STATE BANK OF INDIA v. FLEET NATIONAL BANK AND OTHERS

HCMP 1919/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1919 OF 2004

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J U D G M E N T

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1.  By an originating summons filed on 4 August 2004 the plaintiff bank made application for discovery orders against the four defendants under the principles now known as Norwich Pharmacal relief, so named after the decision of the House of Lords in Norwich Pharmacal Co. v Customs and Excise Commissioners [1974] AC 133.

2.  Norwich Pharmacal orders are designed to assist victims of fraud or other alleged wrongdoing in identifying the perpetrator of such wrongdoing and, in particular cases, of tracing the passage of funds or other assets to aid restitution in whole or part.  The discovery sought will be from a party who on the face of it has innocently become implicated in the offender’s activity and who may be privy to vital information, but who is bound by a duty of confidentiality not to disclose the wrongdoer’s identity or other details, and thus cannot do so without risk of exposure to liability.  In considering the granting of the relief sought a court is obliged to weigh the competing interests of the victim of the wrongdoing and the innocent third party caught up in it.

3.  In this case the plaintiff alleges that it is the victim of serious fraud or breach of trust and is thereby out of pocket to the tune of in excess of US$10 million.  The discovery sought against the defendants is for the purpose of identifying the fraudsters and to trace the funds wrongfully taken.

4.  An order for discovery has already been made against the 1^st defendant in its former guise the First National Bank of Boston.  That included statements and other documents to enable a tracing of funds.  Documents and other information released indicate involvement by a predecessor of the 2^nd defendant, which undertakes administrative services for companies incorporated in Hong Kong, and the 3^rd defendant, an employee of the 2^nd defendant and its predecessor. 

5.  The matter before me concerns these two defendants.

6.  Mr Levy representing them both stresses that whilst the application is contested, this is not in an adversarial sense.  The defendants are not however prepared to consent or otherwise let the matter proceed unopposed because of a high degree of confidentiality owed to their clients.  In that sense, they put the plaintiff to the proof that the requisite threshold for Norwich Pharmacal relief has been achieved, warranting an order that they make disclosure without consent of the client concerned.

History

7.  This goes back to 1996, by which year the plaintiff conducting business as a bank in Singapore had approved credit facilities up to US$10 million to a customer called Great Win International Pte Limited.  Directors of Great Win called Navaratna Kothari and his wife Sayar Kothari were called upon to guarantee repayment in the usual way.  It is said that Mr Kothari was the controlling mind of Great Win.

8.  Between June and October 1996 the plaintiff approved the issue of international letters of credit to enable Great Win to purchase warrants for nickel and aluminium on the London Metal Exchange (the LME Warrants).  The plaintiff took trust receipts over the LME Warrants.  A feature of the accommodation provided was that Great Win (Kothari) had a buyer of the LME Warrants called al-Buhaira Marketing Corporation in UAE.  Payment was to be made by al-Buhaira by way of bills of exchange drawn up by Great Win and accepted by al-Buhaira.

9.  However, by December 1996, Great Win had defaulted in repayment of the amount owed the plaintiff.  Outstanding was about US$9 million.  Settlement negotiations did not achieve a result.  By September 1999 the plaintiff having issued proceedings in Singapore to recover the debt had judgment by default against Great Win and the Kotharis for an amount by then in excess of US$10 million.  There was no recovery then, and there has been none since.

10.  The plaintiff also sued al-Buhaira in UAE on the bills of exchange presented for payment which al-Buhaira declined to pay.  The plaintiff has judgment but appeals are pending.  It is said that al-Buhaira refused to honour the bills of exchange and continues to deny liability because it did not receive the LME Warrants it had contracted to buy.

11.  In May 2000 the plaintiff issued proceedings in Ontario to enforce the judgment it had from the Singapore Court against the Kotharis who now live in Ontario.  But an application for summary judgment was dismissed, because the judge found that the Kotharis, who this time did take part, raised triable issues by alleging that the judicial process in Singapore may be corrupt or biased.  That, too, is the subject of an appeal.

Investigations

12.  In 1999 the plaintiff engaged a company called Gresham & Reed Limited to carry out investigations to find assets of its judgment debtors and, suspecting fraud or other foul play, to attempt a tracing of the LME Warrants and any proceeds of sale.

13.  It was thereby established that Great Win did purchase the LME Warrants, but that there was no subsequent delivery to al-Buhaira.  Instead, Mr Kothari directed that his vendor deliver the warrants to a London based broker called Refco Overseas Limited, which in turn sold them on the direction of its affiliate company in Singapore called Refco Investment Services Pte Limited (Refco Singapore).  Refco Singapore received the proceeds of sale and paid them into the account of a third party.

14.  Norwich Pharmacal proceedings taken out in Singapore against Refco Singapore resulted in an order of discovery, which revealed that instructions to sell the LME Warrants came from a Hong Kong incorporated company called High Seas Holdings Limited, the 4^th defendant, with directions that the sale proceeds be paid into its account with the Hong Kong branch of the First National Bank of Boston, predecessor of the 1^st defendant.  That was done by payment in six tranches, between August and October 1996.

15.  Records produced revealed that Refco Singapore posted the 4^th defendant’s statements of account to the 4^th defendant care of one Eliza Wu at an address in Hong Kong.  Further enquiry revealed that the address was the office of ICS Trust Asia Limited, the 2^nd defendant, and that Eliza Suk Ying Wu, the 3^rd defendant, is an employee.

16.  These connections gave rise to these proceedings against all four defendants.

An Earlier Order

17.  Electing to go first after an order for discovery against the 1^st defendant, the plaintiff achieved this by order of February 2005.

18.  Documents discovered include those of the 4^th defendant submitted to the 1^st defendant (then the First National Bank of Boston) for the purpose of opening an account.  These revealed that the sole director was then someone called Daw Omar Yin who had sole signing rights; that ICS Corporate Securities Limited was the secretary, that Ms Wu of ICS Corporate Securities Limited gave a statutory declaration that the company was “in good standing”.

19.  This is consistent with the predecessor of the 2^nd defendant undertaking the administrative function of secretary of the 4^th defendant.

20.  But there was an additional connection with the 3^rd defendant.

21.  In a document called a Money Transfer Agreement dated 25 September 1996 she was appointed by the 4^th defendant to be an “authorized representative” of the 4^th defendant, whereby she could be used by staff of the bank in a call-back procedure to confirm the authenticity of requests made to transfer money out of the 4^th defendant’s account.  Furthermore, on each of four requests to make transfers out made in October 1996 there is the notation handwritten “Eliza” thereon.  The plaintiff contends these suggest she was telephoned and gave her approval to these withdrawals; presumably on instruction from someone in charge.  And these were for payment of some of the proceeds to al-Buhaira, whose involvement as recipient would seem to contradict its protestations that it was a victim in the wrongdoing also.

22.  There was also a connection, so it seems, between the 4^th defendant and Mr Kothari.  On two requests to make transfer out, one of which was also to al-Buhaira, there are the handwritten notations “confirmed with Navaratna Kothari on September 24 96” and “Kothara” respectively.  Further, an account’s officer of the 1^st defendant who has since left the bank, a Mr Lau, could recall that Mr Kothari was the “chief manager” of the 4^th defendant.

23.  It is pertinent to note here that in the proceedings in Ontario where Mr Kothari this time played an active role in opposition, he swore to having no connection with the 4^th defendant, or al-Buhaira, or the 2^nd defendant; that he had directed that the LME Warrants be delivered to Refco on instructions of his purchaser al-Buhaira; that al-Buhaira had defaulted in paying for the LME Warrants; that Great Win thus had no means to pay back the plaintiff.

24.  The discovery so far has further revealed that the 4^th defendant probably did not trade; that the account opened with the 1^st defendant apparently for the purpose of receiving and dispensing the funds in question being the sale proceeds of the LME Warrants was closed shortly after the final payment was made.

The Discovery Applied for …

25.  … from the 2^nd defendant, is for the following:

“(a) copies of all documents in its possession custody or power relating to:

(i) the incorporation of HSH;

(ii) any work carried out on behalf of HSH in the period from 1^st January 1996 to date;

(iii) the establishment of the Account; and

(b) the identity and contact details of any and all person(s) responsible for providing instructions on behalf of HSH.”

(HSH is shorthand for the 4^th defendant)

and from the 3^rd defendant the following:

“(a) copies of all documents in her possession custody or power relating to:

(i) her involvement with the affairs of HSH in the period between 1^st January 1996 to date;

(ii) her dealings with Refco Investment Services Pte Limited (“Refco Singapore”), in relation to the sale of the [LME Warrants] …, and the proceeds of such sale; and

(b) the identity and contact details of any and all person(s) responsible for providing instructions on behalf of HSH, or any person with who she dealt with in relation to her dealings with Refco Singapore in relation to the sale of the warrants and the proceeds of such sale.”

(It is conceded that the periods in (a)(ii) (in respect of the discovery sought against the 2^nd defendant, and in (a)(i) for that asked for against the 3^rd defendant) may be reduced to between 1 January 1996 and 31 December 1998)

The Position of the 2^nd and 3^rd Defendants

26.  A point was taken, though I think not forcefully, that Miss Wu’s employer during the events of 1996 was not the 2^nd defendant, but the associated company called ICS Corporate Securities Limited that has since been wound up whose records have been destroyed.  However it is apparent that the company was closely connected, operating from the same premises and managed and staffed by the same personnel.  In particular, the 3^rd defendant was employed and remains with the 2^nd defendant to date.  And there is no suggestion that records going to the relationship between the former ICS company and its clients have also been disposed of.

27.  The primary position is that the 2^nd defendant in its dealings with the business and personal affairs of its clients regards itself as having a high duty of confidentiality towards them, which requires it not to make any disclosure to any parties about any matters relating to any client without that client’s consent.  And in her contract of employment the 3^rd defendant is bound by the same obligation of confidentiality.

28.  The integrity of the investigation is challenged, the person responsible making reference to some information which he said was leaked by staff and former staff.  There are protestations that that did not happen.  Those implicated all went into print deposing to that.

29.  Miss Wu in her affidavit stated that she was not responsible for the 4^th defendant’s account with the 1^st defendant, did not know that she had been appointed to be a “call-back” authorized person, and could offer no explanation as to how or why “Eliza” was noted on some of the requests for payment.

30.  She said she has never had any contact with anyone from Refco Singapore or Refco in the UK; nor has she had instructions from anybody on behalf of the 4^th defendant, and nor has she received any instructions of any nature relating to the sale of the LME Warrants or the proceeds of the sale.

The Law

31.  Lord Reid sets out the basic principle in Norwich Pharmacal at p. 175:

“[The authorities] seem to me to point to a very reasonable principle that if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrongdoing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers.”

32.  This has been adopted and followed in Hong Kong.  In A Co. v B Co. [2002] 3 HKLRD 111, Ma J (as he then was) referred to it thus at page 116:

“11. The jurisdiction is a wide one.  It is not restricted, as was at one time thought, to the disclosure of the names of wrongdoers only.  In particular, where a plaintiff wishes to investigate the passage of monies in and out of bank accounts in aid of a tracing claim, discovery can be ordered of a bank’s books and documents: see Bankers Trust Co v Shapira [1980] 1 WLR 1274 at pp. 1281F-1282F.

12. Though founded ultimately on notions of justice, nevertheless, it is important to emphasise the extraordinary nature of this relief because it is not a usual order and is not one that a court would lightly grant in the absence of powerful factors.  I emphasise the following characteristics of this type of order:

(1)   It is made against an innocent party whose only involvement is to become mixed up in the tortious or wrongful activities of others.  There is, at that stage, no evidence of any wrongdoing on the part of the innocent party.

(2)   Instead, whatever wrongdoing there is, exists only on the part of a person or persons against whom no relief may be sought at that stage and indeed against whom there is probably insufficient evidence to found an action. In other words, this person or these persons will most probably not be before the court and would not be able to answer what are often very serious allegations made against them.

(3)   Usually, there will, moreover, exist a legal relationship between the innocent person against whom a discovery order is sought and the alleged wrongdoer and this relationship may involve strict duties to be observed on the innocent party’s part.  The present case offers what is a common scenario: the innocent defendant is a bank and the alleged wrongdoers its customers.  In this situation, any discovery to be made by the innocent party may well, apart from a court order, expose that innocent party to liability, both civil and possibly even criminal.  At the very least, a breach of confidentiality is involved.

13. Given these characteristics as I have outlined, such orders are therefore not lightly made as I have said.  In my view, it is essential for the court to bear the following in mind before a Norwich Pharmacal order is made:

(1)   There must be cogent and compelling evidence to demonstrate that serious tortious or wrongful activities have taken place. And where fraud or similar serious allegations are made, the degree of proof must correspondingly be high: see Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at p. 586C-H.  All the more so when the alleged wrongdoer is not and will not likely be before the court.

(2)   It must also be clearly demonstrated that the order will or will very likely reap substantial and worthwhile benefits for the plaintiff.  Where, as in the present case, the plaintiff is likely to make a tracing claim, there must be a serious possibility that the discovery sought must either allow the plaintiff to preserve what may well be his assets or realistically lead to the discovery of such assets: see Arab Monetary Fund v Hashim (No. 5) [1992] 2 All ER 911 at pp.916D-E, 918J-919A.

(3)   The discovery sought must not be unduly wide.  There is no entitlement to general discovery (by general discovery is meant discovery in the Peruvian Guano sense): see Arab Monetary Fund at 918D-E, 919H.  It follows therefore that not only must any order be specific, it must also restricted to those or those classes of documents that are necessary to enable the plaintiff to preserve or discover assets.  This is not to say that discovery orders cannot be wide; what is important is that the discovery, whether wide or narrow, is necessary.

(4)   The court accordingly, in applications for Norwich Pharmacal relief must, in its discretion, balance the competing interests of the victim of the alleged wrongdoing and an innocent party caught up in the wrongdoing.”

Discussion

33.  Mr Levy in an impressively detailed analysis invites me to question whether (1) to the requisite high degree fraud or other wrongdoing has been made out as the essential pre-requisite for Norwich Pharmacal relief; and (2) the order I am asked to make will very likely reap substantial and worthwhile benefits for the plaintiff.  He goes on to submit that the degree of proof of fraud demonstrated has not been high; further, that discovery against the 2^nd and 3^rd defendants will not advance the plaintiff’s position materially if at all.  He then notes the particular discovery sought and invites the proposition that that which the plaintiff wants to discover has already been made known to it by the 1^st defendant.

34.  Dealing with this last point first; the one matter that has not is whether in their records dealing with their services rendered for the 4^th defendant there is any link with other parties in the saga which connect them to a fraud on the plaintiff.  The 3^rd defendant in her affidavit would suggest not.  But this all took place 10 years ago and she could hardly be expected to remember details of what seems to have been a brief association with a client during the course of which nothing apparently out of the ordinary happened.  What she does not say is that she has made a concerted search, indeed there is no reference to a search, in fairness because the primary concern is one of not breaching confidentiality.

35.  This leaves unexplained the cryptic references to Kothari, and Eliza, and on the face of it her authorizing payments to al-Buhaira.

The Outcome

36.  My view is that there is significant and substantial evidence that goes to fraud, and that Kothari and/or al-Buhaira and others yet unknown may be implicated, and that the records of the 2^nd and 3^rd defendants may well serve to throw light on that.

37.  There is a lot of money at stake.  The plaintiff is the victim.  There is no evidence of any wrongdoing by the 2^nd and 3^rd defendants whose role was no more than the carrying out of duties to their client the 4^th defendant on instruction.  They are justified in wanting to preserve confidentiality.  But I believe the balance swings in favour of my granting the orders that are sought, as amended (see paragraph 25); I order accordingly.

Costs

38.  These are nisi. 

39.  The result is against the defendants.  Their stance taken has resulted in a contested hearing, and enhanced costs.  But I do not hold it against them that they sought to challenge the application they faced.  It was by no means clear-cut that their duty lay to the plaintiff rather than their former client.

40.  The Court of Appeal in Totalise plc v The Motley Fool Ltd & Another [2001] EWCA Civ 897 in overturning a costs order made against a defendant in a Norwich Pharmacal application which had resisted the same, stated that it was entitled to do so and have the matter submitted to and determined by the court before supplying the information, and thus although it did not succeed, it should have its costs on the established grounds.

41.  In the circumstances I make the usual order that the defendants shall have their costs in defending the application and complying with this order on an indemnity basis.