Herbert Smith Freehills v Chris Au

 Herbert Smith Freehills v Chris Au
[2018] 5 HKLRD 207
Court of First Instance
High Court Action No 3030 of 2015
Godfrey Lam J in Chambers
10 October 2018

Civil procedure - enforcement of judgment - charging order - whether money paid into court by judgment debtor as security for costs of defendant in different action capable of being charged - whether judgment debtor had beneficial interest in funds in court - whether funds subject to Quistclose trust so as to preclude charging order - High Court Ordinance (Cap.4) s.20A(1), (2)

P, a firm of solicitors, obtained summary judgment against D1 for unpaid legal fees. D1 was himself the plaintiff in a different action against K and, pursuant to a court order, paid into court $2 million as security for K's costs (the Funds) (HCA 1285/2014). P was granted a charging order nisi over the Funds and now sought to make the order absolute. Under s.20A(1) of the High Court Ordinance (Cap.4), a charging order may be imposed only on "(a) an interest held by the debtor beneficially - in any asset of a kind mentioned in subs.(2) or (ii) under any trust; or … (2)(c) funds in court." D1 argued that the Funds were not capable of being charged as: (a) they were paid into court as security for costs and so he had no further beneficial interest therein under s.20A(1)(a); and (b) they were subject to a Quistclose trust between D1 and his brother, B, which arose because the Funds were a loan to D1, intended to preserve his proceedings in HCA 1285/2014, from B which were paid from a company wholly beneficially owned by him (RGL) (the Agreement) directly to D1's solicitors in HCA 1285/2014 (the Loan).

Held, making the charging order nisi absolute, that:

  • A party who had paid money into court as security for costs, as a condition for defence or as fortification for an undertaking as to damages, may be treated as the "owner" of the funds subject to the other party's security interest therein. Where a plaintiff, such as D1, had paid money into court as security for the defendant's costs, the plaintiff retained a beneficial interest in the funds sufficient to found a charging order. "Beneficial" in this context meant he held the interest for his own benefit, rather than for or on behalf of another (Re Ford [1900] 2 QB 211, Halvanon Insurance Co Ltd v Central Reinsurance Corp [1988] 1 WLR 1122, Emmott v Michael Wilson & Partners Ltd (No 3) [2017] 1 WLR 4330, Re Peak Hotels and Resorts Ltd (in liq) [2017] EWHC 1511 (Ch) considered; Nativivat v Nativivat (No 2) [2013] 5 HKLRD 145 distinguished). (See para.14.)
     
  • On the facts, D1's argument based on a Quistclose trust was also rejected. Since the $2 million was lent to him, it was prima facie his to dispose of. Firstly, the money came from RGL, which was a separate legal person from B with its own money. The transaction was between RGL and D1 and it was the parties' objective intention, as a matter of construction of the Agreement, that was material. There was nothing in the Agreement to suggest any intention that the Loan had to be used exclusively for security for costs in HCA 1285/2014 (See paras.20-23, 26.)
     
  • Secondly, the mere fact that money was either borrowed with a certain object or motive as to its use by the borrower or paid for a particular purpose by a lender, did not impress upon it any trust. The question in every case was whether the parties to a loan intended the money to be at the free disposal of the recipient. Here, there was nothing in the arrangement to prevent D1 from withdrawing the money from his solicitors or instructing them to apply it for another purpose (Twinsectra Ltd v Yardley [2002] 2 AC 164 applied). (See paras.24, 25.)
     
  • Accordingly, a charging order could be imposed on the Funds standing to the credit of HCA 1285/2014, for the payment of the judgment debts owed by D1 to P, subject to the deemed security interest of K. It was appropriate in all the circumstances to make the order absolute. (See para.28.)

Application

This was an application by the plaintiff to make absolute a charging order over funds paid into court by the first defendant for the costs of a defendant in a different action. The facts are set out in the judgment.

Jurisdictions: 

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