Re LAW KIN MAN AND 38 OTHERS, INCLUDING: CHEUK WAI-MAN , SUNG TIN-BIU and TRAINWELL COMPANY LIMITED

M.P. No. 1711/1991 and
M.P. No. 3419/ 1989

H E A D N O T E

Neither the making of a restraint order nor the making of an external confiscation order will defeat the equitable title of an innocent third party in the property the subject of the order.

A Judge in declaring a right of set-off and consolidation is not creating any rights he is merely declaring an existing state of affairs.

The importance of citing all relevant authority known to Counsel cannot be over emphasised. To fail to do so renders the Court no more than a debating chamber on legal matters. The observance of the rule is not simply a matter of etiquette but of the proper administration, maintenance and development of the law.

IN THE SUPREME COURT OF HONG KONG

IN THE MATTER OF THE DRUG TRAFFICKING
(RECOVERY OF PROCEEDS)(DESIGNATED COUNTRIES
AND TERRITORIES) ORDER 1991

HIGH COURT

(MISCELLANEOUS PROCEEDINGS No. 1711/1991)

Re LAW KIN MAN AND 38 OTHERS,
INCLUDING: CHEUK WAI MAN , SUNG TIN BIU and
TRAINWELL COMPANY LIMITED

____________

IN THE MATTER OF THE DRUG TRAFFICKING
(RECOVERY OF PROCEEDS) ORDINANCE 1989

HIGH COURT

(MISCELLANEOUS PROCEEDINGS No. 3419/1989)

Re LAW KIN MAN AND 48 OTHERS,
INCLUDING: CHEUK WAI MAN , SUNG TIN BIU and
TRAINWELL COMPANY LIMITED

____________

_______________

J U D G M E N T

_______________

Rogers, J.:

1. This is an application made by Notice of Motion. It is made apparently in 2 different Miscellaneous Proceedings commenced under the Drug Trafficking (Recovery of Proceeds) Ordinance.

2. It comes at a stage where at least 9 other High Court Judges have dealt with the matter at first instance at various times. I doubt that this present application would have been made or, if it had been, would have extended as long a duration had this matter been handled by the same Judge throughout.

3. I should state at the outset that the Applicant has applied to amend the Notice of Motion and has not moved paragraph 3 of the Notice of Motion. As I indicated during the course of the hearing, there is hardly any need to amend a Notice of Motion or for that matter a Summons. A new one can be served and provided that is done at least 2 clear days before the hearing then the only question is as to costs and whether the Respondent has had sufficient time to prepare.

4. In this Application the Attorney-General seeks a number of declarations. The first is that by reason of the Order of Mr. Justice Gall dated the 1st November, by which he registered 2 external confiscation orders the ownership of and entitlement to deposits in the Bank of Credit and Commerce (Hong Kong) Limited (In Liquidation) in accounts in the names Mr. Cheuk Wai-Man, Mr. Sung Tin-Biu which were prior to the 1st November 1991 beneficially owned by Law Kin Man, reposed in the Hong Kong Government. In other words that is, a declaration that the title to the property in the accounts was on the 1st November 1991 forfeit to the Hong Kong Government.

5. The Second Declaration sought is that those deposits were since the 19th June 1991 held under a statutory trust by virtue of Section 17(1) of the Drug Trafficking (Recovery of Proceeds) (Designated Countries and Territories) Order.

6. The third Declaration sought is that no rights of set-off or security which creditors of Progress City Company Ltd, Trainwell Company Limited might have against assets in the name of Mr. Cheuk Wai-Man and Mr. Sung Tin-Biu which had not been exercised before the 1st November 1991 could be exercised after that date.

History of the Application

7. These proceedings commenced with a Notice of Originating Motion in H.C.M.P. 3419 of 1989 upon which Sears J. made a restraint Order under Section 10 of the Drug Trafficking (Recovery of Proceeds) Ordinance on the 20th December 1989. At that stage none of the present respondents were parties to the proceedings.

8. The present respondents first became involved when Sears J. made an Order on the 29th May 1990, again under Section 10 of the Drug Trafficking (Recovery of Proceeds) Ordinance. That Order took effect, inter alia, against the 17th, 18th and 19th Respondents named in the title to this application. In so far as it is relevant to this application, it prevented them from disposing, charging or in any way dealing in their interests in various named accounts with the Bank of Credit and Commerce (Hong Kong) Ltd., the liquidator of which has been made a party to this application. The bank accounts were in the names of both the named Respondents and a company by the name Progress City Co. Ltd. which was wrongly named in the order as a firm, but nothing turns on that.

9. In July of that year the Bank of Credit and Commerce (Hong Kong) Ltd. applied by summons for variation of that Order. Such is the speed of things the date for the hearing was set originally in December but in point of fact the matter came to be heard over 3 days in the following June. The variation sought was to allow the Bank of Credit and Commerce (Hong Kong) Ltd. to be at liberty to apply amounts held by them in 5 of the accounts against the outstandings of 2 companies and a firm (in point of fact the 17th Respondent under another name) as being security for the outstandings and in respect of 3 of the accounts by way of set-off and consolidation.

10. Prior to the hearing taking place, Justice Glasser sitting in the Eastern District Court of New York made an Order on the 11th June 1991 confiscating the funds contained in the accounts in question and, it might be added, a great deal more.

11. On the 19th June 1991 the Attorney-General obtained an ex parte restraint order under Section 10 of the Drug Trafficking (Recovery of Proceeds) (Designated Countries and Territories) Order. That Order again covered the accounts in question.

12. On the 5th July 1991 Barnett J. delivered his reserved Decision in the application by Bank of Credit and Commerce (Hong Kong) Ltd. Before coming to that I should note that Bank of Credit and Commerce (Hong Kong) Ltd. were not Respondents in the Miscellaneous Proceedings. Although in certain aspects that application might be considered interlocutory, it was a hearing which decided the rights of the parties. If the Bank of Credit and Commerce (Hong Kong) Ltd. could consolidate accounts or use the funds to offset what was owing to it there would an extinguishment of the credit balances to that extent and that would be the end of the matter.

13. This latter factor was indeed appreciated at the time because at page 7 of his Decision Barnett J. referred to the argument before him as to the parallels between restraint orders and Mareva injunctions and said:

"I pointed out that I was in effect conducting a trial and would be making a final order because, subject only to appeal, neither the Crown nor BCC would be able to reopen the matter. Accordingly questions of prejudice and balance did not appear to me to be relevant. Both sides seem content to adopt this view. Certainly it was the basis on which Otton J. appears to have proceeded."

14. I should mention that a key figure in the Bank of Credit and Commerce (Hong Kong) Ltd.'s case was a Mr. Wong who had been the manager of the relevant branch of the Bank. Barnett J. held that he acted so much on a frolic of his own that his knowledge of the wrongful source of the funds in question could not be attributed to the Bank of Credit and Commerce (Hong Kong) Ltd. Barnett J. held that the Bank was entitled to the relief on the application. He held that the Security Over Deposit documents gave them that as did their lien and right of combination in respect of 3 of the accounts. The Order made reflected the relief sought in the summons.

15. Although Mr. Wong did not give oral evidence at the hearing he was present under a subpoena and, as recorded in the Judge's notes of the proceedings, the only reason he did not give evidence is that neither side wished to cross-examine him. His affidavit evidence therefore stood as his evidence.

16. Taking matters out of chronological order I should mention that attempts were made to take the matter on appeal. These were unsuccessful in the ultimate analysis because the appeal was out of time. Nevertheless Kempster J.A. in refusing to extend the time had this to say:

"In the premises I would dismiss this application to extend time for serving a Notice of Appeal on the same grounds as those relied upon by Nazareth JA; comforted by the thought that none of the monies released from restraint will become available to those alleged to have acquired them by trafficking in dangerous drugs and also by the attitude of the legislature as reflected in s. 17(2) of the Ordinance which reads: ..."

17. Reference to S 17(2) of the Ordinance was by then apposite because on the 17th July 1991 the initial steps were taken which eventually led to the winding up of Bank of Credit and Commerce (Hong Kong) Ltd.

18. On the 1st November 1991 the order of Justice Glasser together with another was registered as an external confiscation Order.

19. On the 18th November 1991 the Bank of Credit and Commerce (Hong Kong) Ltd (in Liquidation) issued a summons in the 1991 proceedings to vary or discharge the registration of the 2 external confiscation orders in a similar manner to the manner in which the domestic restraint orders had been varied by Barnett J. It is perhaps noteworthy that the same account numbers were identified in that summons as in the summons before and Order of Barnett J. That summons was dismissed by Gall J. on the 21st November because it was premature. At the hearing, counsel on behalf of the Attorney-General undertook not to enforce the external confiscation order against the relevant accounts pending the outcome of the appeal against Barnett J.'s Order.

20. However on the 19th February 1992 the Bank in Liquidation again issued a summons in the 1991 proceedings seeking a similar variation to that in the 1991 proceedings, but this time it referred to 3 accounts, 2 of which were held in the names of the 18th Respondent and the other in the 17th Respondent. None of these accounts had been the subject of the application before or the Decision of Barnett J. I also note the applicants only relied upon the security and not upon consolidation and set-off, for the reason, quite obviously, that the outstandings were in accounts in different names to the credit balances which were sought to be used to set them off.

21. The Court of Appeal refused leave to appeal out of time against Barnett J.'s Order on the 15th October 1992. There then followed correspondence between the solicitors for the liquidator and the Attorney-General. The solicitors proposed an order in the 1991 proceedings (i.e. the external confiscation order proceedings) which would cover all the accounts covered by Barnett J.'s Order and the 3 accounts referred to in the January 1992 summons which was still outstanding. The Attorney-General's Chambers replied that in principle the order was agreeable subject to a query in respect of one of the accounts. That was apparently clarified because on the 9th December 1992 Crown Counsel endorsed consent on behalf of the Attorney-General to an order in the 1991 Action effectively combining the Order of Barnett J. with that sought in the January summons.

22. On the 15th December 1992, Gall J. refused to make a consent order without the consent of all the personal and corporate respondents. That consent could not be readily obtained and so a summons was taken out on the 21st January 1993, repeating the relief of the consent summons. That was supported by an affidavit from the liquidator's solicitor.

23. On 26th February 1993 Deputy Judge Daniel granted that application . Although the order made by the Deputy Judge was not a consent order in the technical sense it was one that was made without opposition as a result of prior agreement between the Attorney-General and the liquidator.

24. In the meantime the Special Managers of the Bank in Liquidation had confirmed, in response to an Order which had been obtained, that the right of set-off had not been exercised in respect of the 5 accounts the subject of Barnett J.'s decision and order.

The Attorney-General's Application

25. The Attorney-General today seeks relief on the basis that by reason of the restraint Order in the external proceedings and by reason of the external confiscation order the Bank of Credit and Commerce (Hong Kong) Ltd. (in Liquidation) and now, of course, the liquidator is no longer entitled to any interest in or right to use the monies held in the named accounts whether by way of set-off or at all. There are 2 answers to that. One short and one rather longer.

The Short Answer

26. The short answer is that given the history of this matter concluding with the order of Deputy Judge Daniell that matter cannot now be open to the Attorney-General. The principle that there must be an end to litigation dictates that the Attorney-General must now be barred for taking these points which should have been taken at the latest at the hearing before Deputy Judge Daniell. Instead of contesting the matter, the Attorney-General by at the very best not opposing, if not actually consenting, has put it out of his power to reopen the matter now.

The Long Answer

27. The longer answer is that the liquidator's rights as found by Barnett J. are still extant and are not overridden as argued by Mr. Barlow. In the circumstances it seems to me to be necessary to examine shortly the provisions of the Drug Trafficking (Recovery of Proceeds) Ordinance in so far as it relates to external orders.

28. Section 28 of the Ordinance provides that the Governor may by Order in Council with the approval of the Legislative Council direct that the Ordinance shall apply to a designated country subject to modifications. The Order in Council was made and Schedule 1 sets out the designated countries and appropriate authorities. Schedule 2 to the Order sets out the modifications in the Ordinance in respect of external confiscation orders and related proceedings in relation to designated countries. Schedule 3 of the Order sets out the effect of the Ordinance in such circumstances. For convenience, unless the context otherwise makes it clear when I refer in this Decision to Schedule 3 of the Drug Trafficking (Recovery of Proceeds) (Designated Countries and Territories) Order I will refer to it as the "Order".

29. I observe first of all that this Order was enacted to give effect to a treaty signed by the Hong Kong Government on the 23rd November 1990. I was shown a copy of the Treaty. I need only refer to Article II which provides that the Parties shall grant assistance in freezing the proceeds of drug trafficking. Clause 3 provides that a Party in control of forfeited or confiscated proceeds shall dispose of them according to its laws. It goes on that either Party may transfer such assets to the other Party to the extent permitted by their respective laws upon such terms as may be agreed. I mention that because it seems to me that as far as the Treaty is concerned there is no requirement that the proceeds shall be remitted to the Party in whose jurisdiction a confiscation Order is made. Indeed it seems to be envisaged by the Treaty that the laws of the other Party may not provide for that. In such case the other Party must merely deal with the assets according to its own laws. On that basis, therefore, one observes a distinction between the schemes allowed for under the Treaty and the usual accepted provisions for reciprocal enforcement of Judgements in civil proceedings.

30. The Drug Trafficking (Recovery of Proceeds) (Designated Countries and Territories) Order provides in Section 10 for the issuance of a restraint order. Nothing turns on the question of what property may be included in a restraint order.

31. When a restraint order is made the Court may appoint a receiver to take possession of and manage the relevant property. Whilst Section 10(7)(b) might have a wide import it is the clear intent of this section to safeguard the property and have it retained i.e. the appointment of a receiver under Section 10 is for the preservation as opposed to the realisation of assets.

32. In contrast Section 12 of the Order deals with the position where an external confiscation order has been registered. It provides that when the order has been registered the Court may also appoint a receiver. In those circumstances however, the Court may empower the receiver to realise any realisable property. There are 2 subsections which are of interest. Section 12(6) provides that a person holding an interest in realisable property may be ordered to pay an amount in respect of any beneficial interest held by the Defendant and thereafter the Court may transfer any interest. This section clearly acknowledges the possibility of the existence of third party interests in property held by the Defendant and the recognition of those interests. Far from a third party losing an interest such persons' interests appear to be protected. This is perhaps emphasised by the other sub-section to which I was referring namely Section 12(8). That requires reasonable opportunity to be given to persons holding an interest in property to make representations before the Court makes an order empowering realisation or the making of an order under Section 12(6).

33. Section 13 of the Order then provides for how realised assets are to be dealt with. In simple terms after the payment of costs and expenses the sums realised were until the amendments last year treated as a fine, in other words they would fall to general revenue. Now they are still treated as a fine, but the foreign country in whose court the original order was made, may apply to the Attorney-General for a payment out to it of some or all of the proceeds.

34. There is thus no single provision which divests a Defendant of property in the assets the subject of an external confiscation order, rather the effect of the sections is that the registration of the order triggers the appointment of a receiver, followed by realisation of assets which are then dealt with according to the section. It is thus that the external confiscation order operates to divest a drug trafficker of property which is vested in him. The effect is noted in a number of cases such as A-G v Lo Chak Man Joseph [1993] 1 HKC 548 at 551G and Cheang Kwok Sam v Chui Kin Wing and Attorney General [1995] 1 HKC 636.

35. This latter case did not come to my attention until after the initial hearing was completed. It is of no small interest in this case. The majority of the Court of Appeal Nazareth V.P. and Bokhary J.A. reversed the finding of fact of the judge at first instance and found that the Plaintiff had an equitable charge over property which later became subject to an external confiscation order. On that basis the Court said :

"Therefore such rights as the Attorney General might have secured over the property would have been subject to the prior equitable charge."

36. The remaining judge, Liu J.A., was not prepared to hold that there was an equitable charge. He said that he expressed no concluded view as to the effect of the restraint order or what priority the confiscation order would have over general creditors.

37. In his judgment in July 1991 in the 1989 proceedings Barnett J. had held that the Bank had enforceable rights in respect of the "Sung" and "Cheuk" accounts by virtue of what were called the security over deposit documents. Those accounts were 310-3150-806 and 310-3481-817 and 310-3150-884. He also held that in respect of 310-3150-884, 310-2250-009 and 310-2250-474 the Bank had rights of set-off and consolidation. The 3 accounts in respect of which he held there were enforceable rights of security are 3 of the accounts the subject of the first declaration sought. I see no discernible difference between those accounts and the other accounts mentioned in paragraph 1 of the Notice of Motion and no submissions were made that there was any distinction to be drawn.

38. In my view, there is issue estoppel between the parties as a result of Barnett J.'s decision and Order. If the Bank has a right of security over the property then that is in the nature of an equitable interest which existed prior to the making of any restraint order or external confiscation order. That equitable interest which the Bank held cannot it seems to me be defeated by those orders. The external confiscation order only deprives a Defendant of such right of property as he has. There is nothing in the Ordinance which sanctions a third party being deprived of his interest. As I have indicated there are indeed provisions in the Ordinance which indicate that such third party rights are preserved. Although not explicit in the terms of the order sought in paragraph 1 of the Notice of Motion it is the clear intent of that part of the Notice of Motion that the Court should declare that the Hong Kong Government had acquired the "title, ownership and entitlement to the deposits" to the exclusion of any rights of the Bank and thus the Liquidator.

39. Furthermore this is a matter which was either decided by the Order of Deputy Judge Daniell or is a matter which should have been raised before him and therefore is now not open to the Applicant to take.

40. I therefore decline to make an order in terms of paragraph 1 of the Notice of Motion.

41. The same points apply, in my view, equally to paragraph 1A of the amended Notice of Motion. Although Section 17(1) says that where realisable property is held by a company which then goes into liquidation the functions of the liquidator shall not be exercisable in relation to property subject to the restraint, that again must be subject to rights of the liquidator in respect of equitable interests which the company had. Indeed that is confirmed by the provisions of Section 17(2) to which Kempster J.A. specifically referred in this context in the passage which I have quoted.

The final order sought is that under paragraph 2 of the Notice of Motion. In effect what that seeks is a declaration that the liquidator is not entitled to exercise any rights of set-off which were not exercised prior to the date of the registration of the external confiscation order. For the reasons I have indicated I do not see that the registration of the external confiscation order can deprive a party of an equitable interest which he has. Not only is there clear authority to that effect but as I have pointed out there are specific statutory provisions directed to preserving the rights of those who have equitable interests.

42. After the case of Cheang Kwok Sam v Chui Kin Wing and Attorney General came to my attention, I caused it to be drawn to the attention of Counsel and asked for further submissions in the light of it. Mr. Stone Q.C., Counsel for the Liquidator, had like myself not previously been aware of it, but Mr. Barlow had been Counsel in the Cheang Kwok Sam case. In a letter to the Court passed up at the resumed hearing it was stated that the case had been referred to when it was stated that "the Court of Appeal had recently accepted that upon registration of an external confiscation order the drug trafficker's entire estate was forfeited." 2 points are to be noted here. In the first place the case was not identified nor was a copy provided. In the second place the passage in the judgement which I have quoted above was neither alluded to nor cited.

43. Counsel sought to distinguish the case on the following basis and in order that I did not misconstrue his argument I took down what he said verbatim and checked it with him. He said :

"The right arose by variation of the statutory Mareva Injunction. The interest was conferred by Barnett J.

We say there was no pre-existing right of set-off against the trafficker. Once the trafficker's title to the money was established, Mr Faulkener, before Mr Justice Barnett, submitted that Law Kin Man was estopped from challenging the Bank's asserted right of set off against the nominees. Pre-liquidation, that argument was upheld and the trafficker was estopped. As a result of that judgment the bank were entitled to set off and were at liberty to set-off. In these circumstances the failure to do so before forfeiture resulted in the opportunity being extinguished.

This right only arose after Mr. Justice Barnett's order and not before. Mr Justice Barnett was creating a right not declaring how one works."

44. It seems to me that the fundamental error in the argument is quite simply that Barnett J. created nothing at all. All he did was decide that the Bank had a right. That right existed whether Barnett J. decided the case or not. The Judge has no power to create rights in property. The argument on behalf of the Attorney General if taken to its logical conclusion would lead to the position that the Court could take away the Crown's right to property and give the property that belonged to the Crown to some third party. The reality is that the Bank was always entitled to set-off and all Barnett J. did was to say so.

45. Be that as it may Counsel is always entitled to distinguish previous authorities if he can. In this case looking back over the argument I can see how Mr. Barlow was skilfully trying to argue around the effect of this decision without explaining why. The result was an argument that was difficult to follow and might, if it had been accepted, not only have caused a wrong decision but considerable disruption.

46. The codes of conduct of the Bar and the Law Society that require an advocate to draw to the attention of the Court any relevant decision on a point of law or any legislative provision of which he is aware whether it be for or against his client is a matter of the utmost importance. It is not simply a matter of etiquette in the sense of behaving properly. Nor is it a matter simply of honour and fair play. It is matter of the proper administration, maintenance and development of the law. If Counsel wishes to take a "fine" point then it is all the more important to show the Court where the "Scylla" and "Charybdis" lie. The proper observance of this crucial rule not only makes it very much easier for the Court to understand the point being made, which is thus more likely to lead to success, but also makes for an orderly development of the law and certainty of decision. As Lord Birkenhead L.C. remarked in Glebe Sugar Refining Co. v Trustees of the Port and Harbours of Greenock [1921] W.N. 85 when he was dealing with this duty of Counsel :

"A similar matter arose in this House some years ago, and it was pointed out by the then presiding judge that the withholding from their Lordships of any authority which might throw light upon the matters under debate was really to obtain a decision from their Lordships in the absence of the material and information which a properly informed decision required; it was in effect to convert this House into a debating assembly on legal matters, and to obtain a decision founded upon imperfect knowledge. The extreme impropriety of such a course could not be made too plain."

47. In the premises I refuse relief on paragraphs 1, 1A and 2 of the Notice of Motion and make an Order nisi that the Bank of Credit and Commerce (Hong Kong) Limited (In Liquidation) shall have its costs.

(Anthony G. Rogers)

48. Judge of the High Court