CITIBANK, N.A. v. EXPRESS SHIP MANAGEMENT SERVICES LTD. AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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DECISION

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1. The facts that gave rise to the Plaintiff's claim are certainly not complicated, but the matters relied upon for the two injunctions against the 1st and the 2nd Defendant's are far from being uninvolved. On the 2nd February this year, certain deposit was made into the 1st Defendant's bank account with the Plaintiff. The 1st Defendant had acted as agent for Caswell Enterprises Ltd. for the purchase of a vessel known as "BOBO KW". Balance of the purchase price in the sum of $523,458 was despatched to New York in purported performance of a provision in the sale document known as the Memorandum of Agreement, dated the 23rd January 1987. It is common ground that upon receipt of this balance of purchase price, due to certain imprecision in the instructions, the same amount was remitted back to Hong Kong and erroneously deposited into the account of the 1st Defendant with the Plaintiff. On the same day, the 2nd of February, one Miss Fung of the Plaintiff bank communicated with the 1st Defendant company and supplied information to and obtained confirmation from a Miss Yeung as to the deposit. Credit advice was duly sent by the Plaintiff to the 1st Defendant. I was informed in the course of these proceedings that there was an additional bank statement. That document should not, I believe, add too much to what has been known, and relied upon. The less said about it, this being a document introduced at the last moment of these proceedings, the better.

2. Some seven days after the deposit so erroneously made, the 2nd Defendant, the Managing Director of the 1st Defendant, caused to be transferred almost all of the deposit in the form of four T.Ts. and one draft. If my calculation is correct, they amounted to $523,110. These T.Ts. and the bank draft went to various recipients, one US$95,000 went to Ashaye and US$250,000 went to a New York firm of stock brokers.

3. The error was not discovered by the Plaintiff until the 18th February 1987 during its routine account reconciliation. Immediately, solicitors for the Plaintiff contacted the 1st Defendant, and finally there was a meeting between the 2nd Defendant and the bank and its solicitors on the 21st. There was a meeting scheduled for the 23rd for certain confirmation to be obtained and documents to be shown, but that scheduled meeting was cancelled.

4. An application was made before Mr. Justice Nazareth on the 26th February on a writ then only against the 1st Defendant for one single cause of action, namely money had and received. A Mareva Injunction was obtained exparte against the 1st Defendant company, then the only defendant. On the 5th March, the Defendant. company sought a variation for payments to be made out of certain Charter Hire under some supervision of the Plaintiff through its solicitors. That was acceded to by the learned judge. An extension of 7 days was also granted for making discovery within and without jurisdiction. The judge refused the Defendant's company's application to vary the disclosure order without jurisdiction in the Mareva Injunction on the ground that it ought not to have been granted. That forms the subject matter of a pending appeal. Counsel for the Defendants explained to the Court that on the 5th March the Defendant company was not ready to apply for the Mareva to be discharged and that criticisms were limited to its terms.

5. Came the 9th March, when the matter was brought before Mr. Justice Wong. The plaintiff was minded to have the 2nd Defendant joined. The matter was disclosed to the learned Judge. A Mareva Injunction in like terms was applied for on notice to the 2nd Defendant and granted but only with a disclosure order within jurisdiction.

6. The summons filed to amend the general endorsement on writ was also conveniently put into my list for consideration and duly granted by consent. As against the 1st Defendant, we have now two causes of action, one of the original "money had and received", and the other for damages for breach of trust. As against the 2nd Defendant, the Plaintiff relies on the self-same two causes of action. As for the disclosure orders, the time limit has elapsed. Certain Consent Order was proposed and I was supposed to have a draft for approval this morning. To my understanding, the parties returned to Mr. Justice Nazareth because of certain difficulty I thought I had in entertaining the application for an extension or a stay.

7. Before me, three grounds were advanced by Mr. Graham on behalf of both Defendants for discharging the injunctions. Suffice it for me to say that I am now left with only two. It was contended on behalf of the Defendants that there was no full disclosure. The principal complaint seems to lie in two sums: the US$250,000 to the New York stock brokers firm and a US$95,000 to Ashaye. It cannot be denied, I think, that at the time of both injunctions, the Plaintiff had not been clearly informed and confirmed that the US$95,000 could not be successfully retrieved. Enough for me to say that I have been led very carefully by Mr. Graham through the telexes which reflect the position that the US$95,000 which had been refunded remained unreleased as at the 26th February and the 9th March. Authorization to debit this sum was given only on the 10th March. As for US$250,000 to the New York stock brokers, the Plaintiff was informed as early as the 25th February by a telex sent on the 24th that the beneficiary "refunded to refund". Clarification did not come until the 7th March by a telex of the 6th March. Despite that clarification in the telex of the 6th March, the further inquiry from New York drew a reply in telex on the 9th March received on the 10th March from Citibank, N.Y. finally confirming that the beneficiary had refused to refund the US$250,000 and seeking authority to debit the Plaintiff's account. As for this US$250,000, the situation seemed to have been left fairly fluid. The Plaintiff bank authorized the requested debit only on the 10th March. Before the 10th March, these two recredited sums, together more than half of the Plaintiff's claim in this case, speak for themselves. Certainly, there was no full and frank disclosure of material facts.

8. I should condescend to particulars: The Plaintiff was re-credited US$95,000 on the 23rd February. This sum was made to Chase Manhattan Bank, New York to pay to Bank of Credit & Commerce (Gilbratar) Limited for the account of Bank of Credit & Commerce (Nigeria) Ltd., ultimately in favour of Ashaye. I shall call them "Chase Manhattan", "BCC (Gilbratar)" and "BCC (Nigeria)". The Plaintiff accepted this re-credit. Its claim and the defendants' liability were consequently reduced, and however the defendants are said to have misconducted themselves, their alleged manipulations should be less implicated by US$95,000. The Plaintiff was active in its attempts to ascertain whether or not the re-credit was made before a recall from the beneficiary bank. On the 5th March, the Plaintiff bank was advised by Citibank, New York that Chase Manhattan's 26th March return entry, presumably for the recall, was in error as the receiving bank, presumably 'BCC (Nigeria)", had paid Ashaye. Therefore not only had the Plaintiff bank been re-credited, but the sum had been successfully recalled. Citibank, New York then sought a debit against the Plaintiff's account with them, but the Plaintiff authorized such requested debit only on the 10th March. As a matter of fact, it would seem that the US$95,000 was still outstanding up to the 13th March. Mr. Leung, in his affirmation filed on the 13th March referred to a conversation between one Mr. Fung and one Mr. Usman of "BCC (Gilbratar)" on the 12th March to the effect that the receiving bank "BCC (Nigeria)" had in fact remitted the US$95,000, though Ashaye had since insisted on its return. As at the 13th March, so Mr. Leung assumes, this sum was still being "currently held by either Chase or by BCC Gilbratar". As for the US$250,000 for the New York stock brokers, it was transmitted to Manufacturers Hanover Trust. I shall call it "Manhantrust". The Plaintiff was re-credited with it on the 20th February 1987 and expected soon to receive it. By the 23rd February, the Plaintiff pressed Citibank, New York for actual payment. On the 24th February, Mr. Bede of "Manhantrust" informed the Plaintiff that the beneficiary refused to return this sum of US$250,000. I said the position was left fairly fluid because on the 24th February, when "Manhantrust" telexed the Plaintiff, they advised that the beneficiary "refunded to refund". That was confusing. The Plaintiff sought clarification on the 5th March despite Mr. Bede's said telephone conversation which was apparently not regarded as conclusive. "Manhantrust" never replied but repeated on the 6th March the contents of its telex of the 24th, advising this time, that the beneficiary "refused to refund". We know not what reliance the Plaintiff placed on this repeat telex without a direct response. On the same day as the Plaintiff sought clarification from "Manhantrust" i.e. the 5th March, the Plaintiff telexed Citibank, New York posing three specific questions, namely (1) Had Citibank, New York given any guarantees "to get back the funds" from Chase Manhattan and Manufacturers Hanover Trust? (2) Had any funds been actually received from the beneficiaries? and (3) Had the Plaintiff's account been re-credited before actual receipts, if any, from the beneficiaries? Clearly, the Plaintiff must have then still considered itself reimbursed by such re-credits. After "Manhantrust's" repeat telex, the Plaintiff did not take the matter up with Citibank, New York. To the outstanding inquiry, the reply from Citibank, New York came only on the 10th March in its telex of the 9th March, whereby the Plaintiff was advised of the beneficiary's refusal to return the US$250,000 and asked for its authorization to debit against its account with Citibank, New York, which was then "out of the funds". The Plaintiff authorized such debit on the 10th. Therefore, the Plaintiff had been paid these two sums up to the 10th March. The Plaintiff did not divest itself of these two sums or relinquish its right until the 10th March, i.e. after both injunctions. These sums are more than half of the amount under consideration. The position before such relinquishment would or could materially affect the Plaintiff's claim, the Defendants' liability, likelihood of fraud and matters as to any real risk of default.

9. The Plaintiff, through its counsel Mrs. Clough, strongly refuted any suggestion of non-disclosure on the part of the bank, hence there was no explanation offered as to whether such non-disclosure was or was not deliberate except for Mr. Richard Leung's personal belief of Mr. Freeman's intention. This is not meant to be a criticism against the Plaintiff bank. It is to be understood as a plain statement of fact. It is the law that even if there has been no full and frank disclosure, I have a residual discretion either to set aside or discharge the injunctions without enquiring into the merits or to consider the case as it is re-presented. I have not been invited to exercise my discretion to consider the case afresh presumably, I think, because of the stance taken by the Plaintiff. It would have been a very difficult question to decide, and I think the matter would have had to be decided in favour of the Defendants in the absence of any offered explanation as to whether or not such non-disclosure was intentional. That is one aspect of the case which with reluctance the submission of Mr. Graham shall have to be given weight to and accepted. There has been material non-disclosure, and I would set aside the injunctions. I said with reluctance because the facts, viewed superficially, do cast not too good an impression on the Defendants. In fact, such impression must have driven me subconsciously to appear to be wholly against Mr. Graham right from the start. I need merely refer to the summary set out in paragraph 14 of the second affirmation of the 2nd Defendant, for the events which I regard as prima facie against both Defendant's bona fide in the transmissions of funds. In order to have the matters highlighted, I would simply repeat the Roman numerals in proper sequence: I think they should be read (xi), (v), (vii), (i), (iii), (ix) and (ii). I have mentioned the telephone conversation between Miss Fung and Miss Yeung on the 2nd February. The Defendants declined to, though on legal advice, respond to these accusations. These events I have just enumerated are sufficient to show a real risk of disposal of property so that judgment or award in favour of the bank would, in the end, remain wholly or in part unsatisfied. The transactions as revealed in these proceedings are such as would arouse suspicion and lead to an inference of dishonesty or fraud.

10. I turn next to the second contention of Mr. Graham. Counsel submitted that fraud, be it a legal ingredient or not for any cause of action, must be pleaded to support and obtain a Mareva Injunction. Counsel referred me to the case of Peter Scales v. William H.H. Wong, [1980] 3HKLR 110. That fraud has to be specifically pleaded is a doctrine we have faithfully followed from time immemorial. I have not come across, in my limited experience, any decision in support of the proposition that fraud, not forming one of the legal ingredients in a cause of action, has to be specifically pleaded. The White Book enjoins a pleader to follow that rule only when the cause of action is dependent on fraud. In fact, in trademark and passing-off cases, it is said at page 646 of Kerr on Fraud and Mistake, 7th Edition that it is not necessary to aver and prove fraud.

11. The first cause of action against the 1st and the 2nd Defendants, for money had and received, is not founded on fraud. In essence, as Mrs. Clough fairly explained, for the 2nd Defendant, fraudulent conduct on the part of the 1st Defendant and her knowledge thereof are necessary elements for fixing the 2nd Defendant with liability. "Money had and received" was thus inferentially conceded as not being applicable to her. As for the 1st Defendant, the second cause of action is obviously dependent on fraud. This second cause of action was not before Mr. Justice Nazareth. It was sought to be introduced subsequently on the 9th March. I think I would be justified in proceeding on the basis that the second cause of action against the 1st Defendant is a material and significant limb of the Plaintiff's case, in time to come, against the 1st Defendant. Such second cause of action should have been disclosed to the learned Judge on the 26th February when the Mareva Injunction was sought. So whether the Scales' decision has gone, by way of orbits, to the extent as submitted by Mr. Graham on behalf of the Defendants, or whether my understanding of this matter in pleadings is accurate, has lost much of its significance if the second cause of action against the 1st Defendant had been (as I think it should have been) put before the learned Judge, Mr. Justice Nazareth on the 26th February. The second cause of action is the central issue and decidedly more serious. As an application for a Mareva Injunction is based on an overall evaluation, the Plaintiff would not have likely been allowed to raise fraud without an averment, even confining itself to "money had and received", if Nazareth, J. had been told of this second cause of action.

12. To summarise: If the case against the defendants is not one that they defrauded the bank with open eyes as to its error in making the deposit, then however devious the manner in which the deposit appeared to have been lifted, and however suspicious the circumstances surrounding these transfers seemed to be, the movements of funds on the 9th February cannot be evidence of dissipation of assets. When one deals with what he believes to be his own, there being no pre-existing debt, his conduct, however mysterious, cannot give rise to any grounds for believing that there is a risk of assets being removed or disposed of before judgment is satisfied. It would be ludicrous to accuse anyone of avoiding payment of an unknown debt. Therefore, in the instant case, only if a likelihood of dishonesty or fraud is shown, could any real risk of frustrating a judgment be inferred. In other words, without allegations of the defendants defrauding the bank, no inference could be drawn from such transmissions of funds on the 9th February that the defendants are likely to divest themselves of assets to avoid payment of any sum that may be adjudged against them in this action. Hence, there would be no need for protection and the Mareva Injunctions should not issue. Fraud cannot be raised against the 2nd Defendant because it has not been specifically pleaded. If all the present causes of action against the 1st Defendant had been brought to the notice of Nazareth, J., he could hardly have been expected to permit fraud to be raised under a much less condemning cause of action when the Plaintiff was not free to rely on it for the more sinister allegation run on the same facts, particularly when the Mareva application should then have had to be judged on an assessment of the situation taken as a whole. Given both causes of action against the let Defendant, as I am now, the Plaintiff should not have, in my view, raised fraud without pleading it. Indeed, cases where unpleaded fraud could be raised, in like circumstances, without abandoning the charge of fraudulent breach of trust must be rare. In my opinion, this is not such a case for either of the Defendants.

13. Mrs. Clough rose virtually at the conclusion of the proceedings to seek an amendment, as an alternative, in the form of an added word "fraudulent" before the words "breach of trust". Mr. Graham resisted the application, I take it, violently by reason of the late stage at which it was made. It is too late. Mr. Graham raised this point at the very inception. Counsel also reminded the Court that the word "fraudulently" cannot by itself be sufficient for pelading and raising fraud. I have had the advantage of re-reading some of the rules relating to pleading of fraud. I agree with Mr. Graham that if fraud which has to be pleaded, is presently relied upon, then material facts ought to be set out now so as to enable the Defendants to know what case they have to meet and whether the allegations sought to be made fall within the pleaded fraud. After all, a Mareva application is not less important than the trial proper.

14. Mr. Justice Nazareth was invited to and did rely on fraud which has not been specifically pleaded. The amendment now proposed by Mrs. Clough at the conclusion of the proceedings is, in my view, insufficient. Matters have gone far enough and too long for me to extend a further invitation to the Plaintiff for formulating other proposed amendments, particularly in the light of the view that I have taken in respect to non-disclosure and time. In view of the impression that I formed, and still retain, I accede to the application of Mr. Graham with not inconsiderable discomfort and reluctance. In the circumstances, for all these reasons I order that both injunctions be discharged with costs to the Defendants.