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26 January 2021
In the recent case Re Chinacast Education Corp,(1) the High Court allowed a defendant's application for the release to him of a sum of money paid into court by the plaintiffs in order to fortify an asset freezing injunction that the plaintiffs had obtained against (among others) the defendant. The plaintiffs' claims ultimately failed and the injunction was discharged. The defendant, in turn, obtained a monetary judgment against the plaintiffs. In allowing the defendant's application, the High Court had to decide whether the money paid into court had been advanced to the first plaintiff by the plaintiffs' funders for a specific purpose such that it was subject to a trust claim and could be used only for that purpose, or whether the money could be used to satisfy the amount owed to the defendant.
Re Chinacase Education Corp appears to involve high-profile and drawn out litigation, culminating in the dismissal of the plaintiffs' claims and judgment for the defendant. During the proceedings, the plaintiffs appear to have obtained an asset freezing (Mareva) style injunction against (among others) one of the defendants. As is customary, the plaintiffs were required to pay an amount of money into court in order to fortify (support) an undertaking as to damages with respect to the injunction – namely, the plaintiffs would compensate the defendant in the event that the injunction was discharged and the defendant was found to have suffered a loss. The plaintiffs paid HK$3 million into court for this purpose.
As it turned out, the defendant's claim for damages consequent on the imposition of the injunction was dismissed but he did obtain a monetary judgment against the plaintiffs. Unsurprisingly, the defendant applied for an order for payment out of so much of the money in court as would satisfy the amount of the defendant's judgment. This was resisted by the plaintiffs.
The defendant's application was initially rejected by the lower court (with a judicial 'master' determining the application). The defendant appealed to a High Court judge. The plaintiffs applied for an order that the money in court be returned to them.
As the court sets out in its judgment, the principal issue for determination was:
[w]hether or not the Fund is the subject of a Quistclose trust such that it can only be used for the purpose of complying with and satisfying the court order, pursuant to which it was paid into court as fortification of the P's undertaking as to damages, or whether it can and should be used for the purposes of satisfying the Indebtedness.(2)
The plaintiffs opposed the defendant's application on the basis that the funds used to make the payment into court had been provided by some of the first plaintiff's shareholders and other third-party funders for the sole purpose of fortifying the plaintiffs' undertaking as to damages.
In an interesting and reasoned decision, the court allowed the defendant's appeal and ordered that the money in court be paid to the defendant to the extent necessary to extinguish the amount owed by the plaintiffs (pursuant to the judgment) and any balance be returned to the plaintiffs.
The court analysed the relevant legal principles relating to whether a claim to a Quistclose trust should succeed. After seeking to explain these principles, the court summarised the position as follows:
The fact is that, once the purpose of the payment in has been spent (in the case of bail money, by making an attendance at court for which the bail money had stood as security or in the case of a payment into court by way of fortification of an undertaking, by the dismissal of a claim for damages for which the undertaking was given), the money in court does prima facie stand to the credit of the party making the payment.(3)
On the facts, the court held that the money advanced by the shareholders and third-party funders was more in the nature of a loan to the first plaintiff so that the plaintiffs could pay the amount into court. Therefore, on the facts, the first plaintiff did not hold the money on trust for the funders. In particular, the court noted that:
The court, therefore, allowed the defendant's appeal.
The case reviews some interesting legal issues with regard to Quistclose trust claims in the context of payments into court. Quistclose trust claims are generally not easy to establish and they turn on their facts. However, the courts are willing to declare the existence of such a trust in circumstances where the requisite threshold is met on the facts – for example, in the context of victims of bank fraud.
The issues raised in the case also draw attention to the status of money paid into court for the purpose of fortifying an undertaking as to damages once that purpose becomes spent – for example, on dismissal of a defendant's claim for damages for which an undertaking is given. Practitioners drafting an acknowledgement of receipt or other document in similar circumstances should specifically consider whether the wording should make clear that a trust is being created.
For further information on this topic please contact David Smyth, Warren Ganesh or Jacky Darsono at RPC by telephone (+852 2216 7000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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