SEACLIFF LTD. v. DECCA LTD. & OTHERS

HCMP 4900/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4900 OF 2000

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J U D G M E N T

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Introduction

1. This is the third judgment in these proceedings, being an originating summons in which the plaintiff (Seacliff) sought pre-action Norwich Pharmacal orders for discovery against two merchants and two banks. The two previous judgments of 5 March and 20 March 2001 set out the historical background and my interpretation of the relevant legal principles grounded in the hallmark case of Norwich Pharmacal Co. v. Customs & Excise Commissioners [1974] AC 133. In the second judgment, reported as Seacliff v Decca Limited & Ors [2001] 1 HKC 588 I ruled in favour of Seacliff and against the first defendant (Decca) in respect of all but one of the various classes of documents sought to be discovered. By the date of hearing Seacliff and the second defendant (Tai Ping) had reached agreement and I was invited to make a 'Tomlin' order to give effect to the settlement. The fourth defendant (Credit Lyonnais) offered no opposition; I ordered discovery against it for the documents sought.

2. The remaining application was that by Seacliff against the third defendant (HSBC) for disclosure of accounts held by the fifth defendant (Benswick). Benswick, not originally a party, joined for the purpose of opposing the discovery sought against HSBC. HSBC adopting a neutral stance has played no part.

3. It is this remaining contested application that I am now to deal with.

The History

4. I have already referred to the role played by Alexander Duperouzel (Duperouzel) whose employer Kroll Associates (Asia) Limited (Kroll) was engaged by Seacliff to investigate the massive overrun of the Shanghai Centre redevelopment project.

5. It was largely in reliance on his evidence that I concluded in Seacliff (supra) that his investigation pointed to a large scale commercial fraud implicating Seacliff's ex Chief Financial Officer (CFO) surnamed McNett and Benswick's owner and alter ego, surnamed Howe, and perhaps others.

6. Since then and for the purpose of hearing and disposing of the application against HSBC I have Howe's reply on affidavit to the various allegations of impropriety against himself and Benswick, and a supporting affidavit from one Denis Compton (Compton) who was employed by Seacliff between 1994 and January 1997, in charge of its construction management department (CMD). In response from the plaintiff I have an affidavit of Paul David Dopp (Dopp) a principal of Kroll, who with Duperouzel is also engaged in the investigation.

7. Recapping Duperouzel's evidence the following are pertinent:-

(a) Seacliff as manager of the Shanghai Centre approved a redevelopment and refurbishment programme and a budget of US$49m, to be undertaken between 1995 and 2000;

(b) supervision was purportedly by Seacliff's CMD, headed by Compton until his resignation in January 1997 and thereafter by a man surnamed Marquis, under the overall control of the General Manager. Financial responsibility was in the hands of the CFO, McNett, under the General Manager;

(c) in June 1995 Benswick was engaged to provide project management services and services for the supply of, inter alia, carpet, furnishings and lighting, for a monthly fee. A series of contracts between Seacliff and Benswick ran from June 1995 to December 2000;

(d) four companies incorporated in Guangzhou (the Guangzhou companies) came to be engaged in the project, for reasons not apparent to Duperouzel. These companies are called for short Panya, Shi Hua, Chang De and Li Hong Li. Two contracted with Seacliff in January 1996 and the others in March 1997 and November 1998;

(e) the project was completed by December 2000 at a total cost, revealed by the investigation, of US$84m., US$35m. over the budget of US$49m.;

(f) according to a report completed by surveyors engaged by Kroll the value of the work actually undertaken was closer to US$41m., representing an overspend of US$43m;

(g) though there was for the investigators a paucity of records there was enough of a paper trial to reveal that about US$42m. was paid to or through the Guangzhou companies;

(h) there were accounting irregularities. An example was Benswick claiming reimbursement from Seacliff for the sum of $16,831,568 purporting to be the amount paid by Benswick in advance to Decca when, according to Decca, no such advance was made. The amount corresponded with that in an invoice from Decca to Seacliff direct;

(i) there were expense account irregularities. The procedure in place for reimbursement of expenses required the claimant to fill out a voucher stating his name and position, itemising what expenses had been incurred and the amount claimed, with supporting receipts. This had to be checked and approved in turn by the head of the department involved, the finance department and General Manager. Howe was frequently reimbursed for expenditure incurred, but the security procedure in place was seldom observed. Exhibited were vouchers in which variously he described himself as head of department when he held no such position, and where McNett was the sole authorizing signatory, and where Howe on occasion authorized payment to himself and to his brother, who was of Benswick. On one occasion a voucher in which McNett was claiming reimbursement was supported by a receipt in Howe's name. And much of the expenditure was for goods and services unrelated to the Shanghai Centre; for instance credit card slips for night clubs and sauna parlours in Hong Kong, for duty free establishments at international airports and for a sports shop in Sydney, Australia;

(j) McNett, employed still as CFO when Duperouzel's investigation began in March 2000, disappeared without explanation within the week. (Dopp's subsequent affidavit reveals that McNett was found to have embezzled about US$4m from Seacliff between January 1996 and March 2000. He has since been brought to justice, pleading guilty to a felony count of fraud in a New York State court for expense account abuse and theft of over US$4m.)

8. Howe in his affidavit said that he sought and was reimbursed only for business related expenses, travelling expenses and living expenses incurred in Shanghai. Aware of the set procedure in place, designed to avoid abuse, he said there was strict adherence, putting Seacliff and/or Duperouzel to the proof that it was otherwise. But he concluded "In any event the total claim is less than 1% of the total contract sum which in this business is considered less than average for claims by a consultant such as [Benswick]". I pause here to note in passing that the vouchers, receipts, chits and so on tell their own tale of irregular procedures and questionable claims.

9. Howe stated that the engagement of the Guangzhou companies had nothing to do with him; in fact they were already contracted to Seacliff before Benswick came on the scene. He pointed out that Compton in his affidavit supported that history. (In fact Dopp's affidavit reveals that was not so; the series of contracts with these companies came into existence from 1996 onwards).

10. I quote from Howe's affidavit:-

"31. The use of the Guangzhou Companies was well-known to [Seacliff] also. Duperouzel's Affidavit gave the impression that [Seacliff] had no prior knowledge of them, or of the purpose for using such companies, namely, to procure the channeling of foreign currencies outside Mainland China to pay the suppliers for which the said companies would expect to be paid a fee."

11. Howe said the mechanics were that a supplier of goods or services was paid by the plaintiff paying one or other of the Guangzhou companies which would pay Benswick which then paid the supplier. He could not explain why the documentation appears to be absent from Seacliff's files, beyond the assertion that if they were missing that was not a matter for Benswick.

12. As to the so-called duplication of the charge of $16,831,568, he said that was invoiced by Benswick which received it and paid it to Decca. He said there was no double charge or payment made. He pointed to an affidavit filed on behalf of Decca which confirmed that. He went on to state, referring to Decca as the 1st defendant:-

"The 1st Defendant had always maintained a running account with [Benswick]. Due to exchange control reasons [Benswick] could only remit Hong Kong Dollars to the 1st Defendant in lump sums from time to time, hence the 1st Defendant and [Benswick] would agree on which of the invoices to be settled and the amounts thereof when a lump sum is remitted by [Benswick] to the 1st Defendant."

13. Howe refuted any misappropriation or mismanagement of funds by either himself or Benswick during the course of the Shanghai Centre project. He has, he said, done his best to provide documents and statements from Benswick's files to assist Seacliff and its investigators. But he opposes the blanket disclosure of its bank accounts and statements that Seacliff by this action is asking for. He stated:-

"I must state at the very outset that [Benswick] opposes the blanket disclosure of its bank accounts that is now being sought by Seacliff. [Benswick] is an active company and had many dealings with other companies and persons during the period in which disclosure is sought. I verily believe that such blanket disclosure would be extremely prejudicial to [Benswick] as well as to its business associates who have had nothing to do with [Seacliff]."

14. Again I pause here to mention that he made no specific reference to any other project or customer or why there would be "extreme prejudice" to a particular business associate.

15. Dopp, in his affidavit referring to the manner of payment for goods and services via the Guangzhou companies, stated:

"During the period between 1996 and 1999, [Seacliff] entered into a series of contracts with four "Guangzhou" companies, with a purported total value of USD $38.5 million. Our investigation, to date, has been unable to determine what goods or services, if any, were received from the Guangzhou companies.

[Seacliff's] payment vouchers that authorized payments to the Guangzhou companies are incomplete and often lack sufficient supporting invoices. The payment vouchers authorizing the payments to the Guangzhou companies were, in the main, not approved by the [CMD] contrary to the assertions made by Howe in his Affirmation dated March 23, 2001 ..... Instead, many of the payment vouchers were approved by McNett and, in some instances, by Howe, contrary to Howe's assertion in his aforementioned Affirmation ...."

16. Referring to Howe's justification for the use of the Guangzhou companies as conduits for payment of foreign currency Dopp went on to state:-

"This statement makes no business sense. [Seacliff] made payments directly to all known suppliers and vendors including [Decca] (over USD $7 million) and [Tai Ping]. His Affirmation sheds no light on why the contracts were entered into with the Guangzhou companies or why payments were made by [Seacliff] to the Guangzhou companies."

17. Having regard to the massive over budget expenditure the investigation has revealed he went on to state:-

"Accordingly, in order to properly investigate this matter, it is necessary to obtain copies of bank accounts and other financial information relating to Howe's company, Benswick, and others, to identify and trace the use and disposition of the questionable payments giving rise to the excess CIP expenditures."

18. I now turn to consider the legal principles and in particular those with specific relevance to Seacliff's claim against HSBC.

The Law

19. I shall not revisit Norwich Pharmacal beyond reminding myself of what was therein stated and in particular that part of Lord Reid's judgment which I reproduced in Seacliff (supra) at p. 593.

20. The application for discovery of Benswick's bank statements is founded in the principle that it falls as an exception to the mere witness rule and within the jurisdiction of the court to order discovery by way of a tracing exercise to establish where the proceeds of suspected fraud have got to; see Bankers Trust Co. v. Shapira [1980] 1 WLR 1270. In this case the plaintiff sought discovery against a bank called the Discount Bank suspected, albeit innocently, to be the conduit through which a customer had wrongfully channelled funds rightfully the plaintiff's. Lord Denning MR, acknowledging this was new law, said at page 1282:-

"So here the Discount Bank incur no personal liability: but they got mixed up, through no fault of their own, in the tortious or wrongful acts of these two men: and they come under a duty to assist the Bankers Trust Co. of New York by giving them and the court full information and disclosing the identity of the wrongdoers. In this case the particular point is "full information".

This new jurisdiction must, of course, be carefully exercised. It is a strong thing to order a bank to disclose the state of its customer's account and the documents and correspondence relating to it. It should only be done when there is a good ground for thinking the money in the bank is the plaintiff's money - as, for instance, when the customer has got the money by fraud - or other wrongdoing - and paid it into his account at the bank. The plaintiff who has been defrauded has a right in equity to follow the money. He is entitled, in Lord Atkin's words, to lift the latch of the banker's door: see Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321, 355. The customer, who has prima facie been guilty of fraud, cannot bolt the door against him. Owing to his fraud, he is disentitled from relying on the confidential relationship between him and the bank: see Initial Services Ltd. v. Putterill [1968] 1 Q.B. 396, 405. If the plaintiff's equity is to be of any avail, he must be given access to the bank's books and documents - for that is the only way of tracing the money or of knowing what has happened to it: see Mediterranea Raffineria Siciliana Petroli S.p.a. v. Mabanaft G.m.b.H. (unreported). So the court, in order to give effect to equity, will be prepared in a proper case to make an order on the bank for their discovery. The plaintiff must of course give an undertaking in damages to the bank and must pay all and any expenses to which the bank is put in making the discovery: and the documents, once seen, must be used solely for the purpose of following and tracing the money: and not for any other purpose. With these safeguards, I think the new jurisdiction - already exercised in the three unreported cases - should be affirmed by this court."

21. The point was further addressed in the case A and Another v. C and Others [1981] 1 QB 956, in which the plaintiffs sought, inter alia, an order against a bank tracing the whereabouts of funds claimed to have been lost because of suspected fraud. Reciting the facts at p. 957 Goff J said:-

" The factual background of the case is that the plaintiffs claim to be the victims of a fraud which they say was master-minded by the first defendant, but which implicated the second, third, fourth and fifth defendants. They have placed before the court affidavit evidence which constitutes prima facie evidence that a fraud has been committed; though whether such a fraud may hereafter be proved depends upon the effect of the evidence given at the trial of the action. In their writ, they are claiming against the first five defendants damages for conspiracy to defraud and damages for deceit, and against the fifth defendant damages for breach of warranty, in a sum of ￡5.7 million. They are also claiming to trace a sum of ￡383,872.44 which they say was paid, under a mistake of fact induced by the fraud, into an account at the sixth defendant, the bank. There is no allegation of malpractice against the sixth defendant: simply a claim to trace money into the bank's hands which the plaintiffs say is their property in equity."

22. Goff J cited cases in which interlocutory relief was granted to preserve assets pending trial and then said, at p. 959:-

" Now these cases provide ample authority that, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court not only has jurisdiction to grant an injunction restraining the disposal of that property; it may in addition, at the interlocutory stages of the action, make orders designed to ascertain the whereabouts of that property. In particular, it may order a bank (whether or not party to the proceedings) to give discovery of documents in relation to the bank account of a defendant who is alleged to have defrauded the plaintiff of his assets; and it may make orders for interrogatories to be answered by the defendants or their employees or director."

23. This was a case at first instance. But the principle enunciated was referred to with approval by Hoffman LJ in Mercantile Group (Europe) A.G. v. Aiyela and Others [1994] CA 366. He said at p. 374:-

"Mr. Mann says that the Norwich Pharmacal principle is limited to finding out the identity of a tortfeasor. But this is not the only situation which falls outside the mere witness rule. In Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274 discovery was ordered against a bank which had received the proceeds of fraud. The purpose of discovery was to trace what had happened to the money. The bank had innocently become mixed up in the fraud and there was no infringement of the mere witness rule because there would be no point in the plaintiff seeking the information at the trial. By that time the money would be gone. In A v. C (Note) [1981] Q.B. 956, 961, Robert Goff J. made an order for disclosure in aid of a pre-judgment Mareva against a bank which had been joined solely for the purposes of discovery."

24. In Societie Romanaise de La Chaussure S.A. v. British Shoe Corporation Limited [1991] FSR 1 Millet J was asked to order discovery against the defendant which had, again albeit innocently, become involved in a breach of copyright. He granted the order. Suffice to repeat headnote 4:-

" (4) A defendant who has prima facie become involved, however innocently, in wrongdoing was under a positive duty to assist a plaintiff by both disclosing the identity of the wrongdoer and giving him full information, which included all information necessary to enable the plaintiff to decide whether it was worth suing the wrongdoer or not.

Norwich Pharmacal Co. v. Commissioners for Customs and Excise, [1973] F.S.R. 365, [1974] R.P.C. 1021 (H.L.), followed."

25. Finally I come to the case The Coca-Cola Company & Ors v. British Telecommunications PLC [1999] FSR 518. In that case the judge was invited to make a pre-trial discovery order against BT namely, that it disclose the address of a subscriber, called Akrell, alleged to be infringing the plaintiff's trade marks in conjunction with a person called Mabe. He reviewed a number of authorities before stating that he would grant the order. He said at p. 523:-

" From these authorities I derive the following propositions. First, I must be satisfied that it can be said on the facts of the case that there may be a tort of which the plaintiff has cause to complain, but as P v. T, and in particular the passage I have just quoted, shows, it is enough, in certain cases at any rate, that the plaintiff has good and honest reason to believe that a tort has been committed. Secondly, before I can make any order I must be satisfied that the respondent has in some real way become mixed up in the transaction concerning which discovery is required. Thirdly, the purpose of any order which I may make must be with a view to trying to enable justice to be done. Fourthly, I must balance the interests of the plaintiff in pursuing a case against Mr Akrell with the natural concern of BT not to open the floodgates.

Bearing in mind these principles I have come to the conclusion, albeit with some hesitation, that this is a case where I should make the order sought. First, while the evidence is rather thin but in a case such as this it must frequently happen that the evidence will be rather thin. There is reason to believe that, even in his "full and frank" affidavit Mr Mabe played his cards close to his chest. He does, however, state, as I have indicated, that he had a business relationship with Mr Akrell, and I find it an almost irresistible conclusion that the telephone formed an important part in their business relationship."

26. With these authorities establishing how a pre-trial application for discovery should be dealt with I now turn to the circumstances giving rise to this application, to determine whether in this case it is within my jurisdiction to make the order and, if it is, whether it is a proper exercise of my discretion to "lift the latch of the banker's door".

The Opposition

27. Mr Dissanayake for Benswick mounted a spirited defence on a number of grounds. Those I regard as pertinent follow, with my reaction to them:-

(1) "It is for Seacliff to prove, to a standard higher than on a balance of probabilities, that it is the victim of a fraud and that there is a direct link to Benswick". This is not a correct interpretation. The authorities cited, in particular Bankers Trust (supra) state that in a tracing exercise it is enough to establish there is a good ground for thinking the money in the bank is the plaintiff's money. It follows that fraud is not an essential ingredient, but prima facie fraud, in which the customer is or may be implicated, would in most cases be enough to allow the relief.

(2) "Pre-trial discovery will not be permitted where it is needed for a claim to be mounted in a foreign jurisdiction; see Manufacturer's Life Insurance Company of Canada v. Harvest Hero International Limited (unreported) HCCL 96/2000. In this case the alleged fraud was committed in the PRC; the remedial action would need to be undertaken in the PRC courts". The statement of law is correct. But as Mr Burns, counsel for Seacliff argued, the remedial action if it is to be mounted will be a proprietary claim against funds in a Hong Kong bank account of a Hong Kong incorporated company. No foreign court will be involved.

(3) "Any impropriety in the claiming of reimbursement of expenditure by Howe is denied; Seacliff is put to the proof. In any event that can be pursued without discovery; the parties are known and the cause of action can be framed." As argued by Mr Burns, the discovery sought does not concern the fraudulent conduct referred to; it is a tracing exercise sought to identify funds missing from Seacliff's coffers. But it is part of its case that that impropriety by Howe, Benswick's alter ego, carried out in tandem with McNett, a convicted felon, serves to demonstrate that Howe and Benswick are or might be implicated in a wider embezzlement.

(4) "Pre-trial discovery of the type sought by Seacliff should only be permitted if there is no alternative course available to it. Seacliff is looking to trace moneys paid to and then from the Guangzhou companies. It should look to them to disclose their records to establish where the money went." The statement of law is not correct. It is not a prerequisite that an applicant for discovery must establish there are no other means of formulating a cause of action. It is enough to show that without the information being sought the constructing of a claim would not be possible. And, as argued by Mr Burns, Seacliff knows that US$42m. was paid to the Guangzhou companies and that much of that went to Benswick. It knows that because Howe told Duperouzel as much. And payments scheduled for Decca also travelled this path. The essential information required is how much went to Benswick's account and what happened after that, which only Benswick's bank accounts will reveal. There is the added factor that the relief suggested by Mr Dissanayake would have to be pursued through the PRC courts which might not be possible or feasible.

(5) "There has in these proceedings been material non-disclosure by Seacliff; furthermore it has not proved there was a budget and thus that there was an overspend; this remedy being an equitable one Seacliff should be denied relief because whilst seeking equity it has failed to do equity." Mr Burns' argument is that there is evidence, sufficient for the purposes of this action, that there was a budget of US$49m; Duperouzel as a disinterested independent professional investigator did not pluck this figure out of the ether; furthermore, it is the massive overspend beyond the assessed value of the completed work rather than an approved budget which is the more crucial aspect. I agree with this argument. On the issue of material non-disclosure, Mr Burns submitted that this being in the nature of an interlocutory application it would be entirely inappropriate to burden the court with every conceivable document. There is no evidence that Duperouzel, Dopp or Seacliff have withheld documents or information as to mislead the court. I accept this to be so also.

(6) "The application is for blanket disclosure by the HSBC of all accounts for the period in question. This would expose information relating to others who dealt with Benswick having no bearing on Seacliff's project." I do not find this is a reason for refusing the application or otherwise limiting the terms. There is nothing before me to establish Benswick was engaged with others; there is nothing to suggest how or why disclosure might be prejudicial. And, in a normal commercial transaction, it is hard to see how or why this could be so.

The Result

28. I am satisfied that the plaintiff has done enough to establish that there is a good ground for thinking that money that found its way into Benswick's account with HSBC is its money as a result of a fraud committed against it. As such it is entitled to follow the money and thus to the orders sought, granted now on the basis that Seacliff undertakes to meet all the costs of HSBC reasonably incurred in meeting the terms of this order and to indemnify it in damages. Costs of Seacliff, taxed if not agreed, shall be borne by Benswick. (This order for costs shall be nisi at first instance).