TERKILD JOHAN TERKILDSEN AND ANOTHER v. BARBER ASIA LTD AND OTHERS

CACV 156/2007, CACV 163/2007, CACV 165/2007, CACV 180/2007
AND CACV 181/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 156, 163, 165, 180 AND 181 OF 2007

(ON APPEAL FROM HCA NO. 1963 OF 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a decision of Saunders J given on 8 March 2007.  The matters before the judge were applications by the second, third, fourth, fifth and seventh defendants to strike out the statement of claim under the provisions of Order 18 rule 19(1) of the Rules of the High Court.  Those applications were on the grounds that the pleading did not disclose a reasonable cause of action.  There was also an application by the plaintiffs to amend the pleadings.  There were a multiplicity of causes of action pleaded against the various defendants.  The judge made orders permitting the plaintiffs to amend the statement of claim in order that various claims might be made against the first, second, third, fourth and seventh defendants.  He ordered that those claims which were not specifically permitted should be struck out and that the action against the fifth defendant should be struck out.  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

2.  Before dealing with the substantive issues it has to be observed that the applications to strike out the statement of claim were made some four years after the commencement of the action and, notably, after defences had been filed and discovery, apparently, completed.  This was despite considerable difficulties which are caused by the way in which the statement of claim has been framed with the inclusion of what would appear to be a number of irrelevant matters and the complicated manner in which the plaintiffs’ case has been presented.  It was thus not the defendants’ case that the statement of claim was unintelligible nor was the application to strike out put forward on the basis that the pleading was embarrassing.

3.  In the second place it must be emphasised that because this application is made on the basis that the statement of claim does not disclose reasonable causes of action there has, of necessity, been no assessment of any evidence and the truth of the allegations has not been tested in any way.  Hence because the court is constrained to proceed upon the basis of the facts pleaded in the statement of claim nothing said in this judgment should be taken as being a proven fact.

4.  The plaintiffs’ case arises out of losses of a sum of US$750,000 paid by the first plaintiff into a bank account of the second defendant and a sum of US$500,000 paid by the second plaintiff into the same bank account of the second defendant.  In essence it is alleged that the money so deposited was used in a way which was not authorised by the plaintiffs and contrary to the manner in which the defendants or at least some of them had indicated it would be used.  It is said that a substantial part of that money found its way into bank accounts of the first, second and fifth defendants.  In those circumstances it is hardly surprising that the plaintiffs have brought proceedings.  What might be surprising is that only civil proceedings have ensued.

5.  It is alleged that the fourth defendant, who was registered as an investment adviser under the provisions of the Securities Ordinance, Cap. 333, and the seventh defendant were the directors and shareholders of the first defendant, which was also a registered adviser.  The third defendant, who was also a registered investment adviser, had become acquainted with the plaintiffs as an investment adviser whilst working for another company.  He persuaded the plaintiffs to transfer their businesses to the first defendant of which it is pleaded he was an employee.

6.  It is said that the third defendant proposed and recommended to the plaintiffs that they should invest in a “Fully Secured Leverage Programme” (“FSLP”).  It is said that they were informed that the FSLP involved leveraged trading of assets,specifically purchasing instruments, such as US treasury bills or bank debentures, for less than their face value and reselling them at a profit.  The plaintiffs claim to have been told that there was a guaranteed high return with no risk of losing the principal investment.  Profits were said to be in the region of at least 100% over a period of six months.  The plaintiffs also allege that they were told that the FSLP was controlled by the US Federal Reserve.  It is to be inferred from the pleadings that, on the basis of those representations, the plaintiffs considered such an investment attractive.

7.  Thereafter it is said that communications with the plaintiffs were to a large extent by letter written by the third defendant on the second defendant’s letterhead.  The second defendant was a British Virgin Islands registered company.  The plaintiffs were told that the FSLP investments had to be made through an overseas registered company and hence the second defendant, whom they were told was operated, owned and controlled by the first defendant, was to be used as the vehicle.

8.  The third and fifth defendants were directors of the second defendant.  It is pleaded that various representations were made in letters signed by the third defendant addressed to both plaintiffs on the notepaper of the second defendant in order to induce the plaintiffs to part with their money.  For example, the second plaintiff was informed in October 1997 that the third and fifth defendants would travel to London to effect the transaction and if they were satisfied about proceeding with the FSLP programme they would verify the bank guarantee.  The first plaintiff was slightly later told that he could expect a profit of US$400,000 on an investment of US$500,000 and that there would be a security in the form of a guarantee from Barclays Bank.  He was also informed that the second defendant had carried out a thorough four-month investigation and was satisfied that the FSLP programmes were legitimate and operated in conjunction with and under the auspices of “one of the top 25 banks and in this case, Barclays.”.  He was also told “we could not have been more thorough in conducting due diligence concerning the investment.”

9.  It is said that on those representations the plaintiffs paid over the respective sums of US$750,000 and US$500,000.  It is then alleged that the first to fifth and seventh defendants were well aware that the Bank of East Asia, London Branch was anxious that its nominee company should cease to act as a nominee of the second defendant.  It is also said that the first to fifth defendants were well aware in March 1998 that the investments in the FSLP were likely to be a “clever documentation fraud” in which the defendants were likely to incur liability because of “inadequate and insufficient due diligence”.

10.  It is then alleged that further representations were made to the plaintiffs by the second and third defendants in July 1998 in answer to concerns which had been raised by the plaintiffs about the genuineness of the scheme.  It was said that there had been “great caution and professionalism” and “a very great amount of due diligence had been conducted”.  The plaintiffs were assured that the investments into which their monies were to be put bore no resemblance to the supposed scams which had been reported in a leading financial newspaper.

11.  It is finally alleged that the plaintiffs’ monies were part of a sum of US$4 million which was transferred to a bank account in Brussels; the money disappeared except to the extent that it was known that US$1.8 million was transferred to a senior officer of the corporation which held that bank account in Brussels.  Of that money US$512,500 was transferred to the second defendant’s account in Jersey, US$250,000 was transferred to an account in the name of Day Ltd a company belonging to a person who was alleged to be an associate of the senior officers of the corporation that owned the bank account in Brussels and US$237,000 was paid into an account of the fifth defendant.  As such, and not surprisingly, it is alleged that the plaintiffs’ monies had been applied in a way other than that in which the first, second and third defendants had asserted that they would be applied.

12.  The plaintiffs had pleaded and argued their case on the basis of no less than what was said to be eight different causes of action.  The first defendant had taken no part in the proceedings before the judge below and the allegations against it were allowed to remain.  In respect of the second defendant the judge held that there were insufficient pleadings for the plaintiffs to mount a claim in respect of negligence based on what was referred to as the Hedley Byrne liability.  However the judge went on to say that there had been sufficient pleadings in the original statement of claim and in the amended statement of claim to found a case under the Protection of Investors Ordinance Cap. 335 (“the Ordinance”).  The judge, however, referred to what had been termed in the course of argument below the “extended Hedley Byrne liability”.  By this was meant negligent acts as opposed to negligent advice.  The judge considered that there was sufficient in the unamended pleadings in relation to the transfer of funds from the second defendant’s account without proper safeguards including a bank guarantee to found an action.  There was no dispute in the court below that the plaintiffs had a viable claim against the second defendant for breach of trust and for money had and received.

13.  In respect of the third defendant the judge considered that there were viable claims in respect of negligence both as regards negligent advice, following the Hedley Byrne case, and what was termed professional negligence as well as negligence in respect of the transfer of the funds under what had been termed the “extended Hedley Byrne liability”.  The judge also held that there were valid claims under the Ordinance and for breach of trust.

14.  In respect of the fourth defendant the judge held that there were claims under the Ordinance as well as for professional negligence but not in respect of either of the two Hedley Byrne heads of liability.

15.  In respect of the fifth defendant the judge considered that there had been no pleading which would give rise to a valid cause of action.  In particular, although the fifth defendant was named as a director of the second defendant there had been no specific claim made under the Ordinance in respect of him.  The judge considered that there was a valid claim under the Ordinance against the seventh defendant.

This appeal

16.  On this appeal Mr Smith SC, who appeared on behalf of the second, third and fifth defendants, argued first of all that there were no representations made by the second defendant which would give rise to a liability of negligence.  In my view he took too narrow a view of the distinction between a representation and a promise which might or might not be fulfilled.  Saying that the statements on behalf of the second defendant that there would be a bank guarantee in place were merely statements of intention and in the absence of dishonesty it could not been shown that there was any falsity in that statement, in my view takes a purely semantic point.  Clearly given the facts of the present case, investment in FSLP’s, which according to its name meant “fully secured” investments, was, in itself, it seems to me, such a strange form of investment as to give rise to sufficient doubt that it could exist and the maker of statements who encouraged such an investment almost certainly has to be called upon to establish that he had been in a position to make those statements and that those statement had not been made recklessly and without reasonable care.

17.  Section 8 of the Ordinance which was in force at the relevant time read as follows as:

“8.  Liability in tort for inducing persons

  to invest money in certain cases

    (1)    Any person who, by any fraudulent, reckless, or negligent misrepresentation, induces another person-

    (a)   to enter into any agreement-

(i) for or with a view to acquiring, disposing of, subscribing for, or underwriting securities; or

(ii)    the purpose or effect, or pretended purpose or effect, of which is to secure to any of the parties to the agreement a profit from the yield or securities or by reference to fluctuations in the value of securities or property other than securities; or

    (b)    to take part in any investment arrangements in respect of property other than securities,

shall be liable to pay compensation to that other person for any pecuniary loss that he has sustained by reason of his reliance on the misrepresentation.

    (2)    For the purposes of subsection (1) “fraudulent, reckless, or negligent misrepresentation” means-

    (a)   any statement-

(i) which to the knowledge of its maker was false, misleading, or deceptive;

(ii)    which is false, misleading, or deceptive and was made recklessly; or

(iii)   which is false, misleading, or deceptive and was made without reasonable care having been taken to ensure its accuracy;

    (b)   any promise-

(i) which the maker of the promise had no intention of fulfilling;

(ii)    which, to the knowledge of the maker of the promise, was not capable of being fulfilled; or (Amended L.N. 56 of 1974)

(iii)   which was made recklessly or without reasonable care having been taken to ensure that it could be fulfilled;

    (c)   any forecast-

(i) which, to the knowledge of the maker of the forecast, was not justified on the facts known to him at the time when he made it; or (Amended L.N. 38 of 1974; L.N. 56 of 1974)

(ii)    which was not justified on the facts known to the maker of the forecast at the time when he made it and was made recklessly or without reasonable care having been taken to ascertain the accuracy of those facts; or

    (d)    any statement or forecast from which the maker of the statement intentionally, recklessly, or negligently omitted a material fact of which he had knowledge or ought to have had knowledge, with the result that the statement was thereby rendered untrue, misleading, or deceptive, or, as the case may be, the forecast was thereby not capable of being justified or was thereby rendered misleading or deceptive.

    (3)    For the purposes of this section-

    (a)    where any statement, forecast, or promise to which this section relates was made by a company or other body corporate, every person who was a director of the company or body corporate at the time when the statement, forecast, or promise was made shall, in the absence of evidence to the contrary, be taken to have caused or authorized it to be made; and

    (b)    a person is deemed to be a director of a company or other body corporate if he occupies the position of director by whatever name he may be called, or is a person in accordance with whose directions or instructions the directors of the company or other body or any of them act; but a person shall not, by reason only that the directors of a company or other body corporate act on advice given by him in a professional capacity, be taken to be a person in accordance with whose directions or instructions those directors act.

    (4)    Nothing in this section limits or diminishes any liability which any person may incur under the common law.

    (5)    This section does not confer a right of action in any case to which section 40 of the Companies Ordinance (Cap. 32) applies.

    (6)    An action may be brought under this section whether or not a person has been charged with or convicted of an offence under this Ordinance.”

18.  In my view there was sufficient pleadings to found an action based on section 8(2)(a)(iii) and (b)(iii) against the first and second defendants.

19.  In respect of the third defendant, he was a director of the second defendant and, as already noted, he was responsible for nearly all the correspondence.  In my view there are sufficient pleadings in respect of negligence and under the Ordinance as well as in breach of trust by reason of the fact that the pleadings show that the third defendant was intimately involved in the wrongful distribution of the plaintiffs’ monies.

20.  In respect of the fourth defendant I consider that the pleadings as originally framed and, indeed, as now framed do not demonstrate a sufficient cause of action in negligence but they do demonstrate that the fourth defendant could have incurred liability under section 8 of the Ordinance by reason of his having been a director of the first defendant.

21.  In respect of the fifth defendant the difficulty arose that originally there was no specific claim made under the Ordinance.  Nevertheless the pleadings as originally framed disclosed a claim against the second defendant under the Ordinance and alleged that the fifth defendant had at all material times been a director of the second defendant.  In those circumstances liability under section 8 would follow if the relevant facts were proved.  I consider that therefore that would follow was a matter of law and the plaintiffs should be allowed to include a prayer for relief.  A claim in respect of breach of trust had always been made against the fifth defendant and in my view given the fact that the fifth defendant was at all material times a director of the second defendant and that the second and fifth defendants had both received proceeds of the wrongful distribution of the plaintiffs’ monies, I see no reason why an action for breach of trust was not appropriate.  I would therefore allow the appeal in respect of the fifth defendant in this respect and restore the action against him on those bases.

22.  In my view the same considerations apply in respect of the claim under the Ordinance against the seventh defendant as applied in respect of the fifth defendant save in that case the seventh defendant was a director of the first defendant.

23.  Consideration has been given as to whether the statement of claim, whether in its original form or in the form which was before the judge, should be struck out and the plaintiffs permitted to replead their case in a succinct and intelligible fashion as required under the Rules of the High Court.  Nevertheless, as indicated above, the defendants have hitherto taken the stance, by filing defences and proceeding with discovery, that the pleading was intelligible.  In those circumstances should the plaintiffs wish to plead their case in a more easily comprehensible fashion, an appropriate application would have to be made separately.  In the meantime the parties should attempt to agree a draft order which can be submitted.  In view of the nature of these proceedings I consider that there should be no order as to costs in relation to this appeal.

Hon Le Pichon JA:

24.  I agree.