THE HONG KONG & SHANGHAI BANKING CORPORATION v. MOHANDAS DETARAMNSAKHRANI also known as DETARAM SAKHRANI MOHAN

Headnote

                O.49B - effect of non-disclosure of material facts in affidavit - whether oppressive to order examination when debtor party in forthcoming proceedings dealing with same subject matter - no unfair advantage.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

No. 2750 of 1976

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JUDGMENT

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1. In January, 1977 over seven years ago the plaintiff obtained judgments by default in separate actions against Mr. D.S. Mohan (No. 2750/76) and his son, Mr. Gobind (Obi) Mohan (No. 191/76), in the sums of $9,817,265 and $9,746,307 respectively. The actions arose out of non-payment of loans to Obi Mohan, which were guaranteed by his father.

2. Shares and other securities had been mortgaged to the plaintiff and have now been sold. The judgment debt has been reduced thereby to approximately $3,600,000, including interest, but the defendants have done nothing to reduce it furthers.

3. No steps were taken to enforce the judgment until this year. On 20th June the plaintiff obtained an order from Master Betts, following an ex parte application under O.49B of the Rules of the Supreme Court, that the defendants attend and be orally examined, on 26th July, as to their means of satisfying the debt.

4. The defendants took out an inter-partes summons, in which they asked that the order of 20th June be set aside, or alternatively adjourned pending the determination of another action (No. 4611/78), in which the defendants are suing (inter alia) the plaintiffs. This summon was dismissed by Master Betts and the defendants now appeal.

5. O.49B has been amended since the order of Master Betts and is now wholly discretionary, but, on 20th June, which is the relevant date, it read:

6. Rule 1 A provides:

7. Mr. Rogers, for the defendants, does not now seek to have the order set aside, but asks that the matter stand adjourned pending the trial of Action No. 4611/78 and yet another action (No. 5854/82), in which the plaintiff is suing Obi Mohan in respect of pledged shares, which it mistakenly believed he owned beneficially.

8. The submission is based on two grounds:

(1) Non-disclosure

9. Mr. Rogers concedes that the evidence in support of the ex parte application was such that the Master was bound to grant the application, but he submits that he clearly had a discretion as to the date of the examination. The plaintiff, having suppressed the information about the forthcoming actions, which was material to the exercise of that discretion, the Master was not in a position to make a proper order. And this is so even if the omission was made with no ulterior motive, provided it had that effect.

10. He relies, in particular, on R. v. Commissioners for Income Tax for Kensington 1917 IKB 486. It was held by the Court of Appeal that, there having been a suppression of material facts by the applicant in her affidavit, the Court would refuse a writ of prohibition without going into the merits of the case. Scrutton L.J. said at page 514:

"and it has been for many years the rule of the Court, and one which it is of the greatest importance to maintain, that when an applicant comes to the Court to obtain relief on an ex parte statement he should make a full and fair disclosure of all the material facts- facts, not law. He must not misstate the law if he can help it-the Court is supposed to know the law. But it knows nothing about the facts, and the applicant must state fully and fairly the facts, and the penalty by which the Court enforces that obligation is that if it finds out that the facts have not been fully and fairly stated to it, the Court will set aside any action which it has taken on the faith of the imperfect statement. This rule applies in various classes of procedure.''

11. In Wardle Fabrics Limited v. G. Myristis Limited FS Reports 1984 263, a copyright case, in which the plaintiff obtained on Anton Piller order, it was held that the Court should be fully informed of all facts that are relevant to the weighing operation which the Court has to make in deciding whether or not to grant the order sought.

12. I think those cases can be distinguished from this one. In the first place, the plaintiff only had to prove the judgment debt in order to obtain an ex parte order. The Court always has a discretion as to the hearing date in any proceedings. The date selected was approximately one month after the application. If that did not suit the defendants, it was open to them to take out a summons and apply to have it changed, as in fact they did. That they failed makes no difference. No prejudice has resulted from the plaintiff's failure to refer to the pending litigation in the affidavit, since all facts relevant to the proper time for the examination were put before the Master at the hearing of the summons on 19th July. I do not see why the plaintiff should be obliged to raise the issue of the pending litigation, not knowing that the defendants intended to object to the hearing date. It was not a matter relevant to the weighing operation as to whether or not the Court should grant the order sought.

13. It would have been different had false information about the judgment debt been given in the plaintiff's affidavit. The Court would then quite properly have been able to say that it had been misled on a material matter and consequently the order must go. In this instance the Court was not deceived.

(2) Unfair advantage

14. I come now to the question of whether Master Betts, having been made aware of the other actions, should have adjourned the examination until after their determination. Will the plaintiff obtain an unfair advantage? If so, then the appeal must succeed.

15. The pending litigation, in particular Action No. 6411, is massive and wide-ranging. Not only is the plaintiff being sued, but also the defendants' solicitors. The statement of claim runs to 62 paragraphs and has been amended by order of the Court of Appeal. The bank's defence contains 95 paragraphs. The hearing is due to take place in October this year and has been set down for 39 days.

16. The defendants claim their professional advisers were in breach of duty to their clients in the advice they gave relating to the floating of a public company, Mohan Property and Investment Company Limited (MPIL), in early 1973, the time of the dramatic rise and fall of the stock market.

17. The defendants were advised that they needed to put together assets of at least $50,000,000 before a flotation could take place. To purchase property on his scale, they had to borrow from the plaintiff and to pledge shares. All might have been well had the MPIL shares sold at anything like the price anticipated by the parties, but, when offered the public, they opened at a considerably lower figure and thereafter sank almost out of sight. This has resulted in financial disaster for the defendants, the blame for which they are now attempting to lay at the door of their advisers.

18. The plaintiff is concerned that assets are now being disposed of in order to avoid execution, and that the forthcoming litigation is being financed by money due to the plaintiff. The defendants complain that it is unfair to bring these proceedings, at this stage, after such a long delay.

19. There are, it seems to me, valid reasons for acting now. The plaintiff did not believe there were any prospects of successful execution in the intervening years and refrained from taking the necessary steps. There was also the matter of the notorious prosecution of Obi Mohan, which arose out of this affair. The plaintiff did not wish to appear to be vindictive or oppressive.

20. The plaintiff now believes, rightly or wrongly, for reasons with which I will deal later, that the defendants may be in a position to pay. I see nothing wrong with this, provided, of course, that the application to examine the debtor is made not merely in order to assist the plaintiff in the other actions. The mere fact that a debtor is suing his judgment creditor should not be a bar to attempted execution.

21. Obi Mohan was legally aided at some stage, from 1981 -83, I think, but that is no longer the case. There is no evidence as to who is going to finance Action No. 4611. The costs will be enormous; I dare say they are already. Leading counsel from London has been instructed. Mr. Bunting, for the plaintiff, submits that, in the absence of evidence to the contrary, which could easily be made available by the defendants, the Court may infer that the defendants themselves are financing the actions. In that case, he says, they should settle their debts first. Mr. Rogers says the defendants' family may be rallying round, but, if so, why is there no evidence to that effect?

22. The plaintiff suspects that the defendants have come into funds by way of dividend payments from Mohan's limited, a company which was, until recently, wholly owned by the defendants. Obi Mohan had pledged some Hong Kong and Shanghai Banking Corporation shares with the plaintiff, which were the property of Mohan's Limited. These shares were sold by the plaintiff, who believed, wrongly, that Obi Mohan was the beneficial owners. Mohan's Limited sued the plaintiff (Action No. 3317/ 79) for the return of these shares and this action was settled by a payment to Mohan's Limited of $6,000,000. This was the precursor of Action No. 5854/82.

23. Mohan's Limited was in liquidation, but the plaintiff discovered, in June this year, that the winding-up had been stayed by the Court. The plaintiff fears that some or all of this $6,000,000 may have found its way into the defendants' hands.

24. There is no evidence of this. The defendants point out that they disposed of their holdings in Mohan's Limited to Mrs. D.S. Mohan, for valuable consideration, in March this year and resigned as directors at the same time. Obi Mohan states in his affidavit that any dividend paid by Mohan's Limited would go to his mother.

25. There is also exhibited a copy of Mohan's Limited's accounts for the period 1.4.76 to 29.2.84. These are unaudited accounts, prepared by a firm of public accountants. They reveal that the company has liabilities in excess of $6,000,000, principally by way of amounts due to a subsidiary, Mohan's Retail Limited. It would be most improper, therefore, if these accounts are correct, for the company to pay a dividend.

26. Nevertheless, I agree with counsel that there is material here which is suitable for examination under O.49B. The plaintiff has, in my view, established adequate grounds for examining the defendants now, rather than later, provided he does not thereby gain a collateral advantage in respect of the trial.

27. As to this, the defendants rely on Re Imperial Continental Water Corporation 1886 33 Ch. Div. 314. The headnote of this case reads :

"An order having been made for winding-up a company, P., who held a mortgage on calls, and who was also a holder of shares, brought his action against the company and the directors, claiming to have his mortgage of calls enforced, and any deficiency made good by the directors, and also to have an agreement enforced, one term of which was that his shares should be cancelled, and to have his name removed from the register and from the list of contributories. Before issue was joined in this action, P., as an alleged contributory, obtained an order under sect. 115 of the Companies Act, 1862, for the examination of the directors. The directors moved to have their examination under this order postponed till after the trial of the action, and Mr. Justice Chitty made an order accordingly :-

 

Held, on appeal, that this postponement eras right, for that the powers of sect. 115 were given for the more beneficial winding-up of the company, and ought not to be used for the purpose of giving to the plaintiff in an action brought to enforce his own individual rights, and which could not be for the benefit of the company, means of discovery beyond those which the law gives to a plaintiff."

At page 317 Chitty J. said :-

"

On appeal, Cotton L.J. said at page 320:-

28. The same principle was applied in Re Bletchley Boat Co. 1974 1AER 1225, another winding-up case. It was held :-

29. It is submitted that, at the October trial, the whole state of the defendants' finances and assets will have to be investigated. Paragraph 52 of the Statement of Claim alleges that the bank was reckless as to whether the Mohans were in a position to fund the acquisition of MPIL. Mr. Rogers says the kind of advice that should have been tendered to the defendants depended on the degree of risk involved in building up the assets of MPIL to $50,000,000. This, in turn, depended on whether the defendants' wealth was sufficient to enable them to ride out the storm if necessary. There will accordingly be an overlap with the enquiry under O.49B and such a preliminary run will inevitably give the plaintiff an unfair advantages.

30. In my judgment that is unrealistic. If the defendants were less than frank with their advisers as to their financial situation, they cannot complain that things went wrong, provided the advice was not negligently given. A bank has no duty to query information, about assets and financial clout, provided by a client seeking advice as to whether he might profitably become a public company and, if so, what properties he should acquire to that end. It might do so were it unsure of the credi-tworthiness of the client, but that is a different matter. In this case the plaintiff thought it had sufficient security to cover the loans subsequently made to the defendants. The fact that it was wrong was due to the collapse of the stock market and was a misjudgment. Whether its advice was negligent or not depends on other factors. In 1973, the defendants alone knew the full extent of their assets. They had been prominent businessmen in Hong Kong for many years. I see no reason why the plaintiff should have doubled their ability to assess their own wealth.

31. On 3rd January, 1978, the plaintiff sold 18,846,000 MPIL shares, the property of the defendants and their major assets which had been pledged as security for loans. The sale price was 30 cents and the judgment debt was thereby reduced by $5,653,800. The defendants claim that the plaintiff failed to obtain the best price available for these shares, which they suggest were, in truth, worth at least 45 cents per share. If such a price had been obtained, the judgment debt might by now have been extinguished.

32. In their original statement of claim in Action No. 4611 the defendants sought a declaration and the return of these shares. This has now been withdrawn by order of the Court of Appeal and the matter is no longer a cause of action. Mr. Rogers, however, submits that the issue arises on the question of damages, and is particularized on page 14 of the further and better particulars of the amended statement of claim.

33. I accept that this may be so, but questions as to the true value of these shares can have no relevance to the disclosure and disposal of assets, which are the matters to be enquired into under O.49B R.1A.

34. An examination under O.49B is much more circumscribed than that permitted under the Companies Acts. Furthermore, Rule 1A(2) specifically limits the scope of questioning by the creditor by the words "subject to the directions of the Court".

35. These shares are fully disclosed already and so is their disposal. For the purposes of O.49B, their value is irrelevant. I have little doubt that, on objection being raised by the defendants, any such questions would be disallowed by the Master.

36. I see no unfair advantage to the plaintiff in ordering examination under O.49B in advance of the pending actions. There are good reasons why the examination should be allowed. The appeal is dismissed with costs.