CTO (HK) LTD v. LI MAN CHIU AND OTHERS

HCA5165/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5165 OF 2001

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D E C I S I O N

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1. The 1st defendant has applied for an amendment to the Defence and Counterclaim.

2. In this case, the plaintiff is claiming against the 1st to the 3rd defendant as constructive trustees in respect of misappropriation of the plaintiff's funds.

Background

3. With due deference to Madam Chu J, I shall adopt the background appearing in paragraph 2 to paragraph 6 of her reasons for decision in discharging the Mareva injunction obtained by the plaintiff against the three defendants.

"2. The plaintiff is a freight forwarder. The 1st defendant used to be its managing director. The 2nd defendant is his wife and is the former customer services manager of the plaintiff. The 1st and 2nd defendants each holds one of the two shares of $1 each in the 3rd defendant and are its directors. The 3rd defendant is a non-trading entity and functions as the designated exporter for one of the plaintiff's customers, Rustan Commercial Corporation ('Rustan').

3. In June 2001, the 1st and 2nd defendants resigned from the plaintiff following the discovery of certain misdeeds committed by the 1st defendant in respect of payments concerning Rustan. The matter was settled, and the 1st defendant executed a Deed of Undertaking dated 7 June 2001 ('the Deed') in favour of the plaintiff and paid approximately HK$1 million to the plaintiff. The 1st and 2nd defendants left the plaintiff's employment thereafter.

4. In September 2001, the plaintiff moved office. In the course of removal, a box of documents relating to the 3rd defendant was found. Investigations into the documents led the plaintiff to commence this action and to apply for the ex parte Order on 1 December 2001.

5. The plaintiff's complaints herein are twofold. Firstly, it says that the 1st defendant had caused the plaintiff to short-invoice Rustan and caused the 3rd defendant to invoice Rustan for the services not covered by the plaintiff's invoices. Secondly, it is said that the 1st defendant had caused the 3rd defendant to invoice and obtain payments from the plaintiff for expenses and charges that had not been incurred.

6. The plaintiff claims against all the defendants as constructive trustees and in money had and received. The relief sought include account and tracing remedies."

The defence

4. It is not in dispute that payment has been made by Rustan and by the plaintiff to the 3rd defendant. The defence was that those moneys were received pursuant to a joint venture agreement between Mr Uria on behalf of the plaintiff, and the 1st defendant on behalf of the 3rd defendant.

Amendments sought

5. The amendment sought falls into three categories. The first one is paragraph 11 of the Defence and Counterclaim. That relates to the illness of the 2nd defendant at the material time. It has been allowed on terms by consent and I shall not repeat the matter here.

6. The second matter relates to the knowledge and involvement of the 2nd defendant in the joint venture agreement between the plaintiff and the 3rd defendant. The 2nd defendant seeks to delete from paragraph 12 of the Defence and Counterclaim the pleading that she assisted in the carrying out of the joint venture agreement for both the plaintiff and the 3rd defendant, and to plead in various subsequent paragraphs that she had no knowledge or involvement in dealing with either the joint venture agreement or the Rustan account.

7. The third category of amendment relates to paragraph 39A. Paragraph 39A was concerned with denial of knowledge or involvement with the 3rd defendant, but in the last sentence it was pleaded that: "Further or in the alternative, if the alleged dishonest acts as pleaded in the statement of claim had been committed, which are not admitted, the 2nd defendant had reasonable ground to believe the said acts were authorized by the plaintiff." The particulars given were matters to the effect that all the alleged transactions have gone through the computer accounting system of the plaintiff and the plaintiff could have found out those discrepancies.

8. I shall first deal with the knowledge and involvement point. Mr Law, for the plaintiff, objected to the amendment on the basis that it amounted to withdrawal of admissions previously made: Firstly, in paragraph 12, it was pleaded that the 2nd defendant assisted in carrying out the joint venture for the plaintiff and the 3rd defendant. That is now sought to be deleted. Secondly, in Answers to Requests for Further and Better Particulars under paragraph 12, the 2nd defendant stated that she knew the existence and terms of the joint venture agreement, and she had carried out liaison work with customers, including Rustan.

9. Further, in the witness statement of the 2nd defendant, she said she knew about the joint venture agreement but she had little involvement with it. And also in the witness statement of the 1st defendant, it included a statement in the same terms of paragraph 12 of the defence and counterclaim. It was further pointed out that the 1st and 2nd defendants had verified the Defence and Counterclaim in an affirmation filed in opposing the Mareva injunction.

10. Mr Law submitted that the 2nd defendant is now saying that she has no knowledge or involvement, and she had never assisted the 1st defendant or the 3rd defendant in respect of Rustan. It amounted to withdrawing the admission.

11. Mr Law further submitted there has been absolutely no explanation as to why such a mistake of error was made in the pleadings. Mr Law referred me to the practice of the court in Tse Yuk-tim, administrator of the estate of Tse Yat-hung, deceased v. Chee Cheung Hing & Co. Ltd. [1984] HKLR 391, per Hunter J (as he then was) at p.395 E to G :

"Conversely it seems to me equally wrong to say that the court never allows a party second thoughts: never allows a fundamental change of direction even after conscious decision. My understanding of the practice is and always has been, that the court allows a party to withdraw an admission deliberately made or to resile from the conscious choice for good reason, and if good reason is shown. In particular, it expects the party to put before it a convincing credible explanation of the circumstances in which the admission was in fact made, which is sought to be said to have been made under a mistake. A typical sort of case is where a party is able to say 'Yes, when I said this, or when I admitted this, I believed that to be the case. I have now got some totally fresh evidence in my possession which if true suggests that it was not the case, and I want to advance that proposition'. In those circumstances the court, I think, can readily give leave to withdraw the admission and does so. Conversely if no credible or convincing explanation is given, that is a powerful factor in favour of the exercise of discretion against the application."

12. Miss Lau, for the defendants, did not argue against that there were inconsistencies or contradictions between the pleadings and what the 2nd defendant is now going to say, but she said that the 2nd defendant had said it all along in her previous witness statement. Hence, it did not really amount to withdrawing admissions. Further, even if it amounted to withdrawing admissions, the court should balance the prejudice to both parties.

13. Miss Lau has referred me to Re Chung Wong Kit (a bankrupt) [1999] 1 HKC 684 at p.688C to E, the judgment of Rogers JA (as he then was) :

"Mr Fitpatrick relying upon the authority of Tse Yuk Tin, administrator of the estate of Tse Yat Hung, deceased v Chee Cheung Hing & Co. Ltd. & Anor [1984] HKLR 391 argued that the respondents should not have been allowed to rely upon this affirmation as it constituted a withdrawal of an admissions which was made without proper explanation. This however is not a rule of law in itself but just an example of the proposition that a party should not be permitted to resile from an admission unless it was just to allow it to do so having regard to the interests of both sides. There are answers to the objection, it seems to me. The first is that as shown in another case to which Mr Fitzpatrick drew our attention (Gale v Superdrug Stores PLC [1996] 1 WLR 1089) in determining whether it is fair to allow the party to resile from an admission, it is not sufficient for the court to presume prejudice to the opposing party but it is necessary to balance the prejudice suffered by the admitting party if deprived of this right to resile against any prejudice which the other party has specifically established he will suffer if the admission is withdrawn."

14. Miss Lau referred me to the witness statements of the 2nd defendant where she said she had little knowledge about the joint venture transactions, and also to her affirmation filed on 6 December 2001 where she said she was a mere nominee director of the 1st defendant and took no active part in this transaction.

15. Miss Lau said the present application does not go much further than what has been before the court, and it was merely to correct an error in the pleadings. The error is so obvious that it is self-explanatory that there has been a mistake.

16. As to the paragraph 39A amendment, it is now alleged that the discrepancies or the short billing of Rustan by the plaintiff were discoverable from the plaintiff's own computer system prior to the year 2001. The particulars set out attributes of the account system in order to support the allegation of discoverability of the discrepancies.

17. So far, the plaintiff's case was on the basis that it had no knowledge of the discrepancy. It was not found out until after the 1st defendant had left the plaintiff's employment, a box belonging to the 1st defendant was accidentally found to have been left behind and it was discovered that the 3rd defendant had issued invoices to Rustan for the now alleged misappropriated amounts. The plaintiff formulated its case on information obtained from Rustan about the short billing.

18. Miss Lau, on the other hand, drew to my attention an affirmation of Tsang Hing Tai filed on 8 April 2002 where he said the auditor should have come into notice of the mismatch, i.e. the discrepancy.

19. Mr Law pointed out that discovery in the present case has been skimp. No joint venture agreement has been discovered, nor any joint venture account. The case went on without examination as to the accounting system of the plaintiff. If one were to allow the amendment now and to admit its particulars, it will open up an issue as to the examination of the plaintiff's accounting system and the trial has to be adjourned. The trial has been fixed on 1 April 2003.

Conclusion

20. Now I come to my conclusion on the matter. As to the amendment of lack of knowledge involvement and assistance of the 2nd defendant in the joint venture agreement, I find that it does amount to withdrawal of admissions because before the amendment there was an admission of knowledge of existence and terms of joint venture assistance. The witness statement was to the effect that there was little knowledge or little involvement in the transactions, but what is now sought to be put forward is there was no knowledge and no involvement whatsoever.

21. There has been no explanation. Miss Lau's submission that it is self-evidentiary, with respect, is untenable. The mistake itself is self-evidentiary, but not why it was made and repeated in pleadings and affirmation, which points to a conscious act on the part of the 2nd defendant.

22. Bearing in mind the trial date as well as the issues before me, it would be grossly unfair to allow that withdrawal, in particular, in the absence of a convincing, credible explanation of the circumstances in which the admissions were in fact made. I will not allow the amendment as to the assistance, knowledge and involvement point.

23. As to the amendment in paragraph 39A, although it was put as a rider or an alternative to the paragraph dealing with the 2nd defendant's knowledge, it is in fact prima facie relevant for the issue in dispute, i.e. the existence of the joint venture agreement.

24. Only last week when the parties came before me on a pre-trial review, the defendants had sought specific discovery as to the plaintiff's accounting system for the 6 years' period as to which the joint venture agreement was alleged to be in existence. Such application for specific discovery was withdrawn by the defendants in view of the plaintiff's intimation that it would seek an adjournment on costs.

25. Miss Lau, on the last occasion, stated that the defendants wanted the trial to go ahead on 1 April, and it would be harsh on the defendants to order them to pay costs, hence the withdrawal. Miss Lau is now maintaining the same application, but through the back door, and now she is still resisting an adjournment and payment of costs. She submitted that three weeks would be sufficient for the plaintiff, not in so much as making discovery, but to deal with all the matters which were the substance of the discovery application.

26. I also bear in mind that there has been no explanation as to delay of raising the matter, save that Miss Lau submitted that because the Mareva injunction was freezing the defendants' assets, it would be grossly unfair on the defendants.

27. I find that further discovery or at least going through all the documents of the 6 years' period would be necessary if those particulars under paragraph 39A were allowed and three weeks are surely insufficient. On the basis that an adjournment on costs would be resisted, hence this application, which comes in so late in the day without explanation, is refused.

28. Hence, apart from paragraph 11 of the draft amendment, all the other amendments are refused.

Representation:

Mr Dennis Law, instructed by Messrs Wilson Yeung & Co., for the Plaintiff

Ms Lorinda Lau, instructed by Messrs Hui & Lam, for the 1st to 3rd Defendants

HCA5165/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5165 OF 2001

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REASONS FOR DECISION

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Introduction

1. This is an application for discovery in aid of a Mareva injunction.

2. On 1 December 2001, the plaintiff obtained an ex parte Mareva injunction against the defendants. It was discharged by Chu J on 7 December 2001 on the ground of material non-disclosure. But she granted a fresh Mareva injunction upon fortification of damages.

3. By a summons dated 5 February 2002, the plaintiff applied for discovery in aid of the Mareva injunction. The summons first came before me on 22 March 2002, whereupon I disposed of the 1st and 2nd paragraphs and adjourned the balance of the summons for substantive argument. That took place again before me on 3 July 2002. Having heard counsel, I allowed the plaintiff's various applications but extended the time for compliance. These are my reasons.

Background

4. The background leading to this application can be summarised as follows.

5. The plaintiff is a freight forwarder. The 1st defendant is its former managing director. The 2nd defendant is the 1st defendant's wife. She is the plaintiff's former services manager. The 3rd defendant is owned by the 1st and 2nd defendants who are also its directors. At the material times, it was a non-trading entity and functioned as the designated exporter for one of the plaintiff's major customers, Rustan Commercial Corporation in the Philippines ("Rustan").

6. In June 2001, the plaintiff discovered certain misdeeds committed by the 1st defendant in respect of payments concerning Rustan. The 1st and 2nd defendants were asked to resign. The 1st defendant was asked to, and he did, execute an undertaking dated 7 July 2001 in favour of and pay about HK$1 million to the plaintiff. The 1st and 2nd defendants left the plaintiff's employment thereafter.

7. In September 2001, the plaintiff moved office and discovered a box of documents relating to the 3rd defendant. Investigation into the documents revealed further misdeeds on the part of the defendants. On 1 December 2001, the plaintiff commenced the present action and moved ex parte for a Mareva injunction. The plaintiff complained, in essence, that the 1st defendant had caused the plaintiff to short-invoice Rustan and caused the 3rd defendant to invoice Rustan for the services not covered by the plaintiff's invoices; and that the 1st defendant had caused the 3rd defendant to invoice and obtain payments form the plaintiff for warehouse charges that had not been incurred. The plaintiff claims that all defendants are constructive trustees for the moneys misappropriated. It seeks, inter alia, an account and tracing remedies.

8. The Mareva injunction restrains the defendants from disposing of their properties up to a value of HK$8 million.

9. Pursuant to the discovery order made by Chu J when she re-granted the Mareva injunction, the defendants had filed affirmations regarding their assets. They had also filed a list of documents under the ordinary discovery procedure. The list contained only six documents. Dissatisfied with the discovery made so far by the defendants, the plaintiff took out the present summons.

Purpose of discovery order in aid of Mareva injunction

10. To make a Mareva injunction effective, the court has a discretion to order the defendant to make a statement of his assets and to give discovery of documents for the purpose of ascertaining the existence, nature and location of assets and in the case of a proprietary claim, the whereabouts of the missing trust funds : see A v. C [1981] 1 QB 956. The primary purpose of the discovery order is to preserve the assets or property which might otherwise be dissipated notwithstanding the injunction.

11. It is not uncommon that a plaintiff, like the plaintiff here, seeks to invoke section 21of the Evidence Ordinance, Cap.8 for an order that it may inspect and take copies of any entries in a banker's record. The bank may or may not be summonsed before the court when such an application is taken out : see subsection (2).

12. Though the court would not lightly use its powers to order disclosure of full information touching the confidential relationship of banker and customer, such an order is justified even at the early interlocutory stages of an action where the plaintiff sought to trace funds which, in equity, belonged to it and of which there was strong evidence that it had been fraudulently deprived and delay might result in the dissipation of the funds before trial : Bankers Trust Co. v. Shapira [1980] 1 WLR 1274. The plaintiff would normally be required to give an undertaking that such information would be used only for the purposes of the action to trace the funds and not for any other purposes.

13. In Arab Monetary Fund v. Hashim and others(No.5) [1992] 2 All ER 911, Hoffmann J (as he then was) imposed three limits on the Bankers Trust jurisdiction at pp.918e to 920a. First, the plaintiff must demonstrate a real prospect that the information may lead to the location or preservation of assets to which he is making a proprietary claim. For the jurisdiction rests upon the proposition that unless the assets in question can be located and secured, the ultimate determination of ownership of those assets may be frustrated by their removal or dissipation and there will be no point in calling on the third party at the trial to produce the required documents or give the requested information. Second, the jurisdiction is more restricted than a request to a party for general discovery on an issue. When documents are required to be disclosed, the third party should be entitled to the same specificity in the documents he is asked to produce as he would be served with a subpoena. Likewise, if he is asked for information, the questions should be directed with specificity to ascertaining the whereabouts of the assets in question. Third, even if the application is prima facie falling with the Bankers Trust principle, the court needs to balance the potential advantage against the detriment to the person against whom the order is sought, not merely in terms of costs (for which he is ordinarily compensated on an indemnity basis by the terms of the order) but by way of invasion of privacy and requiring breach of obligations of confidence to others.

The defendants' submissions

14. Resisting the application, Ms Cheung, counsel for the defendants, contended that the plaintiff must first establish a strong prima facie face. In this connection, she relied on Omar v. Omar [1995] 1 WLR 1428. There, Jacob J, granting the discovery order, did mention that if there had been no strong prima facie case to trace, the matter would have been different. Ms Cheung submitted that the test of a strong prima facie case in support of the ancillary relief of discovery is higher than that of a good arguable case for the grant of the Mareva injunction.

15. I must confess I have some reservation whether that is a correct proposition. Discovery is an ancillary order made to aid the principal Mareva injunction. It sounds odd if a plaintiff, having satisfied the court that it has a good arguable case and thereby having obtained a Mareva injunction, would have to surmount a higher hurdle in order to obtain the necessary information to ascertain the whereabouts of the defendant's assets in order to secure them from the risks of dissipation. I wonder if Jacob J's formulation of "strong prima facie case" is just synonymous with "a good arguable case". In any event, I do not consider it necessary for me to make a determination on this point. For in my view, even if the test advocated by Ms Cheung is to be applied, the plaintiff has satisfied me that it has indeed a strong prima facie case. I will explain why below.

16. The defendants admit that the funds identified by the plaintiff in its statement of claim, totalling almost HK$8 million, had been paid into the 3rd defendant's bank accounts. For the reasons given by Chu J in her judgment dated 15 January 2002, which I respectfully agree and adopt, the plaintiff no doubt has a strong prima facie case against all the defendants. The defendants so far have not applied to discharge the Mareva injunction. What they did was to raise a new point not previously placed before Chu J. The point was disclosed for the first time in these proceedings in paragraph 8 of the Defence and Counterclaim filed on 30 January 2002. There, the defendants alleged that in late 1993, the 1st defendant and the majority shareholder of the plaintiff, Mr Uria, had entered into a joint venture agreement whereby, among other things, all the invoices for charges against Rustan for the services provided by the plaintiff and the 3rd defendant would be spilt at the ratio of seven to three, and that the plaintiff would reimburse all the charges the 3rd defendant would pay on behalf of the plaintiff in carrying out the freight forward services including warehouse handling charges.

17. I do not wish to say more than what is necessary to dispose of the application before me. This joint venture point obviously needs to be tried. I would only make the following observations :

(1) This point is no doubt important to the defendants' defence here. It may also provide an answer to plaintiff's complaint back in June 2001. But it was not referred to in the deed of undertaking signed by the 1st defendant.

(2) The defendants did not mention this point in their affirmations to support the application to discharge before Chu J on 7 December 2001, when it is only reasonable to assume that they should have put forward this, which is supposedly the strongest point on merits.

(3) The alleged joint venture agreement was an oral one. Given its importance on the operations of the plaintiff and the 3rd defendant, it is odd to say the least that it was not reduced into writing. Ms Cheung pointed to the past dealings between Mr Uria and the 1st defendant and submitted that they had been working on oral agreements or understandings in the past. That may well be the case. But that cannot explain why there is simply no reference to the joint venture agreement at all in any documentary evidence since 1993.

(4) There is no documentary evidence showing the implementation of the terms of the joint venture agreement, including reconciliation of invoices or accounts to reflect the seven to three spilt.

(5) The defendants seek to rely on the affidavit evidence of a former executive director and a former secretary of the plaintiff. But even they did not expressly refer to the joint venture agreement, the best they could say is that they knew there was some kind of business arrangement between the parties.

(6) The plaintiff also seeks to rely on the evidence of some of its former and present employees, including financial controllers. They are not aware of the joint venture agreement or the seven to three spilt.

18. When the joint venture agreement defence is considered against the above observations, I come to the view that this is a rather suspicious point. It does not, as contended by Ms Cheung, dilute the plaintiff's case on merits. Accordingly, I hold that the plaintiff has a strong prima facie case on its claims against the defendants. In principle, it is entitled to the discovery orders sought.

19. This disposed of the primary contention of the defendants. I next consider the scope of the order.

Scope of discovery

20. Paragraph 3 of the summons is an application under section 21 of the Evidence Ordinance. It gives the plaintiffs liberty to inspect and take copies of the defendants' bank statements listed there. Ms Cheung did not have any objection if the four new accounts disclosed in the defendants' affirmations dated 2 April 2002 are to be included as well. But she submits that it is superfluous if paragraph 4 of the summons, which requires the defendants to state what had become of the monies listed in the schedules of the statement of claim, is allowed. Mr Law submitted that the bank statements are source documents. There might be some overlapping between the two paragraphs but the plaintiff is clearly entitled to the order. I agree.

21. Ms Cheung next submitted that the request is too wide in that it asked for bank statements back to July 1995. Given the long lapse of time, there is no real prospect that the information may lead to the location or preservation of the trust monies. It is common ground that money the plaintiff seeks to trace was first deposited in the 3rd defendant's accounts in July 1995. In order to render the tracing exercise effective, it is, in my view, necessary to begin at the starting point. If the point of enquiry starts at somewhere down the line, it is difficult, if not impossible, to perform the task. Following through the movements of funds from July 1995, there is a real prospect that the information so obtained may lead to the location or preservation of the trust monies or properties representing them.

22. As noted, paragraph 4 of the summons principally requires the defendants to disclose what they become of the monies. The requests are detail but not uncommon. The defendants are also asked to state if the monies or properties had been transferred to a third party, whether the third party had further disposed of the same. Ms Cheung complained that the requests must stop at the defendants and cannot go further. For the defendants would not be in a position to tell if any transfer had been made by a third party. Mr Law submitted that such requests should not impose any real difficulty to the defendants. If they do not know, just say so. Again, I agree with Mr Law.

23. Paragraphs 5 to 7 are consequential orders for list of documents, inspection of documents and verification by affirmations. They are not controversial. I found the time imposed to comply with the discovery orders too short and accordingly extended it to 21 days in paragraph 4 and 28 days in paragraph 6.

Costs

24. Having heard counsel, I ordered that costs of the summons including the costs that I reserved on 22 March 2002 be the plaintiff's costs in the cause, to be taxed if not agreed.

Representation:

Mr Dennis Law, instructed by Messrs Wilson Yeung & Co., for the Plaintiff

Miss Jennifer Tsang, instructed by Messrs Hui & Lam, for the 1st to 3rd Defendants