Hip Hing Construction Company Ltd v. Hong Kong Airlines Ltd

HCCT 107/2022

[2024] HKCFI 370

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 107 OF 2022

____________________

____________________

____________________

_______________

J U D G M E N T

_______________

Background

1.The Plaintiff (“HH”) seeks in this action a declaration that the Defendant (“HKA”) holds $56,321,000 as retention money on trust for HH, pursuant to clause 32.5 of the General Conditions of the Standard Form of Building Contract (2005 Private Edition) (“GCC 32.5”), incorporated into the contract made on 22 March 2017 between HH as main contractor and HKA as employer (“Contract”). The Contract is for the construction of the Hong Kong Airlines Aviation Training Center at Chek Lap Kok (“Center”). In the action, HH also seeks orders for accounts to be taken, for HKA’s payment of all sums found due to HH and for transfer to HH all assets found to be held on trust for HH.

2.By a Decision handed down on 29 May 2023 (“Decision”), this Court found that there was a serious question to be tried on HH’s claim, and granted a mandatory injunction pending trial, to compel HKA to pay the sum of $56,321,000 into a separate account, and for HKA to stand possessed of such sum in such account as trustee for HH, in accordance with the trust specified in GCC 32.5 (“Trust”), and for HKA to cause a separate bank account to be opened for that purpose of payment. An injunction was granted at the same time, restraining HKA from applying the trust monies in the separate account otherwise than in accordance with the Trust.

3.GCC 32.5 states as follows:

“The Retention shall be held upon trust by the Employer for the Contractor and for any Nominated Sub-Contractor or Nominated Supplier (without obligation to invest) subject to the rights of the Employer to have recourse to it for payment of any amount which he is entitled to under the Contract or at law or to deduct from it any sum owed to him by the Contractor, provided that the Employer gives notice to the Contractor in accordance with clause 32.1 (6).”

4.A payment equivalent to HK$56,321,000 was subsequently made into an existing bank account of HKA. It was not designated as a trust account, but HKA undertook not to apply the funds in the account until the substantive hearing of the Originating Summons (“OS”) issued in this action, or until further order of the Court.

5.The hearing of the OS took place on 14 August 2023 and judgment was reserved at the conclusion of the hearing.

Issue in dispute

6.There has been no dispute that the sum of $56,321,000 was the retention money withheld by HKA under the Contract and as certified under Interim Payment Certificate No 19 issued by the Architect on 17 December 2018 (“Retention Monies”). It is also not disputed that the Retention Monies had never, prior to the issue of the OS in this action, been paid into any separate bank account of HKA, nor segregated from the rest of HKA’s receipts and funds held.

7.As recorded in the Decision, HKA had defaulted in payment of the sums due for work carried out by HH under the Contract, which Contract had been varied by a Supplemental Agreement made between the parties on 29 November 2018. Under the Supplemental Agreement, all the remaining balance of the Contract sum including the Retention Monies were to be paid within 90 days from the issuance of the occupation permit for the Center. HH had commenced HCA 692 of 2021 and obtained summary judgment for HKA’s payment of $192 million, with leave granted to HKA to defend the balance of HH’s claim for $21 million.

8.It is not disputed that on 4 March 2022, a winding-up petition had been presented against HKA, and in December 2022, a scheme of arrangement (“Scheme”) and restructuring plan (“Plan”) were sanctioned by the Court for HKA. The Scheme and the Plan became effective on their terms on 26 April 2023, and the winding-up petition against HKA was dismissed.

9.The issues addressed by Counsel at the hearing focused on whether there is a trust validly created over the Retention Monies held by HKA, and whether and to what extent segregation of the funds is necessary for the creation of a trust. As summarized by Counsel for HKA, if the Retention Monies are trust assets belonging to HH, HH could take the money for itself, bypass the equal distribution under the Scheme and not share in the general pool of HKA’s assets with other creditors.

10.HKA pointed out that the relevant date for consideration is the time of the Scheme, and the Retention Monies fall outside the statutory compromise if they existed as a trust asset at the time of the Scheme. HH has not contended otherwise. On its case, the Trust came into being under and by virtue of GCC 32.5. Interim Payment Certificate No 19 stated its amount to be $56,321,000, and HH’s own accounting records reflect the Retention Monies held by HKA under the Contract to be $56,321,000.

Applicable legal principles

11.The submissions made by Counsel, and the authorities to which they referred, turn on the disputed question of whether there is certainty of subject matter, and whether the property said to be subject to the alleged Trust can be identified. It is indisputable that for the creation of an express trust, there must be certainty of intention, certainty of subject matter and certainty of object (Lewin on Trust, 20^th ed, para 5-003). According to HKA, there is no identifiable trust property in the absence of segregation or setting aside by HKA of any funds for the purpose of GCC 32.5 or the retention referred to thereunder, and the Trust must fail for lack of certainty of subject matter.

12.Counsel have referred to two lines of conflicting authorities, on the issue of whether segregation or appropriation is a necessary requirement for the existence of a valid trust, without which there can be no certainty of the subject matter. Marked examples of cases in which trusts have failed on the ground that no apportioned fund can be identified for the trust to attach are Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30; Concorde Construction Co Ltd v Colgan Co Ltd (No 1) [1984] HKC 241 (which followed Rayack); MacJordan Construction Ltd v Brookmount Erostin Ltd [1994] CLC 581; Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKLRD 307, and Parkview Qld Pty Ltd v Commonwealth Bank of Australia [2013] NSWCA 422.

13.On behalf of HH, Counsel sought aid from cases such as Hunter v Moss [1993] 1 WLR 934, Re Kayford Ltd [1975] 1 All ER 604, Re Clowes (No 2) [1994] 2 All ER 316, Re CA Pacific Finance Ltd [1999] 2 HKLRD 1, Re Hsin Chong Construction Co Ltd [2021] 5 HKLRD 212, Re Gatecoin Ltd [2023] 2 HKLRD 1079 and Re Harvard Securities Ltd (in liq), Holland v Newbury [1998] BCC 567, to argue that whilst segregation is normally an indicator of the creation of a trust, the absence of segregation is not fatal as there may be other indicators of a trust.

14.At the end of the day, and having considered all the authorities cited, my conclusion is that each case must be decided on its particular facts, taking into account the nature of the asset which is claimed to be the subject matter of the trust, and whether and how it can be identified with certainty. Segregation is one but not the only relevant factor. As Cheung JA highlighted in Re Hsin Chong, “context is everything in a case”. Considered in their proper context, most if not all of the cases cited may be reconciled to some extent.

15.HH places reliance on the judgment of Yuen J (as Her Ladyship then was) in Re CA Pacific Finance Ltd [1999] 2 HKLRD 1, where she pointed out the important distinction between tangible and intangible assets in the consideration of certainty of subject matter. CA Pacific of course concerned shares purchased by an insolvent securities dealer for its clients, which were deposited into CCASS, and registered in the name of HKSCC or its nominees, rather than the clients. The question before the Court was whether the client acquired a beneficial interest in the securities purchased, and if CCASS brokers held the securities on trust for their clients, whether there was certainty of subject matter.

16.The Court held, firstly, that the client’s proprietary interest in the securities arose from the fact that those securities had been acquired with the client’s funds and on his instructions by the broker. It was also held that despite the fact that there had been no appropriation of securities to each client, there was certainty of subject matter. The Court explained that regard must be had to what the subject matter is before one can decide whether there is sufficient certainty, explaining:

“For certain types of goods, such as wheat in Re Wait [1927] 1 Ch 606, wine in Re London Wine Company (Shippers) Ltd [1986] PCC 121 and bullion in Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74, segregation or appropriation is the means of identifying the goods which have been made the subject matter of the trust. But in my view, it does not follow that segregation or appropriation is necessary for all things.

What is required is not segregation for the sake of segregation. What is required is certainty of the property over which it is intended there should be a disposal of the beneficial interest. What is necessary is the means of identifying or distinguishing the subject matter of the trust.

How one identifies or distinguishes things must depend on the nature of the thing. For tangible goods, that is done by segregating one parcel from the rest of a bulk. Each parcel has its own characteristics and would be subject to its own risks (e.g. corking of the wine in Re London Wine Company (Shippers) Ltd [1986] PCC 121). But for intangible things such as fungible shares ranking pari passu - which enjoy exactly the same rights, which have no separate characteristics and no inherent risks (as HKSCC takes responsibility for replacing any defective securities in CCASS: CCASS r. 815) - it is difficult to see why segregation is necessary, so long as one knows the quantity of the shares which are to form the subject matter of the trust.” (Emphases added)

17.In CA Pacific, there were no numbered certificates issued, and no earmarking of the relevant scrip by number or otherwise. However, it was highlighted in the judgment that the securities are treated under the CCASS rules as fungibles, ie interchangeable units for the purposes of transfer or delivery. There are strict recording requirements at each level of the system to show what securities are held for whom, all transactions for sale and purchase through CCASS are recorded in detail, and the quantities of each type of securities held for the account of each client is recorded by the broker. This is in contrast to the case of tangible assets, which are inherently physically separate and sold distinguishable from the other.

18.Having considered the nature of the securities and the manner in which they were recorded and dealt with, the Court concluded in CA Pacific that there was certainty of the subject matter, as there was no problem in identifying the mass of the fungible shares to be held on trust. There was no mingling of the assets of the broker with the assets of the clients for whom the securities were purchased. The fact that the securities of the clients were mixed did not render it difficult for a client’s assets to be identified from another client’s by virtue of the records maintained.

19.On behalf of HH, Counsel highlighted the fact that like shares, money is by its nature fungible.

20.Re Kayford Ltd concerned tangible goods which a company had ordered for its customers which had paid for the goods. Facing financial difficulties, the company was advised to open a separate bank account to be called “Customers’ Trust Deposit Account”, into which all further sums of money sent by customers for goods not yet delivered should be paid, so that if the company should be forced into liquidation, those sums could be refunded to the customers. The company used a dormant deposit account in the company’s own name for the purpose, instead of opening a new account, but added the words “Customer Trust Deposit account” to the name. The Court held in such circumstances that all the requisites of a valid trust were present, the subject matter to be held on trust was clear, and the company had manifested a clear intention to create a trust. In his judgment, Megarry J explained:

“Payment into a separate bank account is a useful (though by no means conclusive) indication of an intention to create a trust, but of course there is nothing to prevent the company from binding itself by a trust even if there are no effective banking arrangements.” (Emphasis added)

On the facts, there was clearly an intention demonstrated by conduct to create a trust account, and the money paid by the clients into the designated account could clearly be identified, apart from any other money of the company.

21.Rayack Construction Ltd v Lampeter Meat Co Ltd concerned a construction contract, the conditions of which provide for the issue of interim certificates by the architect, and retention by the employer of a proportion of the sum due to the contractor. Clause 30(4) of the contract provides:

“The amounts retained by virtue of sub-clause (3) of this Condition shall be subject to the following rules:

(a) the Employer’s interest in any amounts so retained shall be fiduciary as trustee for the Contractor (but without obligation to invest) and the Contractor’s beneficial interest therein shall be subject only to the right of the Employer to have recourse thereto from time to time for payment of any amount which he is entitled under the provisions of this Contract to deduct from any sums due or to become due to the Contractor.”

22.The Court held in Rayack that clause 30(4) imposes an obligation on an employer to appropriate and set aside as a separate trust fund a sum equal to that part of the sum certified in the interim certificate as due in respect of work completed which the employer is entitled to retain. It was further held that the predicated “beneficial interest of the contractor”, as referred to in clause 30(4), could only subsist in a fund so appropriated and set aside.

23.The Court in Rayack granted an interlocutory order until trial to enforce the obligation of the employer to pay a sum equal to the certified amount of retention into a separate bank account. The purpose of clause 30(4) was also explained in the judgment, as being for the protection of both the employer and the contractor against the risk of insolvency of the other. In the case itself, no insolvency was involved.

24.In Hunter v Moss, the Court found that a declaration of trust orally made in respect of 5% of the issued share capital of a company was sufficiently certain as to subject matter. In that case, the defendant was the registered holder of 950 shares in a company. The trial judge found as a fact that in the course of a conversation between the plaintiff and the defendant, the defendant had made it clear to the plaintiff that he would hold 5% of the issued shares of the specified company for the plaintiff and would account to him for all the dividends. The Court rejected the argument that there was no certainty in the subject matter as it could not be identified which particular shares in the defendant’s entire holding the plaintiff was beneficially interested in. The Court again made the distinction between tangible and intangible assets, an example of the latter being a trust of a specific sum of money forming part of a larger credit balance in a particular bank account. Counsel for HH relies on the observation made by the trial judge (at p 945G of the reported judgment), when he explained:

“So approaching the matter, I accept of course that the trust which the defendant purported to declare had to satisfy the ‘three certainties,’ including certainty as to its subject matter. However, it appears to me that the question of whether in any particular case there is such certainty depends, or ought to depend, not on the application of any immutable principle based on the requirements of a need for segregation or appropriation, but rather on whether, immediately after the purported declaration of trust, the court could, if asked, make an order for the execution of the purported trust. ln any particular case it could and will only do so if, inter alia, the subject matter of the trust is identified with sufficient certainty.”

25.The learned judge went on to explain what he regarded to be the irrelevance of identification, in a case of money being held:

“If A has two bank accounts, each with a credit balance of £1,000, Mr. Hartman accepts that a declaration of trust with regard to the entire balance standing to the credit of one such account is valid. Further, if immediately after making the declaration of trust the trustee were to transfer the trust money to his other account, the court would have no difficulty in recognising that the trust money could be traced into the latter account and in making all necessary orders for the execution of the trust. If, however, A has only one account with a credit balance of £2,000, Mr. Hartman submits that a purported declaration of trust in respect of £1,000 standing to the credit of such account will only be valid if and when such sum is first withdrawn from the account and identified as a distinct fund and that the court would be impotent to enforce the purported trust before that had happened.

As to the latter example, 1 can see no reason in principle why this should be so. If, immediately after such a purported declaration of trust, and before the £1,000 had been segregated in any way, the intended beneficiary were to apply to the court for an order for the execution of the trust, what difficulty could there be in the way of the court simply making an order for the payment of £1,000 to the beneficiary? Questions of uncertainty just would not arise. The trustee did not either need or intend to identify any particular element of his credit balance as being intended to answer the trust because it would have been both irrelevant and impossible to identify any part of the credit balance in the bank account as representing the particular £1,000 which he had in mind. Put simply, his intention was to hold £1,000 of his money in a particular bank account on trust for the beneficiary. What does it matter, either to him or the beneficiary, which £1,000? What is there about the trust which is in any degree uncertain?” (Emphasis added)

26.The decision in Hunter v Moss has been the subject of some criticism and has sparked interesting academic debate, but the case itself concerned a trust of one and the same class of shares, in one company. Hence, the Court explained that as all 950 of the defendant’s shares carried identical rights, it did not matter which particular 50 shares were to be regarded as held for the plaintiff. It was pointed out that the shares were of such a nature that each of them could satisfy the trust just as well as any other of them, and the mere fact that they formed part of a larger holding belonging to the defendant beneficially did not create any obstacle. The trial judge concluded that any suggested uncertainty as to subject matter in the case appeared to him to be theoretical and conceptual, rather than real and practical.

27.On appeal, Dillon LJ held that there was no basis to reject the trial judge’s finding that there was a clear declaration of trust which was intended to have immediate effect, and agreed that there was no uncertainty of subject matter, when the trust is solely about the shares of one class in the one company. The cases on the need for segregation and appropriation were considered to relate only to chattels.

28.Hunter v Moss is a decision on which HH places much reliance, in arguing that there can be a valid trust with certain subject matter, when HH claims that HKA holds $56,321,000 of all the monies in its accounts on trust for HH.

29.Counsel for HH further argued that Re Gatecoin Ltd also supports HH’s argument, in line with CA Pacific and the principles enunciated in Hunter v Moss, that certainty of subject matter can be satisfied for fungible and interchangeable property such as shares, money and, in the modern age, cryptocurrency, so long as the mass is sufficiently identified and the beneficiary’s proportionate share of it is not uncertain. Re Gatecoin concerned cryptocurrencies held on trust for customers of a company operating a cryptocurrency exchange platform which was wound up, and the issue was whether there was certainty of intention and certainty of subject matter when cryptocurrency acquired for purchasers would be mixed. It was held that the subject matter is sufficiently certain since each unit of cryptocurrency is identical to other units, it made no difference which particular unit is held for a particular customer, but the internal ledgers clearly recorded the contributions of each account holder, and the proportionate share of the undivided bulk to which each account holder was entitled could be identified with certainty. Linda Chan J referred to Re Lehman Brothers International (Europe) (In Administration) [2010] EWHC2914 (Ch), to explain that such a trust works by creating a beneficial co-ownership share in the identified fund. That was also the analysis advocated in Professor Roy Goode’s article “Are Intangible Assets Fungible?” [2003] LMCLQ 379.

30.The Court in Re Gatecoin Ltd held, however, that on the facts of the case, there was no express declaration of trust, the terms and conditions of the relevant agreement with the customers expressly disclaimed any fiduciary relationship, and the parties’ conduct was inconsistent with the existence of a trust. Amongst the matters taken into consideration by the Court was the fact that the cryptocurrencies deposited by the customers were not segregated, and the company was permitted to use the currencies for its own purposes.

31.In Mac-Jordan Construction Ltd v Brookmount Erostin Ltd (in receivership), a building contract between a developer and the plaintiff provided for interim payments to be made and for the developer to retain, as retention money, 3% of the amount due as interim payments. The contract contained the same clause 30 in Rayack which provided that the developer’s interests in the retention monies was fiduciary, as a trustee for the plaintiff. No fund was ever appropriated or set aside in respect of the retention monies, and there was a dispute as to whether the retention monies were held on trust for the plaintiff, when the developer became insolvent.

32.Following Rayack, Scott LJ held that clause 30(4) imposed a contractual obligation on the developer to appropriate and set aside a separate trust fund, and that in the absence of the appropriation of such a fund, there were no identifiable assets which had been subjected to the trust. In his judgment, Scott LJ referred to Re Jartay Developments Ltd (1983) 22 BLR 134, where Nourse J had observed:

“It is clear both in principle and on authority that Clause 30(4)(a) of the RIBA conditions imposed an obligation on Jartay to appropriate and set aside the £23,090 retentions as a separate trust fund, and that if RPW had made an application before Jartay went into liquidation the court would have made a mandatory order to that effect (see Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30). However, it is equally clear in principle that that relief ceased to be available to RPW on the commencement of the liquidation. Accordingly, there being no evidence of any part of the retentions were appropriated or set aside before the liquidation commenced, RPW cannot now claim to be treated as if it had.” (Emphasis added)

33.The Court in MacJordan emphasized that the developer’s implied obligation under clause 30(4) is no more than an obligation to pay money, and that where the employer is insolvent and the position is being considered as between the contractor and other creditors of the insolvent employer, there is no reason for treating the employer as having set aside the retention fund when it has not in fact done so, and no reason for treating the contractor as other than an unsecured creditor. Scott LJ also observed that if an application for a mandatory order is made when the employer is insolvent, such order would give preference to the contractor as against other unsecured creditors, and there is no reason why the court should do such a thing.

34.This is the reason advanced by Counsel for HKA for the Court not to accede to HH’s application, since winding up proceedings had been commenced against HKA, and the Scheme and Plan were approved by the Court under or as part of the winding up regime. It was argued for HKA that there is no good reason why the Court should permit HH to bypass the equal distribution under the Scheme as sanctioned by the Court, when no fund had ever been set aside as the Retention Monies.

35.In R v Clowes (No 2), the Barlow Clowes group of companies (“BC group”) marketed investment schemes, and issued brochures which contained terms of the investments they made for clients. The brochures stated that investors’ cheques were to be made payable to the BC group’s international clients account, that all monies received are held in a designated clients account, and that the clients are the beneficial owners of all securities purchased on their behalf. All investors’ money was mingled together in deposit accounts, and large sums were withdrawn therefrom for the group’s unauthorized use. On the disputed issue of whether the relationship between the BC group and each investor was one of trustee and beneficiary, or of creditor and debtor, the Court held that construing the brochures and the terms of the portfolio investments as a whole, the BC group had received funds from investors on trust to invest them in particular stocks, and the BC group was not authorized to treat investors’ funds as his own. The brochures and their express terms constituted the BC group a trustee for investors, notwithstanding that all the investors’ monies were mingled together after they were paid into “clients accounts”, and individual investors’ payments were not kept segregated. On the question of whether there was a need for segregation, Watkins LJ explained:

“As to segregation of funds, the effect of the authorities seems to be that the requirement to keep monies separate is normally an indicator that they are impressed with a trust, and that the absence of such a requirement, if there are no other indicators of a trust, normally negatives it. The fact that a transaction contemplates the mingling of funds is, therefore, not necessarily fatal to a trust.” (Emphasis added)

His Lordship went on to explain that the essential question is “to determine, in all the circumstances of the transaction in question, not just the express arrangements as to how the money is to be held, but whether it is held on trust”. Even if there was no segregation, there may be other indicators which can support the existence of a trust.

36.Yew Sang Hong Ltd v Housing Authority was a more peculiar case in which the subcontractor took action against the employer to seek restitution of the amounts due to it from the main contractor which had become insolvent. This was notwithstanding the fact that there was no privity of contract between the subcontractor as plaintiff and the employer as defendant in the action. The employer was successful in striking out the subcontractor’s claim, for disclosing no reasonable cause of action, and the striking out was maintained on appeal.

37.Primarily, the Court of Appeal held that the law of restitution, which was the subcontractor’s cause of action, will not normally cut across long‑established statutory regimes regulating creditors’ rights against insolvent debtors, and the pari passu principle whereby unsecured creditors share rateably in the assets of an insolvent debtor. The Court considered that to allow a creditor a restitutionary claim in the interests of doing justice in a specific case would only lead to that creditor jumping the queue of unsecured creditors, and so bring about injustice in everyone else’s case.

38.The Court also rejected the claim made by the subcontractor, that the retention money in the hands of the employer which related to the subcontractor’s works was subject to a Quistclose trust in favor of the subcontractor. Reyes J considered that firstly, a specific fund could not be identified in the hands of the employer which can be subject to the trust, since it was not clear that there was any specific fund earmarked as retention monies in the hands of the employer. Secondly, there was no clause in either the main contract or subcontract which expressly subjects retention monies in respect of the subcontractor’s work to a trust, or which makes the employer a fiduciary of any retention monies. On this point, Reyes J observed that general condition 83, which allows the employer to set-off from the retention monies all the employer’s damages, costs, or sums due to it in respect of the works of the main contractor or subcontractor, implies that there is no trust in favor of the subcontractor.

39.In Hong Kong, we also have the decision of the Court of Appeal in Re Hsin Chong Construction Co, which is of course binding on this court. In Hsin Chong, Cheung JA in fact considered the authorities on segregation and on the employer’s right of set off. The decisions in Re Tout and Finch Ltd [1954] 1 All ER 127 and in Yew Sang Hong, and the view held by Yuen JA and Reyes J on the contractor’s right to make deductions from the retention money were considered and analyzed.

40.In Re Tout, the English court had considered the provision for set-off contained in clause 11(h) of the building contract, and its effect on the provision for a trust of retention money. Clause 11(h) provides as follows:

“If and to the extent that the amount retained by the employer in accordance with the main contract includes any retention money the contractor’s interest in such money is fiduciary as trustee for the sub-contractor and if the contractor attempts or purports to mortgage or otherwise charge such interest or his interest in the whole of the amount retained as aforesaid (otherwise than by floating charge if the contractor is a limited company), the contractor shall thereupon immediately set aside and become a trustee for the sub-contractor of a sum equivalent to the retention money and shall pay the same to the sub-contractor on demand; provided that upon payment of the same to the sub‑contractor the amount due to the sub-contractor upon final payment under this sub-contract shall be reduced accordingly by the amount so paid.”

41.The English Court’s finding on clause 11(h) was as follows:

“Bearing in mind that definition of retention money, I turn to cl. 11(h). On the face of it there are clear words used which are apt to create a trust which will operate by way of an equitable assignment of assets described as the contractor’s interest in the retention money. It is said, first, that on a true construction of the document, which, of course, must be read as a whole, there is no trust, and nothing more than a running account. In support of that argument there is prayed in aid, for instance, cl. 13 of the sub‑contract, which provides that the contractor shall be entitled to make certain deductions or set off from any sums, including any retention money, which he may be liable to pay to the sub‑contractor. But such a clause as that appears to me not to affect the matter one way or another. It cannot, in the least, be decisive, because it appears to me to be a perfectly normal and sensible provision to make, namely, that, against what the [main contractor] may owe to the [sub‑contractors] as trustee, the [main contractor] may set off moneys which may be owing by the [sub‑contractors] to the [main contractor]. ... (Emphasis added)”

42.At paras 35 and 36 of his judgment in Hsin Chong, Cheung JA explained that as GCC 32.5 expressly provides for a trust, some meaning must be given to these words and clear expression. He did not accept that the right of deduction from the retention monies had any effect on the trust to render it uncertain, and explained the matter as follows:

“In our view, the proper reconciliation is, as proffered by Re Tout & Finch Ltd, that the provision for deduction does not affect the trust and the two co-exist side by side. The issue of certainty of subject matter of a trust as argued by Ms Eu simply does not arise. ... In our view, Re Tout & Finch Ltd remains to be the authority in this area where the contract provides for the trust. Read properly in its context, the judgment of Reyes J on set-off is not intended to abrogate the existence of the trust which is expressly provided for in a contract.” (Emphasis added)

43.In considering the question of segregation, Cheung, JA recognized the line of authorities which require the monies to be kept separate and to be kept from the free disposal of the recipient, in order for such monies to be impressed with a trust (as recognized in Underhill & Hayton: Law of Trust and Trustees (19^th edition) at para 8.7, Rayack, and MacJordan). However, at paragraph 57 of his judgment, Cheung JA pointed out that the question must be considered in context, and on the facts of Hsin Chong, His Lordship explained that the employer in the case had a “stringent” project accounting system, and the retention money could be easily ascertained. He referred to the evidence on how payment was made by the employer, how the retention money had been set aside in the payable account since the commencement of the project, how the retention money was maintained throughout, and that the retention money of each nominated subcontractor can be identified clearly any time. The conclusion on the evidence was that there was no question of the money of the nominated subcontractors being mixed with money of the contractor, or of the employer. In my judgment, that was the important feature leading to the decision, whereby the retention monies were ordered to be released to the respective nominated subcontractors, notwithstanding the winding-up of the contractor.

44.What could be gathered from the cases in which certainty of the subject matter was upheld by the Court is that there had been clear identification of the property, which was not mixed with property of the alleged trustee (as in the cases of CA Pacific, Re Kayford, and Hsin Chong). In CA Pacific, there was no problem in identifying the mass of the fungible shares to be held on trust, and there were means of identifying and distinguishing the subject matter of the trust. In Kayford, the money was put into a designated “customer trust account”. In Clowes, the money of the investors had been paid into designated clients accounts, before they were withdrawn without authority. In Re Gatecoin, “the proportionate share of the undivided bulk” to which each account holder was entitled could be identified with certainty. By contrast, in MacJordan, there was “at best, merely a general bank account” (as noted in Hunter v Moss), as no fund had ever been appropriated as or for retention money in either MacJordan and Parkview. In Yew Sang Hong, it was “far from clear” that any specific fund had been earmarked as retention.

45.In SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd [2019] 3 MLJ 282, the Federal Court of Malaysia overturned the Court of Appeal’s decision in Qimonda Malaysia Sdn Bhd v Sediabena Sdn Bhd & Anor [2012] 3 MLJ 422 (which was relied upon by HH and referred to in Hsin Chong). In the judgment, the Chief Justice considered that there were no facts to support the finding that there was a trust in existence in respect of the retention monies, which had not been set aside in a separate fund. The essential findings were that: (1) there was no express provision in the contract which specifically required the retention sums to be held on trust with the employer as the fiduciary; (2) there was no clause in the contract mandating that the retention monies were to be kept separate from the assets of the respondent, and the contract in question did not prohibit the mixing of the monies of the respondent with the retention monies; (3) there was no evidence of any clear intention or of strong conduct from the parties which indicated that the retention monies should be afforded the status of trust monies.

Any valid trust?

46.It is of course indisputable that a clear intention to create a trust, and the existence of a certain and identifiable subject matter of the trust, are both important. As the Court pointed out in Re Clowes, whilst segregation is normally an indicator of a trust, the mingling of funds is not fatal, and the Court should look at all the circumstances as there may be other indicators of the trust. Even if there was intention to create a trust, the trust intended must be valid in that the subject matter and the object must be sufficiently certain in the Court’s eyes.

47.As Cheung JA highlighted in Hsin Chong, the language of GCC 32.5 makes clear provision for a trust, and some meaning must be given to these words. The clause expressly provides that the Retention Monies “shall be held upon trust” by HKA for HH. In my judgment, it is clear manifestation of the parties’ intention to create a trust over the Retention Monies. It is different in language to that used in clause 30(4) considered in Rayack and MacJordan. With respect, I cannot agree that GCC 32.5 confers simply a contractual right to require HKA to establish a trust, or to set aside funds to be held on trust.

48.The second consideration then is the subject matter of the trust which was intended. Before a valid trust can come into existence, there must be certainty of the subject matter. As CA Pacific made it clear, the nature of the property must be considered. In this case, the intended subject matter is the sum of money certified as payable to the contractor, HH, and which are to be and were withheld by HKA. They are fungible, and at the substantive hearing of the OS, Counsel for HH could only identity them as all the money in any and all bank accounts of HKA. There was no other evidence to which the Court was referred, to show that the Retention Monies can be specified with more particularity, as to where the money was held, whether in one specific bank account, or several bank accounts named. As Counsel for HKA highlighted, a monetary amount of HKA’s general funds is all that has been identified, and Counsel submitted that this cannot be any certain or identifiable subject matter to be impressed with the trust.

49.In Re Lehman Brothers International (Europe) (In Administration) [2010] EWHC 2914, the Court analyzed the authorities including Hunter v Moss, MacJordan and CA Pacific, and set out (at paragraph 225 of the judgment) a summary of the relevant legal principles on the certainty of fungible assets such as shares and securities, and choses in action therein. Hunter v Moss and CA Pacific were cited as authorities for the principle that a trust of part of a fungible mass without the appropriation of any specific part of the mass for the beneficiary does not fail for uncertainty of subject matter, provided that the mass itself is sufficiently identified and provided also that the beneficiary’s proportionate share of it is not itself uncertain. The Court referred to Tailby v Official Receiver (1888) 13 App Cas 523, in support of the principle that a trust does not fail for want of certainty merely because its subject matter is at present uncertain, if the terms of the trust are sufficient to identify its subject matter in the future. In Re Lehman, the securities in question were essentially represented by a credit in the entity’s account with a clearinghouse or depository, described as “an unsegregated house depot account”, and the entity was free to use the fungibles for lending to outsiders, without any obligation to keep the fungibles whole and intact.

50.On behalf of HH, Counsel referred to the part of the judgment in Re Lehman, which highlighted the parties’ intentions to create a trust, over any alleged uncertainty as to the terms of the holding of the subject matter (which may inevitably lead to uncertainty as to the beneficial subject matter). At paragraph 245, Briggs J observed:

“The law does not lightly allow contracting parties’ purposes and intentions to be defeated by supposed uncertainty, and there is in my judgment no reason why the law should do so any more readily than normal merely because the issue is as to the validity of an intended trust. On the contrary, the law commonly recognises the creation of a trust as a necessary consequence of an intention that parties should share property beneficially, in circumstances where the parties themselves have given no thought at all to the terms of the consequential trust, if indeed they even recognised its existence. In all such cases the law fills the consequential gaps by implication, and by importation of generally applicable principles.”

51.The facts in Hunter v Moss were simple. The declaration of trust was made in respect of 5% of the issued share capital of the company which had an issued share capital of 1000 shares, of which the defendant was registered as the holder of 950 shares. The subject matter of the trust could easily be identified as the issued share capital of the company, the proportion was likewise clearly identified as 5%, and as it made no difference which 5% of the same shares should be the ones beneficially owned by the plaintiff, it was not necessary to further identify any particular part of the shareholding as being subject to the trust.

52.Re Harvard Securities likewise concerned shares purchased by a dealer for its customers, and registered in the name of its own nominees. In documents issued to the customers, it was stated that individual parcels of shares had been bought by order of the clients and on their behalf. The Court followed Hunter v Moss and held that it was possible to create a trust of a particular number of unidentified shares of a particular class in a particular company, and that the customers held the beneficial interests in those shares upon the insolvency of the dealer. The cases of Re Wait (on unappropriated wheat), Re London Wine Co (unappropriated wine), Re Goldcorp (unascertained bullion) were all distinguished by Neuberger J (as he then was) as instances of appropriation of chattels, and of “an unascertained part of a mass of goods”, to be contrasted with shares.

53.The Retention Monies in this case are said to be the identified part of a larger but identified mass, comprising (according to HH) all the money in all the bank accounts of HKA. As in Re Lehman, HKA was in theory free to use the money in its bank accounts for its own purposes and for any expenditure, unrelated to the construction of the Center, the project or the Contract. The submission made for HKA is that a monetary amount of an entity’s general funds cannot possibly be certain in subject matter. I do not accept that such submission must be right. On the analysis of the authorities, it depends on whether the “mass” or so-called “general funds” can be identified or identifiable, with sufficient certainty.

54.Hunter v Moss and Re Harvard Securities have been rationalized and explained by academics such as Professor Roy Goode and Sarah Worthington as trusts relating to a co-ownership right in a single asset, or one identifiable bulk of fungibles, such that there is no objection on the ground of lack of identification. In Re Lehman, the Court considered that there is no objection that a fund is beneficially shared with the trustee (as shown in Hunter v Moss and in White v Shortfall [2006] NSW SC 1379).

55.It will be claimed that certainty of subject matter is necessary in order to clearly define the obligations of the trustee. Breach of trust is a serious matter and the consequences are onerous so that a trustee must know whether it is in breach by dealing with assets which are impressed with a trust, and further, the Court must be able also to execute or enforce the trust. However, as Counsel for HH has argued, and as also highlighted in the article from S Worthington: “Sorting out ownership interests in a bulk: gifts, sales and trusts” [1999] JBL 1, legal assumptions can be applied, and traditional trust principles provide ready and acceptable solutions to any problems which may first appear as uncertain. A ready example is that, for any withdrawal from the trustee’s bank account, the trustee will be presumed to have first withdrawn its own money which is not subject to the trust, and to hold the balance on trust (Re Hallett’s Estates (1880) 13 Ch D 696). The same analysis was adopted in White v Short, when the Court considered the question of whether there would be difficulties in identifying whose shares had been sold, if a trustee sold some of the shares which he held without having appropriated the part of his shareholding which he had declared to be holding on trust for the plaintiff. As Counsel for HH pointed out, the mixing of money is simply not a bar to the existence of a valid trust.

56.In Hunter v Moss, (as summarized at paragraph 25 above) the Court at first instance analyzed the question of whether there can be uncertainty when money held on trust is not precisely identified by reference to its source or location. The judge concluded that it was not necessary for the trustee to identify any element of the credit balance in his bank account as being intended to answer the trust. If it makes no difference which £1,000 of the trustee’s money in a particular bank account is intended for the beneficiary, does it make any difference which £1,000 of his money, from whichever account or account he has, was intended to be held on trust?

57.Having carefully considered the matter, I have come to the conclusion that the absence of segregation by itself does not mean that there can be no trust intended, or that the subject matter of the trust must be uncertain. The facts of the case and evidence available as to the mass have to be considered.

58.In the present case, GCC 32.5 expressly states that HKA was to hold the percentage of the certified sum payable to HH as Retention Monies on trust for HH. The purported trust is over a part (ie the specified percentage) of the bulk of the money or funds of HKA. Money is interchangeable, and physically indistinguishable, from each other, and hence fungible. In his article “Are Intangible Assets Fungible?” [2003] LMCLQ 379, Professor Goode advocated that the focus of deciding whether units are fungible should be on legal obligation and entitlement, rather than physical features of the units, as fungibility presupposes that performance is to be rendered or procured by selection and segregation from an indeterminate source or from a larger, identified collection or bulk, each unit within the collection and each part of the bulk being legally the equivalent of any other unit or part. The obligation is to deliver or transfer, not an identified asset, but anything which corresponds to the contract description. On Goode’s analysis, an interest in a particular issue of shares, a particular debt or a particular managed fund which is not divisible by transfer into separate units capable in law of being separately owned is simply a co-ownership right in a single asset, and a declaration of trust relating to it is not vulnerable for want of identification.

59.It is helpful that Goode’s analysis included debts, as he pointed out (at page 385 of the article):

“A single debt is indivisible in the sense that it cannot be assigned in part except by conferring co-ownership. Thus there can be no objection, on the ground of lack of identification, to the assignment of £100 forming part of a bank deposit of £500. There is only one asset, which following the assignment is in the co-ownership of the assignor and the assignee. It is not possible for an assignee to acquire part of the deposit without becoming co-owner of the entire deposit. In terms of identifiability, the distinction between an assignment of a £100 part of a £500 deposit and an assignment of a 20% interest in the deposit is a distinction without a difference. So a single debt is not capable of division into separate parts subject to different ownership. But where there are different debts, whether due from the same debtor or from different debtors, each debt is capable of separate ownership and, as with securities, it is open to the parties to agree to treat the separate debts as fungibles so that any one debt, if to the requisite value, may be assigned in performance of the obligation and treated as interchangeable with any other debt.”

60.On Professor Goode’s analysis, if there are separate debts, it may be difficult to contend co-ownership in the absence of the parties’ express agreement to treat them as fungibles. Money in a bank account is of course a particular type of debt.

61.It seems clear from the authorities (such as Hunter v Moss, Rayack and MacJordan) and from the analyses made by academics on co-ownership interests that it is important to identify the relevant bulk. If there is no identified bulk, or the property is completely unspecified, problems as to uncertainty may arise. In her article, Worthington referred to MacJordan and Re Goldcorp and pointed out that if the transferor is free to choose to select the relevant property from any source, then the transferee cannot possibly acquire an ownership interest in any particular bulk, as the situation is simply one of an intended transfer of property which is completely unidentified until the transferor makes the necessary choice and until such identification, it is impossible for the transferee to obtain a property interest.

62.It is pertinent that in Hsin Chong, the Court was satisfied on the evidence that there was an identified or identifiable source for the retention moneys, in that the accounts where the monies were kept could be clearly ascertained. It was on that basis that this Court considered in May 2023 that there was a serious question to be tried, and for the evidence to be reviewed at the substantive hearing as to whether the Retention Monies could be clearly identified.

63.It is not disputed that HKA had not at any time paid any Retention Monies into any specific account which can be identified. At the substantive hearing, all that could be argued for HKA was that the trust was in respect of all and any of the bank accounts of HKA where its funds were kept. I have not been referred to any evidence to show whether HKA held one, or more, bank accounts, and which accounts these were, from which at least payment of the Contract sum due to HH had been made, or which can be argued to be related to the source of the Retention Monies. If there had been one, or even more than one but specified bank accounts from which the Interim Payments had been made to HH, it might be argued that the Retention Monies should have been withheld from the funds in these accounts, and form the bulk to be co-owned with HH.

64.The argument is simply that HKA holds $56,321,000 of its money and funds, on trust for HH. Adopting the co-ownership argument, this means effectively that HKA holds all its money and funds as co-owner with HH. On the argument that it should make no difference from which source or account HKA should allocate the Retention Monies to HH, this may be extended to mean that HKA may, at different times, even allocate particular assets such as its receivables or other debts, of a value equivalent to the Retention Monies, to the trust. In my judgment, this renders the subject matter of the purported trust too vague and uncertain, and it will be difficult if not impossible for the Court, at the beneficiary’s request, to enforce or regulate the trust, by tracing or otherwise.

65.In summary, I have to conclude that for lack of a sufficiently identifiable bulk of which the trust money is said to form part, the Trust fails for lack of certainty of subject matter.

66.Bearing in mind that the intended purpose of GCC 32.5 is to protect contractors against the insolvency of the employer, it is unfortunate that the contractor in this case has been deprived of the intended protection as a result of the employer’s breach and failure to put the intended trust property into a segregated account. Contractors can only be advised to be vigilant in safeguarding their rights and to apply to the Court at an early stage of the project, to ensure that the trust property is preserved and protected, rather than to wait at its own risk in the event that the employer becomes insolvent or the trust property is otherwise dissipated.

Disposition

67.My finding is that at the material time of the Scheme, there was no valid trust of the Retention Monies. They form part of HKA’s general assets, to be dealt with in accordance with the terms of the Scheme.

68.The application made by HH is dismissed. The order nisi is that the costs of the action (including any costs reserved) are to be paid by HH, with certificate for two Counsel. Unless application for variation is made within 14 days, the order nisi shall become absolute.

Mr Jonathan Chang SC and Mr Eugene Kwan, instructed by Norton Rose Fulbright Hong Kong, for the plaintiff

Mr Laurence Li SC and Mr Look-Chan HO, instructed by Latham & Watkins LLP, for the defendant