FALCON PRIVATE BANK LTD v. BORRY BERNARD EDOUARD CHARLES LTD AND ANOTHER

HCA 1934/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1934 OF 2011

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BETWEEN

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D E C I S I O N

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Background

1.  I have before me two summonses: (1) the defendants’ summons dated 17 January 2012 (“Defendants’ Summons”) seeking extension of time to comply with paragraphs 1 and 2 of the order of Deputy High Court Judge Lok dated 6 January 2012 and for discovery; and (2) the plaintiff’s summons dated 19 January 2012 (“Plaintiff’s Summons”) seeking an order that unless the defendants comply with paragraphs 1 and 2 of the order of Deputy High Court Judge Lok, judgment be entered for the plaintiff in this action.

2.  These applications arose under the following circumstances.  The plaintiff is a licensed bank in Switzerland with a branch office in Hong Kong.  The 1^st defendant is a company incorporated in Hong Kong with a paid up share capital of HK$10.  The 2^nd defendant, a Swiss national apparently resident in Vietnam, is its sole shareholder and director.  He holds himself out as the chairman of the Master Vision Group of Banks (“Master Vision”), a suspected fraudulent business under investigation by the Hong Kong police.  Master Vision was also the subject of warnings issued by the Hong Kong Monetary Authority and the Liechtenstein Financial Markets Authority that it was not licensed to carry on banking or investment business, contrary to representations made by Master Vision.

3.  In July 2011, a Mr Morrison acting on behalf of an English incorporated company known as Bawa Financial Limited (“Bawa”) opened an account with the plaintiff (“Bawa Account”) and deposited certain floating rate bonds with the plaintiff.  The plaintiff placed the bonds with a reputable Swiss custodian known as SIX SIS AG (“SIX”).

4.  On 27 September 2011, SIX erroneously advised the plaintiff of a repayment of principal on the bonds in the amount of US$15,760,320. Pursuant to SIX’s instruction, the principal repayment was credited into the plaintiff’s account with SIX.  On 29 September 2011, the plaintiff credited the Bawa Account with the principal repayment as well as an interest payment on the bonds in the amount of US$39,010.36.  Prior to these payments, the Bawa Account had a credit balance of US$12,915.41.

5.  On 30 September 2011, Morrison informed the plaintiff that he would be instructing the plaintiff to transfer US$10 million to a third party in relation to a private equity placement.  By letters dated 2 October 2011, Bawa instructed the plaintiff to make a series of immediate cash transfers in different currencies to different recipients out of the Bawa Account and to transfer the bonds to a securities firm in Canada.  Pursuant to that instruction, the plaintiff made the transfers, including a sum of US$10 million to the 1^st defendant’s account with Standard Chartered Bank in Hong Kong (“SCB HK”).  This transfer of US$10 million formed the subject matter of this action.

6.  On 7 October 2011, SIX notified the plaintiff that its previous instruction relating to the transfer of the principal repayment to Bawa had been made in error and that Bawa was only entitled to the interest payment.  The payment of the principal amount from SIX was reversed on the same day.  The plaintiff then reversed the credit of the principal repayment in the Bawa Account.  But as a result of the various transfers out of that account, the reversal resulted in an overdraft of US$11,767,554.

7.  On the same day, the plaintiff also immediately contacted SCB HK by SWIFT requesting the cancellation of the transfer of US$10 million to the 1^st defendant’s account with SCB HK.  On 10 October 2011, SCB HK informed the plaintiff that the said sum of US$10 million had already been credited to the 1^st defendant’s account.  Later, SCB HK confirmed that it was contacting the 1^st defendant to return the funds.

8.  In the three weeks that followed, the plaintiff engaged in discussions with Bawa and its Swiss legal adviser and demanded the 1^st defendant to return the said sum of US$10 million.  The 1^st defendant did not respond.

9.  On 10 November 2011, the plaintiff made an ex parte application before Deputy High Court Judge Au-Yeung and obtained an injunction order restraining the 1^st defendant from disposing of or removing any of its assets within Hong Kong up to the value of HK$78 million and to make certain disclosures on or before 1:00 pm on 15 November 2011 or within 96 hours of service of the order on the 1^st defendant.  In applying for the disclosure order, the plaintiff gave the usual undertaking in paragraph 6 of Schedule 2 in the order in the following terms:

“The Plaintiff will not without the leave of the Court begin proceedings against the 1^st Defendant in any other jurisdiction or use information obtained as a result of an order of the court in this jurisdiction for the purpose of civil or criminal proceedings in any other jurisdiction.”

10.  At an inter parte hearing on 30 November 2011, Suffiad J made various orders, including an order that the 1^st defendant do within 14 days comply with the outstanding items ordered to be disclosed by Deputy High Court Judge Au-Yeung.

11.  At another inter parte hearing on 9 December 2011, Reyes J made various orders, including an order that the 1^st defendant do by 7:00 pm on 9 December 2011 fully comply with the order of Suffiad J dated 30 November 2011 and provide evidence of the transfer of the said sum of US$10 million from the 1^st defendant to Sunesko LLC.

12.  Unknown to the defendants, upon the plaintiff’s ex parte application on 14 December 2011, Sakhrani J granted the plaintiff leave to produce to the Swiss police and the Hong Kong police the 2^nd defendant’s affidavits given pursuant to the order of Deputy High Court Judge Au-Yeung.

13.  On 23 December 2011, the 2^nd defendant’s solicitors were informed by Morrison’s colleague of the arrest of Morrison and his partner, Brenner, in Switzerland in connection with the present action. 

14.  The disclosure by the 1^st defendant had hitherto been partial only.  The parties appeared before Deputy High Court Judge Lok on 6 January 2012 when a further disclosure order was made. Paragraphs 1 and 2 of the disclosure order read as follows:

“1. The 1^st Defendant (acting by a proper officer) and the 2^nd Defendant do within 14 days of the date hereof file a further affidavit in full and proper compliance with paragraph 4 of the Order of the Deputy High Court Judge Au-Yeung dated 10 November 2011, disclosing to the Plaintiff’s solicitors:

(giving certain particulars)

  2. In the event that the documents referred to in paragraph 1 is not in the possession, custody or control of the 1^st or 2^nd Defendant, the Defendants have to explain and provide the whereabouts of such documents in the affidavits.”

When making the disclosure order, Deputy High Court Judge Lok was unaware of the order of Sakhrani J.  

15.  The defendants’ solicitors subsequently learned from Morrison’s Swiss lawyer that a warrant of arrest had been issued against the 2^nd defendant and that the Swiss police had been supplied with copies of the 2^nd defendant’s affidavits filed in this action.  On 13 January 2012, they enquired from the plaintiff’s solicitors who confirmed that an order had been obtained from the court allowing the release of the 2^nd defendant’s affidavits to the Swiss police, but refused to provide a copy of the order of Sakhrani J as it was confidential.

Defendants’ Summons

16.  The defendants were anxious to know what information had been disclosed to the Swiss police and hence issued the Defendants’ Summons seeking discovery: (1) under paragraph 2.1 discovery of all summonses, supporting affidavits and affirmations, orders, skeleton arguments and other documents relating to the ex parte application before Sakhrani J; and (2) under paragraph 2.2 discovery of all correspondence relating to the disclosure of the affidavits to the Swiss police and/or other person; and extension of time to comply with paragraphs 1 and 2 of the order of Deputy High Court Judge Lok.

17.  The plaintiff did not oppose the discovery sought by the defendants under paragraph 2.1 of the Defendants’ Summons.  On         20 January 2012, the parties filed a consent summons seeking leave from this court for the defendants to inspect the sealed documents relating to the plaintiff’s ex parte application before Sakhrani J.  As there are a number of sealed documents in the court file, clarification was sought from the parties as to the particulars of the documents sought to be inspected.  A reply was only received on the day before this hearing.   The consent summons was approved on the same day.  Thus, the issue of discovery of the summons, affirmations and other documents used at the hearing before Sakhrani J became a non-issue. 

18.  The outstanding issue is about discovery of the correspondence relating to the disclosure to the Swiss police and/or other person.  Mr Lam, counsel for the plaintiff, admits that there are such correspondence to the Swiss police and Hong Kong police and confirms that there are none to the New Zealand police, which the defendants are also concerned.  But, Mr Lam argues that those correspondence are not relevant to the ex parte application before Sakhrani J in particular or to the present action as a whole and need not be disclosed. 

19.  Mr Wright, counsel for the defendants, sings and dances about the plaintiff’s ex parte application before Sakhrani J.  He argues that the plaintiff’s undertaking was an important consideration for the defendants’ disclosure pursuant to the order of Deputy High Court    Judge Au-Yeung.  The rationale for the undertaking was to protect the defendants’ rights to privacy and privilege against self incrimination.    He argues that those rights were infringed.  He submits that it is a matter of public interest that those rights are protected and that the order of Sakhrani J was contrary to all principles of natural justice.  All these are very high sounding principles.  But, for the purposes of this action or specifically for the purpose of any application to set aside the order of Sakhrani J, the question is one of relevancy.  

20.  Mr Wright submits that the information is important and relevant for the purpose of the defendants’ application to set aside the order of Sakhrani J.  He argues that the correspondence will disclose the plaintiff’s motivation and whether it communicates with the Swiss police on its own volition and maliciously.  In fact, the plaintiff never shied away from its intention to file a criminal complaint against Morrison, the 2^nd defendant and others.  In the second affidavit of Brandle dated 28 November 2011 filed on behalf of the plaintiff, the plaintiff confirmed that it was going to do so.  Mr Wright also argues that it is not the plaintiff’s pleaded case that the 1^st defendant had knowledge that the sum of US$10 million was transferred to its account with SCB HK in breach of trust and belonged to Bawa.  He further argues that the plaintiff did not have possession of necessary facts to entitle it to make a report to the Swiss police.  With respect, at this stage of the proceedings, I am not concerned with the strength or weakness of the plaintiff’s case or the merits of the ex parte application before Sahkrani J, but with non-compliance of previous orders of this court.  I am unable to see the logic in Mr Wright’s arguments. 

21.  The plaintiff’s undertaking was not to begin proceedings against the 1^st defendant in any other jurisdiction or use information obtained as a result of an order of this court for the purpose of civil or criminal proceedings in any other jurisdiction without the leave of the court.  The plaintiff may not disclose the information obtained in these proceedings to any person at its discretion.  It has to seek leave of the court before such information may be disclosed.  That was the term of its undertaking. The defendants’ interest was adequately protected by the court when deciding whether to grant leave.  Leave was sought in the absence of the defendants, but Sakhrani J must have considered all necessary information and balanced between the parties’ rights and interests on the one hand and the public interest on the other before granting the plaintiff leave to produce the 2^nd defendant’s affidavits to the police.  There is no need for me to go behind the judgment of Sakhrani J.  If the defendants thought fit, they may apply to have the order of Sakhrani J set aside.  As far as this court is concerned, leave to disclose the affidavits has been granted in compliance with the undertaking.

22.  The materials presented to Sakhrani J at the ex parte application are relevant.  They have all been disclosed.  The correspondence with the Swiss police or Hong Kong police sought by the defendants is irrelevant.  The application for their discovery is just fishing. 

23.  As for the defendants’ application for extension of time, Mr Lam argues that it is manifestly inadequate for a person who is required to comply with an order by a specific time merely to issue a summons for an extension of time returnable two weeks after the due date for compliance: Abu Dhabi National Tanker Co v Lam Ming Chi [1998] 4 HKC 320 at 325.  Mr Wright explains that the defendants’ solicitors had attempted to obtain a return date before the summons judge on 20 January 2012 when the application could have been heard before the due date for compliance expired, but the request was declined by the listing clerk who insisted that the Defendants’ Summons should be returnable before Deputy High Court Judge Lok who made the order and the first available date before the learned judge was 3 February 2012. Then, by consent,  the parties applied to have the Defendants’ Summons heard before me today together with the Plaintiff’s Summons.  I accept that explanation.

24.  The basis of the defendants’ application for extension of time is not that the defendants did not have the information or documents in their possession but their concern that any affidavits they serve will be supplied to the Swiss police as a result of the order of Sakhrani J. They wanted to defer disclosure until they had the opportunity to consider the materials presented to Sakhrani J at the ex parte hearing and to challenge that order.  As of today, the defendants had seven days extension already.  As the plaintiff is seeking an unless order for the defendants to make further disclosure, I shall deal with the issue of extension of time under the Plaintiff’s Summons. 

25.  Accordingly, in respect of the Defendants’ Summons, I make no order in respect of the application under paragraph 2.1 and dismiss the application under paragraph 2.2.  The costs are reserved.

The Plaintiff’s Summons

26.  The further disclosure order sought before Deputy High Court Judge Lok was made further to a number of disclosure orders made by the court, commencing with the proprietary and mareva injunction order made by Deputy High Court Judge Au-Yeung on 10 November 2011, the order of Suffiad J on 30 November 2011, and then the order of Reyes J on 9 December 2011. The disclosures made hitherto were incomplete.  Time is of the essence in a tracing exercise.  The delay was excessive for a simple matter such as this and would not have occasioned had the defendants acted with total candour.  Hence, Mr Lam seeks an unless order.

27.  Mr Wright inundates the court with arguments criticising almost each and every order made.  He argues that the plaintiff has no case against the defendants and the plaintiff’s statement of claim is bound to be struck out in due course.  Hence, the defendants should not be burdened with all these disclosures, wasting their time and costs and suffering prejudice.  Basically, he repeats his submission that it is not the plaintiff’s pleaded case that the 1^st defendant knew that the sum of US$10 million was transferred to his SCB HK account in breach of trust and that the plaintiff would be unable to prove such knowledge on the part of the defendants.  He also argues that the relationship between a bank and its customer is one of debtor and creditor and that a customer holding money in a bank account merely has a chose in action and it is inaccurate to speak of a “transfer” of funds between the bank accounts.  He submits that most importantly the plaintiff has not been frank with the court in failing to draw to the attention of Deputy High Court Judge Au-Yeung the above defence when applying for the ex parte mareva injunction. 

28.  I am not impressed with that line of arguments nor do I find it necessary to consider them.  I am concerned with the defendants’ non-compliance with a series of court orders.  It is not the function of this court to review each and every of those previous orders.  If the defendants had valid objections to the order of Deputy High Court Judge Au-Yeung, they should have applied to have her order discharged.  They did not.  The disclosure order of Deputy High Court Judge Au-Yeung was renewed after an inter parte hearing before Suffiad J and then before Reyes J.  There was no appeal against those orders.  Similarly, there was no appeal against the order of Deputy High Court Judge Lok, the non-compliance of which formed the basis of the plaintiff’s present application.

29.  Another thrust of Mr Wright’s argument is that the plaintiff was in breach of the undertaking given before Deputy High Court Judge Au-Yeung.  He submits that at the time of the hearing before Deputy High Court Judge Lok on 6 January 2011, the learned judge did not know that the plaintiff had been released of its undertaking, had disclosed the 2^nd defendant’s affidavits to the Swiss police and will do so in respect of the further affidavits to be made by the defendants.  Thus, when the learned judge made the order, he was under the misapprehension that the defendants’ interest, privacy, rights, particularly the right not to incriminate oneself were protected by the undertaking.  In my view, the undertaking was not an absolute one.  The protection afforded by that undertaking was the court’s sanction before the plaintiff may disclose the information.  The plaintiff sought and was granted leave from the court.  Sakhrani J must have taken care and considered all the circumstances of the case before granting leave to the plaintiff to make the disclosure.  There was no breach of the undertaking.  The defendants had the protection in the terms of the undertaking. 

30.  Furthermore, I have repeatedly asked Mr Wright if the 2^nd defendant’s affidavits were self incriminating.  He unhesitatingly replies in the negative.  He raises no issue of privilege.  There was no ground for not disclosing the affidavits to the Swiss police.  Indeed, Brandle said in his second affidavit that the plaintiff intended to file a criminal complaint against Morrison, the 2^nd defendant and others.     Thus, if the defendants had appeared before Deputy High Court Judge Au-Yeung when the application for mareva injunction was heard and raised the issue about disclosure to the Swiss police, the learned judge would have dispensed with the undertaking just as Sakhrani J did.  Similarly, had the issue been raised before Suffiad J or Reyes J, the   same would have happened.  The defendants’ complaint was groundless.  In any event, they may seek a review of the ex parte order.  If indeed they suffer any damage, they may make a claim against the plaintiff.

31.  Another line of Mr Wright’s argument is that there is no need for urgency.  The plaintiff delayed commencing the present proceedings for over one month which remains unexplained.  It appears any further affidavits served in accordance with the order of Deputy High Court Judge Lok will be disclosed to the Swiss police.  Hence, Mr Wright further argues that filing of the affidavits should be delayed until the plaintiff had disclosed the materials used at the ex parte hearing before Sakhrani J and that the defendants had an opportunity to review the order of the learned judge; otherwise, any such review would be nugatory. To allay the defendants’ worries, Mr Lam has no objection that the information disclosed under the further disclosure order shall not be disclosed to the Swiss or Hong Kong police unless with the leave of the court obtained pursuant to an application made inter parte. 

32.  The delay in commencing proceedings was not unexplained.  The plaintiff had taken steps to liaise with SCB HK and the  1^st defendant’s company secretary for the return of the money.  Presumably, not knowing then that the 1^st defendant is a HK$10 company and assuming it to be a bona fide businessman and an important client, it was reasonable for the plaintiff to have allowed time for discussion but the defendants did not respond. 

33.  More importantly, Mr Wright is not arguing against disclosure, which he is not permitted to, but for time to consider the circumstances surrounding the plaintiff’s ex parte application before Sakhrani J and to await the outcome of the defendants’ application to set aside that order.  Any such deferment could serve no useful purpose so far as these proceedings are concerned.  Whatever affidavits served by the 2^nd defendant, which had been produced to the Swiss police rightly or wrongly, are relevant for these proceedings.  Whatever further affidavits to be served by the 2^nd defendant, which have not yet been produced to the Swiss police, should have been served long ago and are also relevant for these proceedings.  More importantly, those affidavits will be protected from disclosure as suggested by Mr Lam.  If the defendants are successful in setting aside the order of Sakhrani J, it will have no effect on the admissibility in this court of the affidavits served or to be served.  The only effect a successful challenge will have is on the admissibility in the Swiss court of the affidavits in the hands of the Swiss police.  That would be a matter for another jurisdiction.  It has no effect in these proceedings.  This ground for extension of time is illusory and an obvious delaying tactic. 

34.  The only questions are whether to make an unless order, the time allowed for compliance and the sanction for non-compliance. There  has been  contumelious  delay.   A  substantial  sum of  money is at

stake.  Time is of the essence in a tracing exercise such as this.  Hitherto, disclosure has been half-hearted.  The circumstances cry out for sanction to enforce compliance.  No argument has been advanced that the defendants do not have the information or documents or have difficulties in complying with the further disclosure order.  The materials presented at the ex parte hearing before Sakhrani J have been disclosed.  As of today, the defendants had a de facto extension of seven days already. I grant the defendants another four days to comply.

35.  As for the sanction, the action has only just commenced.  The defendants raised the defence of lack of knowledge that the said sum of US$10 million was transferred in breach of trust and some legal arguments which Mr Wright says constitute a good defence. Accepting what is submitted by counsel at its face value at this stage, I consider a fair and appropriate sanction for non-compliance is to preclude the defendants from calling evidence in any application for summary judgment or at trial.

36.  Accordingly, I order the defendants to make further disclosure sought by 4:00 pm on 31 January 2012 and that such disclosure shall not be disclosed to the Swiss or Hong Kong police without leave of the court obtained pursuant to an application made inter parte. I also order the defendants to pay the plaintiff’s costs with certificate for counsel.  Such costs are to be taxed, if not agreed.

Leave to appeal

37.  At the conclusion of the hearing, Mr Wright applied for leave to appeal against my decision in both summonses.  No further reasons having been advanced, leave to appeal is forthwith refused.