Bei Ni Ltd v. Cornwell (Hong Kong) Ltd

HCA 923/2022

[2023] HKCFI 1799

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 923 OF 2022

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J U D G M E N T

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A. INTRODUCTION

1.On 15 December 2022, the plaintiff and the defendant jointly applied for an ex parte injunction against the interested party (“Huatai”) to restrain it from disposing the 3,459,700 Shanghai Bio-heart Biological Technology Co Ltd (Listco No: 2185) (“2185”) shares in the defendant’s margin account maintained with Huatai (“Charged 2185 Shares” and “Margin Account”).

2.The injunction application was dismissed by DHCJ H Au-Yeung upon Huatai’s undertaking to pay the proceeds of sale for the Charged 2185 Shares into court.  By 29 December 2022, proceeds of HK$23,147,831.93 (the “Sum”) was paid into court.

3.Under paragraph 2 of the Summons dated 11 January 2023 (“Summons”), Huatai applies for leave for payment of the Sum out of court to Huatai.

4.The Summons is opposed by the plaintiff.  The dispute between Huatai and the plaintiff turns on whether the charge over the shares in the Margin Account in favour of Huatai (created by virtue of its terms and conditions) (“Huatai Share Charge”) has priority over the plaintiff’s charging order (“P Charging Order”) over the Charged 2185 Shares.

5.There is no dispute that the Huatai Share Charge was created first in time, but the plaintiff alleges that the Huatai Share Charge is merely a floating charge which crystallised after, and thus ranks behind, the P Charging Order.

6.Separately, since the plaintiff persistently objected to Huatai’s proposal to dispose of the Charged 2185 Shares, there was delay in selling the Charged 2185 Shares.  Meanwhile the price of 2185 shares plummeted such that the Sum is not even sufficient to cover the defendant’s indebtedness to Huatai alone.  Huatai now seeks to recover the shortfall from the plaintiff under paragraph 3 of the Summons.

7.In short, Huatai submits that:

(1)  The Huatai Share Charge is a fixed charge.  Although the defendant could dispose of his shares in the Margin Account, any proceeds were applied automatically to reduce its indebtedness to Huatai.  Huatai retained sufficient control over the Margin Account such that the Huatai Share Charge is a fixed charge.

(2)  The plaintiff’s persistent refusal in allowing Huatai to sell the Charged 2185 Shares in November 2022 was unreasonable and unjustified.  Huatai should be entitled to enforce the plaintiff’s implied cross-undertaking as to damages in obtaining the P Charging Order nisi to seek compensation.

8.On the other hand, the plaintiff submits that:

(1)  The Huatai Share Charge is a floating charge, in circumstances where the Margin Account had been operated in a manner where the defendant was free to dispose of the Charged 2185 Shares (and other securities) prior to the P Charging Order.  The Huatai Share Charge crystallised only after the P Charging Order nisi was obtained on 14 October 2022.  P Charging Order therefore has priority over the Huatai Share Charge.

(2)  Huatai’s submission that the plaintiff was subject to an implied undertaking as a result of the P Charging Order nisi is unsupported by authorities and ought to be rejected.

B.  RELEVANT FACTUAL BACKGROUND

9.The following background facts as set out in Huatai’s Skeleton Submissions are not disputed by the plaintiff.

10.In around July 2022, the defendant opened the Margin Account with Huatai.  The defendant was required to deposit collateral into the Margin Account.  The collateral was subject to a fixed charge in favour of Huatai (ie the Huatai Share Charge) as per the terms and conditions of the Margin Account (“T&C”).  Clause 16.3 of the T&C provided that:

“… the Client hereby charges in favor of Huatai, free of all encumbrances and adverse interests:

(a) by way of a first fixed charge, its interests and rights in all present and future Securities, Collateral, receivable and monies (including any dividends, rights, monies or property accruing in respect thereof) delivered to, deposited with, transferred to, or held in the possession of, in the name of, or under the control or direction of Huatai, or any nominee of Huatai (including Securities, Collateral, receivable and monies held in any Account); and

(b) by way of a first floating charge its interests in all assets referred to in paragraph (a) above insofar as not already charged by way of fixed charge under these Terms and Conditions. …” (Emphasis added)

11.Clause 16.3 specifically provided that Huatai may sell any of the collateral where an Event of Default is triggered.  The Events of Default were set out in the definitions of the T&C.

12.Clauses 7.10, 7.11, and 7.12 further restricted the defendant’s freedom to deal with any collateral deposited in the Margin Account. In particular, Clause 7.10 empowered Huatai to refuse any withdrawal of collateral:

“Withdrawal of Collateral: For so long as there exists any indebtedness to Huatai on the Client’s part or there is any open position entered into by Huatai on behalf of the Client, Huatai shall be entitled to refuse any withdrawal of any or all of the Collateral and the Client shall not (without the prior written consent of Huatai) be entitled to withdraw any Collateral in part or in whole from its Account.” (Emphasis by underlining added)

13.As of 26 July 2022, the defendant had deposited 3,807,500 2185 shares as collateral in the Margin Account.  Some of these shares were sold in August 2022.

14.Thereafter, there were 3,459,700 2185 shares left in the Margin Account (ie the Charged 2185 Shares).

15.On 14 October 2022, the plaintiff obtained the P Charging Order nisi over the Charged 2185 Shares.  On 24 October 2022, the plaintiff’s solicitors Messrs Eric Chow & Co (“ECC”) served a Stop Notice on a related company of Huatai, purporting to restrain any transfer of the Charged 2185 Shares in the Margin Account.

16.Huatai’s solicitors Messrs DLA Piper Hong Kong (“DLA”) corresponded with ECC throughout November 2022, proposing to dispose of the Charged 2185 Shares in view of the then market price of 2185 shares.

17.No agreement was reached.  By Summons dated 28 November 2022, Huatai applied for leave to dispose of the Charged 2185 Shares under Order 50, rule 5(2) of the Rules of the High Court, Cap 4A pending the P Charging Order being made absolute/discharged.

18.The matter came before Master David Chan on 5 December 2022, who declined to deal with the application substantively at that 3-minute call-over hearing.

19.On 14 December 2022, the P Charging Order was made absolute.

20.By then, the share price of the Charged 2185 Shares had plummeted.  The price trend is summarised in the following table:

Date	Price of 2185 shares	Value of Charged 2185 Shares	The defendant’s total indebtedness to the plaintiff and Huatai
1.11.2022	HK$51	HK$176,444,700	HK$56,272,423.38
29.11.2022	HK$22.45	HK$77,670,265	HK$55,408,982.29
5.12.2022	HK$9.49	HK$32,832,553	HK$55,491,253.26
14.12.2022	HK$8.38	HK$28,992,286	HK$55,623,889.87

21.Huatai began to dispose of the Charged 2185 Shares on 15 December 2022, selling 1 million shares on that day.

22.In the evening of 15 December 2022, the plaintiff and the defendant jointly applied for an ex parte (with notice) injunction against Huatai, seeking to restrain Huatai from disposing of the rest of the Charged 2185 Shares.  The injunction application was dismissed by DHCJ H Au-Yeung on 16 December 2022 upon the undertaking by Huatai to pay the sale proceeds of the Charged 2185 Shares into court.  That was done by 29 December 2022.

23.Under paragraph 2 of the Summons, Huatai applies for payment out of the Sum to satisfy the defendant’s margin debt in the Margin Account.

24.Further, Huatai seeks to enforce the implied undertaking of damages against the plaintiff for causing loss to Huatai by relying on the P Charging Order nisi: see paragraph 3 of the Summons.

C.  PRIORITY AS BETWEEN THE HUATAI SHARE CHARGE AND THE P CHARGING ORDER

25.The 3,807,500 2185 shares that were deposited into the Margin Account became subject to the Huatai Share Charge by 26 July 2022 pursuant to Clause 16.3 of the T&C.

26.The P Charging Order was obtained on 14 October 2022.  Prima facie, the Huatai Share Charge ranks ahead of the P Charging Order because it was created first in time: Snell’s Equity, 34^th ed, §4-002.

27.The plaintiff alleges that the Huatai Share Charge was merely a floating charge, which only crystallised after the P Charging Order had been obtained.

C1.  Applicable Principles

28.The general legal principles regarding the classification of a charge as “fixed” or “floating” are not disputed by the plaintiff.

29.As submitted by Huatai, it is well-established that in characterising a charge as fixed or floating, the court will engage in a two-stage process.  The first stage involves construing the terms of the contract.  The second stage is one of characterisation: Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 at §32.

30.Clause 16.3(a) of the T&C prima facie sought to create a fixed charge.  The issue is whether there is any justification to depart from that characterisation.

31.The 3 characteristics of a floating charge are set out in Re Yorkshire Woolcombers Association Limited [1903] 2 Ch 284 at 295:

“(1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.”

32.In Agnew, Lord Millett noted that the third characteristic was the hallmark of a floating charge, namely the chargor’s freedom to deal with the secured assets and by doing so withdraw them from the scope of the security: Agnew§§13, 32.

33.A fixed chargee must have sufficient legal control over the charged assets, namely the contractual right to prevent the chargor from withdrawing the charged assets from the scope of the security: Goode and Gullifer on Legal Problems of Credit and Security, 7^th ed, §4-22.

C2.  Comparing Fixed Charge over Book Debts and the Margin Account

34.In its Skeleton Submissions, Huatai relies heavily on the analogy with a charge on the book debts of a company, which runs as follows.

35.In Agnew (Supra), the Privy Council considered how fixed charges may be created over book debts.  A company that charges its book debts is often allowed to collect it and thus turning it into proceeds.  However, collection destroys the debt itself, thus could be considered a “withdrawal” of assets from the scope of the charge.

36.Lord Millet gave guidance on this issue at §§45-49 of Agnew. At §45, Lord Millett said this:

“…But it does not follow that the nature of the charge on the uncollected book debts may not differ according to whether the proceeds are subject to a fixed charge or a floating charge; for in the one case the charge holder can prevent the company from having the use of the proceeds and in the other it cannot. The question is not whether the company is free to collect the uncollected debts, but whether it is free to do so for its own benefit. For this purpose it is necessary to consider what it may do with the proceeds.” (Emphasis added)

37.In Agnew at §46, Lord Millet recognised the commercial reality that the value of book debts can only be exploited by exercising the right to receive payment from the debtor or by assigning the right for value to a third party.  He concluded at §48:

“To constitute a charge on book debts a fixed charge, it is sufficient to prohibit the company from realising the debts itself, whether by assignment or collection. If the company seeks permission to do so in respect of a particular debt, the charge holder can refuse permission or grant permission on terms, and thus direct the application of the proceeds. But it is not necessary to go this far. As their Lordships have already noted, it is not inconsistent with the fixed nature of a charge on book debts for the holder of the charge to appoint the company its agent to collect the debts for its account and on its behalf. …… The proceeds of the debts collected by the company were no longer to be trust moneys but they were required to be paid into a blocked account with the charge holder. The commercial effect was the same: the proceeds were not at the company’s disposal. Such an arrangement is inconsistent with the charge being a floating charge, since the debts are not available to the company as a source of its cash flow. …”

38.By virtue of Clause 7.10 of the T&C, Huatai was entitled to refuse the withdrawal of shares in the Margin Account pledged as collateral (see paragraph 12 above).  There is prima facie legal control by Huatai over the charged assets.

39.Further, as correctly submitted by Huatai, the focus is on whether the proceeds of the collected debts were held for the benefit of the chargee, or whether they could be applied to the chargor’s own purposes.

40.Re TXU Europe Group plc [2004] 1 BCLC 519 concerned a portfolio of shares owned by the company that was ring-fenced to provide top-up benefits for executives of the company.  The portfolio was managed by an investment manager, who answered to the company, and had the freedom to sell the securities, and to reinvest the proceeds.

41.At issue was whether any charge over the portfolio was created in favour of the executives, and if so, whether that charge would be fixed or floating.  The court held that no charge had been created but went on to find, obiter, that such a charge would have been a fixed charge.

42.At §57, Blackburne J, having recited Agnew, held that:

“I do not accept that these considerations would have resulted in the creation of a floating charge. If the Company has no right to apply the individual investments which together constitute the portfolio for any of its ordinary purposes but is obliged to hold them at all times subject to the charge in favour of the charges, the charge is a fixed charge. It is nonetheless a fixed charge because, under the charge, there is a right in the chargor to convert the investment into cash or exchange it for other investments. If therefore the question had arisen, I would have held that the equitable charge was fixed rather than floating in nature.” (Emphasis added)

43.Re TXU is consistent with Agnew.  Shares, especially listed shares, are valuable because of their market value.  The fact that the company was able to dispose of shares without consulting the chargee is neither here nor there.  The focus must be on whether any restrictions were placed on how the company could deal with the sale proceeds.

44.Applying the above analysis to the present case, I agree with Huatai’s submission that the operation of the Margin Account is similar to a situation where a fixed charge is created over book debts:

(1)  The defendant had the ability to dispose of securities in its portfolio but only through Huatai as broker.  This is important as such disposals could not be carried out without the knowledge of Huatai, and Huatai could refuse permission or grant permission on terms.

(2)  The defendant had no control over the sale proceeds.  Instead, the sale proceeds were automatically applied to reduce/discharge the defendant’s margin debt to Huatai.  This can be demonstrated by the Margin Account Statement, for example on 17 August 2022.

(3)  On that day, 121,000 shares of中國聯塑were sold at the price of HK$1,132,738.31.  The account statement shows that that sum was automatically applied to reduce the defendant’s margin debt to Huatai.  In other words, the proceeds never became available to the defendant.

45.Huatai therefore did not only have control over any sale proceeds, but the further right to immediately apply the sale proceeds for its own benefit.  The sale proceeds never formed part of the defendant’s cash flow (see: §48 of Agnew cited at paragraph 37 above).

46.On that basis alone, the plaintiff’s floating charge argument falls away.  The disposal of shares in the Margin Account cited in evidence are just examples consistent with the operation of the Margin Account set out in paragraph 44 above - the proceeds were always applied to reduce the defendant’s indebtedness to Huatai.

47.On the question of legal control over the charged assets, the plaintiff submits that Huatai’s contractual right to refuse withdrawal, being a negative consent, is insufficient for and indeed fatal to a fixed charge.  The plaintiff cited Lightman & Moss on the Law of Administrators and Receivers of Companies, 6^th ed, at §3-024:

“In Spectrum, Lord Walker referred to the need, if there was to be a fixed charge, for the “positive” concurrence of the chargee.  The need for such positive steps might be seen as a function of the need to demonstrate that the chargee retains control over the charged assets. … it will plainly be fatal to a fixed charge if the release operates by default unless the chargee intervenes (negative consent) …”

48.I do not agree with the plaintiff’s submission.  In my view, the plaintiff’s submission ignores the latter part of Clause 7.10 of the T&C, which provides that: “and the Client shall not (without the prior written consent of Huatai) be entitled to withdraw any Collateral in part or in whole from its Account”.  This is clearly positive legal control over the shares in the Margin Account.

49.The plaintiff further submits that this court cannot derive assistance from Blackburne J’s obiter dicta in Re TXU Europe Group plc.

50.In particular, the plaintiff submits that Blackburne J’s obiter dicta cannot withstand scrutiny.  The plaintiff again cited Lightman & Moss at §3-062:

“… the emphasis of the judgments and speeches in Agnew, Cosslett (Contractors) and Spectrum was on the issue of control of the individual assets which fall within the description of the charged assets. Given that [in Re TXU Europe Group plc] the executives who claimed the benefit of the charge had no say in the management of the portfolio at all, and that the investment manager who did was answerable only to the chargor company, it is difficult to reconcile Blackburne J’s analysis with the statement of Vaughan-Williams LJ in Re Yorkshire Woolcombers that “if at the wish of the mortgagor he can dispose of it and prevent it being any longer a security, although something else may be substituted more or less for it, that is not a ‘specific security’” (emphasis added) or the emphasis in Agnew and Spectrum on control by the chargee of the charged assets. Reference can also be made to the observations of Lord Hoffmann in Cosslett that the freedom given to a chargor to replace a less efficient machine with a newer and more efficient one meant that the charge over the old one (as part of a general charge covering plant and machinery) could not be classified as a fixed charge.”

51.The plaintiff goes on to submit that, in the present case, there being no sufficient control on both the disposal of shares and the sale proceeds thereof, the court should construe any such charge as a floating charge rather than a fixed charge.

52.I do not agree.  In the first part of §48 of Agnew set out in paragraph 37 above, Lord Millet has made it clear that to constitute a charge on book debts a fixed charge, it is sufficient but not necessary to prohibit the company from realising the debts itself, whether by assignment or collection.  From §45 and the rest of §48 of Agnew, the question is not whether the company is free to collect the uncollected debts, but whether it is free to do so for its own benefit.  For this purpose, it is necessary to consider what it may do with the proceeds.  Any arrangement will be inconsistent with the charge being a floating charge if the proceeds collected are not available to the company as a source of its cash flow.

53.In my view, in this regard, there is no difference between “book debts” and “shares” as security for a loan.

C3.  Summary on the Fixed Charge/Floating Charge Issue

54.In the present case, under the T&C, Huatai always had positive legal control over the shares in the Margin Account, and Huatai always had control over the sale proceeds when shares were sold, and applied the proceeds for its own benefit.  The Huatai Share Charge cannot be distinguished from the fixed charge over books debts envisaged in Agnew.  Accordingly, I hold that the Huatai Share Charge has priority over the P Charging Order.

55.I make an order in terms of paragraph 2 of the Summons, namely, the Sum paid by Huatai into court pursuant to its undertaking given to the court on 16 December 2022 be paid out to Huatai.

D.   IMPLIED UNDERTAKING

56.An applicant who obtains an injunction is subject to an implied undertaking to compensate the respondent for any loss caused by the injunction: W v H (Family Division: without notice orders) [2001] 1 All ER 300 at 318j-319g.

57.Huatai relies on DSA Investment Inc v Optima Worldwide Group Plc [2020] EWHC 2770 (Ch), where the court held that the same undertaking applies to an interim charging order.  In DSA at §60, Deputy Master Linwood gave 5 reasons for finding such an undertaking:

“i) its very nature is an enforceable order of this court which prevents the free dealing and/or access in property which could cause loss and damage to persons, not limited to the owner of the asset;

ii) it would be wrong to give an applicant in the position of DSA a commercial advantage or interest at no risk to itself when it may turn out not to be entitled to such relief;

iii) the interests of justice are served by timely and effective remedies for those who would otherwise not be able to secure or detain such assets but

iv) the corollary is that responsibility for interference in the property rights of others means the applicant must be ready, willing and able to compensate those who may suffer loss and damage in the exercise of such remedies;

v) to do otherwise could result in injustice to those who comply with such orders which cannot be right.”

58.The plaintiff submits that Huatai’s contention is misconceived.

59.First, it is right to point out that “no authority on this point was put to” the Deputy Master in DSA: see §60.

60.Second, Deputy Master Linwood was considering “an order the same or similar in effect to that at [3]”, which the Master regarded as “in the nature of an interim injunction”: see DSA §60.  As recorded in §58 thereof:

“The Final Charging Order in [3] of the 3^rd April Order is an order of this Court that GPP … must ‘…retain custody of the Shares … while they stand charged or until the Court orders otherwise.’ In simple terms, the order was directed at GPP as at the time the order was made it held the shares and so it was on the face of the Order injuncted from transferring the shares.” (Emphasis added)

61.Therefore, Deputy Master Linwood was dealing with a charging order the express terms of which prohibit the transfer or dealing with those shares.  In those circumstances, it is only natural that the court finds it akin to an interim injunction.

62.The same cannot be said of P Charging Order nisi.  There is no such express prohibition therein.  It is therefore not akin to an interim injunction.  I agree with the plaintiff that no implied undertaking could arise.

63.Mr Victor Dawes, SC, counsel for Huatai, sensibly accepts that if no implied undertaking as to damages can arise, that will be the end of story as far as this part of Huatai’s application under the Summons is concerned.

64.Accordingly, paragraph 3 of the Summons is dismissed.

E.  COSTS

65.Huatai is only partially successful on the Summons, although in my estimation, paragraph 2 of the Summons took up the larger part of the hearing, as compared with paragraph 3.

66.To reflect the above result, I order that 70% of the costs of and occasioned by paragraphs 2 and 3 of the Summons be paid by the plaintiff to Huatai forthwith, such costs are to be taxed if not agreed with a certificate for 2 counsel.

67.The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

68.Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.

Mr Byron Chiu, instructed by Messrs Eric Chow & Co, for the Plaintiff

Messrs C L Chow & Macksion Chan, for the Defendant, was excused from attending 

Mr Victor Dawes, SC, leading Mr Sik Chee Ching, instructed by Messrs DLA Piper Hong Kong, for the Interested Party