leave behind only the competing parties, and for the interpleading party to drop out.

42.  As to any reliance by Mr Phang on the idea that it is possible for there to be both an interpleader and yet continuation of the proceedings in the present circumstances, I think that may be based on a misplaced reliance on Note 17/1/3 in the Hong Kong Civil Procedure 2022, which states that the applicant may interplead as to so much of the debt as he admits, the dispute as to the residue being settled separately.  In my view, what that phrase envisages is the circumstances where an applicant acknowledges that he owes something on a debt (even if not all of the amount of the debt which might be claimed from him)  but recognises that there may be another claimant to that admitted part of the debt.  This is not such a case, which is dealing not with a debt claim but one on the basis of constructive trust.

43.  Of course, I also note that the plaintiff may not be without a remedy.  As one example only, it can pursue D1 and D4 (including for permitting the payment).  Further, a stay is simply that; an application can in appropriate circumstances be made to lift the stay, if for example it can be demonstrated that there is a different claim which can be properly pleaded against a defendant who has otherwise interpleaded, leading to the original stay.

G.  Result

44.  The interpleader amount paid into Court will remain intact, save that a deduction may be made for D7’s costs of the action up to the date of the interpleader, those costs to include the costs of the interpleader summons (see below), to be taxed if not agreed on the party and party basis.

45.  The action will otherwise be stayed against D7. Though it is probably unnecessary so to do, I will also grant liberty to apply.

H.  Costs

46.  The results on this application are somewhat mixed.  I have acceded to D7’s application for a stay of the action against it upon and following the interpleader, but I have rejected D7’s application for the significant fees and charges deductions it wished to effect.  The deduction of costs was not controversial apart from the basis of taxation.

47.  I also take into account the relevant conduct of the parties, most of which I have touched on above.  Overall in the circumstances, and the exercise of my discretion, it seems to me that the appropriate costs order to make is that D7 should have 50% of its costs of the interpleader summons, to be taxed if not agreed on the party and party basis.