DEX ASIA LTD v. DBS BANK (HONG KONG) LTD AND ANOTHER

HCA 2361/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2361 OF 2006

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D E C I S I O N

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The Application

1.  DBS Bank, made an application to the Master for security for costs in these proceedings.  DEX Asia, the plaintiff, is a company incorporated in the British Virgin Islands.  The Master refused to order security and the Bank now appeals.

2.  The court has a complete discretion whether to order security, and on the exercise of that discretion will have regard to all the circumstances of the case.  That said, it is normally just to exercise the discretion by ordering security against a non-resident plaintiff: Porzelack K G v Porzelack (UK) Ltd [1987] 1 WLR 423.

3.  Following the argument I exercised my discretion against an order for security for costs.  I now give my reasons for that order.

Jurisdiction to order security for costs

4.  The Bank relies upon O 23 r 1(a), that the plaintiff is ordinarily resident out of the jurisdiction, to justify its demand for security.  Mr Manzoni argued that the company, while being incorporated overseas, was not ordinarily resident out of the jurisdiction.  He says that it has an address in Hong Kong, with which the Bank corresponded, and the fact that the shareholder and director were resident out of Hong Kong was irrelevant.

5.  The test as to whether a company is ordinarily resident abroad is by reference to the location of its central management and control: see Charter View Holdings (BVI) Ltd v Corona Investments Ltd & Anor [1998] 1 HKLRD 469.  While it is right that the company has an address in Hong Kong, it is equally clear that the real management and control of the company is abroad.  I am satisfied that the primary basis upon which the Master might grant security for costs exists.

6.  In the exercise of discretion the court must have regard to all of the circumstances of the case and determine, in that light, whether or not security is justified.  Because of the particular circumstances of this case it is necessary to examine the facts in some detail, although plainly that will not be the usual situation on an application for security for costs.

The facts

7.  DEX Asia has a bank account with the Bank.  Mr Lin, the 2^nd defendant, previously the sole director of DEX Asia, was the sole signatory to the bank account.  There is no dispute at all that on 29 August 2006, the Bank was informed that from that date Mr Lin would cease to be the authorised signatory for the account, and that three Japanese gentlemen were to be the authorised signatories.  The Bank was so informed by e-mail.  The Bank explained to the management of DEX Asia that it would be necessary to execute what were unfortunately described as “a/c opening forms”.  That was a confusing instruction, tending to indicate that a new account would have to be opened.  The Bank subsequently clarified to the management of DEX Asia that what was required was a change of the necessary signatures in relation to the mandate.

8.  On 29 September 2006, three authorised representatives of DEX Asia, the three Japanese gentlemen, attended at the Bank in order to make the appropriate alterations in relation to the mandate for the account.  The Bank accept completely that the three authorised representatives were the proper persons to make the necessary changes, and that they had the power to do so.  There is no suspicion nor suggestion that this was fraudulent behaviour.

9.  However as it transpired, primarily because of insufficiently clear information from the Bank, the representatives had not brought with them the precise documents that were required to complete the Bank’s forms.  These were to be sent later.  Mr Ng, for the Bank, accepted, as he is plainly obliged on the evidence, that the Bank knew that Mr Lin no longer had authority to act on the account, notwithstanding the fact that his signature remained on the formal mandate.

The fund is withdrawn

10.  On 9 October 2006, apparently notwithstanding his resignation as a director of DEX Asia, Mr Lin instructed the Bank to transfer US$3.25 million, (the fund), from the account of DEX Asia to the account of another company, BBMF.  The Bank, notwithstanding the information it had, as to the lack of authority on the part of Mr Lin, and without any enquiry of DEX Asia, transferred the fund to the account of BBMF.  The Bank now justifies that action by a strict reliance upon the terms of the mandate, notwithstanding the fact that the Bank accepts that it has a discretion under the mandate whether or not to act upon an instruction.  In this respect Mr Ng attempted to argue that the bank officers mistakenly believed that they were obliged to act.  That is not a matter upon which they can rely to the disadvantage of DEX Asia.

11.  On 10 October 2006, DEX Asia notified the Bank that the instruction given by Mr Lin was unauthorised and illegal.  On that day the Bank froze the sum of US$3.25 million, in the account of BBMF, pending clarification.  On 17 October 2006, the Bank informed DEX Asia in writing that as there were conflicting claims to the fund, and the Bank was considering interpleader proceedings to protect its interests.  That was plainly the proper course.

12.  To reinforce its position, on 18 October 2006, DEX Asia, by its solicitors reminded the Bank that it owed a fiduciary duty to DEX Asia to safeguard the fund and expressly requested the Bank to interplead.

BBMF obtain an injunction against the bank

13.  At the same time as DEX Asia was pressing the Bank not to release the funds, BBMF was pressing the Bank in the opposite direction.  By an e-mail dated 13 October 2006, the Bank informed BBMF’s solicitors that it was not in a position to release the fund because it had been notified the transfer instructions had been given without due authority.  The Bank drew the attention of the solicitors for BBMF to the fact that there appeared to be an association between DEX Asia and BBMF, as they shared the same registered address with the Bank. 

14.  Notwithstanding that e-mail, and the correspondence referred to in paragraph 11 above, the Bank released the fund to BBMF.  It did so following the grant to BBMF on 20 October 2006, of an injunction by Hartmann J. restraining the Bank from withholding the fund in BBMF’s account.  Immediately upon the fund was released by the Bank, upon BBMF’s instructions to the Bank, the fund was transferred to BBMF’s account at HSBC Banking Corporation, completely out of the control of the Bank.

15.  The Bank were offered the opportunity to attend the ex parte hearing before Hartmann J. but declined to do so, citing insufficient time and information.  Had they attended he hearing, and it had been made plain, as it ought to have been, to the judge, that the fund was in dispute, and the fact that the transfer had been made in reliance upon the signature of a person whose authority had been withdrawn, and whom the Bank apparently knew had an association with BBMF, had been made clear to the judge, it may well have been that the injunction would not have been granted.

DEX Asia issue proceedings against the Bank

16.  Not at all surprisingly, DEX Asia now pursue the Bank for the fund that it has lost.  The claim is a straightforward one, based upon the Bank acting contrary to the obstructions that it had been given.  The Bank relies on the strict terms of the mandate, and says simply that at the time the instructions given to transfer the fund, Mr Lin was the sole signatory to the account, and that it was obliged to act upon his instruction.

The proper course for the proceedings

17.  It is absolutely plain, and in reality unarguable, that the proper course in the circumstances was for the Bank to interplead.  They suggested themselves that they would do so, and they were invited to do so by DEX Asia.  Had they done so they could simply stand aside and let DEX Asia and the Third Party resolve the issue as to who is entitled to the fund.  Instead they chose to act in direct contravention of oral instructions that had been given to them, in disregard to warnings to them as to their fiduciary duty, and in direct contravention of their own suggested course of action.

18.  I do not disregard the fact that at 9:38 a.m. on 20 October 2006, the Bank’s solicitors informed DEX Asia’s solicitors that they would release the fund at 3 p.m. on that day unless DEX Asia first obtained an injunction restraining the Bank from releasing the fund.  The letter in which that position was adopted offers no explanation as to why the Bank no longer considered that it ought to interplead. It is right that that would be an alternative procedure.  Neither does it appear that the Bank informed DEX Asia that BBMF were in the course of seeking an injunction which would have the effect of requiring the bank to pay out the fund.

19.  The suggestion that DEX Asia should be required to obtain an injunction was, in the whole of the circumstances impracticable and unrealistic. DEX Asia’s solicitors responded promptly, confirming the fact of conflicting claims to the fund, reminding the Bank that DEX Asia’s representatives were in Japan and would not arrive in Hong Kong until the weekend, and pointing out the risk that if the fund did not remain frozen it would be withdrawn by the Third Party, to the disadvantage of DEX Asia.  Furthermore, as the Bank well knew, BBMF is a Nevada Corporation, thereby placing DEX Asia in all the difficulties that face a plaintiff bringing proceedings against a defendant out of the jurisdiction. The solicitor was reminded of the Bank of its previous suggestion of interpleader.

20.  Notwithstanding that response, the Bank released the fund to BBMF, and, on BBMF’s instruction, transferred the fund to an account held by BBMF at HSBC Banking Corporation.  Thus, the bank now find themselves embroiled in this litigation.

The merits

21.  In the exercise of the discretion as to whether there should be security for costs, a major matter for consideration is the likelihood of the plaintiffs succeeding.  If the case for the plaintiff is genuine and strong, no order for security would be granted.  On the other hand, an order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial: see Hong Kong Civil Procedure, 2007, 23/3/3.

22.  Mr Ng contends that the Bank in a strong position because the purpose of the transfer of the fund was the repayment of a loan made by BBFM to DEX Asia.  He relies upon the decision in B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48, where it was held that, in equity, if a bank, contrary to instructions, pays a cheque of a customer drawn in payment for goods actually supplied, the banker will be protected.  In the same way he says, the loan being lawfully due, the bank ought to be protected if it is repaid, even on having acted upon an unauthorised signature.  In Liggett there is no suggestion that the bank knew or suspected that the debts were not lawfully due. The argument by Mr Ng disregards the knowledge the Bank had that DEX Asia disputed its liability to repay the loan.

23.  Mr Manzoni contends that in fact it is DEX Asia that is in the strong position.  He does so in relying upon the more recent decision of Barclays Bank v Quincecare Ltd [1992] 4 All ER 363.  That decision makes it clear that in the relationship between banker and customer there is an implied term of the contract that the bank will observe reasonable skill and care in executing the customers orders.  A bank may not shut its eyes to the obvious and fail to make enquiries such as an honest and reasonable man would make upon receipt of an instruction.

24.  It is not difficult to argue that, with the knowledge the Bank admittedly had as to the fact of Mr Lin’s resignation, the intention of the management of DEX Asia that Mr Lin was no longer entitled to sign upon the account, and that the necessary documentation was in the process of being completed, that the Bank ought not, in the exercise of reasonable skill and care, have acted upon Mr Lin’s instruction.  At the very least, before acting upon the instruction, the Bank should have made some enquiry of the management of DEX Asia.  That is particularly so when, at the time that the Bank released the fund from BBMF’s DBS account to an account held by BBMF at HSBC Banking Corporation, the Bank knew that DEX Asia disputed liability for the loan repayment.  In my view the merits favour DEX Asia.

25.  It is plain from the correspondence that the Bank itself recognised that the interpleader process was the proper procedure.  It is equally plain that upon receiving the injunction obtained by BBMF, the Bank made a decision to take a commercial risk and pay out the fund to the disadvantage of DEX Asia.  Its alternative course would have been to apply to set aside the injunction, and at the same time, in those proceedings which have already been commenced, interplead.  Minimal expense only would have been involved, compared with the expense of the trial the Bank now faces, and all parties would have been properly protected.

Conclusion

26.  Having regard to all the circumstances of the case, this is not a case where in my view the discretion to grant security ought to be exercised in favour of the Bank.  The interpleader process is established precisely to deal with the type of situation in which the Bank found itself.  Through an inexpensive process it can commence, or take a step in existing, proceedings, thereby protecting itself, and leaving it to the parties to the real dispute to fight out who is entitled to the fund.  By refusing to interplead and releasing the fund, particularly in the plainly questionable circumstances of the authority of Mr Lin to give the necessary instruction to Bank, the Bank has brought this litigation entirely upon itself.  If the Bank are at risk of costs it is through their own conduct and they must carry the consequences of that conduct.

27.  The appeal is dismissed, the order of the Master stands.  There will be an order nisi that the costs on the appeal are to be paid by the Bank forthwith, with certificates for Counsel both here and below.