ILLUSTRIOUS ASSETS LTD v. LU CHUNG CHUN AND OTHERS

HCA 2426/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2426 OF 2007

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J U D G M E N T

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Introduction

1.  This is a summons by the Applicant, Credit Suisse, to vary the terms of a world-wide Mareva injunction, granted by Kwan J to the Plaintiff on 14 November last year, by inserting into the order what is commonly known as the Baltic proviso (see Baltic Shipping Co. v Translink Shipping Ltd & Anr [1995] 1 Lloyds Law Reports 673).  The variation that is applied for appears in the summons [B/34] and is designed to protect third parties.  The following is sought to be added to the current injunction:

“5.	It is further ordered and directed that nothing in this order shall, in respect of assets located outside Hong Kong, prevent Credit Suisse or its subsidiaries from complying with:
(a)	What it reasonably believes to be its obligations, contractual or otherwise under the laws and obligations of the country or state in which those assets are situated or under the proper law of any bank account in question; and
(b)	Any orders of the courts of that country or state, provided reasonable notice of any application for such an order by Credit Suisse (to the extent such notice is permitted by the criminal law of such country or state) is given to the Plaintiff’s solicitors.”

Background

2.  This is a dispute between members of a wealthy Hong Kong family in which it is alleged that the 1^st and 2^nd Defendants have been engaged in siphoning off very large amounts of money to the detriment of its other members.  The injunction granted by Kwan J was for the purpose of freezing and stemming the outflow of funds.  On 23 November 2007, I varied that order to permit the 2^nd and 3^rd Defendants to withdraw $8.30 and $20.5 million respectively from their account with the Applicant in order to pay those sums into court so as to obtain a discharge of the injunction against them, leaving the injunction in place against the 1^st Defendant.

3.  As between the Plaintiff and the 1^st Defendant, there is a summons taken out by the Plaintiff for an order requiring the 1^st Defendant to make further disclosure of his assets including what accounts he has (if any) with the Applicant here in Hong Kong and elsewhere.  That summons has been adjourned to a date to be fixed following directions as to the filing of affirmations.  In this regard, the 1^st Defendant’s current evidence is that he has not and, never has had any accounts with the Applicant.  Mr Anson Wong, who appears for the Plaintiff, submits that the outcome of that disclosure summons against the 1^st Defendant may well have a bearing on this summons by the Applicant in the way that I will come to in due course.

The Baltic Proviso

4.  I have been told during the course of the argument that there is no case in Hong Kong, reported or otherwise, where such provisions as are now applied for by the Applicant have been inserted into a world-wide Mareva order.  This notwithstanding the fact that these provisions are commonplace in England and Wales whose practice in this type of proceeding the courts of Hong Kong have closely followed.  Mr Clarke, for the Applicant, says that the absence of judicial decision on this aspect is perhaps not surprising because such provisions are usually agreed between the parties and therefore there has never been the need, until now, to trouble the courts with such an application.  That may or may not be so and it is not something that I am able to take any notice of.  For my part, this is the first such application that I have had to decide.

5.  One of the arguments addressed to me by Mr Wong is that the order as it currently stands is one drafted in accordance with the existing Practice Direction which makes no mention of the terms which Mr Clarke would like me to insert for the Applicant’s protection and that I should therefore leave the matter as its stands. 

6.  Mr Clarke has carefully taken me to the relevant passages in Gee as well as what is the main authority on this aspect which is the English Court of Appeal’s decision in Bank of China v NBM LLC [2002] 1 WLR 844 where it upheld Steele J’s order inserting Baltic proviso terms, his judgment being reported at [2001] 4 All ER 154.  The principle as expressed by Steele J is conveniently set out in the headnote to the report in the following way:

“Where the court granted a freezing order in respect of assets outside the jurisdiction, it should include in the order, unless it was inappropriate to do so, a proviso that nothing in it prevented an affected third party or its subsidiaries from complying with what they reasonably believed to be their obligations, contractual or otherwise, under the laws and obligations of the country or state in which those assets were situated or under the proper law of any account in question.  Banks which were domiciled to otherwise present within the jurisdiction should not be required to decide whether to act in conflict with the terms of the freezing order or in conflict with its duties to its customer under local law.  Such an approach was consistent with the interests of comity.  Moreover, in maintaining a fair balance between the interests of a claimant and the interests of a third party, the court always had to bear in mind the risk associated with exercising an exorbitant jurisdiction, a risk that might be of particular prejudice to third parties.  In the instant case, the absence of any defendant within the jurisdiction and the consequent inability to enforce the obligation to produce an affidavit of assets rendered the proviso sought by UBS all the more desirable.  A third-party bank should not be exposed to the risks of refusing to comply with the terms of its mandate.  Nor should a court order be made a necessary precondition to compliance.  Accordingly, the application would be granted (see [13], [18]-[21], below).

Baltic Shipping v Translink Shipping Ltd [1995] 1 Lloyd’s Rep 673 followed.”

In the Baltic Shipping case itself, supra Clarke J (as he then was) held at 678-679 that the bank, as in this case not a party to the proceedings:

“… should be given all reasonable protection.  It is not in principle desirable for a bank to have to rely upon the undertaking in damages … I do not think that the bank should have to run the risk that it would be in breach of its contract under the law of Noumea for it to pay out pending an application by the plaintiff to the local Court.  That approach appears to me to be consistent with the general approach of the Courts in the cases to which I have referred … In general plaintiffs should recognise this difficulty and apply to the local Court as soon as they possibly can, either at the same time or as soon as may be after a world-wide Mareva has been granted.  It appears to me that if the bank’s proviso is adopted the plaintiff has reasonable protection because the bank can only act on reasonable belief.  In forming that belief it will have to act on the information available to it.  So if in a particular case the plaintiff has the powerful opinion of a lawyer to the effect that there would be no breach of local law if a payment out were to be made then the bank will have to take the opinion into account in forming its belief.  If the belief is not reasonable then the bank will be at risk”

7.  In upholding Steele J, the Court of Appeal in Bank of China also approved Clarke J’s approach in Baltic Shipping.  This is amply reflected in the headnote at page 844 supra:

“… the limit of the court’s territorial jurisdiction and the principle of comity required that the effectiveness of freezing orders operating upon third parties holding assets abroad should normally derive only from their recognition and enforcement by the local courts; that third parties amenable to the English jurisdiction should be given all reasonable protection, and a freezing order should not require a third party to breach its contractual obligations abroad; that, accordingly, third parties would be entitled to have a proviso added to a worldwide freezing order to the effect that in respect of assets outside the jurisdiction nothing in the order prevented the third party from complying with what it reasonably believed to be its obligations, contractual or otherwise, under the laws and obligations of the country in which those assets were situated, unless the court considered that on the particular facts that proviso was inappropriate; and that there was no reason for not including such a proviso in the claimant’s freezing order (post, paras 17, 19, 22-26).

Baltic Shipping Co v Translink Shipping Ltd [1995] 1 Lloyd’s Rep 673 approved.  Derby & Co. Ltd v Weldson (Nos 3 and 4) [1990] Ch 65, CA considered.”

This reasoning is reflected in the judgment of Tuckey LJ, with whom Jonathan Parker and Pill LJJ’s agreed, starting at para.15 on page 850.  It is helpful to set out in full what he said from para.17, page 851 to para.22 at page 852:

“17. The cases to which I have referred do, I think, establish two general propositions.  Firstly the limit of the court’s territorial jurisdiction and the principle of comity require that the effectiveness of freezing orders operating upon third parties holding assets abroad should normally derive only from their recognition and enforcement by the local courts.  In this respect it is worth remembering that the English courts’ jurisdiction to grant freezing and disclosure orders is a good deal more extensive than in most other jurisdictions, notably the United States.  Secondly, third parties amenable to the English jurisdiction should be given all reasonable protection.

18. It follows that any order of the English court which has the effect of requiring a third party to do or refrain from doing something abroad is exceptional.  With this in mind, what does ‘able to prevent’ in the Derby v Weldon proviso mean?  It was not spelt out in that case and Ms Prevezer accepts that it does not require the third party to disobey the local criminal law or an order of the local court.  Her submission is, however, that it does require the third party to breach its contractual obligations to its customer (its mandate) and that if it has to pay damages as a result, it is adequately protected by the terms of the standard form undertaking which the claimant gives which says:

‘The applicant will pay the reasonable costs of anyone other than the respondent which have been incurred as a result of this order … and if the court later finds that this order has caused such person loss, and decides that such person should be compensated for that loss, the applicant will comply with any order the court may make.

Ms Prevezer submits that if the bank was unwilling to breach its mandate it could apply to the local court for relief so that anything it did nor did not do would  not be in contempt of the English court.

19. This analysis, if nothing else, shows that the Derby v Weldon proviso in unclear.  A third party would be ‘able’ to disobey the local criminal law or an order of the local court, but it is rightly conceded that the proviso does not require it to do this.  Should it be required to breach its contractual obligations?  I do not think so.  Those obligations could be enforced by order of the local court which the third party would have to obey.  I see no logical justification for distinguishing between the third party’s contractual and other legal obligations under the local law.  The onus should be upon the claimant to obtain relief from the local court rather than upon the third party.

20. Like Clarke J I do not think the undertaking in damages provides sufficient protection for the claimant.  Damage to reputation and regulatory consequences abroad could not be adequately compensated.  The bank might also be forced into litigation abroad with a customer or a third party or be faced with arguments here as to whether any particular loss fell within the terms of the undertaking.

21. Saville J’s statement makes it clear that there have been problems with the Derby v Weldon proviso and we were told by UBS that claimants usually agree to the Baltic proviso being added to the standard form so I do not think it can be assumed that the standard form has not given rise to problems in practice.  The Baltic proviso does of course only require the third party to have a reasonable belief as to what its obligations are, but I think it is entitled to this degree of protection.  As Clarke J pointed out in Baltic Shipping Co. v Translink Shipping Ltd [1995] 1 Lloyd’s Rep 673 if the court had to decide whether the third party was able to prevent a breach of the order this might involve a prolonged and contentious inquiry as to what the local law in fact was.

22. So, like the three experienced commercial judges who have previously had to consider this point, I conclude that the need to avoid unwarranted extraterritorial jurisdiction, the need to provide reasonable protection for third parties affected by freezing orders and the need to clarify the Derby v Weldon proviso will usually entitle third parties to have the Baltic proviso added to the worldwide freezing order unless the court considers on the particular facts of the case that this is inappropriate.  As third parties are not represented when the order is first made, I think the Baltic proviso should be included in the standard form.”

As appears at para.22, the Court of Appeal considered this protection so necessary as to suggest that the Baltic proviso should be included in the standard form of worldwide Mareva order and at para.24, it indicated that the Civil Procedure Rule Committee and the Commercial Court should consider the prescribed form in the light of its judgment.

8.  Supported by this weight of authority and where the Plaintiff has taken no steps to obtain appropriate parallel freezing orders in Singapore or indeed elsewhere, some four months having elapsed since Kwan J gave it this order here, Mr Clarke submits that it is only right that the Applicant should now be given the protection that it seeks by this summons.

The Plaintiff’s Stance

9.  Apart from saying that I should not depart from the standard form of order provided by the existing Practice Direction where apparently no other judge in Hong Kong has done, Mr Wong has referred to factual differences between this case and the authorities which I have cited which he says make it both unnecessary and indeed inappropriate to make this order.  Tuckey LJ at para.22 of his judgment supra specifically had in mind that there might well be cases where on the particular facts of a case it would be inappropriate to enter a Baltic proviso in a worldwide order.  In this regard, Mr Wong has complained that both the 1^st Defendant and the Applicant itself have not come clean as to the 1^st Defendant’s accounts with the Applicant.  In such circumstances, he submits that to make the order asked for in this summons would undermine the effectiveness of the Kwan J’s order because if the 1^st Defendant has accounts with the Applicant in Singapore for example, he could require the Applicant to pay out to him under its mandate and the Applicant would have to, and that with the Baltic proviso in place in its favour it could do so with impunity.  Leaving aside for the moment whether Mr Wong is justified in criticising the Applicant for not revealing whether the 1^st Defendant holds any accounts with it, Mr Clarke’s response is that this is precisely why the Plaintiff should protect its position by applying for parallel relief in the overseas courts, which the authorities appear to contemplate as the appropriate way of proceeding.  To this Mr Wong says that when faced with a Defendant and an Applicant who are not putting their cards on the table, this puts a plaintiff in an impossible position because it does not know where to begin in terms of which “local” courts it should be applying to.  He asks rhetorically, is the Plaintiff to blindly bring proceedings in the courts of the numerous jurisdictions where an international bank such as the Applicant has branches.

The Applicant’s Position

10.  The Applicant, in common with most, if not all, banks must very frequently be served with Mareva orders of this sort and invariably it will be careful to comply with what the court has ordered.  In the case of a local injunction this usually presents no difficulty.  In the case of a worldwide order it has to answer to its obligations under the various and different legal regimes of the countries where it operates.  As the cases show it is for these reasons that a court will, in the ordinary course of events, give it the protection that it is asking for in this instance.  The cases show that in obtaining such protection it will not be required to disclose to the Plaintiff or the court information about the Defendant’s assets as a pre-condition to obtaining the court’s protection.  This is discussed extensively in the current edition of Gee at paras 20.018 and 20.019 where the learned author relies on, amongst other authority, the decision of Lloyd J (as he then was) in Oceanica Castellana Armadora SA of Panama v Mineralimportexport [1983] 1 WLR 1294.  In this regard, Lloyd J referred to the judgments of Eveleigh LJ and of Kerr LJ in Galaxia Maritime SA v Mineralimportexport [1982] 1 WLR 539.  These passages are for present purposes sufficiently related at pages 1300-1301E-A:

“There is a world of difference between a defendant who is seeking to vary a Mareva injunction and a third party, such as a bank, which is exercising its ordinary rights and remedies in the ordinary course of its business.  A Mareva injunction was never intended to interfere with the rights of third parties in this way.  In a passage from a case I have already quoted, Galaxia Maritime S.A. v. Mineralimportexport [1982] 1 W.L.R. 539 Eveleigh L.J. said, at p.542, that he regarded it as intolerable that the freedom of shipowners to trade their ships should be restricted, or that ‘third parties should be inconvenienced in this way.’  It seems to me that in exercising a right of set-off against their customers, banks are in the same position as any other third party.
It is true that in the Galaxia Maritime case Kerr L.J. said, at p.542:
	‘In this connection, it is crucial to bear in mind not only the balance of convenience and justice as between plaintiffs and defendants, but above all also as between plaintiffs and third parties.  Where assets of a defendant are held by a third party incidentally to the general business of the third party — such as the accounts of the defendant held by a bank, or goods held by a bailee as custodian, for example in a warehouse — an effective indemnity in favour of the third party will adequately hold this balance, because service of the injunction will not lead to any major interference with the third party’s business.’
I do not read that passage as affecting the bankers’ right of set-off, or as requiring the bank to accept an indemnity from the plaintiffs in lieu of its right of set-off against its customer.  Kerr L.J. continued:
	‘But where the effect of service must lead to interference with the performance of a contract between the third party and the defendant which relates specifically to the assets in question, the right of a third party in relation to his contract must clearly prevail over the plaintiff’s desire to secure the defendant’s assets for himself against the day of judgment.’
It seems to me that to require a bank to disclose the state of its customers’ accounts, or provide other information about its customer, as condition of being able to exercise its ordinary right of set-off would indeed be, in the words of Kerr L.J. above, ‘to interfere with the performance of a contract between the third party and the defendant which relates specifically to the assets in question.”

11.  These passages afford more than ample grounds for my saying that Mr Wong’s criticism of the Applicant not providing information about the 1^st Defendant’s account with it are wholly misplaced and completely unwarranted.  The Applicant has behaved with complete probity in this regard and that submission should never have been made.

The Result

12.  In circumstances where in England and Wales orders of this sort are commonly granted and are usually, it would appear, agreed I now need to decide whether in this jurisdiction and on this occasion, on these facts, it would somehow be inappropriate to make the order that Mr Clarke is asking for.

13.  Mr Wong’s best point really is that at present, four months after Kwan J made the order in common form, there is no evidence that the Applicant can be said to be so troubled by the injunction that it should be protected by the addition of the Baltic proviso.  That is undoubtedly so.  If it had, I have no doubt that this would have been part of its case.  Nevertheless, I suspect that in most cases where a Baltic proviso appears as part of the order there will be no evidence that the order will in fact cause a third party difficulty in respect of its civil or criminal obligations in overseas jurisdictions and yet the protection is given as a matter of form  save in a limited number of instances where such a provision is considered inappropriate.  Not so before our courts — the parties have not been able to provide me with instances where a Baltic proviso has gone into an order nor where one has been asked for and refused.

14.  In the absence of guidance from a higher court, I will have to do my best in the exercise of my discretion.  Whilst I am in no doubt that such a provision should usually appear in a worldwide order, as the English cases show, I also need to have regard to the fact that this form of order does not appear in the Practice Direction.  Neither party has been able to assist me as to why this should be so five years after the English Court of Appeal’s decision in Bank of China.  Whilst all my sympathies favour Mr Clarke’s application, I feel constrained not to make such an order in the absence of proof by the Applicant that it actually has a pressing need for the exceptions to be granted to it.  If it is put on notice of such a problem arising in an overseas jurisdiction it can apply at very short notice to have the proviso made part of the existing order.  In the absence of such evidence at present, I do not propose to disturb the usual course that appears to be taken by courts in this jurisdiction.  This having been said I wish to express the hope that in the not too distinct future, perhaps this case may be an appropriate one, the matter can be clarified by a decision of the Court of Appeal and also that this apparent difference in our courts’ practice with the English courts might be considered by our own rules committee.  Subject to these observations, I propose to refuse the application.  The summons will therefore be dismissed.

Costs

15.  This has been a meritorious application by the Applicant.  Although it has failed, it has been vindicated on the issue of whether it should have revealed information about the 1^st Defendant’s account.  It seems to me that the appropriate order for costs is to say that the Applicant should only pay ½ the Plaintiff’s costs in this matter.  This order will be an order nisi in the usual way.