ADVANCE DISTRIBUTION CO., LTD. v. SHUN YIP LTD. AND OTHERS

HCCL 86/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.86 OF2002

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J U D G M E N T

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The applications

1. There are before the Court two applications by the plaintiff, by summonses dated 15 February 2003, for further disclosure orders against the 1st and 3rd defendants. Each summons lists the extensive categories of disclosure sought, and each summons is predicated upon the right to trace money flows pursuant to that which the plaintiff maintains is (or may be) a remedy in restitution.

The background

2. These applications cannot be understood without reference to the background which has spawned this litigation.

3. On 10 December 2002 this Court granted the plaintiff an ex parte Mareva injunction against the 1st and 2nd defendants. The terms of this injunction subsequently have been amended, and in fact at the outset the writ, which was issued on the same day, named only the 1st and 2nd defendants, the remaining five defendants being joined to this litigation as the result of an application heard on 4 February 2003. Of these additional defendants, only the 3rd defendant, Dennis Leslie Bray, has been served.

4. On the same date as the application for joinder, that is 4 February 2003, three further applications were heard. First, a further application for a Mareva injunction against the 3rd defendant, Mr Bray (initially mounted ex parte and thereafter inter partes) was refused, second, the terms of the Mareva injunction as originally granted were varied (to reduce the sum enjoined from US$1.2 million to US$800,000), and third, further disclosure was ordered in addition to the disclosure which had been ordered on 13 December 2002, the return date of the injunction as originally granted.

5. The business transaction which caused this flurry of interlocutory activity concerned the purchase by the plaintiff, pursuant to a Memorandum of Agreement dated 30 October 2002, of the 2nd defendant's vessel "KOMSOMOLSK ON AMYR" for the price of US$1.03 million. The 1st defendant, Shun Yip Ltd, allegedly acted in this sale on behalf of the 2nd defendant, a Russian company, pursuant to a Power of Attorney granted to Mr Bray, a director of Shun Yip. It was Shun Yip who had entered into the Memorandum of Agreement and had issued to the plaintiff a Certificate of Non-Encumbrance, together with a commercial invoice for the price.

6. The plaintiff paid in two tranches the full purchase price for the vessel, that is US$1.03 million, into a specified HSBC account which was the HSBC account of Shun Yip, from which in turn these monies were transferred to accounts operated by the 6th defendant, Ocean Resources, the 4th defendant, Arctic Resources, and another company named Premex Ltd. It is with regard to the onward transmission of these monies that the plaintiff's present disclosure applications are concerned but this is to get ahead of the story.

7. Upon payment of the price, and in accordance with the terms of the MOA, the vessel was delivered to the plaintiff at the port of Petropavlovsk-Kamchatski on or about 25 November 2002. Following such delivery, the vessel was intended by the plaintiff, its new owners, to go to Mumbai, India, where she was to be scrapped, although the vessel immediately made for Busan, Korea, where it was intended to take on bunkers.

8. On 9 December 2002 the vessel arrived at Busan. On the same day, Orient Marine Services of Korea, together with two other claimants, arrested the vessel in order to obtain security in respect of its claims against the 2nd defendant, UTRF, the vessel's former owners, in the sum of US$503,688,227, which claims related to bunkers and other provisions supplied to the vessel prior to the date of the sale to the plaintiff.

9. What happened then is that the plaintiff, which was in the position of having on-sold the vessel for scrap, reached a settlement with the Korean claimants, by which these claimants agreed to release the vessel from its Korean arrest (and not thereafter to re-arrest her) in consideration of payment by the plaintiff of the sum of US$530,000.00.

10. In short, therefore, the position of the plaintiff in this litigation is thus: having paid the price for the vessel, it then was required to shell out an additional US$530,000 to secure the vessel's release, and in effect it is this sum (which together with interest and costs formed the basis for the amended sum of US$800,000 in the amended Mareva Order) which it is sought to recover in this action on the basis, inter alia, of that which is said to have been payment under a mistake of fact, alternatively fraudulent misrepresentation at the time of the sale as to the fact that the "KOMSOMOLSK ON AMYR" was encumbrance-free, Clause 5 of the MOA having provided that :

"The Sellers warrant that the vessel, at the time of delivery, is free of all encumbrances, maritime liens and any other debts and/or claims of any nature whatsoever. Should any claims, which have been incurred prior to the time of delivery, be made against the vessel, the Sellers hereby undertake to indemnify the Buyers against all consequences of such claims."

The argument

11. Mr Lamplough, the plaintiff's solicitor who has appeared on behalf of his client throughout the various applications in this case, mounted the present applications against a backdrop of not inconsiderable disclosure already having taken place. At the time of hearing these applications, Mr Bray on behalf of the 1st defendant had filed no less than four affirmations, respectively dated 17 December 2002, 19 December 2002, 6 February 2003 and 14 February 2003; in addition a further affidavit dated 7 February 2003 had been put in by Miss Macnaughton on behalf of Shun Yip detailing company searches and lists of directors and shareholders of three companies, including the 6th and 7th defendants herein.

12. Mr Lamplough, however, submitted that such disclosure plainly had not gone far enough, and that which obviously was lacking given the efforts of his client to identify the flow of the purchase monies paid over by the plaintiff monies which had found their way into the Shun Yip account at HSBC and out again was to identify precisely where such monies had ended up. For example, said Mr Lamplough, it was evident that some US$1.24 million of the purchase monies had gone from Shun Yip to Arctic Resources, the 4th defendant, yet from there the trail had gone cold. Notwithstanding his evidence on oath to-date, said Mr Lamplough, Mr Bray pointedly had refrained from fully clarifying the situation, submitting that in this regard all that the plaintiff had been told by Mr Bray who was a director of Shun Yip, and also a director of four other companies, Arctic Resources, Gordon & Sons, Sheung Yang Assets Ltd and Ocean Pacific Shipping Ltd was that the sum of US$1.243 million had been paid to Arctic Resources at Danske Bank AS in London to pay for a purchase of crab from Arctic Resources, which crab in turn had been used to supply Ocean Pacific, the 7th defendant, which had been buying the crab from Shun Yip (whose core business was said to be in the general trading in fish products originating from the Barents Sea.)

13. However, queried Mr Lamplough, what had Arctic Resources done with the money so transferred to it? He sought to argue that in his evidence placed before the court that Mr Bray was seeking to 'compartmentalise' his knowledge, so that although he was a director of Arctic Resources and thus clearly well knew what had occurred in effect Mr Bray was deciding "what should be disclosed and what should not be disclosed in the name of Shun Yip". It was not acceptable, he suggested, that in the present case there should, in effect, be a "cleavage of personality" between Mr Bray qua director of Shun Yip and Mr Bray in his individual capacity.

14. Accordingly the applications now before the court, issued against both Shun Yip and Mr Bray personally, now himself joined as 3rd defendant, had been designed to elicit all relevant detail about the transactions, and the various companies which had been involved in processing the plaintiff's purchase monies. In the present circumstances, said Mr Lamplough, in which those monies had been obtained by the fraudulent representation that the vessel was unencumbered when patently such was not the case, equity should not hesitate to make Mr Bray disclose this information, whether in his personal capacity or qua director of Shun Yip, and thus facilitate any restitutionary remedy that might (Mr Lamplough made it clear that he could put it no higher) remain open to the plaintiff.

15. Mr Burns, appearing on these applications on behalf both of Shun Yip and Mr Bray, sought at the outset to meet the plaintiff's disclosure argument by attacking its fundamental premise. He submitted that these disclosure applications, and the restitutionary claim that was said to provide the underpinning therefor, was intrinsically flawed. He argued that the applications for disclosure were made on the basis that part of the purchase price of the vessel was equivalent to, and could be equated with, the sum as subsequently was required to pay off the Korean claimants and to release the vessel from arrest, and that this latter sum represented 'trust property' on the basis that it was paid under a mistake of fact or as the result of misrepresentation and that as a consequence the plaintiff was entitled to pursue proprietary and restitutionary claims, which involved tracing remedies, in respect thereof.

16. On the present factual matrix this analysis was quite wrong, Mr Burns suggested. In a nutshell the plaintiff had no proprietary or restitutionary claim in respect of any part of the price paid for the vessel, and there was no basis whatever for tracing relief, and thus for the further disclosure orders now sought.

17. His argument was thus. The monies paid for the vessel were paid pursuant to the Memorandum of Agreement dated 30 October 2002, by clause 5 of which the Sellers undertook contractually to indemnify the plaintiff, as Buyer, against all consequences arising from claims against the vessel, a provision wholly inconsistent with the idea that the plaintiff had a right to rescind the MOA in the event of there being any such claims. So that it could not be said that there was any payment of the purchase price under a mistake of fact. Simply put, it was paid on the basis of the contractual terms in the MOA, and that as a matter of law where (as here) a payment was made for good consideration, there was no right to recover it on the grounds that it was paid under a mistake of fact.

18. Similarly, submitted Mr Burns, where a payment is made pursuant to a contractual obligation, no recovery can be made unless the contract itself is held to be void for mistake or is rescinded; in particular, neither misrepresentation nor mistake vitiates consent or gives rise by itself to an obligation to make restitution see for example the observations of Millett LJ (as he then was) in Portman Building Society v. Hamlyn Taylor Neck (a firm) [1998] 4 All ER 202 at 208d-j :

"The obligation to make restitution must flow from the ineffectiveness of the transaction under which the money was paid and not from a mistake or misrepresentation which induced it. It is fundamental that, where money is paid under a legally effective transaction, neither misrepresentation nor mistake vitiates consent or gives rise by itself to an obligation to make restitution ..."

19. Moreover, Mr Burns argued, on the basis of the present factual matrix there could be no question of the plaintiff rescinding the MOA, given the undoubted factual position that the plaintiff had onsold the vessel for scrap, and indeed as a matter of fact the vessel presumably now had been scrapped.

Decision

20. I have no doubt that this 'root and branch' opposition by the 1st and 3rd defendants to the orders as now sought is well-founded. I fail to see how the transaction represented by the purchase of this vessel on the terms of the MOA can be regarded as ineffective by virtue of the fact that subsequently a sum of money was paid out to secure the vessel's release. The other side of this coin is that the identification of a notional portion of the contractual purchase monies as representing the sum which later was paid out to the Korean claimants to secure the release, and thereby asserting a potential restitutionary claim thereto, is an approach which in my view is both ambitious and misconceived. I am unable to see how the happenstance of subsequent settlement, which may have been in any sum, or indeed in any form (such as, for example, release of the vessel against a guarantee) can properly be characterised as the equivalent of monies earlier paid under a mistake of fact or as a consequence of fraudulent misrepresentation.

21. The stark fact is that the plaintiff clearly has its existing contractual remedy against the seller, if such can be established. It follows, therefore, that in the absence of any legitimate proprietary or restitutionary claim and thus in the absence of any basis for tracing relief no justification exists for the extensive disclosure orders presently sought by the plaintiff. I so hold.

22. This conclusion, resulting from that which is put forward as the defendants' primary argument, is in itself sufficient to decide the two applications before the court in favour of the 1st and 3rd defendants. If and in so far as this conclusion be wrong, however, I should perhaps go further and briefly express a view as to the subsidiary arguments which also were raised by the defendant. There are two that in my view have merit.

23. First, I agree with the contention that, in any event, no basis has been established for making any disclosure order against the 3rd defendant personally. As Mr Burns pointed out, no injunctive relief is in place against Mr Bray in fact, such relief specifically was refused and absent the pleading of a Statement of Claim and the framing of a case against him, that which the present application amounted to was early discovery/interrogatories absent a justifiable platform upon which to base a discretionary finding in favour of such application.

24. Had such been necessary, therefore, I would have declined the application against Mr Bray on this ground also. Perhaps it was with this in mind that, in his reply, Mr Lamplough was minded to accept that the summons asking for relief against Mr Bray personally may be unnecessary if and in so far as he should be ordered to make full disclosure as a director of Shun Yip.

25. This brings me to the second, and perhaps the most interesting part of the subsidiary argument, and involves that which, for ease of reference, might be termed the 'compartmentalising' submission. In this regard, I do not accept the premise which in this context must be the premise upon which the plaintiff mounts this aspect of the argument that all the information which Mr Bray, the 3rd defendant, has at his disposal by virtue of his other commercial activities is, as a matter of law, imputable to Shun Yip, the 1st defendant.

26. There appears to be a line of authority on the point, and perhaps the most recent statement of principal, which I adopt, is that of Nourse LJ in El Ajou v. Dollar Land Holdings plc [1994] 2 All ER 685 at 698 :

"It is established on the authorities that the knowledge of a person who acquires it as a director of one company will not be imputed to another company of which he is also a director, unless he owes, not only a duty to the second company to receive it, but also a duty to the first to communicate it: see Re Hampshire Land Co [1896] 2 Ch 743 and Re Fenwick Stobart & Co Ltd, Deep Sea Fishery Co's Claim [1902] 1 Ch 507."

27. I do not consider in this case that the foregoing test can be regarded as satisfied. I would add that I fail to see that Mr Lamplough's argument as to the 'directing mind' of the various companies assists his claim for disclosure against Shun Yip. Whether Mr Bray be the 'directing mind' of Shun Yip, (or for that matter, as Mr Lamplough asserted, of any of the other companies to which reference has been made) does not answer the issue as to what information properly is imputable at law to Shun Yip; this is an entirely different question and is one which, as I have indicated, is governed by an established line of authority.

28. So I am (or would have been) against the plaintiff on this argument also had it been necessary to base my conclusion on the point.

Order

29. The plaintiff's summonses dated 15 February 2003 against the 1st and 3rd defendants are dismissed.

30. I make an order nisi that the costs of these applications are to be to the 1st and 3rd defendants in any event, such costs to be taxed if not agreed.