FIVAL INVESTMENT CO LTD v. BANK OF CREDIT AND COMMERCE HONG KONG LTD AND ANOTHER

Headnote

                Injunction - application to discharge by third party- jurisdiction of court - Bank paying out under Letter of Credit - evidence of fraud to prevent such payment must be clear and compelling.

COMMERCIAL LIST NO. 68 OF 1987

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. As I have come to a clear conclusion I give my judgment straight away. In 1986, the Plaintiff, Fival Investment Company Limited, issued a specially indorsed writ against the Bank of Credit and Commerce in Hong Kong, claiming an injunction, restraining them from parting with the sum of US$432,000.00 to anyone other than the Plaintiff. It is a statement of claim, which in my judgment, really contains no cause of action against the Defendant; it is clear from well-known authorities, to which I need not refer, that an injunction is purely ancillary to a cause of action and it cannot be granted in such a bare manner. As Lord Diplock said in the 'Siskina', the right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action. An ex-parte injunction was granted and there was an inter-partes hearing by Deputy Judge O'Dea as he then was) in November 1986. The Defendant, having had a demand made on it for that sum of money, the injunction which was granted restrained it from parting with the money. Although the injunction says parting to anyone other than the Plaintiff, I think really what was meant was that the 1st Defendant should not part with the money at all.

2. The matter takes an unusual course, in that some eight months or so later, an application was made by summons by the Medium Business Bank of Taiwan to be joined as a Defendant in the proceedings. This came before Mr. Justice Penlington and by consent the Applicant was joined as 2nd Defendant and the further relief which was sought namely the discharge of the injunction of the 18th of November was adjourned and it is that part of the summons which now comes before me.

3. The matter, at first blush, appears complicated but it is not really so. The Plaintiffs were buyers of a quantity of cellophane wrapping and entered into a contract on May 28th 1986 to purchase this cellophane wrapping from N.U.P.'s International Ltd. The history of that matter and the documentation supporting it is set out in the affirmationsin front of me, and I do not repeat them. In order to pay for that, a Letter of Credit was issued by an issuing bank which is the 1st Defendant. This was an irrevocable Letter of Credit, but on the other hand it was freely transferable; the documentation for that is set out in the Affirmationsin front of me.

4. The time came when the shipment of the cellophane wrapping should have taken place, but to the great surprise and anxiety of the Plaintiffs, it was not cellophane wrapping which turned up, but a load of pebbles; not unnaturally the Director of the Plaintiff's company made extensive inquiries, visited Taiwan, contacted various departments, no doubt in Hong Kong and Taiwan because it was clear that a fraud had been perpetrated upon his company; none of the parties dispute the fact that the Plaintiffs have been defrauded.

5. On the 16th of September, the appropriate documentation supporting the Letter of Credit was presented at the 2nd Defendant's bank, The Medium Business Bank of Taiwan and they paid out a very large sum of money some US$420,000.00 to a company called Namson Industrial who clearly were, on the evidence before me, the perpetrators of this fraud.

6. The Medium Business Bank of Taiwan then, in the normal course of commercial business, made a demand on the issuing bank, that is the 1st Defendant, for payment of a sum of money representing the sum of money which had been paid out to Namson. It was at this stage that the Plaintiff issued his writ claiming, as I have said, only against the 1st Defendant and seeking an injunction, not only freezing the money but preventing the lst Defendant from paying out to anyone other than the plaintiff. Might I say, at this stage, that there was no obligation on the Defendant to pay the Plaintiff anything at all; the Defendant did not owe any money at all to the Plaintiff. All that was happening was that the Defendant when it came to pay out under the Letter of Credit would debit the account of the Plaintiff again in the ordinary course of business. Nevertheless, Deputy Judge O'Dea was persuaded to grant this unusual injunction on the basis that a fraud had been perpetrated upon the Plaintiff and the 2nd Defendants were a party in some way to that fraud. It is common for a buyer to come to the Court to prevent a bank paying out under, for example, a guarantee, performance bond or Letter of Credit to the seller who is itself guilty of fraud upon the buyer. What is said here is that the 1st Defendant Bank should be prevented from paying out the sum of money to the 2nd Defendant Bank and Mr. Mitchell is prepared to have the injunction modified so that the Court would restrain the 1st Defendants from paying out under the Letter of Credit to the 2nd Defendants who have made this demand. The law, on this matter, is set out in a series of decisions mainly in the Commercial Court in London, United Trading v. Allied Arab Bank in 1985 and also the well-known Harbottle case. (Harbottle (Mercantile) Ltd. v. National Westminister Bank 1978 QB 146).   It has been the subject of decisions in this jurisdiction, see a decision of mine in January 1987 Watanmal (Liberia) Incorporated v. Chase Manhattan Bank and Credit Lyonnais and a recent decision of the Court of Appeal reaffirming the normal principles that apply in this branch of the law, namely that documents such as Letters of Credit, or guarantees, or performance bonds are vital to the normal life blood of international commerce and the Court should not interfere in the machinery of that well-known group of documents unless there is some clear evidence before it of fraud. I do not set out the relevant decisions, but I merely recite a passage from Bolivinter v. Chase Manhattan found at page 256 of Lloyd's law Report 1984 Volume One, when the Master of Rolls said that the injunction in normal circumstances should not be granted and he said "The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent ...". Now these normally are demands which are made on the bank by the supplier, or the manufacturer, or the seller and one party comes to the Court to prevent the bank paying out to the other party.

7. The matter before me is different in that what has been restrained at the present moment is the issuing bank paying out to a bank which has already paid out on the Letter of Credit and the relevant documentation. Might I say straight away that I did consider it unusual for Mr. Yu, coming in as he does for a new party, to seek to discharge an injunction granted in favour of the Plaintiff who wishes it to continue against the lst Defendant who has no objection to it continuing and I confess I did consider it somewhat unusual that this can be done.

8. In my judgment, it can be done. Courts are always seized of an injunction. Section 19 of the Supreme Court Ordinance empowers the Court to grant injunctions where it is just or convenient so to do. Whenever an injunction is granted, the Court always has an inherent jurisdiction to ensure that when matters are brought to its attention whether by means of affidavits, or submissions, or changes in the law, that injunction can be discharged or modified. The learned judge who looked at this matter originally, did so on the basis of evidence which was then before him. I now have the benefit of an additional affidavit and, of course, the submissions which have been made by Mr. Yu on behalf of The Medium Business Bank of Taiwan which were then not available to the Judge when he made the injunction. What Mr. Mitchell is forced to accept is that it is necessary for him to show, to prevent the issuing bank from paying out, that the 2nd Defendants have made  a fraudulent demand. That really is the issue. He says in effect that the Medium Business Bank of Taiwan, a leading bank in Taiwan and owned by the Government of Taiwan was part and parcel of the fraud which resulted in a shipment of pebbles, instead of cellophane, coming to his clients.

9. This is a serious allegation to make and especially since there was no claim originally made against the 2nd Defendants at all in fraud, but what is said is that because of a number of unusual matters I am entitled to infer fraud by the employees of the Taiwan bank. I emphasize this aspect of the case because in my judgment when such allegations are made to stop an issuing bank paying another bank, then there ought to be clear and cogent evidence of fraud before the Court interferes with normal commercial transactions. Some jurists on the Continent suggest that the evidence of fraud must 'creve les yeux' (which knocks your eyes out). I am prepared merely to use the normal English words that there should be clear and cogent evidence of fraud put forward before the Court interferes. Mr. Mitchell has set out in his submissions, and also in a recent affidavit, a number of features which he says indicated some fraud by the Taiwan Bank. He says that they paid out a large sums of money to a new customer from whom they had not obtained satisfactory references (he refers to exhibit PTY-t); he says that they only had a low average deposit beforehand and certain indications on that reference should have caused them to be careful in what they did. Secondly, they came to the bank with other Letters of Credit on which there was doubt whether they had been negotiated successfully; there were transferred Letters of Credit on a variety of products such as sewing machines and furniture; on any view a diverse range of products. Thirdly, he says, the shipping documents contained inconsistencies and discrepancies. These are found at paragraph 7 onwards in the recent affirmation of Mr. Yusuf, who is the Director of the Plaintiff company and I do not set them all out here. Mr. Mitchell submits that the bank could not possibly be a bona fide holder of these documents, because of their attitude towards Namson and the inconsistencies in the documents themselves.

10. In my judgment, I do not accept that. The evidence which has been disclosed may, although I make no conclusion on the matter, be that the banking methods of the 2nd Defendants were not at times of the highest standard; it may be that they could have investigated Namson, a recent client, in a more thorough manner, but in my judgment, that is a far cry from saying that they themselves were part and parcel of a  conspiracy to defraud the Plaintiffs. I can find no clear evidence of fraud by the person making the demand for payment, that is the 2nd Defendants. They paid out on the 16th September, but by paying out they did not participate in any fraud. I also hold they were not so reckless as in some way to amount to fraud. I can see at the end of the day a certain amount of suspicion which has been raised, but no element of clear fraud.

11. There are instances which are referred to by Lord Justice Ackner, as he then was, in the United Trading case where parties can come to Court to obtain a temporary restraining Order because there is some basis of suspicion of fraud. An ex-parte injunction where there is such a basis can be granted to permit the party in whose favour the injunction is given to add to the material and justify a reasoned case of fraud. The matter comes before me in an unusual manner in that the Plaintiff has never made a claim against the 2nd Defendants at all. There is merely a specially endorsed unit writ asking for an injunction. In my judgment, there is no cause of action between the Plaintiff and the 1st Defendants. On that basis alone, the injunction should not have been granted, because I can see no breach of duty by the 1st Defendants. Even if I assume for the purpose of this application, that there was some breach of duty to found a cause of action between the Plaintiff and the 1st Defendants, I have to ask myself has the Court been given clear evidence to justify an order preventing the Hong Kong Bank paying out to the Taiwan Bank money which has been demanded by the Taiwan Bank under the Letter of Credit.

12. In my judgment, there is no clear evidence of any fraud by the Taiwan Bank to justify such a restriction. One matter which has, I confess, caused me a certain amount of anxiety is the delay in this case; the injunction was granted on 18th November 1986 and it is not until July, eight months later, that the Taiwan Bank comes to the Court seeking to remove that restrictive injunction.

13. In my judgment, this is not inordinate delay; one must acknowledge that in the normal course of commerce, banks try to obtain satisfaction between themselves and no doubt it was because the bank was advised that it has to become a party before such an application could be made. The unusual feature of this injunction was that the Hong Kong Bank was being restrained from paying out to anybody at all other than the Plaintiff. They were prevented from paying a bona fide holder. What the Plaintiff was really trying to do was to prevent its own account being debited with the sum of money which was represented by this Letter of Credit.

14. A court is entitled to examine matters as at the date when they come before the Court. I examine this matter as at today's date having regard to all of the evidence which is placed before me and in my judgment this injunction should be discharged and I discharge it.