OVERSEAS TRUST BANK LIMITED v. MANDAM CHANG LEE SIAN AND OTHERS

Action No. 3780 of 1985

IN THE HIGH COURT OF JUSTICE

HONG KONG

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JUDGMENT

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1. As long ago as the 14th June of last year, the Plaintiff obtained Mareva Injunctions and Orders for discovery against all three Defendants in this action. The return date for the ex parte injunctions was the 21st June. On that date they were adjourned to a date be fixed, giving the Defendants 21 days to file evidence and the Plaintiff 7 days thereafter to file a reply.

2. These summonses came on for hearing before me on the 20th January and lasted three working days. Counsel agreed an order in respect of the 3rd Defendant leaving the issues in relation to the 1st and 2nd Defendants to be decided.

3. The central facts of this matter are these: The Overseas Trust Bank, the Plaintiff, was founded in the mid 50's by the father of the 1st Defendant and husband of the 2nd Defendant, (incidentally also the father of the 3rd Defendant). That company, the Plaintiff, was and remained until the 7th June 1985, a subsidiary of International Consolidated Investments Limited (ICIL). In the early 70's the Plaintiff became a public listed company and on the 27th March 1982 the founder died. Thereafter it appears that for practical purposes the 3rd Defendant took into his hands the reins of power. One month later he became Managing Director and also Chairman of the Executive Committee of the Board. He had been a Director of the Plaintiff since 1974. I mention his position as background. I wish to make it clear that in the decisions which I am about to make in relation to the 1st and 2nd Defendants I put out in my mind as being irrelevant the fact that it appears (prima facie) that he was a prime mover in making ill-advised loans to companies associated with officers of the Bank and companies which he controlled one way or another and that he was in due course arrested, trying to leave the territory with a considerable sum of money in cash.

4. By the 7th June 1985 for reasons upon which I will touch the Plaintiff was totally insolvent. It has lost all his capital and by Ordinance the Government acquired its share capital and appointed Directors.

5. Returning now to the history and dealing in particular with the 1st Defendant. On the 27th April 1982 the 1st Defendant became a Director of the Plaintiff and she remained so until the Government took over. It is to be noted that that on the same day the 3rd Defendant became Managing Director and Chairman of the Executive Committee, exactly a month after the death of her father. On 27th November 1983 the 1st Defendant became Deputy Managing Director of the Company. She then being Deputy to the 3rd Defendant. On the 27th October 1984 she became Managing Director and a member of the Executive Committee of the Board.

6. So far as the 2nd Defendant is concerned her association with the company goes a long way back. On the 1st March 1957 she became a Director and she remained a Director until the end (the time when the Government took over). On the 27th April 1982 she became a Vice-Chairman of the Board and that date, of course, relates to the other Defendants taking positions in the company. On the 14th October 1982 she became the Deputy Chairman. As such she chaired some of the meetings of the Board after that date and in particular she chaired a meeting of the Board which declared an interim dividend. Also, after the 27th of May 1982 the death of her husband, she became a Non-Executive Director of I.C.I.L. the parent company of the Bank, and at all material times, she was a Director of Consortium Investments, a company wholly owned by C.T. Nominees all the share capital of which in turn was owned by the 3rd Defendant.

7. The case advanced by the Company against these former Directors, 1st and 2nd Defendants, is simple to state. There are three aspects of the case put against the 1st Defendant and two aspects of the case against the 2nd Defendant.

8. It can be seen from the balance sheet which is exhibited relating to the 27th October 1984 that advances to customers had gone up between 1983 and 1984 by some HK$500,000,000.

9. By the 31st December 1984 according to the evidence which is before me including the draft balance sheet created for that date by the Banking Commissioner, the advances to customers had gone up to 6.3 billion of which 1.6 billion was non-performing and in total (this is a vague figure and I remind myself to be careful about dealing with vague figures) something of the order of 4.3 billion was thought could well be irrecoverable.

10. The reason for that astonishing picture (in part at least) was that very substantial loans had been made and had been allowed to continue, although the loans were non-performing; although many loans were made to private companies controlled by officers of the Bank, some of which on any commercial basis had a doubtful pedigree (by that, I mean they were incorporated, in Liberia); and although loans were made both to the holding company and other companies which could be described as "parent companies" of the Plaintiff, and to subsidiaries. The security offered and accepted included shares held in the subsidiaries of the borrower, in the parent companies of the borrower and in companies which were on the face of them doubtful as security, for example, a company incorporated in Liberia. These loans meant that a considerable amount of the assets of the Bank were distributed into companies associated either with the Plaintiff itself or to officers of the Bank with totally inadequate security or security which any one even who was naive in commercial matters would have questioned at once and no provisions were made in the reserves of the company to cover that situation. The consequence was that the Bank had become frankly insolvent by the time the letter was written on the last day, 6th June 1985, signed by the 1st and 3rd Defendants and it appears had been insolvent for a considerable time before, certainly by December 1984.

11. The case is brought against the Directors. The duties are set out in the Statement of Claim. An example is para. 15, Put in broad terms the Directors are said to have been in breach of their fiduciary duty to act bona fide in the interests of the company and that in addition they failed to exercise reasonable skill and care in the performance of their duties; in other words they were negligent and were not exercising the skill and care that could be expected of normal persons of their knowledge and experience.

12. Therefore, the first aspect of the case brought against the Directors is that they either caused these loans to be made or they permitted them to continue and permitted the Bank to trade in the situation that I have broadly outlined.

13. Secondly, it was consequent upon this that during the half year ending in about March 1985 the Bank made no profit because no provision was made for these astonishing loans and the lack of security for them. So when at the meeting of the 6th of March 1985 the Directors recommended an interim dividend should be made paid, there were no profits out of which that dividend could be paid. It was paid (I was going to say that it was paid out of capital but it could not have been paid out of capital) in theory at least, it was paid out of capital. It is said that the Directors who were involved in that failed in their duties to the Bank and it is alleged that they were in breach of their fiduciary duty, they failed to exercise proper skill and care and were negligent.

14. Finally, the third aspect of this action is against the 1st and 3rd Defendants. Briefly; about 7 days before the letter was written by the 1st and 3rd Defendants acknowledging that the Bank was insolvent and had lost the whole of its capital, the 1st and 3rd Defendants thought it right to take up a rights issue in a Thai company. The Plaintiff only held a tiny proportion of the shares in that company but they thought it right to take up the whole of the rights issue offered. It is said that expenditure at that time (in effect) was reckless because the Plaintiff did not have the money to spend. It was expending funds when it was insolvent.

15. That is the background to the matter so far as the Plaintiff is concerned. When I come to the individual Defendants I will deal with what they broadly say in answer to those allegations.

16. In considering Mareva Injunctions and whether to grant or refuse them the principles upon which the Court acts are now well established and it is not necessary for me to spend time in this judgment enumerating them. I have heard helpful and detailed submissions by Counsel upon those principles and their particular application in particular circumstances. In this case it is enough for me to say that the power of the Court to grant such injunctions is given by Section 19 of the Supreme Court Ordinance, Cap. 4 where it appears to the Court to be 'just and convenient' to do so. It is recognised that in order for a Plaintiff to cross the "threshold" of the exercise of this jurisdiction the Plaintiff must establish a good arguable case, a case which on the face of it is likely to succeed. Secondly, the Plaintiff must establish that there is a real risk that a judgment or award in the Plaintiff's favour will remain unsatisfied if the injunction is not granted. So that it is necessary to avoid a risk (established by the Plaintiff) that the Defendant will deal with his assets so as to dissipate them and defeat any judgment or award. In considering the case, a court cannot, and will not, act upon bare assertions or averments whether they be in affidavits or in pleadings. In this case there is affidavit evidence on both sides. The Plaintiff's evidence, on one view, is surprisingly limited in its extent and detail but I must look at the whole of the relevant evidence on affidavit and I look at the whole of it in the round. I cannot, and no Court dealing with this type of application can decide issues which are raised in the affidavits. It is necessary for a Judge to exercise his experience and his knowledge of these matters and look at the affidavits on both sides and to decide at the end whether it is made out that the Plaintiff has a good arguable case or not.

17. In this case, there is an added dimension because the pleadings have been filed and they have been filed so far as the Plaintiff is concerned after its main affidavit concerning these two Defendants. In some respects, the Statement of Claim limits the scope of the earlier affidavit. The suggestions of fraud in the affidavit are not pursued in the Statement of Claim and I am asked to consider a number of other matters in the pleadings. The further dimension is that in considering this matter I am entitled to look at the pleadings, not to take into account any averments that are made but I am entitled to take into account any admissions that are made in deciding whether a good arguable case is established.

18. A number of submissions have been made on behalf of both Defendants. First, I am asked to take into account that where the Statement of Claim does not repeat or limits allegations in the affidavits I must treat the case as so limited, and I do. Secondly, I am asked to consider the discrepancies in the pleadings between the allegations in the body of the Statement of Claim and in schedules that have been annexed to it. This point has been advanced with particular force by Mr. Bokhary on behalf of the 1st Defendant and I accept the criticisms of the pleading that he makes in this respect. Thirdly, it is said by the Defendants that the Statement of Claim and the affidavit is very strong on vague generalities and very short on concrete allegations and particulars. There is merit in this criticism. Also, the Statement of Claim is not verified by affidavit. This relates to the point with which I have dealt in relation to unsupported averments not being matters as I can take into account in my decision if not admitted in the defence.

19. Further, it has been argued with great force by Defendants, that in order to establish a breach of duty by the Directors (their fiduciary duty, their duty of skill and care, their duty to act without acting negligently, or their duty to act within their powers) the Plaintiff must establish some participation in the matters complained of in the sense that it must establish that the Director was a party to the decision or to the acts done or, at the very least, the Plaintiff must show that the Director acquiesced in the decision or in the situation with knowledge of the facts.

20. I have been reminded in considering this matter, that acts of Directors, provided they are not unlawful, can receive later approval at the General Meeting. Also, that a Director will not be held liable if he reasonably relies upon factual information provided to him by others in the company from an apparently reliable source.

21. I have been reminded of the statements of principle in the old cases upon which I have broadly touched. I make it clear that I accept and follow those principles set out in the authorities for the purposes of this case. I simply add the caveat (by way of digression) that in modern commercial circumstances those cases may not be a complete statement of the law. Those who accept directorships, particularly in public companies, may now have more extensive duties than those set out in cases when commercial circumstances were totally different. Obviously this may apply with greater force to Executive Directors, but because there is always a choice whether a person decides to accept a directorship even Non-Executive Directors may be subject to rather more stringent duties in this day and age than are set out in those old cases. I mention those matters because they were raised in the course of argument and for the purposes of this decision I follow and adhere to the old authorities which I was invited to consider.

22. In order to establish participation, however, the evidence may be not only of directly participating in the sense of the Plaintiff proving that the Defendant did this or did that. Participation may be inferred from the whole of the surrounding circumstances. This is particularly so in the case of an Executive Director.

23. Let me to turn to the 1st Defendant. Bearing in mind the background of the case which I have endeavoured to set out briefly, the 1st Defendant was a Director from April 1982, Deputy Managing Director from November 1983 and Managing Director from October 1984 to the end and a Member of the Committee of Executive Directors. In my judgment it would be flying in the face of common sense to find that there was not a prima facie or good arguable case against her for breach of her fiduciary duties and failing to exercise the proper skill and care that might be expected of her as set out in the Statement of Claim, having regard to the position in which the Bank was in fact when she was the Managing Director and earlier the Deputy Managing Director. The situation of the company is set out in the balance sheets and in the first affidavit of Mr. Kelting, they refer to non-performing loans, the companies to whom loans were made, the securities offered and the escalating position. Considering the importance of loans in banking it would be flying in the face of common sense to say that all those surrounding circumstances did not enable the Court to say and to clearly say that there is a good arguable case against her of participation in those matters. Indeed it seems to me that if she was doing her duty as Managing Director, Deputy Managing Director and as a member of the Executive Committee of Directors, one of whose particular tasks was to consider loans and security, it would have been difficult for her to avoid having knowledge and to avoid participating in the continuance of that situation.

24. Mr. Bokhary forcefully argues that I should not accept that she actually participated in the granting of or the extension of loans and on that point, I accept his submissions because there is little or no evidence that she actually did that. There are averments that she did and there is a document which shows that one of the loans was to be passed to her for her approval but in my judgment it does not matter that the evidence fails to show that she actually approved a particular loan having regard to the way in which the whole business of the Bank was being conducted under her stewardship as Managing Director.

25. Additionally, in her report of the 27th October, which appears in the evidence, she sets out a detailed knowledge of the company's affairs and aspirations. The document speaks for itself. Of course, there are issues about it which will eventually have to be tried but when one is considering whether there is a good arguable case that report to which she lent her name (and indeed her photograph) is an important part of the evidence.

26. So far as the loans are concerned I have no doubt whatsoever that there is to be inferred from all the surrounding circumstances and her position a good arguable case of breach of duty against her.

27. So far as the declaration of the interim dividend when the company had no profits, she admits participating in that matter. There are then issues to be tried as to the nature of her participation. Having regard again to her position there is of course a good arguable case that she either knew or if she did not know she was reckless in not knowing what was the real position was.

28. Similarly, in the purchase of the rights issue she admits being involved and the question is did she appreciate the true situation at the time and did she participate in breach of her duty? I have considered in some detail what she says in her pleadings and in her affidavits about this part of the case and she takes the point that whatever she did she was doing quite innocently and without knowledge and without participating in the sense of being in breach of her duty. Those are matters which are issues in the case to be decided if and when the case comes to trial.

29. I must now consider if there is a risk that any judgment will not be met as a result of a risk that she will seek to dissipate her assets. On this point also I have been invited to consider the authorities but in the end I have to look at the evidence which is before the Court and decide whether there is a risk. First, I have to decide whether she has assets here in the jurisdiction. There is no dispute about that. Then I have to decide whether there is a risk that she will seek to dissipate those assets in order to defeat any judgment.

30. The fact that she lives in Singapore is in itself no reason for deciding that she will seek to dissipate her assets. I have been invited to consider (and I do) in that regard the reciprocal powers of enforcing judgments which are available to this Court in Singapore. The relevant evidence goes much further than simply the fact that she usually lives in Singapore. The nature of the case showing, prima facie, her participation in making or being involved in the making of continuing to allow loans to be made to companies which are incorporated out of the jurisdiction (the Liberian companies) is one aspect which it is proper for me to take into account, together with these matters; that she has a little or no real property here; her assets here are liquid; she does not have a livelihood here; there is no overwhelming reason for her to stay in this jurisdiction nor to keep her assets within the jurisdiction.

31. With all her international connections which she sets out in her affidavit, in the face of a judgment if the Plaintiff is successful the temptation which faces her to dissipate her liquid assets in all the circumstances must be great and I think there is a considerable risk that she will do so. In relation to that she does not give the Court any assistance which would suggest the contrary. Looking at the case with some experience of considering such circumstances I have not any doubt here a risk of dissipation of those assets is made out.

32. The result is that so far as she is concerned the injunction will continue. There will be an order for discovery but that will be limited to assets within the jurisdiction. In due course I will hear Counsel about any sums that she should be allowed to have out of those assets.

33. I turn to the 2nd Defendant. The 2nd Defendant's case is more difficult from the Plaintiff's point of view. She is a long-standing Director of the Plaintiff but she has been a Non-Executive Director. The fact that she has been the Director for many years, in one sense, may help her because she has been a Non-Executive Director for many years when there has been no reason to think that anything was going wrong. The facts that she is a Director of the holding company (also Non-Executive and with no suggestion that she is a beneficial owner of any part of that company) and that she is a Director of Consortium, are in my opinion, relevant to a consideration of whether it is shown that she participated in the loan aspect of this case but are peripheral.

34. It is said that she was just a figure head over these years but that term is somewhat meaningless. The only question is whether there is a strong prima facie case to be inferred from her position that she knew a great deal about the activities of the group.

35. She admits in her defence that she chaired a number of meetings but cannot remember the exact meetings set out in the Statement of Claim save for the last one. She admits she chaired the meeting when the interim dividend was declared. She admits, as was the fact, that she became a Vice-Chairman of the Board from April of 1982, became the Deputy Chairman from October 1982 and chaired meetings after the 3rd of May 1983. Dealing with the declaration of an interim dividend when there were no profits, it is certainly established not by any affidavit evidence (I emphasise) but is established on her own admission that she participated in that decision. She participated in the decision as Chairman of the meeting occupying her position on that occasion as Chairman because of her position as Deputy Chairman in the company. On the evidence it was a grossly wrong decision on any view. The whole business of the company had foundered by then. A routine enquiry by the Banking Commission eventually revealed the situation. She says in effect; she was ill-educated; she was ignorant of company affairs; that she had always being kept in the dark about what was happening in the company; and had no real interest or reason to enquire as to what was happening. Those matters are in issue. It is likely the Plaintiff will seriously contest that she was so naive about company's affairs when she was actually chairing meetings even though what she says is supported by the evidence of the Company Secretary and there has been no affidavit put in by the Plaintiff denying them. Nevertheless it is clear from the pleadings that those matters are seriously in issue. The fact that she participated as Chairman in the decision which was so grossly wrong (using as neutral a term as I can) in my judgment means that there is a strong arguable case that she participated in that decision and that was a breach of her fiduciary duty and a breach of her duty to use skill and care in the exercise of her non-executive office as Deputy Chairman. That deals with that aspect of the case.

36. I would add that in my judgment where it is found that a s Director has directly participated in a decision which is proved to be wholly wrong as the decision of the Board was in this case - once that is proved the burden is thrown upon the Director to excuse himself from the obvious consequences if he or she can.

37. Turning to the loans aspect of the case. There is little doubt that there is a prima facie case against the 2nd Defendant of knowledge that the loans made by the company were escalating. However, there is no direct evidence of what took place at any of the meetings (although one might have expected such evidence) and until the time when she chaired the meeting which approved the interim dividend, there is an evidence upon which I would feel safe to act which showed she in any way participated in the company affairs so as to have any knowledge of the actual position in relation to those loans which gave rise to a duty upon her to act. After the declaration of the dividend when the natural questions ought to have been asked at the Board Meeting in relation to the company's financial position it may be different. It may be that from then on there is a good prima facie case of her participating after that date in March. However, there is absolutely no evidence which could quantify any loss which arose after that time save for the payment out of the interim dividend.

38. My judgment, therefore, is that there is a good arguable case of breach of duty and negligence against her in respect of the payment of the interim dividend and that the amount of the claim is therefore limited to the amount of the interim dividend which was paid and interest on that sum.

39. Is there a risk that if a Mareva Injunction is not made that she will seek to dissipate her assets so as to defeat that claim? Again, she is not resident in Hong Kong and I approach that aspect with caution. It is only one of the factors. In almost all cases there must be more to enable the Court to make a Mareva Injunction.

40. Her affidavits show that she has not come to Hong Kong regularly. She came to look after her duties at meetings. She has no beneficial interest in the companies of which I am aware. She has liquid assets here and no substantial real property. She has no livelihood here and it is clear that she is used to dealing with matters outside the jurisdiction and abroad. But the overwhelming matter in her case, although it is relied upon by her, is the situation of the Redberry Company in respect of which she has assets standing in the Bank which are under her control. It said that she is bringing assets into the jurisdiction rather than taking them out and that is a matter I must consider. The fact that she brought them in with such ease equally means that they can be taken away with equal ease. But if one considers the Redberry Company the authorised share capital is one thousand dollars. The paid-up share capital is $20. One share each is held by two nominee companies, the history of whom is totally unknown as far as I am concerned, save that appears that the company has its registered office somewhere in the Plaintiff's building. She has control over the assets because she has a power of attorney given to her by Thai Directors. The whole of the circumstances make it obvious in my experience that there is a risk here that if a Mareva is not made, she will seek to dissipate those assets.

41. So it is necessary and it is both just and convenient that such a Mareva Order should be made. I understand that it is accepted between Counsel that this bank account is sufficient in order to cover this part of the claim for $20,000,000 odd.

42. The order, however, should cover not only the sum but also the interest on that sum.