A1 AND ANOTHER v. R1 AND OTHERS

HCMP 307/2021

[2021] HKCFI 650

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 307 OF 2021

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REASONS FOR DECISION

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A.  Introduction

1.  On 9 March 2021, I heard what was said to be an urgent application by which the Applicants sought a Norwich Pharmacal order against the three respondent banks (“Banks”) in respect of disclosure relating to four bank accounts.  The Applicants also sought gagging, confidentiality and anonymity orders.

2.  At the end of the hearing, I granted those orders in the terms of a draft Order provided, subject to various amendments which I made to the draft. I did so with the benefit of knowing each of the Bank’s stance towards the application, revealed in correspondence with the solicitors for the Applicants.

3.  However, because the application seemed to me to give rise to points of wider interest than merely affecting the particular parties to these proceedings, I said I would hand down my Reasons for Decision on a later date.  Those points of wider interest relate to: (1) the making of the application ‘ex parte on notice’; (2) how properly to make full and frank disclosure; and (3) orders relating to bank accounts not held in Hong Kong.

4.  These are my Reasons for Decision.

B.  Background

5.  In order to preserve the value of the confidentiality and anonymity orders made, my description of the various background matters will necessarily omit much of the detail.

6.  The underlying dispute arises out of investments which the Applicants made, both of them as limited partners of a Cayman Islands exempted limited partnership (“Fund”).

7.  The Applicants assert that they have strong reasons and evidence to believe that the Fund has been the subject of a large-scale fraud (“Fraud”) committed by various persons/entities including the Fund’s general partner (“GP”), its investment manager, and various individuals in control of and associated with those entities.  The Fraud is said to have resulted in the misappropriation of over US$100 million of assets belonging to the Fund, causing substantial losses to (amongst others) the Applicants as limited partners.

8.  After taking steps to investigate the Fraud, the Applicants have commenced legal proceedings in the Cayman Islands and other jurisdictions.  The actions taken in the Cayman Islands have included applications against the Fund and the GP, seeking disclosure of information and documentation relating to the business and financial condition of the Fund.  Judgment in favour of the applicants in those proceedings was given by the Cayman Court in mid-2020.  The result of the applications included the later production of some documents which the Applicants say evidence the Fraud, including regarding the payments (“Subject Payments”) the subject of the present application for the Norwich Pharmacal relief.

9.  The Subject Payments are said to have been made in consideration for advisory services provided to the Fund by the recipient of the payments, but where the Applicants say there is no good evidence of any such services being provided and/or or of any other reason why the payment was justified.  The Applicants also say that the assessment of those matters should be seen in the wider context of evidence suggesting other serious irregularities and wrongdoing taking place within the Fund.

C.  Application made Ex Parte on Notice

10.  The application was made on an ‘ex parte on notice basis’, on the stated grounds of both urgency and secrecy.

11.  The urgency was said to arise from the timing of information and documentation obtained by the Applicants pursuant to the disclosure orders made by the Cayman Court, and obtained only from November 2020 onwards.

12.  The secrecy was said to arise from there being a real risk that by making the application inter partes, those involved in the Fraud may become aware of the Applicants’ actions and so take (further) steps to hide their wrongdoing including further to dissipate the monies misappropriated from the Fund as part of the Fraud.

13.  In my view, there was neither real urgency nor the stated need for secrecy.

14.  The starting point is that natural justice requires all parties to be heard, save in the most exceptional circumstances where extreme urgency or secrecy so requires.  Even in cases where genuine urgency can be shown, often the proper course will still be to apply on an inter partes basis, but with time to be abridged.  If that is not possible, it may still be possible to make an ex parte application at least on notice.

15.  The steps taken by the Applicants prior to making the application seemed to me to identify why it was not one which needed to be made urgently.  As it happens, in this case, the Applicants took what I think is the slightly unusual approach of writing (by their solicitors) to the Banks on 3 March 2021 (5 days before the application papers were delivered to court) informing the Banks of the Applicants’ intention to make the application for a Norwich Pharmacal order, and providing the draft affidavit material (without exhibits) setting out the factual background and the basis of the application, as well as the draft of an order to be sought, the draft originating summons, the draft skeleton argument and the draft list of authorities.  The unusual aspect is not that the Banks were invited to identify their likely response to an application, but in the fact that the letters to the Banks also invited the Banks to note that an application would be made for a gagging order, and the Banks were asked to treat the letter and its enclosures as strictly private and confidential, and to refrain from taking any steps which would be contrary to the gagging order including notifying any third party (as well as the relevant account holder or connected persons) of the letter, the draft order and other enclosures or their contents.

16.  As Mr Geiser accepted, the Banks were in effect being asked and trusted not to do something contrary to a gagging order which had not yet been made, and which might not be made.  Whilst I do not suggest that the trust was misplaced, this approach might have placed the Banks in a difficult position vis-à-vis their own customer, to whom they owe certain obligations or duties arising from the banker/customer relationship.

17.  The same point also seems to me to identify why there was no secrecy point justifying an ex parte application.

18.  The Banks were also being given significant advance notice of the intended application, of a magnitude which shows that an inter partes application was entirely possible (and that the label ‘ex parte on notice’ was not really applicable).

19.  The correct, or better, practice has fairly recently been identified by DHCJ Maurellet SC in Asiya Asset Management (Cayman) Ltd v Dipper Trading Co Ltd [2019] HKCFI 1090.  It bears repetition and bringing wider attention to it.

20.  In that case, the Deputy Judge noted the surge in recent years in the number of fraud cases, where the victims of dishonest schemes have turned to the courts for relief, and Mareva injunction applications coupled with disclosure order applications or bankers’ books applications have become commonplace.  He referred to the case of A Co v B Co [2002] 3 HKLRD 111 – see also below – where Ma J revealed the existence and availability of the Norwich Pharmacal jurisdiction, and set out how in practice practitioners should proceed.  In that case, the Court granted a gagging order against the bank, pending an application for Norwich Pharmacal discovery which was about to be made.  That allowed the bank to make submissions to the court on whether an order should be made, and if so on what terms.

21.  The Deputy Judge went on to point out that it is critical to bear in mind that the bank’s client is not aware of the application and cannot make submissions to the court to protect his own interests.  The importance of the bank being able to make submissions in this context is thus one of the important safeguards for the client.  After all, what the bank is being asked to do is override the customer-bank confidentiality.

22.  Recognising that in many cases banks would remain neutral, or perhaps would simply highlight some factors germane to the exercise of discretion by the court, the Deputy Judge suggested that practitioners seem to have taken the view that it is either unnecessary or waste of costs to go through the two stages highlighted.  Instead, they seek an ex parte order against the bank without giving notice to it, as that would apparently not achieve anything of value.  The Deputy Judge thought that was incorrect, and that it would be hard to think of any appropriate case where the court might exercise its discretion to make such an ex parte order against the bank without notice to the bank.

23.  He therefore suggested that the correct procedure should be:

(1)  First, the plaintiff seeks on an ex parte without notice basis a gagging order against the bank pending the hearing of the Norwich Pharmacal discovery against the bank either on an inter partes basis or at the very least on an ex parte basis but with notice.  Whatever notice period is given should normally be sufficiently long so that the bank can meaningfully make submissions, if it thinks it appropriate to do so.

(2)  Second, at the hearing of the Norwich Pharmacal discovery application against the bank, the court will then have the benefit of the submissions of the bank, if any, while the plaintiff will on the other hand be protected by the gagging order until the conclusion of the application.

(3)  Third, the court can in an appropriate case grant a further brief period for the gagging order to continue, to allow the plaintiff to make such applications as it sees fit to protect its interests.

24.  I agree that that procedure would be the correct one, and it should be followed in all save the most exceptional of cases.  Had it been followed in this case, the Applicants would have been protected by a gagging order pending the ability to have made the discovery application on an inter partes basis, and the Bank would not have been placed in the potentially difficult situation of being provided with all the materials and then being invited to honour a request for confidentiality made by the Applicants, when in fact their duty of confidentiality (as well as other duties) was owed to their customer.

25.  The approach adopted by the Applicants in this case did not seem to me in the end to be one as should make a material difference to the outcome, or one which adversely affected the overall fairness of the process.  This was because of the stance taken by the Banks in response to the materials sent to them, so that by the time the application was made to me the situation was likely the same as would have been achieved on an inter partes summons.  This also reflected the amount of time between the letters to the Banks and the making of the application.

26.  Nevertheless, I have made the above comments, as they seem to me to be important for practitioners to bear in mind.  The approach adopted by the Applicants in this case showed the application was not in fact urgent and that secrecy had been given up.  The correct procedure identified above would not have been to the Applicants’ detriment.  It provides the proper balancing of interest between (a) the party seeking the information from the bank and (b) the bank’s customer.  I agree with the Deputy Judge, when he said that those safeguards cannot be avoided in the name of convenience or to save costs, and are not overridden by the understandable wish to obtain information as quickly and cheaply as possible.

D.  Making Full and Frank Disclosure

27.  In the affidavit leading the application, the deponent for the Applicants specifically dealt with matters of full and frank disclosure in a separate section of the affidavit.

28.  I accept that the deponent was seeking to be both full and frank, and so to disclose matters which might be material to the weighing of matters relevant to the grant or refusal of the application.

29.  However, one aspect of the way in which the disclosure was given is worthy of some comment.  It arises because of the prior proceedings in the Cayman Islands, in the context of which there had been an exchange of correspondence between the lawyers for the parties.  In the affirmation, the deponent referred to one particular letter which he said set out the Fund’s and the GP’s lawyers’ statement of their position in relation to a number of the specific allegations of wrongdoing set out in the affidavit, and the deponent said that “the Court is invited to read that letter should it wish to understand what they have said” (and the page reference within the exhibit was given).

30.  At the very least, giving disclosure in that way is not best practice. At least arguably, it could give rise to the suggestion that full and frank disclosure has not actually been made.  The body of the affidavit itself comprises over 170 paragraphs on 47 pages.  The lawyers’ letter in question is 23 pages long, and covers a range of topics.  But the total of the exhibit to the affidavit runs to almost 2,500 pages, in six large lever arch files, divided by 139 tabs.  Recognising and allowing for the fact that there was, no doubt, some pressure of time in the preparation of materials to be presented to the court in support of the application, it seemed to me that even the internal organisation of the parts of the exhibit (admittedly divided by tabs) was not very clear and logical.  I am not even sure that each part of the exhibit was actually expressly referenced in the affidavit.

31.  In any event, when an application comprising that amount of material is put forward in support of an application described as urgent, it is not always realistic to think that the assigned Judge will have had the time to bring much focus to bear on all parts of the materials.  Even if the Judge’s instinctive view is that the application may not be as urgent as suggested, the Judge may nevertheless out of caution defer to the applicant’s description, and rush to hold the hearing.  Depending on the particular Judge’s own working method and area of prior experience or expertise, the Judge might not pick up on all relevant and material points, unless the particular importance of any part is made absolutely clear.

32.  Inevitably, if there are exhibits to just one affidavit which are as voluminous as 2,500 pages, some of those pages will be much more important than some of the others.  Concerns about later allegations of material non-disclosure are not going to be dispelled by creating a deluge of paper, some of which may not be material (and, in my frequent experience of similar applications, certainly is not material).

33.  The particular importance of any particular page or pages (or anything on them) may not always ‘leap off the page’ to the Judge as being important on just the reading through of materials in the time available.  Where an application is put forward as being urgent, the time available is itself necessarily limited.  It must also be remembered that urgent applications frequently interrupt what other work the assigned Judge might otherwise have intended to do at that particular time.  That is why the courts rely upon the parties and their representatives specifically to bring to the attention of the court those matters which the court must, or likely will wish, to take into account in the context of the particular application.

34.  It has been said on many previous occasions that full and frank disclosure of the contents or purport of a document is not made simply by placing the document somewhere in a bundle of exhibits to an affidavit, even if there is some glancing reference to that document in the affidavit itself.  The greater the amount of material placed before the court, the more likely the court will need – and is entitled to – clear sign-posting to the various aspects of that material (which, hopefully, also has been organised in a logical way, making it easier to find, follow and understand).

35.  That is all the more important when an application is made ex parte, which triggers the requirement specifically to make full and frank disclosure – meaning specifically drawing the attention of the court to those matters, and doing so fully as well as frankly.  The requirement is neither removed nor watered-down simply because the application is, or is said to be, urgent.

36.  As it happens, in this instance, I made the time and had the prior experience to note (amongst other things) the importance of reading carefully and understanding the points in the lawyers’ letter in question.  In doing so, it was left to me to try to match the particular responses to the particular allegations, and as to how they were or might be material to the particular application (accepting that materiality is ultimately a question for the Court). But, I think that the proper – or at least the better – way of making full and frank disclosure would have been at least to have summarised in the body of the affidavit (and/or in the skeleton argument) what particular position had been set out in respect of what specific allegation of wrongdoing – as well as any suggested response given by the Applicants to that position.

37.  To be fair, I raised this comment and criticism with Mr Geiser before he had the opportunity specifically to address me on the detail of the matters relating to full and frank disclosure, which he was probably about to do.  But, had the matter been dealt with as I suggest it should, my comments in court and in these Reasons would be unnecessary.

38.  This point is also connected to the previous point.  I do not think it would have made a material difference to the effect of the order sought if the application had been made a day or two later.

E.  Application Relating to Bank Account Outside Hong Kong

39.  The Banks are banks operating in Hong Kong.  Two of the four accounts, where the recipient received some of the Subject Payments, are held in Hong Kong.  The other two accounts which received some of the Subject Payments are held with the Macau branches of two of the Banks (“Bank A” and “Bank B” respectively).

40.  All of the Banks are incorporated in Hong Kong, and neither of the respective Macau branches of Bank A or Bank B is a separate legal entity.  Instead, each is an overseas branch and part of the same Hong Kong entity.

41.  Both of Bank A and Bank B are regulated by the Hong Kong Monetary Authority (“HKMA”) and are apparently required to ensure that their respective Macau branches comply with the extensive record-keeping requirements imposed by the HKMA, including keeping various records for at least five years for the purposes of (amongst other things) tracing criminal or terrorist property and providing evidence for prosecution of criminal activity.

42.  On that basis, it was submitted by Mr Geiser on behalf of the Applicants that it is reasonable to infer that Bank A and Bank B may have possession or custody of documents and information relating to the relevant subject accounts, and/or that such documents and information may be within their power.

43.  Bank A indicated a neutral stance towards the application, and took no point in relation to the Macau branch.  Rather, it simply asked the Applicants to note that it might require more than 28 days to produce the documents if an order were to be made.  It did, however, point out that it had no record of one of the account numbers identified by the Applicants’ solicitors.  I note that is the number of the account held at the Macau branch.

44.  Bank B indicated it would not attend the hearing, so as to avoid unnecessary further incurring of costs for the Applicants.  But it pointed out that it had no record of the identified account in the possession, custody or power of the Hong Kong operation of Bank B.  It also stated that customer information and documents of its Macau branch are kept separately from the Hong Kong operation, and control and access of Macau branch customer information and documents are also kept separately from the Hong Kong operation.  The letter suggested contacting the Macau branch directly.

45.  Further, I should point out that whilst I assume that the Macau branches of Bank A and Bank B would be subject also to some regulation by the Autoridade Monetaria De Macau (Monetary Authority of Macau), I do not know the extent of any overlap or conflict between the two regulatory regimes.

46.  The question arises whether it is appropriate to grant a Norwich Pharmacal order in relation to discovery of documents and information about a bank account held not in Hong Kong, but in Macau.

47.  Mr Geiser’s researches had not found any relevant Hong Kong case authority on the question.  But he referred me to the English High Court decision in Credit Suisse Trust v Intesa San Paulo SPA & Banca Monte Dei Pasche Di Siena [2014] EWHC 1447 (Ch).  The case involved an application for Norwich Pharmacal relief against two Italian banks. Both banks had London branches.  Both banks indicated that they did not intend to contest the proceedings.  But, both banks raised the question whether, because the activity undertaken in relation to the Banks was said to have occurred in Italy and not in England, any information could be released by the Italian bank, albeit a defendant to the application, because that bank and that activity was governed by Italian law and in particular Italian law regarding banking confidentiality.  There was a slight factual difference between the position of the two banks, as one had made it clear that its London branch could obtain certain information from its Italian branches, whereas the other bank was less forthcoming about that.

48.  HHJ Waksman QC, sitting as a Judge of the High Court, identified two points of concern.  The first was whether it was appropriate to grant relief given that the activities were concerned with the branch of the defendant bank abroad.  The second was whether there was any point in granting the relief in England.

49.  As to the second point, the Judge was satisfied that there was utility in the orders.  As to one of the banks, it appeared willing to provide at least some information, though it was perhaps unsurprisingly not prepared to do so unless armed with an order of the court, which is often the case where banks are concerned about confidentiality.  By way of analogy, the Judge also thought it was not by any means impossible for that bank to obtain information from Italy through its London branch.  The Judge considered there to be at least a realistic prospect that if the order is made against the bank, at least some steps will be taken to comply with it via the London branch.

50.  The Judge also pointed out that if the orders made did not bear fruit in the case of either bank, the intention of the claimant was not to proceed against the bank for contempt, but rather would go down the next stage of the route, perhaps to have the order recognised by the Italian courts.

51.  As to the first point, the Judge was satisfied that there was nothing to prevent him from making an order simply because the information is contained in a branch of a bank which is abroad.  He expressly recognised the analogous circumstances where the defendant is an English bank but is being asked to provide information in relation to a foreign branch, where it has been held that such a remedy is exceptional and should be granted only with care, and where it has perhaps particularly been granted in cases of fraud.

52.  Similarly, I think there is no authority in Hong Kong or other reason which prevent me from making the order sought by the Applicants in this case, simply because the information sought is contained in the Macau branch of a bank incorporated in Hong Kong, and of which entity that branch is a part.  It might be thought straightforward that one legal entity has possession, custody or power over the documents held by any part of that entity, including in its branches overseas.  Indeed, this would perhaps be thought a stronger position than where the branch is local ad the main bank overseas (as in the English case cited above).

53.  Further, on the materials in particular relating to the regulation by the HKMA, it seems to me that there is the likelihood that each of Bank A and Bank B can have access to – in other words, they have control or power over, and can obtain possession of – the documents and information held in their respective Macau branch.

54.  Mr Geiser also confirmed that if in the case of either bank the orders I made do not bear fruit, it is not the intention of the Applicants to proceed by way of any contempt proceedings; rather, the Applicants would have to consider a different route, perhaps seeking recognition in Macau of the Hong Kong order.  He confirmed that the order sought was limited to requiring disclosure of documents and information in the Banks’ respective possession, custody or power.  Therefore, to the extent that the inference invited – that the Hong Kong operations likely have access to documents and information contained in their branches in Macau – turns out to be incorrect, then that simply means that Bank A and/or Bank B would not be required to disclose documents pursuant to the order.

F.  Orders Granted

55.  These Reasons do not need to recite at any length the principles relating to applications for Norwich Pharmacal relief, which are well-settled: see, for example, A Co v B Co [2002] 3 HKLRD 111 at §§10-12; Pacific Andes Enterprises (BVI) Ltd (in liq) v Hong Kong and Shanghai Banking Corp Ltd [2019] 4 HKLRD 621 at §5.

56.  The three main requirements include: (1) there must be cogent and compelling evidence to demonstrate that serious tortious or wrongful activities have taken place (where allegations of fraud or something similar requires the degree of proof to be correspondingly high); (2) it must be clearly demonstrated that the order will or will very likely reap substantial and worthwhile benefits for the plaintiff, and where a tracing claim is made that the discovery sought will either allow the plaintiff to preserve what may well be his assets or realistically lead to the discovery of such assets; and (3) the discovery sought must not be unduly wide, so any order must be specific and also restricted to those documents or those classes of documents that are necessary to enable the plaintiff to preserve or discover assets.

57.  On the substantial evidential materials, I was satisfied that the necessary merits test was satisfied.  It also seemed to me that the proposed Norwich Pharmacal order would, or would very likely, have the effect of: (1) helping identify the wrongdoers, to ascertain the identity of all parties involved in the Fraud against whom proceedings might be commenced (whether in or outside Hong Kong); (2) assisting in investigating the movement of money in and out of the bank accounts in tracing a potential claim to the Subject Payments (and possibly other monies belonging to the Fund); and (3) obtaining information necessary to ascertain additional wrongdoers and/or the nature and extent of wrongdoing of each of the wrongdoers.

58.  Though I did not grant discovery for the full period sought by the Applicants, I did grant discovery with a temporal limit that seemed to me to be reasonable and proportionate, beginning with the date of the services agreement under which it is said the Subject Payments were supposedly made.

59.  The Banks are, of course, not themselves wrongdoers.  They are simply mixed up in the wrongdoing in the Norwich Pharmacal sense.

60.  The principles applicable on an application for a gagging order, and for confidentiality and anonymity orders, are also well-settled.  The jurisdiction to grant a gagging order falls within the wide statutory jurisdiction to grant injunctions where the justice of the case requires, found in section 21L of the High Court Ordinance Cap 4 (which represents a statutory statement of what has always been the court was less inherent jurisdiction).

61.  A gagging order is granted where there are grounds to believe that once a wrongdoer is aware he has been pursued, steps may be taken by him to frustrate any claim that may be made against him or any investigations being carried out.  Of course, gagging orders are exceptional remedies, which may entail a serious intrusion into what otherwise would be a party’s basic rights.

62.  On the materials in this case, I was satisfied that the gagging order (and consequential directions) to be made in conjunction with the Norwich Pharmacal order sought was reasonable, non-prejudicial and proportionate. It was also specifically limited to a period of 70 days after the order is made or until further order of the Court (whichever is later).  I took into account the fact that other proceedings have been commenced in other jurisdictions, where allegations of fraud have been made in respect of the operation of the Fund by the GP and connected persons, so that it might be said that the alleged wrongdoers already know they are being pursued.  However, on balance, it seemed to me that the particular avenue of pursuit underlying the application in Hong Kong is one which justified the temporary gagging order.

63.  The confidentiality and anonymity orders go hand-in-hand with, and have similar justification to, the gagging order.  Essentially, all those orders seek to ensure that the court proceedings and the process are rendered effective and just.