Typhoon 8 Research Ltd. v. Seapower Resources International Ltd. and Another
Read the full judgment text of CACV 2980/2001 on BabelCite. This Court of Appeal judgment was delivered on 30 July 2002.
1. This is an appeal from that the judgment of HH Judge Cheung dated 5 September 2001 dismissing the plaintiff's claim against the 1st defendant Seapower Resources International Limited ("Seapower"). The action was brought against Seapower and the 2nd defendant to recover a deposit of $366,000 paid under a tenancy agreement which the plaintiff entered into with the 2nd defendant, a wholly-owned subsidiary of Seapower. The plaintiff was not legally represented and appeared by its duly authorised
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CACV002980/2001 CACV 2980/2001 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 2980 OF 2001 (ON APPEAL FROM DCCJ NO. 5911 OF 2001) ____________________
____________________ Coram: Hon Rogers VP, Le Pichon JA and Suffiad J in Court Date of Hearing: 9 July 2002 Date of Handing Down of Judgment: 30 July 2002 ____________________ J U D G M E N T ____________________ Hon Le Pichon JA: 1.This is an appeal from that the judgment of HH Judge Cheung dated 5 September 2001 dismissing the plaintiff's claim against the 1st defendant Seapower Resources International Limited ("Seapower"). The action was brought against Seapower and the 2nd defendant to recover a deposit of $366,000 paid under a tenancy agreement which the plaintiff entered into with the 2nd defendant, a wholly-owned subsidiary of Seapower. The plaintiff was not legally represented and appeared by its duly authorised director, Mr Lachlan Christie. Background 2.The 2nd defendant was the registered owner of the premises in question. In November 1998, the premises were mortgaged to Wing Hang Bank to secure advances to Seapower. The mortgage contained a provision prohibiting the letting of the premises without the prior consent of the mortgagee. Seapower was a party to that mortgage. 3.On 11 November 1999, the 2nd defendant and the plaintiff entered into a lease of the premises for a term of two years commencing 6 October 1999. No consent as was required under the mortgage was obtained prior to the granting of the lease. A deposit of $366,000 which was equal to six months' rent was payable thereunder to secure payment of the rent and performance of the plaintiff's obligations under the lease. The 2nd defendant did not and never had a bank account. So, at the direction of the 2nd defendant, the deposit as well as all rent payments were made to Seapower, its "ultimate holding company". In October 2000, Seapower defaulted under the mortgage. The mortgagee commenced possession proceedings in January 2001 and on 1 February 2001, it gave the plaintiff notice that it was taking possession of the premises. At that stage, rent had been paid up to 5 February 2001. The plaintiff demanded the return of the deposit from Seapower but Seapower refused to do so. This precipitated the present action which the plaintiff brought against Seapower and the 2nd defendant for the return of the deposit and interest. The judgment below 4.The judge held that although the lease was unauthorized, the parties to the lease (i.e. the plaintiff and the 2nd defendant) were estopped from disputing the relationship of landlord and tenant until interference by the mortgagee. That took place when the bank demanded payment of the rent pursuant to the mortgage on 1 February 2001. The interference in the tenancy relationship brought it to an end and the deposit became refundable on that day. The judge held that the 2nd defendant was liable to refund the deposit as of 1 February 2001 but dismissed the claim against Seapower. He rejected the plaintiff's claim that there was a binding promise on the part of Seapower to be responsible for the refund of the deposit to the plaintiff. He further held that Seapower had acted as the agent of the 2nd defendant in handling all tenancy matters. He found that at the date of the trial, the deposit money was still with Seapower but that Seapower as agent for the 2nd defendant was not liable to repay the money to the plaintiff. The judge also rejected the plaintiff's submission that Seapower held the deposit on a resulting trust for the plaintiff. Subsequent events 5.In November 2001, the plaintiff as judgment creditor issued garnishee proceedings against Seapower on the basis that it was holding monies as agent for the 2nd defendant. The hearing took place on 12 December 2001 but was adjourned, Seapower having filed evidence opposing the garnishee on the grounds that the 2nd defendant was indebted to it for $39 million. Some two weeks later, on 31 December 2001, provisional liquidators were appointed for Seapower. The hearing of this appeal originally scheduled for 18 January 2002 was vacated as a result. 6.The plaintiff applied for leave to continue this appeal. On 30 January 2002, the stay was lifted by Master Au Yeung. The provisional liquidators of Seapower appealed against the order of Master Au Yeung. That appeal was dismissed by Deputy Judge Woolley on 14 March 2002. A new date was then set for the hearing of this appeal. Meanwhile, on 4 February 2002, Master C K Chan stayed the garnishee proceedings. 7.Evidence was filed by the provisional liquidators to the effect that immediately upon the receipt of the rental deposit, it was banked by Seapower into a bank account it maintained and applied by Seapower in reduction of the 2nd defendants indebtedness to Seapower. Inter-company ledgers were exhibited showing that the 2nd defendant was indebted to Seapower in excess of $5.6 million at that date. The 2nd defendant never had any bank accounts. All transactions were made through Seapower. Major payments made by Seapower on behalf of the 2nd defendant were payments in respect of the principal and interest due to the bank in relation to loans advanced for the purchase of the premises. This appeal 8.The issue which arises in this appeal is whether Seapower is under any obligation to return the deposit to the plaintiff and, if so, on what basis. In practical terms, if no such obligation is found to exist, the deposit would swell the assets of Seapower and be available for distribution to its creditors.
9.A preliminary question is the effect of the lease which had not been authorised by the bank. Vis-à-vis the bank, there is no question but that the lease was void. But as between the plaintiff and the 2nd defendant, so long as the plaintiff remained in possession of the premises, by an ancient rule of common law, the plaintiff was estopped from alleging that the 2nd defendant had no title. See Levingston v Somers [1941] IR 181 at 193-4. So long as the lessee continues in possession under the lease, the law does not permit him to set up any defence founded upon the fact that the lessor had no title. See per Martin B in Cuthbertson v Irving (1859) 4 H&N 742 at 758 and Industrial Properties (Barton Hill) Limited v Associated Electrical Industries Limited [1977] 2 All ER 293, 309a. 10.Whilst there does not appear to be any direct authority on the point, so long as the plaintiff continued to have possession of the premises under the lease undisturbed, there would not have been a basis for any claim for the repayment of the deposit. In the absence of an adverse title, a lessee cannot repudiate his obligations under the lease. See Megarry & Wade, The Law of Real Property, 6th Ed at 14-095. As the payment of the deposit was one of the obligations under the lease, until actual disturbance by title paramount, any claim for the return of the deposit would have been premature. The judge's holding that the deposit was not repayable until 1 February 2001 was therefore correct.
11.As noted above, the deposit was paid to Seapower at the direction of the 2nd defendant. This was apparently because the 2nd defendant never had any bank accounts of its own. Seapower knew that the sum paid to it was the deposit due under the lease. Indeed, there is an official receipt dated 10 November 1999 issued by Seapower which expressly acknowledged that the payment of $366,000 received was the six months' rental deposit for the premises. 12.It is common ground that the lease was negotiated by the senior staff of the group employed by Seapower and not by any director or staff employed by the 2nd defendant. In fact, Mr Boris Lam, the chief financial officer of Seapower was in charge of negotiating the lease with the plaintiff. There is no question but that Seapower was fully aware of the terms of the lease, in particular, the terms relating to the deposit. 13.In circumstances such as these, was there any scope for any trust to have arisen? Mr Bartlett who appeared for Seapower submitted that the express commercial contractual relationship between the plaintiff and the 2nd defendant contradicted the existence of such a trust. He referred to Crocodile Garments Ltd v The Prudential Enterprise Ltd [1989] 1 HKC 474 for the proposition that when a deposit is received, it merely created a prospective and contingent liability on the landlord to repay it when the tenancy came to an end. The deposit provisions in that case were similar to those in the present case. The point which arose for decision in that case was whether the tenant was entitled to summary judgment on a claim for the repayment of the deposit as against the original landlord upon the termination of the tenancy. Godfrey J held that there was no defence to the action. The trust issue never arose in argument and was not considered by the court. That decision is accordingly of little assistance. It is definitely not authority for the proposition that where deposit monies are paid pursuant to a lease, a trust can never arise. 14.The question of a trust arose for consideration in Re Chelsea Cloisters Ltd (In Liquidation) (1980) 41P & CR 98. In that case, the company had taken an underlease of a block of flats. It managed the block by granting tenancies. The standard tenancy agreement required the payment of one or two weeks rent as deposit against which sums which might be due from the tenant at the end of the tenancy for damage, breakages and compensation could be deducted and the balance was to be credited to the tenant at the termination of the tenancy. When the company took the underlease, no special arrangements were in place in respect of the deposits. In 1974, the company fell into financial difficulties and a chartered accountant was appointed to supervise the running of the company. The supervisor made arrangements for deposit monies received since his engagement to be kept separate from other monies of the company. The company subsequently went into liquidation. It was held that a trust was created with regard to the money and the tenants' deposit account in that the supervisor manifested an intention to create a trust in setting up the tenants' deposit account when he took over and that the monies in the tenants' deposit account should go to the immediate landlords upon trust for the tenants and were not available for either the general or secured creditors of the company. 15.Bridge and Oliver LLJ left open the question whether the payment of the tenants' deposit pursuant to the tenancy agreements was such as to impress the deposit in the hands of the landlords with a trust at the time when they were paid. Lord Denning MR considered that those deposits were made contractually with an obligation to repay and that "there was no trust at the beginning", citing Potters v Loppert [1973] Ch 399. But Potters v Loppert concerned a deposit held by an estate agent as stakeholder pending the conclusion of a contract for the sale of land which is quite different. In my view, Chelsea Cloisters is not an authority for the proposition that no trust can attach to sums paid by way of rental deposits from the very beginning. This question therefore is very much an open one, free from authority. 16.When Seapower received the deposit monies, it knew that it was paid pursuant to the provisions of the lease. Although Seapower was not a party to the lease, it nevertheless had knowledge of its terms for the reasons stated in [12] above. The lease contained the following provisions for a deposit: "SECTION IX DEPOSIT
The purpose of the deposit was clear: to 'secure' due performance on the part of the plaintiff of the terms of the lease. Clause 9.01 specifically provided that the deposit should be "held" by the landlord "throughout the currency" of the lease, and, subject to specific deductions permissible under clause 9.01, the deposit or its balance was to be refunded. 17.Did this give rise to "a Quistclose trust"? 18.Where a loan is made to a borrower for a specific purpose and the borrower is not free to apply the money for any other purpose, that arrangement gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. See Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567. The nature of a Quistclose trust was the subject of detailed analysis by the House of Lords in the recent decision of Twinsectra Ltd v Yardley [2002] 2 WLR 802. For such a trust to arise, a settlor must possess the necessary intention to create the trust but his subjective intentions are irrelevant. If he entered into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. As Lord Millett explained at [74]:
He went on to explain at [76]:
It is to be noted that in Twinsectra, Lord Millett dissented on an issue (liability as an accessory to a breach of trust) which does not arise in the present case. The House was unanimous on the question whether a trust arose in the circumstances of that case. 19.Where a Quistclose trust arises, the money remains the property of the lender unless and until it is applied in accordance with his directions and insofar as it is not so applied must be returned to him. The money is not at the free disposal of the borrower. Lord Millett observed (at [83]):
It would appear that the duty to keep the money separate is an incident of a Quistclose trust should one arise from the circumstances rather than a pre-condition for the existence of such a trust. It is implicit from Lord Millett's observations that he rejected the submission (at [70]) that "there must be something more, for example, a requirement that the money be paid into a segregated account" before it is appropriate to infer that a trust had been created. 20.In the present case, there was no loan but the deposit was paid over for a specific purpose and the landlord covenanted to "hold" the same "throughout the currency" of the lease, to deduct therefrom for specific purposes only and subject thereto, to refund the deposit to the plaintiff. These are all the hallmarks of a Quistclose trust. For my part, the fact that the present case involved a deposit under a lease as distinct from a loan would not prevent the Quistclose principles from applying. As Lord Millett observed (at [99]):
21.If a Quistclose trust would have arisen had the monies been paid to the 2nd defendant as landlord, does it make any difference that the recipient was Seapower? I think not. Assuming that the judge was correct in his finding that Seapower was an agent for the 2nd defendant, the particular circumstances of this case are such that it would not be open to Seapower to contend that as agent, it was not subject to the same trust. This is because having negotiated the lease, it cannot deny knowledge of the terms upon which the deposit was to be held. 22.It would follow from my conclusion of the existence of a Qusitclose trust that the deposit is returnable to the plaintiff and that it does not form part of the assets of Seapower available for distribution amongst its creditors. For present purposes, it is immaterial whether or not the judge was correct in holding that Seapower was the 2nd defendant's agent, although I have to say that the finding is somewhat surprising. Seapower's witness Monica Chow Shuk-kuen gave evidence to the effect that Seapower was not an agent of the 2nd defendant. Nowhere in the written receipt or in any of the relevant documents before the court was there any reference to Seapower being the 2nd defendant's "agent". The 2nd defendant's letter giving directions for payment to Seapower referred to it simply as the 2nd defendant's "ultimate shareholder". It would also not appear to have been the case of any of the parties below that Seapower was the 2nd defendant's agent. Given the fact that the 2nd defendant was nothing more than one of the many property holding companies within the Seapower group, a holding that it was Seapower's agent would have accorded more with reality. Were it necessary to do so in the present case, I would reverse the judge on the issue of agency as being contrary to the weight of the evidence.
23.Where, as here, the plaintiff's tenancy had been terminated through the exercise by the bank of its title paramount, such an event does not trigger clause 9.03. The deposit became repayable on the date of termination which was 1 February 2001. The judge so held and Seapower does not seek to contend that repayment arose on a later date. Interest on the deposit monies should therefore run from 1 February 2001. 24.The plaintiff seeks an award of compound interest. The principles which entitle the court to award compound interest are set out in Wallersteiner v Moir (No. 2) [1975] 1 QB 373, recently considered by this court in China Everbright - IHD Pacific Limited v Ch'ng Poh (Unreported) CACV 513 of 2001, 19 February 2002 at [85-92]. They are encapsulated in the following passage from the judgment of Lord Denning at 388 C-D:
The obligation to repay arose on 1 February 2001 at a time when Seapower was a listed company. What is apparent from the recent evidence filed by Seapower is that in breach of its fiduciary obligations, it applied the deposit in partial discharge of the 2nd defendant's indebtedness to it immediately upon receipt in October 1999. It thereby derived an advantage from the wrongful application of the deposit monies and when the obligation to repay arose, it sought to preserve the advantage so derived by wrongfully resisting the plaintiff's claim. More than that, after Seapower went into liquidation, the provisional liquidators have sought at every turn to stymie the plaintiff's claim. As provisional liquidators were not appointed for Seapower until some 11 months later, it is reasonable to infer that in the interim, Seapower did employ the deposit for its business purposes. In those circumstances, I see no reason why the court should not exercise its discretion to order that interest, compounded annually, be paid on the sum of $366,000. 25.So far as the rate of interest is concerned, the general guideline is to be found in the judgment of Forbes J in Tate & Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149 at 154D-E applied by this court in the China Everbright case at [99]. There is no evidence relating to the rate of interest at which a plaintiff with the general attributes of the plaintiff in present case could borrow money. However, it is to be noted that in relation to the 2nd defendant, the judge ordered interest to be paid at the rate of 10% per annum from 1 February 2001 to the date of judgment and thereafter at the judgment rate until full payment. Prima facie, there is no reason why a different rate of interest should be awarded in the case of Seapower. No issue has been taken by the 2nd defendant who has not cross-appealed the rate of interest and Mr Bartlett made no submissions, written or oral, as to the rate of interest. In the special circumstances of this case, I consider that a similar award is warranted. Costs 26.Since the plaintiff has succeeded in its appeal, it is entitled to its costs (both here and below). However, several specific matters arise in relation to the costs order which I will deal with below. These matters were addressed extensively by Mr Christie in his written submissions. Mr Bartlett made no submissions written or otherwise save in relation to the undertaking and the date from which interest should run. Since no assistance was offered to the court, it can only be assumed that he did not dispute the submissions advanced on behalf of the plaintiff on the other issues.
27.Order 62 rule 28A of the Rules of the High Court provides for the recovery of costs by a litigant in person. In the annotation to the Hong Kong Civil Procedure 2002 at 62/App/57, it is stated that "litigant in person" does not include a company represented by one of its directors. Australian Telephone Distributors Pty Ltd v Golden Always Ltd [1996] 3 HKC 401, a decision by Nazareth VP sitting as a single judge of the Court of Appeal, is cited for that proposition. In reaching that conclusion in the Australian Telephone case, Nazareth VP followed the English Court of Appeal's interpretation of 'litigant in person' in Jonathan Alexander Ltd v Proctor [1996] 1 WLR 518. But in that case, the court was concerned with the meaning of that term as used in the Litigants in Person (Costs and Expenses) Act 1975 ("the 1975 Act") which has no counterpart in Hong Kong. Nazareth VP adopted the reasoning of Peter Gibson LJ in Jonathan Alexander at 525G-H to the effect that if someone other than himself represents him (i.e. the litigant in person), then, notwithstanding that that other person is his agent, that party is not a litigant in person and since the company appeared by a representative, its director, it is not a litigant in person. In short, Nazareth VP adopted a construction of 'litigant in person' which made it inherently impossible for a company who is a party to a litigation and not legally represented from recovering costs. The injustice of the result in Jonathan Alexander led to an amendment under the new Civil Procedural Rules in England under which litigants in person include companies acting without a legal representative. The injustice that arises from the interpretation adopted in the Australian Telephone case is such that unless constrained to do so, I would not follow it. 28.Nazareth VP appeared to have overlooked two matters. First, applying the principles of attribution described in the opinion of the Privy Council delivered by Lord Hoffmann in Meridian Global Funds Management Asia Limited v Securities Commission [1995] 2 AC 500, 506B-F, where a director appears for the company, his acts count as the acts of the company. Second, the legislative history of Order 63 rule 28A and its English counterpart namely RSC Order 62 rule 18 (introduced by virtue of section 1(1) of the 1975 Act) has been quite different. See Tse Ming-cheung, Alexander v Wilkinson & Grist [1991] 1 HKLR at 33C-34F which explains that difference. In arriving at its proper meaning, regard should be had to the language of rule 28A, its content and policy. Part V of Order 62 deals with the assessment of costs. Rule 28A was intended to cater for the costs of litigants who for whatever reason (although usually because of financial constraints) is not legally represented. That is how I would construe the term 'litigant in person'. I can discern no basis for confining the rule to litigants who are natural persons only and discriminating against corporations which are legal persons. Such a strained meaning militates against common sense. 29.Mr Christie in his very thorough submissions drew attention to Order 5A of the new Rules of the District Court which came into effect in September 2000. This specifically provides that a company may carry on proceedings by a duly authorised director. The practice in the High Court was different in that leave was required. See Order 5, rule 6(2) of the Rules of the High Court. The Concordance Table to the Rules of the District Court confirms that Order 5A gave effect to a previous District Court practice. In other words, it has always been the case in the District Court that a company may appear by its director without leave, whether under the old or the new rules. It would seem logical that a company so appearing acts in person: it would be a 'litigant in person' for the purposes of Order 63 rule 28A of the Rules of the District Court. Since this rule is identical to Order 62, rule 28A of Rules of High Court, I agree that it could not have been the intention of the legislature that the term 'litigant in person' appearing in both those provisions should be given different meanings. 30.For these reasons, I agree with Mr Christie that when a director appears for a company as of right in the District Court and when he appears with leave in the High Court, in each case, he appears as the company and for the purposes of Order 62, rule 28A of both the Rules of the District Court and the Rules of the High Court. In each case, the company would be a 'litigant in person'.
31.As noted above, provisional liquidators for Seapower were appointed on 31 December 2001. Where there is an order for costs in favour of a successful party against a company in liquidation, such costs are payable out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator for his own costs. See per Lord Hoffmann in Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1 at 20G and 21C. As explained by Lord Hoffmann, since a company in liquidation is liable for costs because it has adopted the action, such costs would extend to pre-liquidation costs. 32.In the present case, it is abundantly clear that since their appointment the provisional liquidators have adopted the action. They have taken part in the proceedings and actively resisted the plaintiff's claim. The costs to which the plaintiff is entitled is therefore to be paid in full out of Seapower's assets in the hands of the provisional liquidators.
33.At the hearing before Master Au Yeung on 30 January 2002 for leave to continue the proceedings against Seapower which had gone into liquidation, the provisional liquidators opposed the lifting of stay. Leave was granted subject to the plaintiff undertaking not to hold the official receiver or the provisional liquidators personally liable for costs. 34.The provisional liquidators appealed the master's order. The appeal, which was by way of a rehearing, took place before Deputy Judge Woolley on 14 March 2002. The deputy judge dismissed the appeal with costs reserved to this court. There was no mention in the order to the undertaking given to the master. At that stage, the formal order of Master Au Yeung of 30 January 2002 had not been drawn up and entered. At the conclusion of the hearing before the judge the solicitor appearing for Seapower asked whether leave would be given on any specific terms "For example the enforcement and costs?" The judge made it quite clear that he was "not going to make any conditions" and leave things as simple as possible. It is to be noted in this regard that the appeal before the judge is a rehearing. Some 3 weeks after the hearing before the judge, Seapower's solicitors caused the order of 30 January 2002 to be drawn up and entered. When the plaintiff requested by letter of 3 May that the draft order of the judge which had been submitted for approval be amended to include a provision "that the Court's leave to proceed with CACV 2980/01 is not subject to any term", the reply from the court was "The undertaking was not part of the master's order and is not affected by the appeal." 35.Clearly, whatever was meant by the words "not affected by the appeal", the judge made his order on the basis that there was no undertaking to the court. On its wording the undertaking only related to a personal liability of the Official Receiver and the provisional liquidators; it did not, in any event, affect the right of the plaintiff to have the costs paid from Seapower's assets in the hands of the provisional liquidators: see [32] above. If Seapower's assets were to prove insufficient to cover the plaintiff's costs and thus it were to become relevant as to whether the shortfall could be recovered from the provisional liquidators, then it seems that following the ruling and order of the judge, there is nothing to prevent an application to that effect being made. Had Seapower wished Deputy Judge Woolley's order to be made conditional upon an undertaking being given or continued, then that should have been made clear at the time the judge said he was not imposing any conditions. Order 36.I would allow this appeal. The judge's order in relation to Seapower is to be set aside. I would declare that Seapower held the deposit upon a resulting trust for the plaintiff. I would order that the deposit of $366,000 be repaid to the plaintiff with interest at 10% per annum compounded annually for the period from 1 February 2000 to the date of judgment and thereafter at judgment rate until payment. 37.I would also make an order nisi that the costs both here and below be to the plaintiff. 38.Finally, it would be appropriate to express my gratitude to Mr Christie for the considerable assistance he has rendered the court. His research on the very many legal issues arising in this case was both thorough and comprehensive and, if I may say so, quite remarkable, coming from a layman. Hon Suffiad J: 39.I agree. Hon Rogers VP: 40.I agree. There will therefore be an order as proposed in paragraphs 36 and 37 above.
Representation: The Plaintiff/Appellant acting in person, represented by its director, Mr Lachlan Christie, present Mr Jeremy Bartlett, instructed by Messrs Allen & Overy, for the 1st Defendant/Respondent |
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