AKAI HOLDINGS LTD (IN LIQUIDATION) v. THANAKHARN KASIKORN THAI CHAMKAT (MAHACHON) also known as KASIKORNBANK PUBLIC CO LTD

CACV 177/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 177 OF 2008

(ON APPEAL FROM HCCL NO. 59 OF 2004)

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BETWEEN

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J U D G M E N T

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Hon Tang VP:

Introduction

1.  Akai Holdings Limited (In Liquidation) (“Akai”) was incorporated in Bermuda. It was formerly known as Semi-Tech Global Company Limited. At all material times, its shares were listed on the main board of the Hong Kong Stock Exchange (“HKSE”). It was ordered to be wound up in Hong Kong on 23 August 2000 and in Bermuda on 29 September 2000.

2.  The defendant bank, Thai Farmers Bank (“TFB”), carries on the business of banking in Thailand, Hong Kong, and until 2000, in London.

3.  Akai was 43% owned by STC Canada, a company listed on the Toronto Stock Exchange. 57% of the shares in Akai was owned by the public. Mr James Ting, was the Executive Chairman and Chief Executive Officer (“CEO”) of Akai.

4.  STC was owned as to 45% by Mr Ting and 55% by the public.

5.  STC owned 50% of the shares in Singer Company NV (“Singer NV”) which was listed on the New York Stock Exchange, the balance being owned by the public. Singer NV indirectly owned 48% of Singer Thailand (listed on the stock exchange of Thailand).

6.  Mr Ting was the chairman, president and CEO of the STC. He was the chairman and a director of Singer NV. At the material time, the CEO and President of Singer NV was Mr Stephen Goodman.

7.  We are concerned with a loan agreement dated 4 December 1998 (“the Loan Agreement”), under which Akai was granted a loan facility of US$30,000,000 by TFB (“Akai Credit Facility”), to be secured by a pledge of 56,000,000 shares in Akai Electric Company Limited (“Akai Electric”) (listed on the Tokyo Stock Exchange) which was 70.8% owned by Akai.

8.  It is common ground that the Akai Credit Facility was made on the basis that the proceeds would be used to repay a loan of US$30,000,000 then owing by Singer NV to TFB. The parties have described the arrangement as a Switch Transaction. The Singer NV loan was secured by 6,000,000 shares in Singer Thailand. Under the terms of the Singer NV loan, the value of the loan should not exceed 70% of the market value of the pledged shares. By October 1998, the value of the Singer Thailand shares covered only 4.2% of Singer NV’s outstanding debt to TFB.

9.  On 4 December 1998, Akai entered into a Share Pledge Agreement under which 56,000,000 shares of Akai Electric were pledged to TFB as security in respect of the Akai Credit Facility. It was a term of the Akai Credit Facility that the value of the loan would not exceed 70% of the market value of the pledged shares. 5.5 million of Akai Electric shares were released to Akai on 30 June 1999 as a result of a positive movement in the Akai Electric share price.

10.  On 13 September 1999, Singer NV filed for Chapter 11. On 6 December 1999, Akai defaulted upon the Akai Credit Facility. An event of default was declared by TFB on 23 December 1999, and in April and May 2000 TFB exercised its rights under the Share Pledge Agreement, sold the remaining security of 50.5 million shares in Akai Electric, and applied the proceeds of US$20,504,295.38 towards payment of the amount then outstanding under the Akai Credit Facility. A balance of US$13,243,618.38 remained due and owing to TFB, in respect of which TFB sought to prove in the Akai liquidation.

11.  By Notice of Adjudication of Proof of Debt dated 16 August 2002, the Hong Kong liquidators notified TFB that its claim against Akai had been adjudicated to be US$13,243,618.38 in the Hong Kong liquidation of Akai, and by Notice of Adjudication of Proof of Debt dated 16 August 2002, the Bermudian liquidators of Akai notified TFB that its claim against Akai in the Bermudian liquidation had been adjudicated to be US$13,402,457.15. These adjudications have been relied on by TPB in its defence of election.

12.  The present proceedings were commenced on 3 December 2004, one day prior to the expiry of the 6 year period after Mr Ting had executed Akai’s Loan and Share Pledge Agreements with TFB on 4 December 1998.

13.  In this claim, Akai seeks, inter alia, a declaration that TFB held the Akai Electric’s shares as constructive trustee for Akai, a declaration that the Loan Agreement and the Share Pledge Agreement both dated 4 December 1998 are void, and that TFB is liable to Akai for all benefits and profits received by TFB from Akai pursuant to these agreements, and equitable compensation for breach of trust, including compensation for the loss of use of money and available assets, damages, including damages for loss of use of money and assets.

14.  After a 20-day trial, Stone J dismissed Akai’s claim essentially on the basis that

“424. … in entering into the Akai Loan and Share Pledge Agreements on 4 December 1998 that TFB was entitled to rely upon the apparent authority of Mr Ting, whose course of conduct throughout his dealings with TFB, culminating in Akai’s entry into these Agreements, unequivocally had represented his ability and authority to bind Akai.”

and that upon the defendant’s counterclaim, he granted a declaration that Akai’s Loan and Share Pledge Agreements on 4 December 1998 are valid, subsisting and binding, and further that as at October 2000, Akai was indebted to TFB in the sum of US$13,243,618.38, and that TFB is entitled to a distribution within the liquidation of Akai according to the Notices of Adjudication as filed.

The Appeal

15.  This is Akai’s appeal.

16.  The background facts were set out by the learned judge in paras. 26 to 147 of his 194-page-judgment. There is little or no dispute over these facts. I gratefully adopt his statement of the background facts. I will refer to such of them as may be necessary for this judgment.

17.  Stone J said:

“13. The fundamental issue in this trial is the validity of, and thus the entitlement of TFB to rely upon and to enforce the Loan Agreement and Share Pledge Agreement made between itself and Akai.”

18.  That is so, but at the heart of Akai’s claim is the complaint that it was contrary to Akai’s interest for it to take up a debt of US$30 million from Singer NV and in the process pledge the Akai Electric shares.

Knowing Akai’s claim

19.  Mr Kosmin, QC, appearing for Akai put Akai’s claim on two basis:

(1)     TFB is liable to Akai for knowing receipt

(2)     the Akai Loan & Share Pledge Agreements were not binding on Akai because they were entered into without authority, actual or apparent.

20.  The leading authority on knowing receipt is BCCI v. Akindele [2001] Ch 437, a decision of the English Court of Appeal. I will refer to this decision in greater detail in due course. For the present purpose, the following passage from the headnotes suffices:

“(2)     That, although a knowing recipient would often be found to have acted dishonestly, dishonesty was not a prerequisite to liability under the knowing receipt head; that in order to be liable for knowing receipt the recipient had to have knowledge that the assets received were traceable to a breach of trust or of fiduciary duty, the single test for which was whether the recipient’s state of knowledge was such as to make it unconscionable for him to retain the benefit of the receipt;”

21.  Mr Kosmin put knowing receipt at the forefront of his case. He submitted that the principles applicable to knowing receipt will provide the answer to Akai’s claim. Lack of apparent authority is his secondary argument.

22.  Mr Richard Snowden QC, for TFB, submitted that Akai is fundamentally wrong to contend that this case is primarily about knowing receipt. The key issue is that of authority, namely whether Akai was bound by the agreements by reason of Mr Ting’s actual or apparent authority.

Authority was key

23.  Stone J held that authority was the key issue and determinative of Akai’s claim.

24.  Stone J said knowing receipt:

“450. … would arise only if – contrary to my earlier finding – TFB cannot hold Akai to the Loan and Share Pledge Agreements by virtue of Mr Ting’s actual or apparent authority: see the analysis of Lord Nicholls in Criterion Properties v. Stratford UK Properties ([2004] 1 WLR 1846), at 1848:

‘…If a company (A) enters into an agreement with B under which B acquires benefits from A, A’s ability to recover those benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A’s ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of ‘knowing receipt’ by B do not arise. So far as B is concerned there can be no question of A’s assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B’s personal accountability will not be dependent upon proof of fault or ‘unconscionable’ conduct on his part. B’s accountability, in this regard, will be ‘strict’…’”

25.  Mr Kosmin submitted that the learned judge erred in applying the dictum of Lord Nicholls in Criterion Properties v. Stratford UK Properties as authority for the proposition that knowing receipt did not arise to be determined unless the Switch Transaction was set aside upon the basis on Mr Ting’s want of authority. He submitted that Criterion Properties was concerned with the setting aside of an executory contract in circumstances where there had been no transfer of trust property. It was upon this basis that the question of knowing receipt did not arise for consideration, not upon the basis that the contract was not liable to be set aside. Mr Kosmin relied on the following passage on the judgment of Lord Scott:

“27. My Lords, I must express my respectful disagreement with the approach both of Hart J and of the Court of Appeal to the critical issue in this case. This is neither a case of ‘knowing receipt’ nor one of ‘knowing assistance’. The word ‘receipt’ in the expression ‘knowing receipt’ refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a ‘receipt’ of assets when the contract is completed and the question whether there is ‘knowing receipt’ may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a ‘receipt’ of assets in the sense that a ‘knowing receipt’ involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a ‘knowing receipt’ are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion. It is fair to say, however, that it appears to me that the courts below dealt with the case on the basis on which it was presented to them by counsel. It was indeed presented to your Lordships as being a case to which the principles of ‘knowing receipt’ ought to be applied.”

26.  Criterion Properties was concerned with the enforceability of a poison pill agreement [SSA] under which the 1^st defendant (“Oaktree”) was entitled to have its interests bought out by the claimant in the event of a takeover. Hart J awarded summary judgment to the claimant and made a declaration that Oaktree was not entitled to enforce the agreement [2002] 2 BCLC 151. Originally, both the claimant and Oaktree had launched applications for summary judgment, however the application by Oaktree was not pursued because it conceded that the apparent authority point raised a triable issue. The apparent authority point was put on the basis that:

“… because the purpose of the (relevant agreement) was an improper one on the part of Criterion’s board, and Oaktree was on notice of the improper purpose, and thus that the agreement was in excess of the actual and ostensible authority of the members of Criterion’s board …” at 160.

27.  The Court of Appeal allowed the appeal [2003] 1 WLR 2108. As appears from the judgment of Carnwath LJ, essentially, on the basis that on the issue:

“28. … whether Oaktree knew sufficient about the motivation of the Criterion board to disable it from relying on that board's apparent authority to commit Criterion to the contract. …”,

applying Akindele test on knowing receipt, namely, the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt,

“40. … this was not a suitable case for summary judgment. It was not enough that Oaktree had knowledge of the relevant facts. To decide whether to set aside the agreement, under the correct test, it is necessary to consider their actions and knowledge in the context of the commercial relationship of the parties as a whole. This can only be done at trial.”

28.  Mr Kosmin relied, in particular, on the following words in the passage from the judgment of Lord Scott quoted in para. 25 above:

“There may be a receipt of asset when the contract is completed and the question whether there is knowing receipt may be come a relevant question at that stage.”

29.  But, Lord Scott went on to say:

“30 This case turns, in my opinion, on the ‘authority’ issue. If Mr. Glaser and Mr. Palmer either had actual authority to conclude the SSA, given by a person or body with power to confer that authority (see British Bank of the Middle East v Sun Life Assurance Co of Canada (UK) Ltd. [1983] 2 Lloyd’s Rep 9, and especially Lord Brandon of Oakbrook at p17), or, if they did not have actual authority, had apparent authority to do so, then I can see no reason why the SSA should not be held enforceable against Criterion. If, on the other hand, Mr. Glaser and Mr. Palmer had neither actual nor apparent authority to conclude the SSA, then the SSA could not be held enforceable against Criterion. Mr. Glaser and Mr. Palmer might be liable to Oaktree for breach of warranty of authority, but the SSA would not be Criterion's contract. The conscionability or unconscionability of Oaktree's behaviour in seeking to hold Criterion to the SSA would in either case be irrelevant.” (Emphasis added)

But if SSA was enforceable and enforced, I do not understand Lord Scott to say that a claim based on knowing receipt might still be made against Oaktree.

30.  I turn to examine Lord Nicholl’s judgment more closely. The citation from his judgment quoted in para. 24 above was part of para. 4 and was preceded by the following:

“2. As explained by Lord Scott, the issues arising on this application for summary judgment were clouded in the courts below by a faulty elision of two different issues to which different principles apply. The only relevant issue on this application is whether the second supplementary agreement was a valid and binding agreement. It is accepted by Criterion, for the purposes of this application, that Oaktree's directors acted honestly. Thus this issue of validity turns solely on whether the directors who signed the agreement on behalf of Criterion did so within the actual or apparent scope of their authority. This issue, in turn, depends upon an application of ordinary agency principles, having due regard to the rule inRoyal British Bank v Turquand (1856) 6 E & B 327 and sections 35A and 35B of the Companies Act 1985 (as substituted by section 108(1) of the Companies Act 1989).

3. Unfortunately, in the courts below this 'want of authority' issue was approached on the basis that the outcome turned on whether Oaktree's conduct was unconscionable. This seems to have been the test applied by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 both to questions of 'want of authority' and to liability for what traditionally has been labelled 'knowing receipt'.

4. I respectfully consider the Court of Appeal in Akindele's case fell into error on this point. …”

31.  Paras. 2, 3 and 4 read together show that the validity of the agreement, if established, will conclude the matter.

32.  I return to Akindele. For this purpose, the rest of the headnotes is produced below:

“The claimants were the liquidators of two Cayman Islands companies, both controlled by the same holding company, licensed to carry on the business of banking. In 1985 employees of the first company, acting in fraudulent breach of their fiduciary duties to their employers, procured the second company, then in financial difficulties, to enter into an artificial, but legally binding, agreement with the defendant, a prominent Nigerian businessman, for the purpose of giving a false impression that certain dummy loans were performing normally. Pursuant to the agreement US$10m was paid by the defendant to the second company in exchange for 250,000 shares in the holding company and on terms that after two years the second company would arrange for their sale at a price that would give the defendant a 15% annual return on his investment. Under the terms of a divestiture agreement in 1988 the shares were sold and after internal arrangements were made between the companies the defendant received payment of some US$16.679m. The claimants contended that the defendant was liable to account to them for US$6.679m as a constructive trustee on the basis that he had knowingly assisted the breaches of duty or had received the divestiture payment with knowledge of the breaches. The judge dismissed the action on the ground that dishonesty by the defendant was the essential foundation of the claimants' case whether under the head of knowing assistance or of knowing receipt and that that had not been established by the claimants.

On appeal by the claimants-

Held, dismissing the appeal, (1) that on his primary findings of fact the judge had been entitled to conclude that the defendant had acted honestly in entering into the 1985 agreement; and that, accordingly, the claimants' case that the defendant had knowingly assisted the breaches of trust had been bound to fail.”

33.  In Akindele, the court was concerned with agreements which had been performed. The claimants’ claim that the 1985 agreement was a sham was rejected by the trial judge (Carnwath J, as he then was).

34.  Lord Nicholls considered the Court of Appeal in Akindele had fallen into error by applying the unconscionability test to the “want of authority” issue. I believe it is implicit in Lord Nicholls’ judgment that “want of authority” should have been determined upon an application of ordinary agency principles, and that:

“If applying these principles, the agreement is found to be valid and is therefore not set aside, questions of ‘knowing receipt’ by (Oaktree) do not arise.”

35.  Lord Nicholls’ judgment supports the view taken by Stone J that if the underlying contract was enforceable on the application of familiar principles of agency and company law, questions of “knowing receipt” would not arise because so far as the recipient is concerned there can be no question of the claimant’s assets having been misapplied. Lord Nicholls said in his judgment, that he agreed with Lord Scott and that for the reasons Lord Scott gave, he would dismiss the appeal. It is clear that Lord Nicholls did not regard the judgment of Lord Scott as being in any way inconsistent with his view. Lord Walker agreed with the judgments of both Lord Nicholls and Lord Scott.

36.  Thus, Akindele could have been decided on the basis that the agreements were entered into with the apparent authority of BCCI and since the defendant had acted honestly the agreements were enforceable against BCCI, such that there was no question of BCCI’s assets having been misapplied.

37.  So, with respect, I agree with Stone J that the claim based on knowing receipt cannot arise if TFB could:

“450. … hold Akai to the Loan and Share Pledge Agreements by virtue of Mr Ting’s actual or apparent authority …”

However, if Mr Ting had neither actual nor apparent authority such that those agreements are liable to be set aside, TFB:

“… will be accountable for any benefits (it) may have received from (Akai) under (those agreements). …” per Lord Nicholls in Criterion Properties at [4].

38.  Stone J went on to hold:

(1)     in entering into the Switch Transaction Mr Ting acted in breach of his fiduciary duties to Akai (para. 324).

(2)     thus Mr Ting did not have either actual or implied actual authority to bind Akai (para. 351).

(3)     that Mr Ting had apparent or ostensible authority to enter into the Switch Transaction, it seems:

“384. … by reason of the usual authority attaching to the position which he held, namely that of Executive Chairman and Chief Executive Officer, and that such usual authority was confirmed by the fact that Akai invariably had permitted Mr Ting to enter into all manner of financing agreements on its behalf.”

(4)     that there was nothing:

“401. … of substance occurring at the time which should have placed the Bank ‘on inquiry’, far less is there any evidence of actual knowledge on the part of the Bank either as to any breach of fiduciary duty on the part of Mr Ting, or in terms of any want of authority on his part to do as he did, and to execute the Akai Loan and Share Pledge Agreements on 4 December 1998.”

(5)     In case he was wrong on his conclusion, he held

(i)     on knowing receipt / restitution, following BCCI v. Akindele,

“456. … to found a cause of action in ‘knowing receipt’ property not only must be applied in breach of fiduciary duty and be received by the defendant, but the personal liability to account therefore does not arise unless and until the recipient’s retention of the property can be characterised as ‘unconscionable’.”

“458. … neither ‘constructive knowledge’ nor ‘constructive notice’ suffice to found a liability in ‘knowing receipt’ …”

(ii)     TFB

“469. … did not have actual knowledge of Mr Ting’s breach of fiduciary duty and/or lack of authority to enter into the (Switch Transaction) …” [469]

(iii)     knowing/dishonest assistance was not made out. [485]

39.  On TFB’s defences, Stone J held:

(1)     There was no election. [515]

(2)     Nor change of position although TFB had not proved in Singer NV’s liquidation.

40.  On quantum, Stone J would have awarded Akai, the sum of US$20,504,295.38, being the proceeds of sale of the Akai Electric shares [558], with:

“568. … compound interest, with quarterly rests, upon the sum of US$20,504,295.38 at the rate of 1% over US dollar LIBOR from time to time prevailing.”

41.  Stone J did not deal specifically with Akai’s claim for:

“550. … interest and fees from Akai totalling US$2.037 million over the life of the Akai Credit Facility …”

42.  The parties agree that should the appeal be allowed, this sum should be awarded.

Authority

43.  I turn to consider whether the Loan and Share Pledge Agreements were valid and binding on Akai. These agreements, having been signed by Mr Ting on behalf of Akai, would be binding on Akai if Mr Ting had actual authority, implied actual authority or apparent authority to sign those agreements on behalf of Akai.

44.  Authority can be conferred expressly, for example, by a board resolution, or it can be implied, for example, by appointment to office of managing director, which would impliedly authorize the person so appointed to do all things following within the usual scope of the office, Lord Denning MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 583. However, the grant of actual authority is impliedly subject to a condition that it is to be exercised honestly and on behalf of the principal.

45.  Stone J described the circumstances under which the Loan and Share Pledge Agreements were signed by Mr Ting on behalf of Akai:

“96. Miss Wattanakul (of TFB) was instructed by her superior to obtain evidence of the authority of the person who was to sign the agreements on behalf of Akai, and when, in early December 1998, Miss Wattanakul telephoned a Mr Pipat Bhadranavikat the Hong Kong branch of the Bank, and requested that he arrange for the signing of the documentation by Akai.”

“97. She also liaised with Mr Domine Ko of Akai and requested a date and time for Akai to execute the Loan Agreement and the Share Pledge Agreement, in response to which Mr Ko told Miss Wattanakul that Mr Ting would be signing the agreements on behalf of Akai; in turn, Miss Wattanakul asked Mr Ko to provide evidence at the meeting confirming Mr Ting’s authority, and thereafter told Mr Bhadranavik in the Bank’s Hong Kong office that Mr Ting would be signing on behalf of Akai, and that evidence of his authority so to do should be obtained.”

“98. On 4 December 1998 Mr Bhadranavik attended at Akai’s office in Hong Kong and was met by Mr Ting, Ms Clara Loh and Mr Domine Ko of Akai.

99. Mr Bhadranavik was handed Minutes of an Executive Committee meeting of Akai of 4 December 1998 signed by Mr Ting as Chairman, which stated that he had authority to enter into the Loan Agreement and the Share Pledge Agreement on behalf of Akai.”

46.  The minutes showed that present at the meeting of the executive committee on 4 December 1998 were Mr James Ting, Ms Clara Loh, Dr Frank Edward Holmes (by phone), and Mr Chuck Tam (by phone). It purported to show as resolved:

“It was resolved that the Loan Agreement and the Pledge (the ‘Agreements’) be accepted and approved and that any one of the Directors be authorised to approve any changes made to the Agreements prior to their execution and to execute, under hand or seal, and deliver the Agreements, and any other documents which may, from time to time, necessary for the Loan on behalf of the Company.

It was also resolved that the Loan be operated as follows:

Mr. James H. Ting                              signing singly

Ms. Clara Loh                                  ) two out of

Dr. Frank Edward Holmes                ) any three

Mr. Chuck Tam                                ) signing jointly”

47.  TFB relied on the minutes of the executive committee of Akai as evidence of the express actual authority of Mr Ting to enter into the loan agreement and the Share Pledge Agreement. Paragraph 48 of the Re-Amended Points of Defence and Counterclaim stated that:

“It was the normal practice of TFB to require evidence of authority from its borrower before entering into a facility pursuant to this practice. (TFB) received the minutes of Akai’s Executive Committee meeting dated 4 December 1998 before the Loan Agreement and Share Pledge Agreement were executed.”

48.  Dr Holmes gave evidence at trial. He denied that he had attended the meeting of the executive committee by telephone. His denial was accepted by the learned judge. The learned judge found:

“355. … the overwhelming probability in the circumstances – and I now so find – was that Mr Ting, the dominant force within Akai who apparently trucked no dissent, simply had this Minute made up, no doubt with the co-operation of his close associate and co-director within Akai, Ms Clara Loh, in order to suit the immediate purpose at hand, which was to comply with TFB’s request for some form of ‘evidence’ as to his authority to sign the Loan Agreement and the Share Pledge Agreement on behalf of Akai.”

49.  He also said that:

“356. … had it been necessary so to find I should have been driven to the conclusion that these ‘Minutes’ were false and of no effect.”

50.  On the basis of such finding, it is clear that Mr Ting did not have express actual authority. TFB’s case on implied actual authority is that Mr Ting was the executive chairman and CEO of Akai, and as such must be regarded as having implied actual authority to sign those agreements on behalf of Akai. There is no dispute that if Mr Ting had been acting in breach of his fiduciary duty to Akai, the case on actual authority or implied actual authority must fail.

Breach of Fiduciary Duty

51.  I turn to deal with the learned judge’s finding that Mr Ting had acted in breach of his fiduciary duties. In this context it is essential to bear mind the words of Millett LJ (as he then was) in Bristol and West Building Society v Mothew [1998] Ch 1 that:

“… not every breach of duty by a fiduciary is a breach of fiduciary duty. …

It is similarly inappropriate to apply the expression to the obligation of a trustee or other fiduciary to use proper skill and care in the discharge of his duties.”

52.  Bristol and West Building Society was concerned with a claim brought against the defendant solicitor who acted for a husband and wife in the purchase of a house and also the plaintiff who financed the purchase in return for a mortgage. The solicitor was sued, inter alia, for breach of trust. The plaintiff instructed the solicitor to report, prior to completion, any proposal that the purchasers might create a second mortgage or otherwise borrow in order to finance part of the purchase price. The solicitor knew that the purchases were arranging for an existing bank debt of £3,350 to be secured by a second charge on the new property but, due to an oversight, he stated in his report to the plaintiff that the balance of the purchase price was being provided by the purchasers without resort to further borrowing. When the purchasers defaulted on their mortgage repayments the plaintiff enforced its security and the house was sold at a loss. The plaintiff ought to recover the whole of its loss from the transaction, from the solicitor, alleging, breach of contract, negligence and breach of trust.

53.  The headnotes read:

“(2) That the solicitor’s conduct in providing the plaintiff with the wrong information, although a breach of duty, was neither dishonest nor intentional but due to an oversight and was unconnected to the fact that he was also acting for the purchasers; that, accordingly, his conduct and subsequent application of the money advanced by the plaintiff to complete the purchase was not a breach of trust or fiduciary duty; and that the order for damages for breach of trust would therefore be set aside.”

54.  Millett LJ said:

“The expression ‘fiduciary duty’ is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties.” At page 16.

“The nature of the obligation determines the nature of the breach. The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty.” At page 18.

55.  Millett LJ also endorsed the comments of Ipp J in Permanent Building Society v Wheeler [1994] 14 ACSR 109 (a decision of the Supreme Court of Western Australia) at 158 that:

“The director’s duty to exercise care and skill has nothing to do with any position of disadvantage or vulnerability on the part of the company. It is not a duty that stems from the requirements of trust and confidence imposed on a fiduciary. In my opinion, that duty is not a fiduciary duty, although it is a duty actionable in the equitable jurisdiction of this court ..”

56.  Mr Snowden submitted that the conventional test for breach of fiduciary duty where there is no direct evidence as to whether the director in question actually failed to consider the interests of the company is to ask, whether an intelligent and honest man in the position of director could reasonably have believed that the transaction was for the benefit of the company. Mr Snowden relied on the following dictum of Pennycuick J in Charterbridge Corporation Ltd v Lloyds Bank Ltd & Anor [1970] Ch 62 at 74.

“That is sufficient to dispose of the action; but in case I am wrong on my view of the law, I must proceed to express a conclusion upon the contention that in creating the guarantee and legal charge, the directors were not acting with a view to the benefit of Castleford. That is a question of fact, and the burden of proof lies on the plaintiff company. As I have already found, the directors of Castleford looked to the benefit of the group as a whole and did not give separate consideration to the benefit of Castleford. Mr Goulding contended that in the absence of separate consideration, they must, ipso facto, be treated as not having acted with a view to the benefit of Castleford. That is, I think, an unduly stringent test and would lead to really absurd results, i.e., unless the directors of a company addressed their minds specifically to the interest of the company in connection with each particular transaction, that transaction would be ultra vires and void, notwithstanding that the transaction might be beneficial to the company. Mr Bagnall for the bank contended that it is sufficient that the directors of Castleford looked to the benefit of the group as a whole. Equally I reject that contention. Each company in the group is a separate legal entity and the directors of a particular company are not entitled to sacrifice the interest of that company. This becomes apparent when one considers the case where the particular company has separate creditors. The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company. If that is the proper test, I am satisfied that the answer here is in the affirmative.”

57.  As Mr Snowden submitted the test has been applied in England, Australia and Singapore. Indeed Stone J acknowledged the Charterbridge test as the “accepted wisdom in this area” [326].

58.  The Charterbridge test has to be examined in the light of breach of fiduciary duty as explained by Millett LJ in Bristol and West Building Society, with its connotation of disloyalty or infidelity. The headnotes in Charterbridge explained the context in which the dictum was made:

“Held, that where, as here, a company was carrying out the purposes expressed in its memorandum, and did an act within the scope of a power expressed in it, that act was within the powers of the company; that the memorandum of a company set out its objects and proclaimed them to persons dealing with the company and it would be contrary to the whole function of a memorandum if objects unequivocally set out in it should be subject to some implied limitation by reference to the state of mind of the parties concerned; and that the state of mind of officers of C. Ltd. and the bank as to whether the transaction was intended to benefit the company was irrelevant on the issue of ultra vires.

In re Lee, Behrens & Co. Ltd. [1932] 2 Ch. 46 distinguished.

In re David Payne & Co. Ltd., Young v. David Payne & Co. Ltd. [1904] 2 Ch. 608, C.A. and In re Introductions Ltd., Introductions Ltd. v. National Provincial Bank Ltd. [1968] 2 All E.R. 1221 considered.

Held, further that, alternatively, even if the intention was relevant on the issue of ultra vires, the directors acting as intelligent and reasonable men might reasonably have concluded that the transaction would have enured to the benefit of C. Ltd.”

59.  Although Stone J acknowledged that the Charterbridge test as the “accepted wisdom in this area” he preferred the tentative approach suggested by Clarke and Cripps JJA in Equiticorp Finance Ltd (in liquidation) v Bank of New Zealand [1993] 32 NSWLR 50, at 148G-E. The majority judgment in Equiticorp provided a useful insight into the Charterbridge test.

60.  Their lordships explained the occasion to apply:

“… the Charterbridge test only arose when it was clear that the directors had not considered the interests of the relevant company at all” 148E

and not when

“… the directors embarked on a course to support the group unconcerned about the detrimental effect of the action on the particular company or were prepared to sacrifice that company for the good of the other companies in the Group”. 148D.

61.  Their lordships’ consideration of the Charterbridge test commenced at 146E with the observation that:

“It is trite law that directors must exercise their powers for the benefit of the company: (Kinsela v Russell Kinsela Pty Ltd (In Liq) [1986] 4 NSWLR 722) (at 729). If they exercise those powers for other, and improper, purposes they will breach their duty to the company. Where a case of breach of fiduciary duties on the part of the directors is raised upon the ground that they have acted otherwise than for the benefit of the company it will be necessary for the court to determine, as a factual issue, whether the directors did exercise their powers for the benefit of the company. This is a straightforward question of fact which can, in most cases, be answered in the affirmative or negative.”

Thus, when particular companies form part of a group of companies,

“… a transaction carried out for the benefit of one of the companies in the group, company A, may be seen to be for the benefit of another company in the group, company B.”

“A particular difficulty arises when the directors of the particular company enter into the transaction on behalf of that company because they consider that the transaction is of benefit to the group as a whole and do not give separate consideration to the benefit of their company. It was this difficulty which faced Pennycuick J in Charterbridge.”

62.  After citing from Viscount Finlay in Hindle v John Cotton Ltd [1919] 56 Sc LR 625 at 630-631, that:

“Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye motive, possibly of personal advance, or for any other reason.”

Their lordships then said that the courts have traditionally not pronounced upon the commercial justification for business decisions of directors and that there is no appeal on the merits from management decisions to courts of law. They continued:

“Accordingly there seems to us to be difficulties in substituting an objective test (How would an intelligent and honest man have acted?) for the factual question raised in the proceedings. It may be that if a director bluntly states that he or she did not consider the interests of the particular company at all and solely had regard to the interests of the group then difficulties would arise in resolving that factual question (sic). But the position will rarely be such a black and white one and it would usually be possible to discern whether in deciding to take certain action for the benefit of the group the directors perceived, and were justified in their perception, that in so doing they were acting for the benefit of the particular company. On the other hand it may be possible to discern that the directors embarked on a course to support the group unconcerned about the detrimental effect of the action on the particular company or were prepared to sacrifice that company for the good of the other companies in the group. A careful analysis of the factual situation will usually reveal the answer to the factual question posed although no doubt on some occasions the problem may very well be a difficult one.

We are mindful of the fact that Pennycuick J was not substituting the objective test for the subjective one which had traditionally been applied. In his view the occasion to apply the objective test only arose when it was clear that the directors had not considered the interests of the relevant company at all. In a sense he proposed a legal test to be applied only in limited cases to avoid what he regarded as an absurd situation.

Nonetheless we have reservations about this means of resolving those difficulties. A preferable view may be that where the directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. If, however, the transaction was, objectively viewed, in the interests of the company, then no consequences would flow from that breach. Such an inquiry would not require the court to consider how the hypothetical honest and intelligent director would have acted. On the contrary, it would accept the finding of breach of duty flows from the failure to consider the interests of the company and would then direct attention at the consequences of the breach. However, the approach adopted by the parties in this case both before Giles J and this court requires that the Charterbridge test be applied and absolves the court from further considering this tantalizing question.”

63.  It is clear from the discussion in Equiticorp that the Charterbridge test is limited in its application. That accords with the actual decision in Charterbridge. Pennycuick J said:

“To avoid any possible misunderstanding, these findings do not, of course, imply that either Mr Pomeroy or the bank officers believed that the transactions were prejudicial to Castleford. …

All these witnesses deposed that in their view today the transaction were in the interest of Castleford for reasons which they gave.” 67H.

64.  Bearing in mind that a breach of fiduciary duty connotes disloyalty and infidelity, I am unable to accept the tentative view expressed in Equiticorp that mere failure to consider the separate interest of the relevant company, for example, due to incompetence, would, ipso facto, amount to a breach of fiduciary duty. It is unnecessary for me to consider whether the breach of duty identified by Pennycuick J is a breach of fiduciary duty or a breach of a duty to use proper skill and care.

65.  Mr Snowden’s reliance on Charterbridge is predicated on a finding that the only complaint against Mr Ting is that he had looked to the benefit to the Group as a whole and did not give separate consideration to the benefit of Akai. But that was not the only complaint against Mr Ting. Indeed, as Mr Kosmin submitted, Stone J had found that the entry into the Switch Transaction was in blatant disregard of the interests of Akai and its creditors and/or shareholders [342]; it was “unarguable” that imposing upon Akai the substantial debt burden of Singer NV, which Akai had no obligation whatever to assume, and encumbering Akai’s highly valuable Akai Electric shares as collateral was to the financial detriment of Akai and could only be reflective of a failure to consider the interests of Akai qua Akai [329; 333; 334], it was “absurd” to suggest that objectively it was in the interest of Akai to take up a debt of US$30 million from Singer NV, nor was there any evidence of how the US$30 million was to be repaid by Singer NV. It was wrong for there to have been any equation between the interests of Akai on the one hand and those of Singer NV on the other, merely by reason of the existence of a common shareholder [337-339]. Thus, this is not a case where the Charterbridge test is relevant at all.  

66.  Mr Snowden referred to [268], [328], [331] and [332] and submitted that the learned judge had reached a conclusion as to Mr Ting’s conduct which was influenced by his perceptions of Mr Ting’s general reputation and behaviour, gathered from other proceedings concerning Akai, none of which had anything to do with the bank, and which related either to unproven allegations, not forming part of the evidence in a case or misconduct of an entirely different type to that in issue in this case.

67.  I need only refer to [268] and [322]:

“268. I bear this admonition in mind when considering the evidence before me, and the inferences to be drawn therefrom, although in principle I see no reason to lean over backwards to give Mr Ting the benefit of the doubt, not least since this territory’s highest court, whilst unanimously upholding Mr Ting’s appeal and in refusing to order a retrial upon two counts of false accounting upon which Mr Ting originally had been convicted, nevertheless saw fit to observe (at paragraph 52 in the speech of Lord Woolf NPJ) that it was important to bear in mind that “the appellant … has … properly been found by a jury to have acted with dishonesty, notwithstanding that his convictions have been set aside …” : see Ting James Henry v. HKSAR [2007] 5 HKC 182, at 199.

……

332. In my view, therefore, speculative inference of what could have been in Mr Ting’s mind – and it must not be forgotten that this is a man whose part in the ultimate asset-stripping of Akai achieved breathtaking proportions – does not suffice to discharge the evidential burden which is on the defendant as a result of the undisputed actions of Mr Ting which, when taken at face value, raise a strong prima facie case of breach of fiduciary duty.”

68.  With respect to the learned judge, the references to the criminal proceedings against Mr Ting and any part which he might have played in the asset-stripping of Akai are unhelpful. They cannot form a proper basis for the evaluation of the evidence relating to Mr Ting’s bona fides in the present case. Even so, on the evidence, I believe the learned judges’ findings outlined in para. 65 above are perfectly justified.

69.  I have earlier referred to the learned judge’s finding that the minute of the executive committee was forged. I agree with Mr Kosmin’s submission that Mr Ting’s creation of a false and fraudulent minute purporting to authorize his conduct was clearly dishonest. An honest director would have brought the matter to the attention of the board for proper determination by the board. This never happened.

70.  Akai was listed on the HKSE. It is not disputed that under the listing rules of the HKSE, the Switch Transaction would have been regarded as a connected transaction because Akai and Singer NV were connected persons. Under rule 14.23(2), all connected transactions were required to be disclosed to the HKSE. The HKSE would then determine what further disclosure and shareholders approval to require in relation to the transaction. The learned judge said:

“335. … had (HKSE) been so informed, at the very least a public announcement would have been required.”

71.  Indeed, I would go further. Rule 14.23(2) provided that:

“… where a waiver is given from the requirement to obtain shareholders’ approval the Exchange may require a letter from the issuer’s auditors or a financial adviser acceptable to the Exchange stating that in their opinion the transaction is fair and reasonable far as the shareholders of the company are concerned …”

72.  I am of the view it is likely that HKSE would have required at least such an opinion given the amount involved and the Asian Financial Crisis. Indeed, more likely than not, HKSE would have required shareholders’ approval. Thus, if the matter had been reported to HKSE, not only would the outcome be uncertain, it probably would have taken substantial time, and the agreements would not have been signed on 4 December 1998. The longer the delay, the more uncertain the outcome - It will be recalled that although Singer NV had been relieved of the TFB debt, it filed for Chapter 11 on 13 September 1999. I also note that earlier on 30 October 1998, Moody had downgraded, with a negative rating outlook, Singer NV’s $150 million 7% senior notes rated Ba to B3 and downgraded its parent, STC(’s) $654 million face value 11.5% of senior secured discount notes from B2 to Ca with a statement that Semi-Tech’s:

“… ratings reflect the risks associated with the vast deterioration of the holding company’s portfolio of companies, which include Singer, Pfaff, and Semi-Tech Global (Akai). All of which have been impacted by the weakening economies of Southeast Asia and Japan.” Dow Jones News 10-30-98 7/84

73.  Regarding the earlier, albeit, more substantial transaction, the “Pfaff transaction”, the learned judge said:

“340. In contrast to the relatively ‘informal’ entry by Akai into the Akai Credit Facility, Mr Kosmin sought to compare, within the context of the ‘Pfaff transaction’, the elaborate steps then taken by the Board of Akai to ensure that because of the apparent conflict resulting from the fact that Singer was an affiliate of STC Canada, which itself was a substantial shareholder of Akai, that none of the ‘interested’ directors who were on the boards of both companies participated in that decision; in particular, noted Mr Kosmin, Mr Ting had not participated by reason of his position as Chairman of STC Canada and Singer, and because of his substantial equity interest in STC Canada (and thus, indirectly, of Singer), and that instead Akai had established an independent Board committee to take financial advice from an independent financial adviser, together with the fact that the Hong Kong Stock Exchange had required that the matter be decided by the shareholders of Akai. Whilst obviously not directly in issue, this submission is not unpersuasive.”

74.  Had Mr Ting brought the matter to the consideration of the executive committee or the board, I see no reason to believe that Dr Holmes or Mr Tam would not have required that the transaction be referred to the board or that the board would not have required disclosure to HKSE.

75.  The creation of a forged minute and the failure to report the Switch Transaction to the HKSE are strong reasons to support the conclusion that Mr Ting had acted in breach of his fiduciary duty.

76.  I am satisfied that Mr Ting was in breach of his fiduciary duty such that TFB cannot rely on his actual implied authority.

Apparent / Ostensible Authority

77.  Reliance on apparent authority was introduced by amendment made on 4 December 2007. Para. 48A of the Re-Amended Points of Defence & Counterclaim pleaded that:

“… by reason of Mr. Ting’s appointment and consequent holding out as Executive Chairman of the Board and Chief Executive Officer of Akai, Mr. Ting had … apparent authority to enter into the Loan Agreement and the Share Pledge Agreement on behalf of Akai.”

78.  As Lord Denning MR said in Hely-Hutchinson at 583:

“Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority. Thus, when the board appoint one of their number to be managing director, they invest him not only with implied authority, but also with ostensible authority to do all such things as fall within the usual scope of that office. Other people who see him acting as managing director are entitled to assume that he has the usual authority of a managing director. But sometimes ostensible authority exceeds actual authority. …”

79.  Stone J said:

“361. The editors of Bowstead & Reynolds on Agency (18^th ed, 2006) state, at Article 72, para 8-013:

‘Where a person, by words or conduct, represents or permits it to be represented that another person has authority to act on his behalf, he is bound by the acts of that other person with respect to anyone dealing with him as an agent on the faith of any such representation, to the same extent as if such other person had the authority that he was represented to have, even though he had no such actual authority’

362. Such ‘representation’ or ‘manifestation’ can be of a general nature, and, as Mr Snowden emphasized, can arise only from the principal putting the agent in a specific position which carries with it the usual authority to enter into the transaction of the type in question. In this context, the locus classicus in the English common law as to such representation is contained in the speech of Lord Diplock in the leading decision in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) [1964] 2 QB 480, at 505:

‘The commonest form of representation by a principal creating an ‘apparent’ authority of an agent is by conduct, namely, by permitting the agent to act in the management or conduct of the principal’s business. Thus, if in the case of a company the board of directors who have ‘actual’ authority under the memorandum and articles of association to manage the company’s business permit the agent to act in the management or conduct of the company’s business, they thereby represent to all persons dealing with such agent that he has authority to enter on behalf of the corporation into contracts of a kind which an agent authorized to do acts of the kind which he is in fact permitted to do usually enters into in the ordinary course of such business. The making of such representation is itself an act of management of the company’s business. Prima facie it falls within the ‘actual’ authority of the board of directors, and unless the memorandum or articles of the company either make such a contract ultra vires the company or prohibit the delegation of such authority to the agent, the company is estopped from denying to anyone who has entered into a contract with the agent in reliance upon such ‘apparent’ authority that the agent had authority to contract on behalf of the company.’”

80.  In Armagas Ltd. v Mundogas S.A. (H.L.(E.)) [1986] 1 AC 717 at page 777, Lord Keith of Kinkel said (with the concurrence of the other law lords):

“… Ostensible authority comes about where the principal, by words or conduct, has represented that the agent has the requisite actual authority, and the party dealing with the agent has entered into a contract with him in reliance on that representation. The principal in these circumstances is estopped from denying that actual authority existed. In the commonly encountered case, the ostensible authority is general in character, arising when the principal has placed the agent in a position which in the outside world is generally regarded as carrying authority to entered into transactions of the kind in question. Ostensible general authority may also arise where the agent has had a course of dealing with a particular contractor and the principal has acquiesced in this course of dealing and honoured transactions arising out of it. …”

81.  It is clear there must be reliance on the representation. Mr Kosmin submitted that TFB had not relied on any apparent authority because it:

“375. … specifically requested and obtained the ‘Minutes of the Executive Committee’ of Akai as ‘evidence’ of Mr Ting’s authority, …”

82.  Mr Snowden submitted that:

“The fact that the Bank also asked for written evidence of Mr. Ting’s authority, and received the Exco Minute of 04.12.98 in response, is entirely consistent with the Bank’s reliance on Mr. Ting’s ostensible authority. It does not indicate that the Bank placed no reliance on the appearance of Mr. Ting’s authority. The question of what the Bank relied upon is a question of fact that involved a careful appreciation of the evidence given at trial. Stone J clearly decided the question in the Bank’s favour [398-399], and those are no grounds, still less any strong grounds, to interfere with his finding on appeal.”

83.  This is what the learned judge said in [398] and [399]:

“398. True it is, as Mr Kosmin pointed out, that the Bank in fact did make a formal request for some evidence of Mr Ting’s authority to enter into the Loan and Share Pledge Agreements, but I decline to accept the conclusion that in itself this request suffices to remove or to destroy the argument of TFB based upon the apparent authority of Mr Ting.

399. Mr Kosmin pressed this point, but in my view such conclusion does not necessarily arise. If anything I should have thought that the nature of the brief (and much criticised) Executive Committee Minute as was produced on 4 December 1998 – and as was faxed to TFB by Mr Niasinn of the Bank’s Hong Kong branch – serves to inform the apparent authority argument, and buttresses the contention that to all intents and purposes the Bank regarded this Minute as an entirely natural development within the overall scheme of things as then perceived by TFB, and reflected the position wherein Mr Ting was, and indeed throughout had been recognized by the Bank as, the dominant and wholly authoritative force within and behind the operation of Akai.”

84.  With respect,

(1)     The apparent authority sought to be relied on is the apparent authority of Mr Ting as chairman and CEO of Akai. I do not understand how the request for and the provision of the Executive Committee Minute as evidence of Mr Ting’s authority assisted the apparent authority argument. The minute has been set out in para. 46 above. It “accepted and approved” the agreements. It authorized

“… any one of the Directors … to execute … the Agreements.”

but that “the Loan be operated by” Mr Ting signing singly and any two of the other directors signing jointly. So far as the execution of the agreements is concerned, Mr Ting was put on an equal footing with the other three directors.

(2)     I agree that it was natural for TFB to require evidence of actual authority but that is not supportive of reliance on apparent authority. It undermined it. With respect, the minute purported to confer authority on Mr Ting and is not evidence that:

“Mr Ting was the dominant and wholly authoritative force …”.

85.  In Armagas the defendant sought to rely on the position of the agent as carrying with it the usual authority to enter into the transaction. In the Court of Appeal, Robert Goff LJ (as he then was) after referring to:

“… (Diplock LJ’s judgment in Freeman & Lockyer), that ostensible authority is created by a representation by the principal to the third party that the agent has the relevant authority; and that the representation, when acted upon by the third party, operates as an estoppel, precluding the principal from asserting that he is not bound. …” at 731, said:

“… it is plain that (they) did not act on that basis, since they thought that it was necessary for (the agent) to obtain the express approval of his superiors.” At 731G.

86.  What was the evidence on reliance? There is no reference in any of the witness statements filed on behalf of TFB regarding reliance on the apparent authority of Mr Ting.

(1) According to the statement of Tattaya Wattanakul, who was at the material time an account officer with the Manufacturing and Service Industry Credit Department in Thailand, when she was told by Domine Ko of Akai that Mr Ting would be signing on behalf of Akai she

“35. … explained that it was the normal practice of TFB to require evidence of authority from a borrower before entering into a facility, and I asked Domine Ko to provide such evidence confirming Ting’s authority.”

(2) Pipat Bhadranavik, who was a Senior Operations Officer with TFB Hong Kong branch office at the time, said in his statement:

“6. … Wattanakul told me that (Mr Ting) would be signing on behalf of Akai. She also told me what documents had to be signed and that I had to obtain minutes which showed the signing authorities of Ting. …

7. Wattanakul made the necessary arrangements with Akai for the execution of the agreements. …”

(3) Niasinn Lamsam was the co-general manager of TFB’s Hong Kong branch office at the time. In his statement of 5 September 2007, he said wrongly that he was present on 4 December 1998 when the agreements were signed. That was corrected in his supplemental statement of 3 December 2007. In his earlier statement he had said:

“6. … I thought that the Akai Minutes were self explanatory and on the basis of that document I was satisfied that (Ting) had the authority to sign the agreements on behalf of Akai.”

In his supplemental statement, para. 6 was amended as follows:

“I was told by Bhadranavik that one of the people attending also presented him with (the Akai minutes) to confirm Ting’s authority to enter into (the agreements) on Akai’s behalf.”

87.  These witnesses have been described by the learned judge as “relatively junior (or very junior) staff members of the Bank”. [160] Admittedly their statements were made prior to TFB’s amendment relying on the apparent authority of Mr Ting but we have not been referred to any relevant evidence in the transcript of their evidence at trial.

88.  The only relevant senior members were Mr Banthoon Lamsam (the Chief Executive Officer) and Mr Siripongs Kalayanarooj who was at the material time a First Senior Vice President of TFB, with responsibility for supervising the Manufacturing and Service Industry Credit Department. Neither of them made any relevant statement on apparent authority in their witness statements. Nor any of their oral evidence relied on for this purpose.

89.  I should add that Mr Banthoon Lamsam, who became the Chief Executive Officer in April 2004 and has been a member of TFB’s Board of Directors since 1 January 1992, had never met Mr Ting. He had no personal contact with Singer NV or Akai at any time and that he:

“30. … dealt with the Akai credit applications on the basis of the papers submitted and in the normal course of my role as a member of the Executive Committee and of the Board of Directors of TFB.”

He was not involved with the mechanics of the execution of the Loan Agreement or Share Pledge Agreement.

90.  In my view TFB has failed to show that it had relied on the apparent authority of Mr Ting. If that is right, the apparent authority of Mr Ting, if any, cannot help TFB.

Representation

91.  Mr Kosmin submitted:

“42. Stone J incorrectly treated Mr Ting's prior ‘course of conduct throughout his dealings with TFB’ (which was a course of dealing in his capacity as a director of Singer NV) as a representation concerning his authority to bind Akai [424]. A representation by an agent as to his authority is insufficient to establish apparent authority; the representation must come from the principal or a person with actual authority to enter into the transaction or one of the same kind - in this case, the Board of Akai. There was no prior banking relationship between TFB and Akai. Nor did the Board of Akai make any representation concerning Mr Ting's authority to borrow or to provide security on behalf of Akai.”

92.  But as the learned judge pointed out:

“363. Under the apparent authority doctrine, the third party must deal with the apparent agent ‘on the faith of the representation’. In certain instances, the ‘holding out’ in question may be specific, but it may also be general: in this context the editors of Bowstead & Reynolds, op cit., state, at paragraph 8-026:

‘…it is clear, however, that in many cases a third party can simply rely on the agent’s having the authority usual to a person in his position (usual authority) unless that third party knew that the agent had no such authority. It is not therefore necessary, though it is sufficient, that the representation be to a specific person…’”

93.  I accept that TFB was entitled to proceed on the basis that by virtue of his position in Singer NV Mr Ting had apparent authority to bind Singer NV regarding loans to and pledge by Singer NV. I am prepared to accept that Mr Ting had similar authority regarding Akai. Mr Kosmin submitted that this was not simply a loan to Akai secured by a pledge of Akai Electric shares, but that the proceeds of these loans would be used to repay Singer NV’s indebtedness to TFB, and there is no evidence that Singer NV or Akai had ever held out Mr Ting as having authority to enter into such transactions. Even so, Hely-Hutchinson supports the view that a person in the position of Mr Ting might have apparent or implied actual authority to enter into a transaction such as the Switch Transaction. In Hely-Hutchinson, the judgment at first instance of Roskill J turned on apparent authority, however on appeal the decision turned on implied actual authority, because the question arose:

“… between the principal and the agent - either of them claiming against the other - actual authority must be proved.” Per Lord Pearson at 593G.

94.  However, since I have come to the conclusion that TFB had not relied on Mr Ting’s position in Akai the question of representation is academic. In any event, it is fact sensitive and cannot easily be separated from the question of reliance. Absent reliance, it is artificial to “find” what representation might have operated on the mind of TFB, and whether such representation, had it been relied on, would be sufficient.

Put on Enquiry

95.  The same is true regarding whether TFB was put on enquiry. Since it was TFB’s normal practice to require evidence of authority and that the normal practice was followed in this case, it is artificial to enquire whether TFB was put on enquiry. What better evidence that TFB was not satisfied with relying on Mr Ting’s apparent authority than that it asked for evidence of actual authority? With respect, I cannot agree with Stone J:

“425. … ‘the thought never had crossed anyone’s mind’ at TFB that Mr Ting in fact had possessed no authority so to bind Akai, …”

The fact that TFB required evidence of actual authority shows that TFB did enquire.

96.  Anyway, I will consider briefly Mr Kosmin’s submission that TFB could not rely on Mr Ting’s apparent authority because it had been put on enquiry. In this context, it must be noted that we are not concerned only with the Loan Agreement and the Share Pledge Agreement. The relevant transaction is the Switch Transaction.

97.  In Morris v Kanssen [1946] AC 459, Lord Simonds (in a judgment which had the concurrence of the other lordships) said at 475:

“… One of the fundamental maxims of the law is the maxim ‘omnia praesumuntur rite esse acta’. It has many applications. In the law of agency it is illustrated by the doctrine of ostensible authority. In the law relating to corporations its application is very similar. The wheels of business will not go smoothly round unless it may be assumed that that is in order which appears to be in order. But the maxim has its proper limits. An ostensible agent cannot bind his principal to that which the principal cannot lawfully do. The directors or acting directors or other officers of a company cannot bind it to a transaction which is ultra vires. Nor is this the only limit to its application. It is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims. This is clearly shown by the fact that the rule cannot be invoked if the condition is no longer satisfied, that is, if he who would invoke it is put upon his inquiry. He cannot presume in his own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done.”

98.  In Rolled Steel Products v British Steel Corporation [1986] 1 Ch 246, Slade LJ said (with the concurrence of Browne-Wilkinson LJ (as he then was) and Lawton LJ):

“(6) If, however, a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, he cannot rely on the ostensible authority of the directors and, on ordinary principles of agency, cannot hold the company to the transaction.” 295H.

99.  Northside Developments Proprietary Limited v Registar-General and Ors [1989-1990] 170 CLR 146, an authority of the Australian High Court supports the same view. Northside was concerned with a mortgage of land in favour of Barclaysmade by Northside to secure a loan of approximately $1.4 million, made to one or more companies owned and controlled by Robert Sturgess who was a director of Northside. Following default, Barclays sold the land and the purchaser became registered as proprietor. Northside sued the registrar general in the Supreme Court of New South Wales for damages under section 127 of the Real Property Act 1900 (N.S.W.) by way of compensation for a loss of an estate in the land on the ground that it did not execute the mortgage. Young J awarded damages. The Court of Appeal allowed an appeal by the registrar general. On appeal to the High Court of Australia, the appeal was allowed.

100.  The following extract from the headnote suffices:

“Held, (1) that the company had suffered loss by registration of the mortgage and not by reason of the execution of the mortgage, and was accordingly entitled to damages under s. 127(1); by Mason C.J., Dawson and Toohey JJ. On the ground that the mortgagee was put upon inquiry by the fact that the mortgage was given to secure an advance to a third party without any indication that the mortgage or advance was for the purposes of the company’s business, and that accordingly the rule in Turquand’s Case (1856), 6 El. & Bl. 327 [119 E.R. 886] did not prevent the company from relying upon the fact that the mortgage was executed without its authority; by Brennan and Gaudron JJ. on the ground that in the circumstances the company was not estopped from showing that the mortgage was executed without its authority; and by Dawson and Toohey JJ. on the further ground that the transaction was completed without the actual or apparent authority of the company and therefore the affixation of the seal was a forgery, and that accordingly the rule in Turquand’s Case did not apply.”

101.  Stone J said that the question for determination was:

“372. … whether, as a matter of fact, … TFB – knew or suspected the lack of authority of Mr Ting to enter into the Akai Loan Agreement and Share Pledge Agreement such that the Bank cannot be said to have relied upon the appearance of authority on the part of Mr Ting, and not whether the Bank made, or did not make, what may be regarded as such ‘normal’ inquiries as would have been made by the hypothetical reasonable bank, nor whether it failed to appreciate matters which may have become apparent to the hypothetical onlooker who was conducting a forensic post-facto examination of the relevant documents.”

102.  Stone J also said:

“423. It follows from the foregoing that upon the all‑important issue of actual knowledge on the part of TFB as to Mr Ting’s lack of authority, upon which issue the plaintiff bears the burden, I have concluded that this burden has not been discharged.”

103.  That has led to Ground 17 in Akai’s grounds of appeal:

“… the learned judge erred in holding [423] that it was necessary as a matter of law for Akai to establish that TFB had actual knowledge as to Mr. Ting’s lack of authority …”

104.  But the learned judge went on [424] to deal with “the issue of ‘absence of enquiry’ upon which he held TFB had the burden of proof. When [423] and [424] are read together it is clear that the learned judge was saying that Akai had failed to prove “actual knowledge of lack of authority”, and that TFB had discharged its evidential burden on the issue of “absence of enquiry”.

105.  In [420] Stone J said TFB was not put on enquiry on the facts of the case, but that:

“420. … for example, if Akai had been an entirely unrelated third party company to Singer – this may have stimulated inquiry as to the authority of the person within the unrelated entity which was seeking to undertake the transaction, …”

106.  As noted, the learned judge in [372] used the expression “knew or suspected the lack of authority”. It is clear that it was not the learned judge’s view that nothing less than actual knowledge would suffice. Moreover, in [373] he described as the more significant issue “whether this was a ‘suspicious’ transaction which should have stimulated appropriate inquiry”.

107.  Furthermore, in [421] he referred to the judgment of Bryson J in Maronis Holdings Ltd and Anor v Nippon Credit Australia Pty Ltd and Ors 38 ACSR 404, in the Supreme Court of New South Wales, where Bryson J said on the facts of Maronis:

“There is nothing … to prompt further enquiry …”

108.  Mr Snowden did not contend that actual knowledge was required. He submitted the correct test is whether the Bank actually knew that Mr Ting lacked authority, or , in the light of what it actually knew, whether it had reason to believe (and hence was “on inquiry”) that Mr Ting lacked authority.

109.  There are passages in the judgment, for example, [416] which give the impression that the learned judge thought that actual knowledge of Mr Ting’s lack of authority would be required. However, that is so clearly contrary to the authorities and to other passages in the learned judge’s judgment that I am convinced that the learned judge had not proceeded on the basis that actual knowledge was required.  

How?

110.  How might TFB be put on enquiry? It is important to note that we are concerned here with the apparent authority of Mr Ting, and the issue is whether TFB was put on enquiry regarding Mr Ting’s authority. As will be seen, some of the authorities referred to are concerned with the circumstances under which a bank might be put on enquiry regarding whether a transaction was in the interest of the company. Whilst such authorities might illustrate how one might be put on enquiry, it is important to bear in mind that the circumstances under which a bank might be put on enquiry regarding the authority of, for example, a managing director, are likely to be different from the circumstances under which a bank might be put on enquiry regarding whether a transaction is in the interest of the company.

111.  Stone J correctly pointed out whether a person has been put on enquiry is fact sensitive. He said:

“387. … ‘the starting point is a presumption of trust and not distrust’, and that, even in a case such as Barclays Bank plc v. Quincecare Ltd [1992] 4 All ER 363, which had concerned an existing banker/customer relationship which imposed upon a bank the duty to take reasonable care not to execute a payment without authority, Steyn J nevertheless had observed, at 377:

‘Everything will no doubt depend on the particular facts of each case. Factors such as the standing of the corporate customer, the bank’s knowledge of the signatory, the amount involved, the need for a prompt transfer, the presence of unusual features, and the scope and means for making reasonable inquiries may be relevant. But there is one particular factor which will often be decisive. That is the consideration that in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief. In Sanders Bros v Maclean & Co (1883) 11 QBD 327, at 343, Bowen LJ observed:

“But the practice of merchants, it is never superfluous to remark, is not based on the supposition of possible frauds. The object of mercantile usages is to prevent the risk of insolvency, not of fraud; and any one who attempts to follow and understand the law merchant will soon find himself lost if he begins by assuming that merchants conduct their business on the basis of attempting to insure themselves against fraudulent dealing. The contrary is the case. Credit, not distrust is the basis of commercial dealings; mercantile genius consists principally in knowing whom to trust and with whom to deal and commercial intercourse is no more based on the supposition of fraud than it is on the supposition of forgery.”

That was, of course, a very different case, and the relationship between merchants is very different from the relationship between a banker and a customer. But, it is right to say that trust, not distrust, is also the basis of a bank’s dealings with its customers. And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.’”

112.  In [390] and [391] the learned judge continued:

“390. That bank officers are not to be regarded as detectives, and are not required to carry out a meticulous and detailed examination of every document in their possession in order to ascertain the propriety of any particular transaction also was touched upon by Millett LJ, on this occasion writing extrajudicially in an article entitled ‘Equity – The Road Ahead’, (1995) 9 Trust Law International 35, at 40, wherein he observed:

‘…If, however, the equitable doctrine [of constructive notice] is to be imported into commercial transactions, as I believe it must, then we must have regard to the warnings of judges like Bowen LJ in Sanders v Maclean (1883) 11 QBD 343, 377 and Steyn J in Barclays Bank v Quincecare Ltd [1992] 4 All ER 363, 377 that the basis of commercial dealings is trust, not distrust. Bankers and traders are not detectives. Unless and until they are alerted to the possibility of wrongdoing, they proceed and are entitled to proceed on the assumption that they are dealing with honest men. They are not put on inquiry unless they are made aware of facts that make it obvious that the transaction may well be improper, and make it imperative to seek an explanation before proceeding further. The honest but incompetent accessory who does not in fact recognize the obvious cannot be made liable; he is not implicated in the wrongdoing. But equity has never allowed such a person to set up his own title in order to defeat the beneficial owner…’

391. Accordingly, the bar for being placed ‘on inquiry’ clearly is placed at a high level, and, as Sir Peter Millett has pointed out, the facts of each case must make it ‘obvious’ that the transaction is probably dubious, and hence that it is “imperative” to seek an explanation prior to proceeding. Whether this benchmark is met, of course, is peculiarly fact-sensitive and, as will shortly be seen, I have taken the view that the necessity for TFB to have sought explanation or to have made inquiry from Akai regarding Mr Ting’s entry, on behalf of that company, into the Akai Loan and Share Pledge Agreements, in fact was not ‘triggered’ in the particular circumstances of this case.”

113.  However, Millett LJ went on to say in the same article at page 40:

“There are distressing indications that some Chancery judges are seeking to draw a distinction between commercial and non-commercial transactions, requiring actual knowledge or dishonesty in the former but not in the latter. This is not an appropriate distinction. A bank loan to a corporate customer on the security of the managing director's house is just as commercial as a similar loan on the security of his shares. But there is a real distinction between the two cases nonetheless. The difference is that in the case of the house there is, and in the case of the shares there is not, a recognised means of investigating the mortgagor's title which the mortgagee disregards at his peril. Where there is a custom and practice to make a particular inquiry, the recipient is fixed with knowledge of what he would have discovered if he had made that enquiry. Where there is no such custom and practice, he should not be liable unless he has been put on enquiry: that is to say, unless he is aware of facts which would cause a reasonable man to refuse to enter into the transaction without further enquiry. …”

I believe the facts need not be more obvious than if they would have caused a reasonable person to refuse to enter into the transaction without further enquiry.

114.  I turn to the facts known to TFB, and consider whether they would cause a reasonable bank to refuse to enter into the transaction without further enquiry, bearing in mind the importance of holding a fine balance between the competing interests identified by Mason CJ in Northside. Mason CJ said at page 164, after pointing out the need to:

“… give sufficient protection to innocent lenders and other persons dealing with companies, thereby promoting business convenience and leading to just outcomes. The precise formulation and application of that rule call for a fine balance between competing interests. On the one hand, the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. On the other hand, an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies.”

115.  Stone J would have found that TFB had been put on enquiry if the Switch Transaction:

“418. … cannot be represented as a repayment of the existing Singer facility by an unknown and entirely unrelated third party company; had this been the case I accept that this no doubt would have raised concern within TFB.”

116.  Or that:

“420. … for example, if Akai had been an entirely unrelated third party company to Singer – this may have stimulated inquiry as to the authority of the person within the unrelated entity which was seeking to undertake the transaction, or perhaps would have raised concerns with the Bank as to the risk profile of the new borrower under any such new loan arrangement.””

117.  Stone J then went on to conclude:

“421. The attitude of the courts to any suggestion that a lender should be so concerned (and thus, presumably, should make its own determination as to whether the anticipated loan was, or was not, in the new borrower’s financial interests), succinctly is summarized in the judgment of Bryson J in Maronis Holdings v. Nippon Credit, op cit., at 28:

‘The facts…do not demonstrate either bad faith on the part of Nippon Credit, or breach of fiduciary duty on the part of its directors. They are acts in the conduct of Nippon Credit’s business in its own interests. It was Nippon Credit’s business to lend money, and to earn interest by doing so, and to attend to the risks of doing so. It was not Nippon Credit’s business to look after Maronis’ interests; that was the business of Maronis and its directors. There is in my opinion nothing to prompt further inquiry, or to form any basis for constructive notice of wrongdoing, about a financier’s declining a loan unsecured, but deciding to make a loan when the intending borrower brings forward security from a business associate, not an individual suffering from some social or intellectual disadvantage, but a commercial organization operating as a subsidiary of a company listed on the Stock Exchange. People dealing honestly with such organizations can take exercises of their powers at face value. Dealing with an uncomprehending child is different…’

422. I respectfully agree with, and adopt this view.”

118.  With respect, Bryson J’s words have to be understood in context. There Nippon Credit was not relying on the apparent authority of an individual. Nippon Credit relied on a board resolution which stated that the transaction was in the interests of Maronis. Bryson J said:

“[427] In any view it is very unlikely that a reasonable person or any person in Nippon Credit’s position would have questioned this resolution and what it conveyed, and if such a person had known, as was the fact (although it was not easy to ascertain) that all directors of Maronis had joined in the resolution, it is in my view impossible to suppose that it would have been questioned.”

119.  Here, the question, is given the size and nature of the Switch Transaction, should TFB have enquired into Mr Ting’s authority.

120.  Both Akai and Singer NV were listed companies with substantial (in the case of Akai, a majority of public shareholders). They were neither subsidiaries nor affiliates of one another. The amount of the loan was US$30 million and the security provided had a market value in excess of US$40 million. The transaction took place during the Asian Financial Crisis, which was a time of great economic stress. The proceeds of the loan were to be used to repay the indebtedness of a company, which TFB was aware:

“80. … was experiencing significant cash-flow problems”.

121.  Another relevant background is TFB’s normal practice of requiring evidence of authority to enter into such transactions. Thus, one would not expect departure from the normal practice and reliance on the apparent authority of an individual without good reason.

122.  In my opinion these facts would have caused a reasonable banker to refuse to enter into the Switch Transaction without further enquiry on Mr Ting’s authority.

123.  Of course, once enquiry was made, there could be no reliance on apparent authority. TFB would be relying on actual authority.

124.  The learned judge said:

“400. It should not be overlooked, as the history of the Singer Credit Facility serves to illustrate, that TFB had been dealing with Akai and Mr Ting, wearing one or other of his various commercial hats, for a number of years, and was well used to the omnipotent manner in which he operated in the conduct of all his business affairs, including the operation of Akai.

……

407. In the present case, of course, Mr Ting was Chairman of the Board and Chief Executive Officer of Akai, and, as the evidence of all the Bank witnesses indicated, universally was understood by officers of the Bank at all levels to be “the boss” who was running Akai.”

125.  These statements require some consideration. Accepting that Mr Ting was

“407. … ‘the boss’ who was running Akai.”,

and

“400. … the omnipotent manner in which he operated in the conduct of all his business affairs, …”,

there is, however, no evidence that TFB had ever entered into a Switch Transaction with any of “Mr. Ting’s companies” on the basis of his apparent authority. The available documentary evidence shows otherwise e.g. in relation to Singer Sewing Machine Company’s pledge of 5,460,000 Singer Thailand’s shares as security for the credit facility extended by TFB to (Akai) that there was a resolution of the shareholders to make the pledge and to authorize Mr Ting to execute the share pledge agreement. Indeed, having regard to TFB’s normal practice, there is no reason to believe that other loan agreements or share pledge agreements would not have been supported by resolutions of shareholders or board of directors of the relevant company. This is not a case where TFB could point to other loan or share pledge agreements which had been entered into on the strength of the apparent authority of Mr Ting.

126.  So, in my opinion, TFB, not only did not, it could not rely on the apparent authority of Mr Ting.

127.  In case I am wrong, I will proceed to consider whether TFB was also put on enquiry whether the Switch Transaction was in the interest of Akai. The background facts have been helpfully stated in [23] to [94] of the judgment, some of which have been repeated in paras. 3 to 10 above. I wish only to note that:

(1)

“91. The Committee’s formal decision was recorded in the following narrative, which reads:

‘Mrs Jutathip Tassama…[of] the Corporate Client Relationship Department, proposed that Semi-Tech (Global) Company Limited operated investment holding company having responsibilities to develop investment for its affiliates, where subsidiaries of its group manufactured and distributed electrical appliances. In the past, The Singer Company N.V. had Short-Term Revolving Line in the amount of USD 30 millions with the Bank with Singer Thailand shares pledged as collateral. Thereafter, the value of such collateral had significantly dropped and could cover only 4.2% of the credit line. As a result, to reduce the Bank’s risk, a change of borrower from The Singer Company N.V. to Semi-Tech (Global) Company Limited, a company in the same group with more stable financial status had been wished, together with changing collateral from pledging Singer Thailand shares to pledging Akai Electric Company Limited shares, which could cover the entire credit line. A condition of this borrowing was to repay the Short-Term Revolving Line in the amount of USD30 Millions of The Singer Company N.V., and adjusting the interest rate from LIBOR + 2.25% to LIBOR + 4.5%, thus proposing to the Meeting for consideration. Since P/N in the amount of USD 30 Million of The Singer Company N.V. would expire on 6 October 1998, but it was in the process of changing borrower and collateral, Khun Siripong Kallayanaruj, Deputy Vice President, on 1 October 1998, approved extension of such P/N for another 30 days, which would be due on 6 November 1998, with the interest at LIBOR + 4.5%, details of which appeared in the documents circulated to all committees. Therefore it was proposed to the Meeting for ratification.

The Meeting acknowledged and ratified the approval of extension of repayment of P/N in the amount of USD 30 Million for another 30 days, which would [be] due on 6 November 1998, with the interest at LIBOR + 4.5%, and approved the change of borrower from The Singer Company N.V. to Semi-Tech (Global) Company Limited, together with changing collateral from pledging Singer Thailand Shares to pledging Akai Electric Company Limited shares, with a condition to apply the money to repay the Short-Term Revolving Line in the amount of USD 30 Millions of The Singer Company N.V., and adjusting the interest rate from LIBOR + 2.25% to LIBOR + 4.5% as proposed.’”

(2) Stone J’s finding that:

“69. Mr Pipit’s understanding of the general position at the time was that Akai and Singer were part of the same general ‘group’ of companies, which understanding was reflected in a ‘corporate chart’ showing STC Canada, Akai, Singer and Pfaff, which he drew up and had entitled ‘Shareholding Structure of the Group’.

70. This ‘corporate chart’ has been referred to extensively throughout this trial, and for immediate reference I now reproduce this in the form as drawn by Mr Pipit at that time:

								Semitech Corporation (Ontario, Canada)
					50.0%													43.0%
		The Singer Company N.V. (Netherland) Antilles													Semi-Tech Global Company Limited (Bermuda)
			80.50%						100.0%
G.M. Pfaff A.G. (Germany)							Singer B.V.
																100.0%				70.8%
											Semi-Tech (Europe) (British Virgin Island)								Akai Electronic Co., Ltd. (Japan)
									48.0%
						Singer Thailand Public Company Limited

71. At the same time Mr Pipit also had prepared for his file an information sheet about Akai, recording that Singer and Akai appeared to share the same executive management, including Mr James Ting and Miss Clara Loh; he had become aware of the sale of GM Pfaff AG from Akai to Singer on 31 December 1997, and he had understood that there were financial dealings between Akai and Singer.”

128.  The learned judge came to the conclusion that there was nothing intrinsically suspicious about the Switch Transaction, he relied on the fact that that was the view taken by the liquidators when admitting the Bank’s Proof of Debt in 2002. He said:

“396. Thus, if the liquidators, who had statutory duties to investigate claims before admitting them to proof, had failed, as they apparently did – and indeed as Mr Borelli now accepted – to appreciate that this transaction “obviously” was to the detriment of Akai, it is not easy to see how it now is convincingly to be maintained that the Bank ought to have reached the like conclusion in conducting its normal commercial activities as long ago as December 1998.”

129.  The learned judge also relied on the fact that it had:

“397. … taken wide-ranging amendments to the original pleading – the final version of which, the Re-Amended Points of Claim, being finalized only during this trial – before the case against the Bank, as finally pursued, saw the light of day. …”

130.  These are relevant considerations but they are not matters which by themselves can determine whether on the facts TFB should have been put on enquiry.

131.  Stone J concluded:

“412. It follows, therefore, that I do not accept that the matters variously canvassed by Mr Kosmin as serving to place TFB ‘on inquiry’ – namely, the repayment and drawdown of the Singer facility in 1997/98, the knowledge of the Bank of the deteriorating financial position of Singer and Singer Thailand, the ‘unusual features’ of the transaction, the position of Mr Ting in relation to STC Canada, Akai and Singer, and the terms of Akai Bye-Laws and the Executive Committee Minute of 4 December 1998 – in the circumstances necessarily should have served, or did so serve, to stimulate suspicion on the part of the Bank, whether taken individually or cumulatively, either as to the propriety of the Agreements made with the Bank, or as to the authority of Mr Ting so to act.

413. In my judgment this was a hard-nosed commercial transaction on the part of TFB, albeit one that took place between Bank and borrower at the time of, and in the somewhat fevered and financially fetid atmosphere of the ‘Asian financial crisis’. It may even have been a transaction regarded by some within the Bank, to use an expression much favoured by Mr Kosmin throughout this case, as ‘a small miracle’, in the sense that a potentially problematic debtor (Singer) was being directly and immediately replaced, together with appropriate security, by a company which appeared to rest on a sounder financial footing, but I do not regard this as the “cosy” or illegitimate arrangement which the plaintiff now seeks to portray; to the contrary, the Bank clearly went out of its way to obtain its commercial pound of flesh with the substantial increase in the applicable interest rate to LIBOR + 4.5%.

414. I further reject the supposition, which has infused the plaintiff’s argument throughout this case, to the effect that at all times the defendant Bank well knew that a ‘fast one’ was being perpetrated by Mr Ting by means of the substitution of Akai for Singer, via entry into the Akai Loan and Share Pledge Agreements, but nevertheless, in the dire surrounding circumstances of the financial crisis then engulfing the Thai banks, that TFB had decided, in effect, to ‘grab the money and run’, and to worry about any adverse consequences if and when they transpired.

415. True it is that I have taken the view (and have so found) that this transaction between TFB and Akai must have been canvassed or discussed, at the least in principle, between Mr Ting of Akai and Mr Banyong Lamsam, Chairman of TFB, but, as earlier observed, this fact is not necessarily destructive of the Bank’s resistance to the plaintiff’s claim, nor does it mean that the arrangement as was entered into between the Bank and Akai necessarily merited the ‘soft loan’ epithet which Mr Kosmin so skilfully deployed during cross-examination and submission.

416. I repeat that in so far as the Bank was concerned this was an admittedly advantageous commercial transaction which attracted high rates of interest, but in my judgment, and absent any knowledge of Mr Ting’s lack of authority (which I have found the Bank did not possess), TFB was perfectly entitled to look after its own commercial interests, and to assume that Akai/Mr Ting were looking after theirs’.”

132.  I have already commented on the learned judge’s view that:

“391. … the bar for being placed ‘on inquiry’ clearly is placed at a high level,”

and his reliance on the dictum of Bryan J in Maronis.

133.  The learned judge was also of the view that:

“416. … TFB was perfectly entitled to look after its own commercial interests, and to assume that Akai/Mr Ting were looking after theirs’.”

134.  But as Mason CJ said in the passage of his judgment in Northside quoted in para. 114 above (which I think also applies to reliance on apparent authority):

“… an over-extensive application of the (Turquand rule) may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders …”. at page 164.

135.  Regarding the circumstances in which the nature of the transaction might be put on enquiry, Mason CJ went on to say:

“… Agency principles aside, to hold that a person dealing with a company is put upon inquiry when that company enters into a transaction which appears to be unrelated to the purposes of its business and from which it appears to gain no benefit is, in my opinion, to strike a fair balance between the competing interests. Indeed, there is much to be said for the view that the adoption of such a principle will compel lending institutions to act prudently and by so doing enhance the integrity of commercial transactions and commercial morality.

It is not possible to give specific guidance as to the circumstances in which the nature of a transaction will be such as to put a person dealing with a company upon inquiry. So much depends upon the circumstances of the particular case, notably the powers of the company (if relevant), the nature of its business, the apparent relationship of the transaction to that business and the actual or apparent authority of those acting or purporting to act on behalf of the company. Much will also depend upon representations about the transaction made by such persons, for the party dealing with the company may often find protection in the principles of agency or the doctrine of estoppel. In this respect, I should indicate my general agreement with the comments made by Brennan J in his judgment, which I have had the advantage of reading since preparing these reasons, concerning the position of a creditor who takes a company’s guarantee for another's debt.”

136.  This is what Brennan J said:

“… In these cases, it was the nature of the transaction which put the party purportedly dealing with the company on inquiry. Although the nature of the transaction is not the only factor which might put a party on inquiry, it is often, and importantly, the factor on which the application of the indoor management rule depends. In Rolled Steel Ltd. Slade L.J. said:

‘the very nature of a proposed transaction may put a person upon inquiry as to the authority of the directors of a company to effect it, even if he has no special relationship with the company. Whether in any given case the person dealing with the company is put on inquiry must depend on all the particular circumstances.’

A creditor will ordinarily be put on inquiry when his debtor offers as security a guarantee given by a third party company whose business is not ordinarily the giving of guarantees, for the execution of guarantees and supporting securities for another's liabilities, not being for the purposes of a company's business nor otherwise for its benefit, is not ordinarily within the authority of the officers or agents of the company. Of course, the circumstances may show that the giving of such a guarantee and supporting security (hereafter indifferently described as ‘guarantee’) is for the company's benefit. For example, it may be for the benefit of solvent companies within a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group. In such a case, provided the creditor has been satisfied that it is such a case, the apparently regular execution of a guarantee and supporting security may be relied on pursuant to the indoor management rule. Of course, the only important consequence of a creditor being put on inquiry is that, in the event that an apparently regular guarantee turns out not to have been authorized by the guarantor company, the guarantor company may show that it is not bound.

When a creditor is put on inquiry, he cannot rely on the apparent regularity of execution of the instrument of guarantee and the indoor management rule but must be satisfied that the relevant officers and agents of the company had the company's authority to execute an instrument pledging the credit or assets of the company to guarantee another's debts.” Page 182.

137.  Northside was not concerned with reliance on the apparent authority of a managing director.

138.  Notwithstanding Mr Pipit’s understanding quoted in para. 127(2) above, it was not TFB’s case that it had considered the matter and came to the conclusion that the Switch Transaction was in the interest of Akai. Rather, it was TFB’s case that that was not their concern.

139.  In Maronis, there was a board resolution asserting that the transaction was in the interest of the company. Here, the minute of Akai’s Executive Committee of 4 December 1998, which “accepted and approved” the Loan Agreement and Share Agreements, was silent on any benefit which the Switch Transaction might have on Akai. Indeed it did not refer to the purpose of the loan, namely, the repayment of Singer’s debt.

140.  Nor do I accept as a sufficient answer that because the minute when received was put away and not seen by TFB’s senior management it could be ignored. In this context, I agree with Mr Kosmin that the knowledge of the person charged with the responsibility to obtain evidence of authority:

“… is to count as the knowledge of the company.”

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 500 at 511.

141.  I bear in mind the matters I have identified in para. 120 above as well as the inadequacy of the Executive Committee minute. I am of the opinion that TFB was put on enquiry whether the Switch Transaction was in the interests of Akai. Had they made the enquiry, it would probably have revealed that the transaction was not in Akai’s interest, or that shareholders’ approval might be required. Further, if they had been put on enquiry whether the Switch Transaction was in the interests of Akai, I believe it is inconceivable that they would not also have enquired into Mr Ting’s authority.

142.  So, for this reason too, I am of the view that TFB could not rely on the apparent authority of Mr Ting.

Knowing Receipt

143.  As I have come to the conclusion that the loan and the share pledge agreements were not made with the authority of Akai then as Lord Nicholls said in Criterion Properties, TFB would be accountable for any benefits it might have received from TFB under these agreements. That being the case, Akai would not need to rely on knowing receipt

144.  Mr Kosmin submitted that Stone J fell into error by formulating the test as requiring actual knowledge of the breach of fiduciary duty. Stone J said:

“458. It also seems clear, and I accept, that neither ‘constructive knowledge’ nor ‘constructive notice’ suffice to found a liability in ‘knowing receipt’: see, for example, Eagle Trust plc v. SBC Securities Ltd [1993] 1 WLR 484, at 504D (per Vinelott J) and Cowan de Groot Properties Ltd v. Eagle Star plc [1992] 4 All ER 700, at 760a-c (per Knox J).

459. Subsequently, following the decision in Akindele, in Papamichael v. National Westminster Bank [2003] 1 Lloyd’s Rep 341, His Honour Judge Chambers QC (sitting as a judge of the QBD) observed, at paras 246-247:

‘“The recipient’s state of knowledge (in a case of knowing receipt) must be such as to make it unconscionable for him to retain the benefit of the receipt” (BCCI (Overseas) Ltd v Akindele [2001] Ch 448 at 455). It is unconscionable for him to retain the benefit of the receipt where he has actual knowledge of the circumstances which make the payment a misapplication (Criterion Properties plc v Stratford Properties plc & ors [2002] EWHC 496 (Ch), Hart J at [38]). This would appear to be an indication of what is meant by knowledge in the judgment of Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, at 700…

Despite the elegant generalization of the grounds for relief set out in Akindele, the application of the precept to the facts of that case seems to leave little room for manoeuvre. The case makes it clear that dishonesty is not necessary for a finding of knowing receipt. It also makes it pretty clear that the type of knowledge which is required is actual rather than constructive knowledge. Such a requirement does away with the suggestion of a balance having to be struck between the relative urgency of the transaction and the degree of notice required: if you know, you know.’ (emphasis added)

460. In light of these authorities, with which I respectfully agree, I accept the proposition that unconscionability is a function of actual knowledge, and not of constructive knowledge. I also accept the proposition, at least within a commercial transaction, that a person who receives property consequent upon a breach of trust or breach of fiduciary duty cannot be said to be ‘unconscionable’ merely if in so doing he is careless or if he fails to make inquiry.”

145.  Stone J also said:

“454. The fundamental elements of a claim in ‘knowing receipt’ were stated by Hoffmann LJ (as he then was) in El Ajou v. Dollar Land Holdings plc [1994] 2 All ER 685, at 700:

‘For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets received are traceable to a breach of fiduciary duty…’”

146.  Hoffmann LJ’s general and introductory remarks have to be understood in context. The facts in El Ajou are complicated. For our purpose, it is only necessary to note that the plaintiff’s claim against DLH for knowing receipt was based on the knowledge of the fraud of Ferdman. Hoffmann LJ said:

“There are two ways in which Mr Ferdman’s knowledge can be attributed to DLH. The first is that as agent of DLH his knowledge can be imputed to the company. The second is that for this purpose he was DLH and his knowledge was its knowledge …” 701J.

147.  The appeal was allowed on the basis that Ferdman was the directing mind and will of DLH and as such his knowledge was that of DLH. We are not concerned with that. We are concerned with the claim that Ferdman’s knowledge could be imputed to DLH on the ground of agency. That claim failed.

148.  However, in that context, Hoffmann LJ examined how the agent’s knowledge might be imputed to the principal. He said that included cases where the principal has a duty to investigate as when:

“… there may be something about a transaction by which the principal is ‘put on enquiry’” 702J.

149.  However, he found on the facts that:

“… in receiving the traceable assets. DLH had no duty to investigate or make disclosure. There was nothing to put it on enquiry.”

150.  So I do not read El Ajou as authority that actual knowledge of breach of fiduciary duty is required.

151.  Moreover, the decision of the English Court of Appeal in BCCI (Overseas) Ltd v Akindele [2001] Ch 448 is clear authority to the contrary.

152.  In Akindele, there was a detailed examination of authorities on the nature of knowledge required for knowing receipt including statements by Buckley LJ and Goff LJ in Belmont Finance Corp v Williams Furniture Ltd (No. 2) [1980] 1 ALL ER 393, and Browne-Wilkinson LJ (as he then was) in Rolled Steel, and Millett J (as he then was) in Agip. Nourse LJ said:

“That collectively, those observations might be thought to provide strong support on the view that constructive knowledge is enough” 452A.

153.  Nourse LJ then turned to the judgment of Sir Robert Megarry VC in Re Montagu's Settlement Trusts [1987] Ch. 264 and said:

“The effect of Sir Robert Megarry V-C’s decision, broadly stated, was that, in order to establish liability in knowing receipt, the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust and that constructive knowledge is not enough.”

154.  Nourse LJ went on to observe that in New Zealand as well as in Canada, the preferred view was that constructive knowledge was enough. Such decisions included a decision of the Supreme Court of Canada in Citadel General Assurance Co. v Lloyds Bank Canada [1997] 152 DLR (4th) 411.

155.  Then after examining the categorisation of knowledge by Peter Gibson J in Baden v. Societe Generate [1993] 1 WLR 509, Nourse LJ concluded:

“What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405, the recipient can ‘conscientiously retain [the] funds against the company’ or, in the words of Sir Robert Megarry V-C in In re Montagu's Settlement Trusts [1987] Ch 264, 273, ‘[the recipient's] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee’. But, if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient's state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made, paying equal regard to the wisdom of Lindley LJ on the one hand and of Richardson J on the other.”

156.  The dicta which Nourse LJ would pay equal regard to are:

”In dealing with estates in land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country.” Per Lindley LJ in Manchester Trust v Furness [1895] 2 QB 539, 545.

“Clearly Courts would not readily import a duty to enquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life.” Per Richardson J in Westpac Banking Corpn v Savin [1985] 2 NZLR 41 at page 53.

157.  Lindley LJ’s observation has to be understood in its proper context. Manchester Trust was concerned with a claim for damages for non-delivery of coals shipped under certain bills of lading. The bills of lading referred to a charterparty. Lindley LJ was dealing with a submission that because the bill of lading referred to the charterparty, the holder of the bill of lading took it with notice of the charterparty. In that context, his lordship said at 545:

“That argument appears to me to be pushing the doctrine of constructive notice a great deal too far. … What is wanted in this case is to say that by reason of the reference to the charterparty the holder of the bill of lading and the person who takes it in the ordinary course of business are to be treated as having notice of all the contents of the charterparty. There is no doctrine that goes to anything like that extent;”

His lordship then referred to the equitable doctrines of constructive notice in dealing with land and estates, where one would be taken to have constructive notice of a document referred to in, say, a document of title. I believe Lindley LJ was objecting to the extension of such a rule of constructive notice to commercial transactions. I do not believe Lindley LJ was of the view that for commercial transactions nothing less than actual knowledge would suffice. That, I believe, is borne out by his reference to London Joint Stock Bank v Simmons [1892] AC 201at 221 where following the words of Lord Herschell quoted by Lindley LJ at 546, Lord Herschell said:

“If there be anything which excites the suspicion that there is something wrong in the transaction, the taker of the (negotiable) instrument is not acting in good faith if he shuts his eyes to the facts presented to him and puts the suspicion aside without further inquiry.”

158.  Furthermore, the dictum from Richardson J (as he then was) shows quite clearly that actual knowledge of breach of fiduciary duty is not required.

159.  In any event, with respect, I believe extrajudicial statement of Millett LJ quoted in para. 113 above has addressed and resolved the concerns of Lindley LJ and Richardson J.

160.  With respect, I do not agree that Akindele is authority that actual knowledge is required for knowing receipt. Nor can I agree, with respect, with Stone J’s comment that:

“460. … unconscionability is a function of actual knowledge, and not of constructive knowledge. …”

161.  So on the basis of the Akindele test, on the finding that the loan and share pledge agreements were not binding on Akai, because TFB had been put on enquiry either as to the authority of Mr Ting alone or whether the Switch Transaction was in the interest of Akai, I am satisfied that it would not be conscionable for TFB to retain the pledged shares.

Dishonest assistance

162.  No case of dishonest assistance was established. The learned judgewas quite satisfied that TFB had acted honestly.

Other defences

163.  I hope I will be forgiven if I deal with TFB’s other defences, namely, election and change of position briefly.

164.  The learned judge dealt with them in pages 168-183 of his judgment.

165.  With respect, I agree with the learned judge.

Quantum

166.  Stone J said had liability been established against TFB, he would have awarded Akai US$20,504,295.38 being the proceeds of sale of the pledged shares.

167.  Mr Kosmin submitted that on 4 December 1998, Akai lost unencumbered shares in a listed company with a market value of US$50,795.31. He claimed that sum, alternatively, the sum of US$71,103,195.38 being value of the shares during the “period of continuous liability to account”. Mr Kosmin submitted that in cases where a party has been deprived of the use or benefit of an asset as a result of a breach of trust, in determining the quantum of compensation, equity will presume that the wronged party would have made the most beneficial use of the asset of which it was deprived. But TFB was not entitled to sell the shares prior to Akai’s default, which took place on 6 December 1999. On that basis, Mr Kosmin put forward a claim for US$30,867,372, being their value as at that date. Although the shares were not sold until April and May 2000, as I understand the evidence, TFB sold the shares as soon as they reasonably could. That being the case, I have no doubt the learned judge was right.

168.  Furthermore, I agree with Mr Snowden that:

“76. On the facts of the present case, it would be entirely unreal for the court to assume that, if the Loan Agreement and Share Pledge had not been made, Akai would have sold the Akai Electric shares on 04.12.98, or in April 1999, or indeed at any other point in time before they were actually sold in April/May 2000. It must be recalled that Akai was a holding company and Akai Electric was its main operating subsidiary at all material times. Akai never gave any indication of an intention to sell its controlling stake in Akai Electric, whether in April 1999 or at any other relevant time, and no evidence of any such plans has ever been adduced. On the contrary, Akai carried on operating Akai Electric as its subsidiary at all times after executing the Share Pledge and throughout 1999. Even when a petition was presented in 2000 to wind up Akai for reasons entirely unconnected with this case, Akai resisted the petition and put an alternative proposal to its financial creditors that involved the retention of its shares in Akai Electric.

77. In short, Stone J. was plainly correct to describe Akai's claim on quantum as having ‘a lack of perspective and a tendency for conceptual argument to outrun basic commercial common sense’.”

Disposition

169.  For the above reasons, I would set aside the judgment below, allow the appeal and enter judgment for the Plaintiff in the sum of US$22,541,332 (see paras. 40 and 41 above) together with compound interest at the rate of 1% over US Dollar LIBOR from time to time prevailing with quarterly rests from 6 December 1999. I also make an order nisi that the Plaintiff is to have the costs here and below, such costs to be taxed if not agreed.

Hon Le Pichon JA:

170.  I agree that this appeal should be allowed for the reasons given by Tang VP and on breach of fiduciary duty and on apparent authority, I make the observations below. I also agree with the order proposed in § 170.

Breach of fiduciary duty

171.  In concluding that Mr Ting breached his fiduciary duty to Akai in binding Akai to the loan and share pledge agreements, the judge espoused the approach expressed by the majority of the court in Equiticorp Finance Ltd (In Liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 148E-F which he characterised as the ‘consequences of breach’ approach (“the Equiticorp test”) and declined to follow the test laid down in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] 1 Ch 62 (§§ 325-326). In this court, as below, the two tests (i.e. the Equiticorp test and the Charterbridge test) were presented as alternatives in ascertaining whether there had been a breach of fiduciary duty by Mr Ting. Much of the debate centred on which of the two was the correct test.

172.  It is relevant to note at the outset that Charterbridge was not a case directed to the liability of directors or to their fiduciary duties. In this regard, I agree with the analysis of Bryson J in Maronis Holdings Ltd and Another v Nippon Credit Australia Pty Ltd and Others [2001] NSWSC 448 at §§ 173-176 where it was explained that the issue in Charterbridge was whether a loan transaction was ultra vires the powers of the company: the directors were not parties to the action and it was not alleged that they had incurred any liability. The determination of the ultra vires question was thus objective and it is clear from the judgment of Pennycuick J (at 74) that for that determination the state of mind of the directors was “irrelevant”.

173.  In that case the judge found that the directors, in deciding to enter into a guarantee had looked only at the interests of the group of companies as a whole and had not taken into consideration the interests of the company (which was granting the guarantee) separately. It was the company’s contention that a transaction could not be within the company’s powers unless it was done for the company’s benefit which, as Pennycuick J recognised, was a question of fact. That was the question that was being addressedin the passage from his judgment cited in § 56 of the judgment of Tang VP but, as earlier noted, that question did not arise in the context of determining whether there had been a breach of fiduciary duty; rather, it arose in the context of determining whether the transaction was ultra vires the company.

174.  It was within the ultra vires context that Pennycuick J stated the test as:

“whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.”

Once its context is appreciated, it will be seen that the Charterbridge test has little relevance to a case such as the present case and inappropriate where what has to be determined is whether there had been a breach of fiduciary duty by a director.

175.  As Clarke and Cripps JJA commented in Equiticorp (at p.147E):

“The directors are bound to exercise their powers, bona fide, in what they consider is in the interests of the company and not for any collateral purpose. Whether they did so or not is a question of fact.”

It was for that reason that they expressed reservations about applying the Charterbridge test in determining whether directors had abused their powers.

176.  They went on to explain that, in such cases, the traditional approach is encapsulated in Viscount Finlay’s statement in Hindle v John Cotton Ltd cited in Howard Smith Ltd v Ampol Petroleum Ltd [1974] NSWLR 68 at 77:

“Where the question is one of the abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon the question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye motive, possibly of personal advantage, or for any other reason.”

177.  Such an inquiry involves ascertaining the intention of the director whose conduct is under scrutiny. The majority in Equiticorp elaborated on their approach thus (at 148B-D):

“Accordingly there seems to us to be difficulties in substituting an objective test (How would an intelligent and honest man have acted?) for the factual question raised in the proceedings. It may be that if a director bluntly states that he or she did not consider the interests of the particular company at all and solely had regard to the interests of the group then difficulties would arise in resolving that factual question. But the position will rarely be such a black and white one and it would usually be possible to discern whether in deciding to take certain action for the benefit of the group the directors perceived, and were justified in their perception, that in so doing they were acting for the benefit of the particular company. On the other hand it may be possible to discern that the directors embarked on a course to support the group unconcerned about the detrimental effect of the action on the particular company or were prepared to sacrifice that company for the good of the other companies in the group. A careful analysis of the factual situation will usually reveal the answer to the factual question posed although no doubt on some occasions the problem may very well be a difficult one.”

This passage highlights that what has to be resolved is the factual question of the director’s state of mind.

178.  In the present case, as the judge noted (§§ 328, 331) there was an ‘evidential vacuum’, there being no evidence from Mr Ting himself. Plainly, that poses certain difficulties in the way of resolving the factual question of whether, in committing Akai to the loan and share pledge agreements, Mr Ting had abused his powers. But the absence of evidence from Mr Ting is not indicative one way or the other as to whether, as a director, he had or had not considered the interests of Akai. Whether Mr Ting had acted honestly remains to be ascertained from all the surrounding circumstances which genuinely throw light upon the question of his state of mind.

179.  The majority in Equiticorp proffered (somewhat tentatively) as a ‘preferable view’ (at 148E-F), the proposition that the failure to give consideration to the interests of the relevant company is ipso facto a breach of duty (i.e. the Equiticorp test). As an approach, I respectfully agree with Tang VP that it seems wrong in principle for the reasons he gives. In any event, on the facts, the question is purely hypothetical as there was no evidence from Mr Ting himself and it would be wrong to equate the absence of evidence with a failure to give consideration to the interests of Akai.

180.  As regards the surrounding circumstances, the minutes of the Executive Committee of Akai dated 4 December 1998 (“the Exco minutes”) become highly significant. The minutes purported to record a telephone meeting with Dr Holmes, one of Akai’s directors, and his approval to the loan and share pledge agreements. The judge accepted Dr Holmes’ “emphatic denial that he had been telephonically present” at the Exco meeting said to have taken place at which approval had been given. At § 355 of his judgment, the judge made a finding that Mr Ting simply had the Exco minutes “made up”.

181.  That conduct is hardly consistent or reconcilable with an honest state of mind and is directly relevant because the Exco minutes were ‘produced’ for the very purpose of satisfying TFB’s requirement that evidence of authority to sign the agreements be provided. I note the reasons (reflected in §§ 287-305 of the judgment below which I do not propose to repeat) advanced by Mr Snowden to show why it was in Akai’s interest to enter into the switch transaction. But, in my view, the need to resort to fabricating the Exco minutes shows a lack of bona fides and undermines what, objectively viewed, might have been reasons for the transaction. While Mr Snowden stressed that Mr Ting had derived no personal benefit from the loan and share pledge agreements in that it is not said that any part of the funds had been diverted to Mr Ting for his personal use, the absence of personal benefit neither establishes that what was done could not have been in breach of fiduciary duty nor precludes any conclusion that there had been such a breach.

182.  In my view, the inference is irresistible that Mr Ting could not have been acting honestly when he committed Akai to the transaction. Had he been acting as an honest director should, he would not have had to resort to fabricating the minutes. Rather, he would have convened a proper board meeting.

183.  In the result, but for different reasons, I agree with the judge’s conclusion that there had been a breach of fiduciary duty on Mr Ting’s part. It follows that there can be no question ofMr Ting having actual authority or implied actual authority.

184.  I now turn to the question of apparent authority.

Apparent authority

185.  While a breach of fiduciary duty effectively precludes any reliance on actual authority because by its very nature it will nullify actual authority, it does not nullify apparent authority. See Hopkins v TL Dallas Group [2005] 1 BCLC 543 at § 89.

186.  It is TFB’s case (which the judge accepted) that Mr Ting had apparent authority to commit Akai to the agreements and that Akai is bound by the agreements. I agree that TFB’s defence of apparent authority is not sustainable.

187.  Mr Ting was the chairman and CEO of Akai. It was Mr Snowden’s submission that

“Akai’s Board generally permitted Mr Ting to commit Akai to contracts without the need for further sanction of the Board …that Mr Ting had, to the knowledge of the other Board members, responsibility for dealing with financial institutions …This included entering into financial arrangements with such institutions on behalf of Akai.”

188.  It was said that although he was not officially Akai’s managing director, the conduct of the board over the years was such as to render Mr Ting, for practical purposes, the de facto managing director of Akai. Mr Snowden’s principal submission was that committing Akai to the switch transaction fell with the usual authority of those positions of Mr Ting. Mr Snowden cited, inter alia, Hely-Hutchison v Brayhead Ltd [1968] 1 QB 549 in support.

189.  Lord Denning MR stated (at 583D) that:

“…when the board appoint one of their number to be managing director, they invested him not only with implied authority, but also with ostensible authority to do all such things as fall within the usual scope of that office. Other people will see him acting as managing director are entitled to assume that he has the usual authority of a managing director.”

While the correctness of that statement of the law is accepted, the question whether the switch transaction was a transaction that fell within “the usual scope” of the office of managing director remains to be determined.

190.  Hely-Hutchison itself was not a decision that turned on ostensible authority. In that case, R was the chairman of the defendant company which had acquired some shares in P, a public company of which the plaintiff was chairman and managing director. R as chairman of the defendant company signed on the defendant company’s notepaper purporting to indemnify the plaintiff against loss on his personal guarantee to bankers for a loan to P and to guarantee to repay money lent by the plaintiff personally to P. It is relevant to note that the office of chairman did not carry with it authority to enter into those contracts without the sanction of the board. (584B)

191.  The judge found that R acted as the de facto managing director of the defendant company. He was the chief executive who made the final decision on any matter concerning finance. He often committed the defendant company to contracts without the knowledge of the board and reported the matter afterwards. The board knew of and acquiesced in R acting as de facto managing director. Lord Denning considered that those findings carried with it the necessary inference that R also had actual authority,

“such authority being implied from the circumstance that the board by their conduct over many months had acquiesced in his acting as their chief executive and committing [the defendant company] to contracts without the necessity of sanction from the board.” (584F)

On that basis, Lord Denning did not consider it necessary to go into the question of ostensible authority. (584G)

192.  Lord Wilberforce was of the same view. He noted that the board of the defendant company had authorised R to enter into heads of agreement with the plaintiff on behalf of P with the object of obtaining for the defendant company a substantial holding in P. From this initial step flowed subsequent transactions, including the letters of indemnity and guarantee in question which Lord Wilberforce considered as merely carrying through to a conclusion the objective of obtaining a substantial holding that had been approved by the board. (587G-588F) Thus, that case was decided not on the basis of ostensible authority but on implied actual authority. In view of the conclusion that Mr Ting was acting in breach of his fiduciary duty, implied actual authority cannot avail TFB.

193.  Mr Snowden also referred to Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480 where Diplock LJ (as he then was) analysed the relevant law on apparent authority (at 505):

“ The commonest form of representation by a principal creating an “apparent” authority of an agent is by conduct, namely, by permitting the agent to act in the management or conduct of the principal’s business. Thus, if in the case of a company the board of directors who have “actual” authority under the memorandum and articles of association to manage the company’s business permit the agent to act in the management or conduct of the company’s business, they thereby represent to all persons dealing with such agent that he has authority to enter on behalf of the corporation into contracts of a kind which an agent authorised to do acts of the kind which he is in fact permitted to do usually enters into in the ordinary course of such business.”

194.  In my view, it seems clear from the passages cited from Hely-Hutchison and Freeman & Lockyer that far from establishing that a managing director (and for that matter a CEO and chief executive) has untrammelled authority to commit his company to any transaction without board sanction, they show that parameters do exist. While what contracts fall within the ordinary ambit of the authority of an executive chairman, CEO and/or managing director may be a matter of debate, there is an ambit to that authority. The relevant question is whether the transaction is of a kind a managing director would in the normal course be authorised to enter into on behalf of the company. As Mason CJ observed in Northside Developments Pty Ltd v Registrar General [1989-1990] 170 CLR 146 at 159,

“the company would not have been bound had it not been one of that kind.”

Moreover, it should not be overlooked that we are dealing here with a publicly listed company.

195.  In so far as the conduct of the other directors of Akai and the practice of the board are said to be relevant to the scope of Mr Ting’s apparent authority, the relevant evidence consisted of the evidence of Dr Holmes, one of the other directors of Akai, which was to the effect that on matters such as dividends, interim or final, or bonus issues of shares or changes to capital and the like, it was Mr Ting who decided on those matters. (Tr. Day 3/30:10-14) Mr Ting was also responsible for dealing with financial institutions as the following passage from the transcript shows:

“ MR SNOWDEN: …

As far as you’re concerned, Dr Holmes, who was responsible for negotiating and arranging Akai’s financial affairs, such as agreements for loans and guarantees and the like?

A. It’s my understanding Clara Loh would normally be responsible. Unless it dealt with, say, a large value loan or if it dealt with a senior executive of a bank, in which case Mr Ting was responsible. The only exception being ScotiaBank in Toronto, which Mr Tam was responsible for, at a senior level.

Q. You were perfectly content with that arrangement?

A. Yes.”

(Tr. Day 4/15:24-16:10)

That was the extent of the evidence on that issue.

196.  I would accept that Mr Ting had authority to negotiate and arrange loans for the purposes of Akai’s own business including the pledging of its assets as security. But the switch transaction was not such a transaction: it was nothing less than assuming the debt of another company and securing the indebtedness by pledging Akai’s own assets in the process with no apparent benefit to Akai discernible from the face of the transaction. On any view, it was anything but an everyday or run-of-the-mill loan transaction made in the ordinary course of business.

197.  Nor was there any evidence of an established practice of entering into switch transactions with TFB. Insofar as it might be suggested that a precedent for the switch transaction exists, that would not appear to be borne out by the facts. As recorded by the judge (§§ 28-30), in September 1990, TFB made available to Semi-Tech Global Ltd a US$20 million revolving credit facility. In June 1991, the STC Group underwent a restructuring: Singer which was listed on the New York Stock Exchange at about that time became a subsidiary of Semi-Tech Global to head the worldwide ‘Singer group’ of companies. In late 1991, at Semi-Tech Global’s request, Singer was substituted as borrower and took over the liability for the US$20 million facility.

198.  While that transaction involved a ‘switch’ of borrower, in substance, it was wholly different from the switch transaction under consideration for the simple reason that the earlier transaction was between a parent and a wholly owned subsidiary where there was an identity of interest which is not the case between Akai and Singer. Akai and Singer are publicly listed companies and 57% of Akai and 50% of Singer are owned by the public. For that reason, it cannot be regarded as establishing a precedent for the switch transaction. Moreover, the notion that any bank would be willing to enter into a loan transaction with a corporate entity, particularly a publicly listed company, without requiring a board resolution authorising the transaction in question seems somewhat removed from reality.

199.  For those reasons, I am unable to accept that the positions held by Mr Ting in Akai, ipso facto, authorised him to enter into the switch transaction.

200.  If (contrary to my view) Mr Ting as CEO, chairman and de facto managing director did have apparent authority to enter into the switch transaction, there was no evidence that TFB relied on the representation. That is essential if the defence of apparent authority is to succeed. The relevant evidence is helpfully set out in §§ 86-89 of the judgment of Tang VP. In my view, TFB’s requirement of “evidence confirming Mr Ting’s authority” from Akai is the very antithesis of reliance on any representation of Mr Ting’s authority. Had TFB relied on the representing arising from the positions held by Mr Ting as conferring the requisite authority, there would have been no need to require “evidence confirming Mr Ting’s authority”. I therefore conclude that TFB has not shown that it had relied on Mr Ting’s apparent authority. That is an insurmountable obstacle and fatal to its defence based on apparent authority. The ineluctable consequence is that Akai was not bound by the loan and share pledge agreements.

201.  On the question whether TFB had been ‘put on inquiry’, there is nothing that I can usefully add.

Hon Cheung JA:

202.  I respectfully agree with the reasons of the judgment of Tang VP.

203.  I would like to focus my discussion on knowing receipt which is relied upon by Akai as one of the major planks of its claim against the Bank.

204.  In my view Akai has established a valid claim against the Bank based on knowing receipt.

Knowing Receipt

205.  A person may be liable as a constructive trustee when he knowingly receives for his own benefit trust property transferred to him in breach of trust: Agip (Africa) Ltd v. Jackson and Others [1990] 1 Ch. 265 at 291. This claim traced its origin to the first limb of the two principles propounded by Lord Selborne LC in Barnes v. Addy (1874) 9 LR Ch App 244 at 251-252, namely, ‘agents receive and become chargeable with some part of the trust property’.

206.  The three elements of knowing receipt are :

1)     a disposal of the plaintiff’s assets in breach of fiduciary duty;

2)     the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff;

3)     knowledge on the part of the defendant that the assets received are traceable to a breach of fiduciary duty.

See : El Ajou v. Dollar Land Holdings Plc [1994] 2 All ER 685 per Hoffmann LJ (as he then was) at 700.

207.  These principles are well established. What is controversial in the present case is on the nature of knowledge that a defendant must possess in order to make him liable. The learned Judge held that actual and not constructive notice is required.

The Judge’s view

208.  The authorities that the learned Judge relied upon are Eagle Trust plc v SBC Securities Ltd where Vinelott Jadopted what Lindley LJ held in Manchester Trust v. Furness [1895] 2 Q.B. 539 at 545,

‘In dealing with estates in land title is everything, and it can be leisurely investigated, in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralysing the trade of the country.’

209.  Vinelott J then held at page 504 stated that,

‘The courts have been particularly reluctant to extend the doctrine of constructive notice to cases where moneys are paid in the ordinary course of business to the defendant in discharge of a liability.’

210.  The learned Judge also referred to Cowan de Groot Properties Ltd v. Eagle Trust plc [1992] 4 All ER 700 at 759-760 where Knox J held that,

‘Neither the fraudulent scheme that is relied upon by Eagle in the present case nor the claimed sale at a gross undervalue in my judgment constitute the sort of incumbrance with which conveyancing investigations of title are concerned. In relation to such dealings it would be inappropriate to introduce the doctrine of constructive notice. I prefer in this context as the proper test to be applied the question whether knowledge that the directors of Eagle were deliberately selling at a gross undervalue can reasonably be imputed to Mr Samuelson; it follows from this view that I do not accept the submission made to me that in the case of a knowing receipt of trust property it is not necessary to establish at least in the case of a bona fide purchaser for value of trust property that the recipient had actual knowledge in categories (i), (ii) or (iii) in the Baden case of the breach of trust.’ (emphasis added)

211.  The earlier authorities which supported the requirement of actual knowledge include CarlZeiss Stiftungv. Herbert Smith & Co [1969] 2 Ch 276. Sachs LJ at 298 held that,

‘It does not, however, seem to me that a stranger is necessarily shown to be both a constructive trustee and liable for a breach of the relevant trusts even if it is established that he has such notice. As at present advised, I am inclined to the view that a further element has to be proved, at any rate in a case such as the present one. That element is one of dishonesty or of consciously acting improperly, as opposed to an innocent failure to make what a court may later decide to have been proper inquiry. That would entail both actual knowledge of the trust’s existence and actual knowledge that what is being done is improperly in breach of that trust―though, of course, in both cases a person wilfully shutting his eyes to the obvious is in no different position than if he had kept them open.’

212.  In Re Montagu’s Settlement Trusts, Duke of Manchester v. National Westminster Bank Ltd [1987] 1 Ch. 264 at 285 Megarry VC summarised the principles as follows :

‘(1)     The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means ofdetermining the rights of property, whereas the imposition of a constructivetrust creates personal obligations that go beyond mere property rights.

(2)     Inconsidering whether a constructive trust has arisen in a case of the knowingreceipt of trust property, the basic question is whether the conscience of therecipient is sufficiently affected to justify the imposition of such a trust.

(3)     Whether a constructive trust arises in such a case primarily depends on the knowledge of the recipient, and not on notice to him; and for clarity it is desirable to use the word “acknowledge” and avoid the word “notice”in such cases.

(4) For this purpose, knowledge is not confined to actual knowledge, but includes at least types (ii) and (iii) of Baden knowledge [see [1992] 4 All ER 161 at 235], ie actual knowledge that would have been acquired but for shutting one’s eyes to the obvious, or wilfully and recklessly failing to make such inquiries as a reasonable and honest man would make; for in such cases there is a want of probity which justifies imposing a constructive trust.

(5) Whether knowledge of the Badentypes (iv) and (v) suffices for this purpose is at best doubtful; in my view, it does not, forI cannot see that the carelessness involved will normally amount to a want of probity.’

The different approach

213.  However there is equally a long line of established cases which supports the view that both actual and constructive notice are applicable in constructive trust, specifically in knowing receipt cases. Hence in Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 1 WLR 1555 at 1590, Ungoed-Thomas J held that,

‘The knowledge required to hold a stranger liable as constructive trustee in a dishonest and fraudulent design, is know­ledge of circumstances which would indicate to an honest, reasonable man that such a design wasbeing committed orwould put him on inquiry, which the stranger failed to make, whether it was being committed. Acts in the circumstances nor­mal in the honest conduct of affairs do not indicate such a misapplication, though compatible with it. And answers to inquiries are prima facie to be presumed to be honest, an aspect of the law which I shall deal with more fully later when considering negligence.’

214.  In Karak Rubber Co. Ltd v. Burden and others (No. 2) [1972] 1 All ER 1210 at 1241, Brightman J adopted the constructive notice approach and held that,

‘To borrow the words of Lord Cranworth, spoken admittedly in a different context, ‘Constructive notice is as good as any notice, if it does amount to notice.’

215.  In Belmont Finance Corporation v. Williams Furniture Ltd and others (No. 2) [1980] 1 All ER 393 Buckley LJ held at 405 that,

‘So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds.’

216.  In Baden, Delvaux Lecuit and others v Société General pour Favoriser le Development du Commerce etc de l’Industrie en France SA [1983] BCLC 325, Peter Gibson J at page 403 specifically accepted the statement in Snell’s Principles of Equity (28^th ed) at page 194 that in knowing receipt the person ‘received trust property with actual or constructive notice that it was trust property.....’

217.  He further held at page 408 that,

‘No court which has considered the problem has been content to limit knowledge to actual knowledge.’

218.  He referred to the five categories of knowledge relevant for the purposes of constructive trusteeship which for the ease of reading, I will list them separately,

‘(i)     actual knowledge;

(ii)     wilfully shutting one’s eyes to the obvious;

(iii)     wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

(iv)     knowledge of circumstances which would indicate the facts to an honest and reasonable man;

(v)     knowledge of circumstances which would put an honest and reasonable man on inquiry.’

219.  In Rolled Steel Products (Holdings) Ltd v. British Steel Corporation and others [1986] 1 Ch 246 at 284, Slade L.J. stated that,

‘……The decision of this court in A. L. Underwood Ltd. v. Bank of Liverpool [1924] 1 K.B. 775, which was cited in Morris v. Kanssen [1946] A.C. 459, in my opinion, illustrates that the very nature of a proposed transaction may put a person upon inquiry as to the authority of the directors of a company to effect it, even if he has no special relationship with the company. Whether in any given case the person dealing with the company is put on inquiry must depend on all the particular circumstances.’

220.  In Agip (Africa) Ltd. v. Jackson and others [1990] 1 Ch. 265 Millett J (as he then was) expressly agreed with the view of Peter Gibson J in Baden. He at page 291 referred to the situation that :

‘The first is concerned withthe person who receives for his own benefit trust property transferred to him in breach of trust. He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was a breach of trust; or if he received it without such notice but subsequentlydiscovered the facts. In either case he is liable to account for the property, in the first case as from the time he received the property, and in the second as from the time he acquired notice.’

221.  In MacMillian Inc v. Bishopsgate Investment Trust Plc and others (No. 3) [1995] 1 WLR 978, Millett J (as he then was) at page 1000 stated that,

‘It is true that many distinguished judges in the past have warnedagainst the extension of the equitable doctrine of constructive notice to commercial transactions (see Manchester Trust v. Furness [1895] 2 Q.B. 539, 545-546, per Lindley L.J.), but they were obviously referring to the doctrine in its strict conveyancing sensewith its many refinements and its insistence on a proper investigation of title in every case. The relevance of constructive notice in its wider meaning cannot depend on whether thetransaction is “commercial:” the provision of secured overdraft facilitiesto a corporate customer is equally “commercial” whether the securityconsists of the managing director’s house or his private investments. The difference is that in one case there is, and in the other there is not, a recognised procedure for investigatingthe mortgagor’s title which thecreditor ignores at his peril.’

222.  However, Millett J at page 1014 emphasised the rather restricted situation where constructive notice may be used :

‘Account officers are not detectives. Unless and until they are alerted to the possibility ofwrongdoing, they proceed, and are entitled to proceed, on the assumption that they are dealing with honest men. In order to establish constructive notice it is necessary to prove that the facts known to the defendant made it imperative for him to seek an explanation, because in the absence of an explanation it was obvious that the transaction was probably improper. In this regard it is necessary to bear in mind what Bowen L.J. said in SandersBros. v. Maclean & Co.(1883) 11 Q.B.D. 327, 343:’

223.  In Twinsectra Ltd v. Yardley and others [2002] 2 AC 164 at 194, Lord Millett stated that,

‘Liability for “knowing receipt” is receipt-based. It does not dependonfault. The cause of action is restitutionary and is available only where the defendant received or applied the money in breach of trust for his own useand benefit: see Agip (Africa) Ltd v Jackson [1990] Ch 265,291-292; Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, 386. There is no basis for requiring actual knowledge of the breach of trust, let alone dishonesty, as a condition of liability. Constructive notice is sufficient, and may not even be necessary. There is powerful academic support for the proposition that the liability of the recipient is the same as in other cases of restitution, that is to say strict but subject to a change of position defence.’

The Canadian approach

224.  More recently in The Citadel General Assurance Company and Another v. Lloyds Bank Canada and Hongkong Bank of Canada [1997] 3 SCR 805 the Supreme Court of Canada reviewed the conflicting views on the type of knowledge that is required in knowing receipt. La Forest J at page 836 approved the view that in receipt cases the liability of the recipient is receipt-based whereas in knowing assistance cases the accessory’s liability is fault based. On the basis of that distinction he held that,

‘.....it makes sense to require a different threshold of knowledge for each category of liability. In “knowing assistance” cases, which are concerned with the furtherance of fraud, there is a higher threshold of knowledge required of the stranger to the trust. Constructive knowledge is excluded as the basis for liability in “knowing assistance” cases; see Air Canada v. M & L Travel Ltd., supra, at pp. 811-13. However, in “knowing receipt” cases, which are concerned with the receipt of trust property for one’s own benefit, there should be a lower threshold of knowledge required of the stranger to the trust. More is expected of the recipi­ent, who, unlike the accessory, is necessarilyenriched at the plaintiff’s expense. Because the recipient is held tothis higher standard, constructive knowledge (that is, knowledge of facts sufficient to put a reasonable person on notice or inquiry) will suffice as the basis for restitutionary liability. Iacobucci Jreaches the same conclusion in Gold, supra, where he finds, at para. 46, that a stranger in receipt of trust property “need not have actual knowledge of the equity [in favourof the plaintiff]; notice will suffice”.

This lower threshold of knowledge is sufficient to establish the “unjust” or “unjustified” nature of the recipient’s enrichment, thereby entitling the plaintiff toa restitutionary remedy. …… In “knowing receipt” cases, relief flows from the breach of a legally recognized duty of inquiry. More specifically, relief will be granted where a stranger to the trust, hav­ing received trust property for his or her own bene­fit and having knowledge of facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of trust property. It is this lack of inquiry that renders the recipient’s enrichment unjust.’

225.  The Gold case referred to by La Forest J is Jeffrey Lorne Gold v Primary Developments Limited and The Toronto-Dominion Bank [1997] 3 S.C.R. 767 where the Supreme Court of Canada also addressed the issue of knowledge in knowing receipt, Iacobucci J at page 788 held that

‘In my view, the test as put forward in bothCarl Zeiss Stiftungand Montagu’s Settlement is inap­propriate to cases of knowing receipt. The basis of liability in both of these cases is a want of probity (see the judgment of Edmund Davies L.J. in Carl Zeiss Stiftung, at p. 301; see also Montagu’s Settle­ment, at p. 285). As such, these cases appear to conflate knowing receipt with knowing assistance.

The judgment of Sachs LJ in Carl Zeiss Stif­tung provides further evidence of this collapsing of the two distinct heads of liability where he describes the defendant in knowing receipt cases as a “party to a fraud” (at pp. 298-99). In my view, such a description is inaccurate. Unlike knowing assistance, knowing receipt does not require the plaintiff to show that the breach of trust was fraud­ulent. And unlike knowing assistance, the defen­dant in knowing receipt is in no way implicated in any wrongdoing perpetrated by the rogue trustee.’

226.  Iacobucci J stated that,

‘…… The defendant will be taken to have notice ifthe circumstances were such as to put a rea­sonable person on inquiry, and the defendant made none, or if the defendant was put off by an answer which would not have satisfied a reasonable person.’

227.  Although Iacobucci J was in the minority on the outcome of the case, the majority accepted the requirement of constructive knowledge in knowing receipt cases : see Sopinka J at page 796 and 798.

The New Zealand approach

228.  In Westpac Banking Corporation v Savin [1985] 2 NZLR 41, at page 53 Richardson J commented on the duty to inquire in commercial transactions,

‘Clearly Courts would not readily import a duty to inquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life. In this regard there is a further consideration affecting the receipt of funds in discharge of indebtedness where, for example, a customer’s account with a bank is overdrawn. Where the creditor is pressing for payment and thus both stands to benefit from the payment and designs and stipulates for that benefit, it will be less easy for the creditor to contend that the regular pressures of commercial life must be taken to have ruled out any need for inquiry.’

229.  McMullin J at page 60, held that

‘A banker as a stranger to a trust becomes a constructive trustee if he has knowledge of circumstances that would put an honest, reasonable man on inquiry: Paget’s Law of Banking (9th ed; 1982) pp 91 and 92; Peter Gibson J in Baden, Delvaux and Lecuit v Société General pour Favoriser le Développment du Commerce et de l’Industrie en France SA [1983] BCLC 325.’

The recent approach : BCCI v. Akindele

230.  The learned Judge relied on the recent case of Bank of Credit and Commerce International (Overseas) Ltd and Another v. Akindele [2001] Ch. 437 where Nourse LJ reviewed the conflicting views in the authorities about the nature of knowledge i.e. whether actual or constructive knowledge is to be used in knowing receipt. At page 455 Nourse LJ came to the view that there is no need for categorization and he held that,

‘... All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

For these reasons I have come to the view that, just as there is now a singletest of dishonesty for knowing assistance, soought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made, paying equal regard to the wisdom of Lindley LJ on the one hand and of Richardson J on the other.’

231.  In the present case the learned Judge held that,

‘…… I accept the proposition that unconscionability is a function of actual knowledge, and not of constructive knowledge. I also accept the proposition, at least within a commercial transaction, that a person who receives property consequent upon a breach of trust or breach of fiduciary duty cannot be said to be ‘unconscionable’ merely if in so doing he is careless or if he fails to make inquiry.’

Post Akindele

232.  The learned Judge further relied on the case of Papamichael v. National Westminister Bank Plc and Another [2003] 1 Lloyd’s Rep 341 which was decided after Akindele where H H Judge Chambers Q.C. sitting in the Commercial Court was of the view that under the new test the knowledge that is required is actual rather than constructive. This view was likewise adopted by Hart J the first instance judge in Criterion Properties Plc v. Stratford UK Properties [2002] 2 BCLC 151 where he considered a sufficient condition was ‘actual knowledge of the circumstances which make it a breach of duty’. Akindele was further applied in Uzinterimpex JSC v Standard Bank Plc [2008] 2 Lloyd’s Rep 456 without a discussion on the type of knowledge required.

233.  However, this rather restrictive approach was rejected by the Court of Appeal in Criterion Properties where Carnwath LJ held at page 2120 that,

‘In my view, this is too narrow an interpretation of Akindele...’

234.  At page 2122, he held that,

‘38. Accordingly, I disagree respectfully with the judge in thinking that the question in the present case could be answered simply by reference to whether Oaktree had actual knowledge of the circumstances which gave rise to the breach of duty. In my view, on the facts of this case, and in the light of the more flexible approach endorsed by Nourse LJ, it was too narrow and one-sided a view of the matter. The SSA did not arise in the abstract. It was one element in a continuing commercial relationship between two parties acting at arm’s length, and should have been judged in that light.’

235.  Although the Court of Appeal in Criterion Properties was reversed by the House of Lords [2004] 1 WLR 1846 on the basis that the issue of knowing receipt was not engaged because the contract in question was an executory contract which may or may not be enforceable, Canworth LJ’s interpretation on Akindele was not disturbed as the issue of knowledge did not arise in that case.

236.  Carnwath LJ again dealt with Akindele in Charter plc and another v. City Index Ltd [2008] Ch 313 where at page 321 he held that,

‘In this court also it is accepted that Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 represents the present law. Accordingly, liability for “knowing receipt” depends on the defendant having sufficient knowledge of the circumstances of the payment to make it “unconscionable” for him to retain the benefit or pay it away for his own purposes.’

237.  In Hong Kong, Akindele together with the elaboration by Carnwath LJ was cited by Lam J in High Fashion Garments Co Ltd v. Ng Siu Tong [2005] 4 HKC 8.

Singapore post Akindele

238.   In Comboni Vincenzo and another v. Shankar’s Emporium (Pte) Ltd [2007] 2 SLR 1020, Kan Ting Chiu J of the Singapore High Court referred to Akindele and came to the view that

‘64 Unconscionability relates to the state of a person’s knowledge. When a person knowingly assists in a breach of trust, or knowingly receives property in respect of which a breach of trust is committed, equity intervenes and constitutes him a constructive trustee. The knowledge could be actual knowledge, or it could be a wilful avoidance of the knowledge, ie, knowledge within the second and third Baden categories. But when there is no actual knowledge or wilful avoidance of the knowledge, and the person’s awareness comes within the last two Baden categories, his conscience should not becalled into question. He will not be deemed a constructive trustee, and any liability on his part would be founded in tort or contract for his failure to discharge his tortious or contractual obligations.’

239.  This was followed in Relfo Ltd (in liquidation) v. Bhimji Velji Jadva Varsani [2008] 4 SLR 657.

Academic Views

240.  Charles Harpum, in an article entitled ‘The Stranger as Constructive Trustee’ (1986) 102 LQR 114 discussed why a stricter approach is required in knowing receipt than in knowing assistance.

‘In such a case, the conflict between beneficiary and the stranger is at its most acute, because the court has in effect to determine which of them has the better title to the trust property. The winner takes all and the loser is left with a claim against the trustee that is likely to be worthless. Because the benefi­ciary stands to lose outright his beneficial interest, equity is at her most demanding, and insists upon compliance with her most exacting standards.’

241.  The author at page 125 further stated that,

‘……In commercial dealings where “possession is everything and there is no time to investigate title”, constructive notice will usually have no application, and this is particularly so in relation to sales of goods. However, the mere fact that a transaction is a commercial one, does not suffice to exclude a duty of inquiry from arising in any circumstances, regardless of ordinary business practices. The pattern of inquiries to be followed by a person acquiring property for his own benefit is usually well known in advance, and provides a simple yardstick for determining whether a recipient does or does not have notice of a matter. Where a person does not receive property for his own benefit, that yardstick is absent.’

242.  In ‘Property Rights in Money’ by David Fox (2008), the author discussed the issue of notice and unconscionability raised by Akindele at paragraph 8.59

‘The standard of unconscionability is intended to cut across the fine distinctions that were once drawn about the degree of awareness that the recipient might be expectedto show. It could be set so that it took into account appropriate standards ofcommercial dealing in the kind of transaction where the money is received. The greater the degree of subjective awareness that the recipient has that the money he or she receives derives from an unauthorized transaction, the more readily it can be said that his or her receipt of the money was unconscionable. But that should not preclude thepossibilityof finding unconscionability when he or she has no subjective suspicions about the provenance of the money but the circumstances of the payment make it reasonable for him or her only to accept the money once heor she has made further inquiries. All depends on the context.’

My view

243.  1)     I do not regard actual knowledge to be the only basis for liability in knowing receipt. In considering the authorities it is important to bear in mind the context in which the principles stated in these cases is addressed. The law of knowing receipt has been a developing one. From its early appearance under the general ambit of constructive trust, the two separate concepts of knowing receipt and dishonest assistance gradually became distinct with their own specific requirements. Hence in dishonest assistance (previously known as knowing assistance), being an accessory based liability, dishonesty or want of probity is required (Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378). On the other hand knowing receipt is receipt based and dishonesty is not required. As Megarry VC observed in Re Montagu’s Settlement Trust the basic requirement in knowing receipt is whether the recipient’s conscience is affected. This becomes the touchstone in Akindele when unconscionability is held to be the single test of knowledge for knowing receipt. Because of the development of this branch of law, many of the cases which addressed the issue of actual knowledge or constructive notice may not have focused on the distinction in these two concepts. As a result the cases may not be necessary reconcilable. However, what is clear is that the law both pre Akindele as shown in cases such as Selangor, Karak Rubber, Belmont Finance, Baden, Rolled Steel, Agip, MacMillian, Twinsectraand post Akindele such as Criterion Properties (CA) and Charter plc does not exclude the reliance on constructive notice in establishing knowledge as a constructive trustee. The review of authorities I have undertaken amply justifies this view. These authorities are too well established to be disregarded.

2)     I agree that the test of unconscionability identified by Akindele provides a sound jurisprudential foundation for knowing receipt. Equity has always proceeded on the basis of conscience. Although Lord Nicholls in Royal Brunei Airlines preferred the use of dishonesty and not unconscionability in accessory based liability, I do not see any real objection in principle to adopt unconscionability as the test in knowing receipt. The test of ‘unconscionability’ identifies the ‘degree’ of knowledge rather than the ‘type’ that is required to attract liability.

3)     In my view it is important to understand what Nourse LJ was trying to achieve by this single test of unconsciounability. Just as Lord Nicholls in Royal Brunei Airlines said at page 391,

‘......To inquire, in such cases, whether a person dishonestly assisted in what is later held to be a breach of trust is to ask a meaningful question, which is capable of being given a meaningful answer. This is not always so if the question is posed in terms of “knowingly” assisted. Framing the question in the latter form all too often leads one into tortuous convolutions about the “sort” of knowledge required, when the truth is that “knowingly” is inapt as a criterion when applied to the gradually darkening spectrumwhere the differences are of degree and notkind.’

Nourse LJ is likewise trying to do away with the difficulties with the ‘sort’ of knowledge required in this area. The Baden categorisation was rejected by Lord Nicholls in dishonest assistance. Nourse LJ likewise called for its rejection and also the actual knowledge/constructive notice division in knowing receipt. I agree with his view.

4)     If such divisions are to be discarded, why are we then still debating this topic in this appeal? First, until Akindele, the cases recognized the distinction, so was the case under appeal, hence the topic has to be addressed. Second, even if the Akindele approach is to be adopted in Hong Kong, the present exercise is not, as submitted by Mr. Snowden QC, who appeared with Mr. Eugene Fung as counsel for the Bank, to resurrect the old division. Rather, it is to deal with the mechanistic rejection of the use of constructive notice, particularly in some of the more recent cases (including the present case), when by so doing, the Courts have failed to appreciate that they may have excluded some highly relevant factors in the determination of unconscionable knowledge. To equate knowledge in knowing receipt as ‘actual knowledge’ only or to say unconscionability can only be constituted by ‘actual knowledge’ missed the point entirely: if there are circumstances which would put a reasonable man on inquiry, why should the knowledge that may be so acquired be discarded in the search for unconscionability?

5)     Likewise in respect of the Baden categorization there should not be a mechanistic approach as well. Wilful blindness or contrived ignorance (sometimes colourfully referred to as ‘Nelsonian knowledge’ based on the story of Admiral Nelson putting the telescope to his blind eye in a losing battle) is treated as actual knowledge. But as Millett J warned in Agip at page 293 that there should not be over refinement or a too ready assumption that knowledge or circumstances which would indicate the facts to an honest and reasonable man (category (iv)) and knowledge of circumstances which would put an honest and reasonable man on inquiry (category (v)) in Baden are necessary cases of constructive notice only. In my view although the terminology in these two categories may be akin to those describing negligence or carelessness, in the context of their application in knowing receipt, one is not saying negligence or carelessness is enough. Rather the focus is whether, given the circumstances of the case, the failure to inquire points towards the knowledge on the part of the recipient of the misapplication of the fund. As Millett J observed in Agip at 295 on the basis of the constructive trustee’s liability,

‘......He is not liable for failing to make inquiry, but for the misapplication of the plaintiff’s property. He is under no duty to make inquiry. His only duty is to act honestly. If he makes inquiry, he does so for his own protection. If he does not make inquiry, the loss is not caused by his failure to do so but by his participation in the misapplication of the plaintiff’s funds. He is liable only if he acted with knowledge; and this must be judged in the light of all the circumstances known to him and any explanation actually given to him. But it is not, in my view, to be judged byconsidering the hypothetical explanations which might have been given to him if he had sought them. If it were otherwise, his liability would depend on whether the fraudster would have been sufficiently inventive to be able to supply a plausible explanation if asked for one.’

6)     In view of their long established usage, my view is that inevitably the terms of actual knowledge and constructive notice will continue to be used (hopefully only for a brief appearance) when authorities are referred to in a legal system which relies on the use of precedents. However, in referring to them it is important to understand the real purpose of their usage.

7)     Whether constructive notice will apply or not in a given case does not depend on whether the transaction in question involves land or commerce. To exclude constructive notice solely because the transaction is commercial in nature is too simplistic. Nourse LJ in Akindele emphasized the need for commonsense decisions in the commercial context in which knowing receipt claims are now made. In my view, it is precisely because of the broad approach when unconscionability is adopted as the underlining test of knowledge that one should not confine the examination only to the actual knowledge of the recipient and exclude constructive notice in its wider sense.

8)     The Bank argued that the doctrine of constructive notice looks first to established practice, to see what should have been done, and then imposes a legal fiction of treating a defendant as if he knew what he would have discovered if he had made the relevant investigation or inquiry. While this is a correct description of constructive notice, my view is that this approach is focused on the traditional aspect of constructive notice which is associated with land transaction with its specific procedure for requisition and inquiry as to title or incumbrance. But constructive notice is also used in the wider sense as Millett J in MacMillian Inc at page 1000 stated that,

‘There is no room for the doctrine of notice in the strict conveyancing sense in a situation in which it is not the custom and practice to investigate the transferor’s title. But in the wider sense it is not so limited. In Barclays Bank Plc. v. O’Brien [1994] 1 A.C. 180 (a case concerned with land, but in which the defect in title¾the presence of undue influence¾could not be discovered by the routine investigation of title) Lord Browne-Wilkinson said, at pp. 195-196:

“ The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights; the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it.” ’

9)     When constructive notice is applied in commercial transactions it does not mean that the requirement to inquire in the traditional conveyancing sense will be adopted without qualification. To do so may cause injustice. Whether there should be inquiry and the extent of the inquiry will depend on the facts of the case. The standard must be what a reasonable person in the circumstances of the case would have done. Where the circumstances requires inquiry to be made, especially if the recipient already has had some established requirement of inquiries in standard transactions but chose not to pursue these established requirement, I cannot see why constructive notice should be excluded in such a case.

10)     I would apply the objective standard in determining unconscionability. Although the issue is concerned with the state of mind of the recipient, I do not see why, as a matter of principle, there should be a different standard from assessing dishonest assistance which is also concerned with the state of mind of the person. In Royal Brunei Airlines at page 389, Lord Nicholls recongized that honesty has a strong subjective element but he held that,

‘However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.’

Further, in Cobbe v Yeoman’s Row Management Ltd [2008] 1 WLR 1752 at 1788, Lord Walker of Gestingthorpe stated that,

‘Here it is being used (as in my opinion it should always be used) as an objective value judgment on behaviour (regardless of the state of mind of the individual in question).’

Similar views are expressed by Fox at 8.58-8.59 and Nolan in his article ‘How Knowing is Knowing Receipt?’ 59 CLJ 147.

11)     Lord Nicholls in Royal Brunei Airlines at page 389 stated that in the context of dishonest assistance, lack of probity is synonymous with dishonesty. In view of this connotation, one should avoid using the same term in the context of unconscionability.

The relevant factors

244.  What then are the relevant factors to be considered in deciding whether a recipient is guilty of knowing receipt. Mr. Kosmin QC and Ms Linda Chan, counsel for Akai, relied on the following factors part of which are drawn from the speech of Lord Nicholls in Royal Brunei Airlines at 390 when he considered the circumstances that an honest person should have regard in the context of dishonest assistance. In my view these factors are applicable on the issue of unconscionability. The circumstances are

1)     The nature and importance of the proposed transaction to the parties and the nature and importance of their respective roles.

2)     Whether the proposed transaction was within the ordinary course of business and the ordinary course of the parties’ business.

3)     The position, conduct, knowledge, experience, personal characteristics, understanding and motives of the parties.

4)     The benefit to be derived from each of the parties from thetransaction.

5)     Their ability to investigate and make checks as to the validityand propriety of the transaction.

6)     The practicability of proceeding otherwise.

7)     The seriousness of the adverse consequences to thebeneficiaries.

8)     Whether there is a customary practice of making routineinquiries, and

9)     Whether and to the extent those inquiries were made.

The facts of the present case

245.  The underlining theme of the Bank’s defence is that it was concerned only with its own business and it was not there to take care of the interest of Akai. One, of course, would not expect commercial entities to have concern for another commercial entity in an altruistic sense. However, the issue here is whether the Bank had attracted liability as a constructive trustee because of its knowledge. Applying the objective standard of unconscionability, my view is that the Bank had the requisite knowledge in knowing receipt.

246.  1)     It is important to take an overview of the case. The special feature in this case which calls out for attention is first, the close relationship of the Bank, Singer and Mr. Ting and second, the Bank was the direct beneficiary of the switch transaction. In my view it is precisely because of these two factors that the Bank had chosen to proceed in a way which ignored the interest of Akai whose assets were dealt with in an unauthorized way.

2)     Mr. Ting was the chairman and director of Singer NV. Through his interest in STC Canada he also had substantial interest in Singer NV. Singer NV also had substantial interest in Singer Thailand of which Mr. Banyong Lamsan (the Chairman of the Bank) was the chairman and Mr. Ting a director. The Bank also owned 8.5% of Singer Thailand.

3)     The earlier version of the Singer NV loan had been in place since 1989. Singer NV assumed the loan in early 1992. The loan was secured by a pledge of six million Singer Thailand shares. By 1997, Singer NV owed US$30 million to the Bank. The pledged Singer Thailand shares only covered 4.2% of the outstanding loan. The Bank knew Singer NV was not in a position to repay the loan.

4)     At the same time the Bank was also in financial difficulties. Thailand being the first country in Asia whose currency was attacked by international hedge funds in 1997. The Bank’s profit for the year ended 31 December 1997 was only US$17 million. This is to be contrasted with the potential default of the US$30 million of Singer NV. With this background, Akai’s assumption of the Singer NV loan backed by a new security from Akai Electric clearly was a gift from heaven for the Bank.

5)     In Selangor at 1586, Ungoed-Thomas J cited Lord Cairns LC’s comment in Gray v. Johnson (1868) LR 3 HL 1 at 11,

‘...if it be shown that any personal benefits to the bankers themselves is designed or stipulated for, that circumstances, above all others, will most readily establish the fact that the bankers are in privity with the breach of trust which is about to be committed.’

Ungoed-Thomas J observed that,

‘A benefit designed or stipulated for “most readily” establishes it―apparently as evidence of it.’

6)     The Bank knew precisely the purpose of the loan to Akai : it was to be used immediately to discharge the Singer NV loan. On the face of it, there was no benefit to Akai (a publicly listed company in Hong Kong with 57% of its shares held by the public) by taking up this loan. To the contrary, the prejudice to Akai was apparent with an immediate assumption of a US$30 million liability together with its pledge of securities in Akai Electric.

7)     Mr. Ting, apart from his role in Singer NV, was also the Chairman and Chief Executive of Akai. Both Akai and Singer NV were also partly owned by STC Canada which Mr. Ting had a substantial interest. In my view the conflict of roles of Mr. Ting was readily apparent to the Bank without the need to resort to post event hindsight.

8)     Yet despite this, the Bank did not comply with its internal practice of making inquiry such as seeking proper evidence of approval by the board of Akai of this transaction or seeking legal advice on the authority of Mr. Ting to enter into the transaction on behalf of Akai.

9)     The 4 December 1998 Executive Committee Minute of Akai obtained by the Bank was clearly not a proper proof of Mr. Ting’s authority. It was not a board minute of Akai. The Bank had the Akai’s Bye Laws which provided for disclosure requirements and how approval in transactions of this type can be obtained. The minute did not show compliance with the standard requirements. The Bank had plenty of opportunity to inquire when there was a two month period for the transaction to be completed.

10)     In my view the fact that the Bank was dealing directly with Mr. Ting who was the Chairman and Chief Executive of Akai could not have possibly justified its conduct in this case. If the Bank chose not to inquire in unusual circumstances because of fear of offending its customer, they must take with the benefit of not annoying their customer the risk of liability because they do not inquire : AL Underwood v. Bank of Liverpool [1924] 1 KB 775 at 793 per Scrutton LJ.

11)     In my view the conduct of the Bank had clearly not met the objective standard of what a reasonable banker in the circumstances of the case would have done. To adopt some of the suggestions used by Lord Nicholls in Royal Brunei Airlines with modification to suit this case, a reasonable banker does not participate in a transaction which he knows involves a misapplication of trust assets to the detriment of the beneficiary. A reasonable banker does not deliberately close his eyes or ears or deliberately not ask questions, lest he learns something he would rather not know, and then proceed regardless.

12)     As the Court of Appeal of New South Wales observed in Yeshiva Properties No. 1 Property Ltd and others v. Marshall 219 ALR 112 at 118 per Mason P that,

‘.... it is not necessary that the fraudulent scheme or purpose of the fiduciary or trustee should be fully known, or should be understood in any detail at all; the test is complied with if the known facts would communicate to a reasonable person a general understanding that there was a fraud, breach of trust or breach of fiduciary duty.’

13)     Similar views were expressed by Lord Hoffmann in Barlow Clowes International Ltd (in liquidation) and others v. Eurotrust International Ltd [2006] 1 WLR 1476 at [28] (as case of dishonest assistance) that,

‘......Someone can know, and can certainly suspect, that he is assisting in a misappropriation of money without knowing that themoney is held on trust or what a trust means: see the Twinsectra case [2002] 2 AC 164, para 19 (Lord Hoffmann) and para 135 (Lord Millett).’

14)     For the reasons I have given I respectfully disagree with the learned Judge’s view. In my view the state of knowledge of the Bank of the transaction made it unconscionable to enter into it. The requisite knowledge in knowing receipt was established. It is not necessary to treat banks as recipients in knowing receipt in a separate category. Their liability is merely an illustration of how knowing receipt can apply in a given situation.

Breach of fiduciary duty

247.  1)     My view is that Mr. Ting had clearly acted in breach of his fiduciary duty towards Akai. The starting point is that Mr. Ting was in a situation of actual conflict in his role as Chairman and Chief Executive Officer of Akai and Chairman of Singer NV, yet he decided alone that Akai should assume the liability of Singer NV and without making the proper disclosure. As the High Court of Australia observed in R v. Byrnes and others [1995] 183 CLR 501 at 517, per Brennan J, Deane J, Toohey J and Gaudron J

‘.... a director who takes part in a decision to enter into a transaction in which the director or a third party in whom the director has an interest or to whom the director owes a fiduciary duty stands to gain an advantage or benefit but who does not make an adequate disclosure of his interest acts improperly.’

Not only has Mr. Ting not made the proper disclosure, he went so far as to produce a false minute of the Executive Committee meeting purporting to authorize his conduct.

2)     Further this was done without any arrangement being put into effect to protect Akai. There was no recourse agreement by Akai against Singer NV in the event that the Bank pursued against Akai on the loan. Akai received no apparent benefit whatsoever from the loan as the money immediately went back to the Bank in discharge of Singer NV’s liability towards the Bank. To the contrary the assumption of the new liability must be from the view point of Akai to its prejudice. It was not in the ordinary course of business of Akai to assume the financial responsibility of Singer NV. Dr. Holmes of Akai, the only witness who could provide evidence on the operation of Akai was not even asked in cross examination by the Bank whether the transaction was to the benefit of Akai.

3)     The only justification that has been advanced is a rhetorical one and that is why should Mr. Ting do something to harm Akai? I do not regard this to be an answer to the conduct of Mr. Ting. Akai, Singer NV and STC Canada are separate legal entities and each had its own interest to look after. One would really go into speculation by saying that the deal was to prevent Singer NV from going into default so as to avoid a domino effect on the rest of the group including Akai, when Mr. Ting who engineered the switch transaction gave no evidence as to why the switch transaction was carried out.

4)     It is not necessary for me to express a view on which of the tests in Equiticorp and Charterbridge is the proper test. Even if the Charterbridge test is the correct one, the Bank will still encounter difficulties. First, to adopt the words of the learned Judge there is an ‘evidential vacuum’ for the Court to find in the first place that the transaction was for the benefit of the group as a whole. If this point cannot be satisfied how can the Court move further and consider that it was for the benefit of Akai as well? Second and more importantly, it is not simply a case where the interest of Akai was not considered. On the contrary the switch transaction was blatantly to the disadvantage of Akai.

Is setting aside the transaction a pre-requisite?

248.  I agreed with Tang VP’s analysis of the respective speech of Lord Nicholls and Lord Scott of Foscote in Criterion Properties.

249.  The reference to ‘binding contract’ and ‘executory contract’ in that case is in the context of a discussion on whether the defence of actual or apparent authority can be relied upon by a person when the agent has carried out acts which are contrary to the commercial acts of the agent’s principal. If the defence can be established, then in the words of Lord Nicholls ‘the agreement is found to be valid and is therefore not set aside, questions of knowing receipt.... does not arise’. In this case the issue of knowing receipt arises because the Bank failed in its case on authority. As Lord Scott observed in Criterion at [31]

‘... if a person dealing with an agent knows or has reason to believe that the contract or transaction is contrary to the commercial interests of the agent’s principal, it is likely to be very difficult for the person to assert with any credibility that he believed the agent did have actual authority. Lack of such a belief would be fatal to a claim that the agent had apparent authority.’

Defence

250.  I agree with the learned Judge’s view that the defendant failed in their defence of election and change of position. In respect of the latter, I would further rely on what Nourse LJ said in Akindele at page 456 that,

‘......Moreover, if the circumstances of the receipt are such as to make it unconscionable for the recipient to retain the benefit of it, there is an obvious difficulty in saying that it is equitable for a change of position to afford him a defence.’

Dishonest Assistance/Strict liability

251.  As liability based on knowing receipt is established against the Bank, it is not necessary for me to discuss whether dishonest assistance is also established or the issue of strict liability.

Equitable Compensation

252.  The learned Judge assessed the compensation to Akai in the event that it could succeed on knowing receipt in the sum of US$20,504,295.38 which was the proceeds of sale of 50.5 million Akai Electric shares in May 2000 (Akai does not claim for the value of the 5.5 million shares that were returned to it in 1999).

253.  Two issues arising from this topic. First, did the Bank receive property for the purpose of knowing receipt? Second, is US$20,504,295.38 the correct award?

254.  On the first issue the Bank argued that the liability for knowing receipt is a liability to account for the value of assets received, the Bank did not receive any assets from Akai by the grant of the share pledge. The Bank’s interest was merely a security interest. It only received assets when it received the proceeds of enforcing its security in 2000.

255.  1)     In my view there was transfer of property within the meaning of knowing receipt. The Bank relied on Re MC Bacon Ltd [1990] BCLC 324. Millett J in considering section 238(4) of the Insolvency Act 1986 which is concerned with the depletion of a company’s assets by transaction at an undervalue held that,

‘…….By charging its assets the company appropriates them to meet the liabilities due to the secured creditor and adversely affects the rights of other creditors in the event of insolvency. But it does not deplete its assets or diminish their value. It retains the right to redeem and the right to sell or remortgage the charged assets. All it loses is the ability to apply the proceeds otherwise than in satisfaction of the secured debt. That is not some­thing capable of valuation in monetary terms and is not customarily disposed of for value.’

2)     However, the security in that case was a debenture over the company’s fixed and floating assets. I do not see this can be relevant in terms of pledge of shares which had been actually disposed of by the Bank.

3)     The Bank also relied on Bank of China (Hong Kong) Ltd. v. Kanishi (Far East) Ltd [2002] 2 HKLRD 52 where the question was whether the security interest in the shares arising from the loan was a simple pledge with no proprietary interest. Ma J (as he then was) held at page 60 that,

‘Shares are choses in action and not choses in possession. It is therefore not possible, as Mr Fung rightly accepted, to create a pledge of shares, as one would pledge either choses in possession (ie physical objects) or, certain types of choses in action, which by custom, are equivalent to the objects they represent (such as bills of lading, which represent cargoes, or bills of exchange, which are treated as cash): see Harrold v Plenty [1901] 2 Ch 314 at p.316. The depositing of share certificates or instruments of transfer cannot therefore constitute a pledge of the underlying shares. All that is pledged here are pieces of paper: see EG Tan & Cov Chase Manhattan Bank NA[1991] 3 MLJ 301 at p.307 (High Court of Singapore).’

However Ma J also held that, that the ‘pledge’ was in truth an equitable mortgage by the depositing of shares, certificates and instrument of transfer.

4) I do not need to go into the debate about the nature of depositing share certificates or instruments of transfer because in my view the pledge of the Akai Electric shares to the Bank can be treated as an equitable mortgage. The pledge included an express power of sale and appointment of the Bank as Akai’s power of attorney for the purpose of exercising the power of sale.

5) In Gold, Iacobucci J discussed the question whether the giving of a guarantee was in the nature of a trust property for the purpose of knowing receipt. He concluded that it was because in that case there was a collateral mortgage of real property as well. But he further added at [54] and [55] that

‘[54] ... Even if one takes the position that the guarantee does not constitute trust property, the giving of the guarantee confers a valuable benefit on the Bank and correspondingly encumbers the estate and detracts from its value. The benefit conferred on the Bank and the resulting loss in value suffered by the estate are sufficient, in my view, to bring the guarantee within the knowing receipt category of liability.’

[55] Furthermore, in the present action, the Bank has attempted to enforce the guarantee against Primary. If the guarantee is enforced, then the Bank will clearly receive property. For these reasons and on policy grounds, in my opinion, the disputed guarantee can be the subject of a claim in knowing receipt.’

See also Doneley v. Doneley (1998) 1 Qd R 602. In my view the same reasoning applied to the present case as well and the Bank did receive trust property for the purpose of knowing receipt.

256.  On the second issue, Akai argued that the compensation should be US$50,775,031 which was the market value of the shares when the Bank received the shares of 4 December 1998. Alternatively the compensation should be US$71,103,196 which was the historical highest value of the shares. This, however, was not pressed upon in the reply submission of Akai.

257.  1)     In my view the amount awarded by the Judge is the correct figure. The law in this area is succinctly summarised by Warren CJ of the Court of Appeal of Victoria, Australia in G.M. & A.M. Pearce & Co. Pty Ltd v. Australian Tallow Producers and Others [2005] VSCA 113 that,

‘[65] The measure of equitable compensation is that sum which would restore the plaintiff to the position he or she would have been in had the breach not occurred. Equitable compensation is not assessed with respect to the foreseeable value at the time the breach of fiduciary duty occurred. This principle is explained by McLachlin J in Canson Enterprises Ltd v Boughton & Co. in reference to an earlier case, Guerin v The Queen, where damages awarded at common law (compensation as assessed from the date of breach) from equitable compensation. With respect to equitable compensation, McLachlin J clearly stated that damages will be based on the trial date “having regard to what actually happened”, as is the case in an equitable award for restitution. Her Ladyship moreover stated that it is essential that losses made good are only those which, “on a common sense view of causation, were caused by the breach”. The dicta of McLachlin J in Canson Enterprises has been followed in Australia, and notably, by the House of Lords in Target Holdings Ltd v Redferns. In Target Holdings, Lord Browne-Wilkinson (with whom Lord Keith of Kinkel, Lord Ackner, Lord Jauncey of Tullichettle and Lord Lloyd of Berwick agreed) held that :

“ Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests. To make good a loss in fact suffered by the beneficiaries and which, using hindsight and common-sense, can be seen to have been caused by the breach”.

The court is also entitled, with the full benefit of hindsight, not to speculate against the interest of the plaintiff. ….’

2)     Further as the High Court of Australia observed in Maquire and Another v. Makaronis and Another 188 CLR 449 at 469 per Brennan CJ, Gaudron J, McHugh J and Gummow J :

‘Recovery is sought in respect of a loss. ...... It is appropriate to begin with those fiduciaries who are trustees. The obligation of a defaulting trustee is essentially one of the effecting restitution to the trust estate. In Target Holdings Ltd v Redferns (78), Lord Browne-Wilkinson said:

“ The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries’ rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate.”

His Lordship continued, with reference to decisions of Lord Eldon (when Master of the Rolls) in Caffrey v Darby, Lord Cottenham LC in Clough v Bond, Street J in Re Dawson (deceased) and Brightman LJ in Bartlett v Barclays Trust Co [Nos 1 and 2]:

“If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed...Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred.’

3)     In the present case Akai lost the shares when they were pledged on 4 December 1998, the market value of which was US$50,775,031. This was the date when the breach occurred. However, one must recognize that the losses made good are only those which ‘on a common sense view of causation, were caused by the breach’. In my view it was when the shares were disposed of in 2000 they were put beyond the reach of Akai. While one must not speculate against the interest of Akai, there really was no evidence from Akai about what use it would have on those shares. Certainly there was no indication the shares would have been disposed of in the market on 4 December 1998. In my view the compensation that should be awarded is US$20,504,295.38 together with interest and fees paid by Akai to the Bank in the sum of US$2.037 million for the use of the loan. The Judge’s order on compound interest, namely 1% over US$LIBOR from time to time prevailing, with quarterly rests was not challenged by the Bank.

Conclusion

258.  I would also allow the appeal by Akai.

259.  Although I took a different view of the case from the learned Judge, I would like to express my gratitude to him for his efforts in dealing with the complicated issues of fact and law of this mammoth case.

Hon Tang VP:

260.  Accordingly, we allow the appeal and enter judgment for the Plaintiff in the sum of US$22,541,332 together with compound interest at the rate of 1% over US Dollar LIBOR from time to time prevailing with quarterly rests from 6 December 1999. We also make an order nisi that the Plaintiff is to have the costs here and below, such costs to be taxed if not agreed.