ITP SYSTEMS N V v. ALAN F REICHENBACH AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. Before me for my ruling are two summonses issued on behalf of the plaintiff in this action seeking orders for discovery. The background to the dispute as presented so far is in essence as follows.

2. Mr Jarvis is Chairman of the Plaintiff company, ITP, incorporated in the Netherlands Antilles. ITP has been involved in a project on behalf of the Philippine Government for the installation of specialist radar equipment at various locations in the Philippines. That project is referred to as the CRP Project. For the purposes of funding the CRP project, ITP caused the company to be incorporated in Hong Kong and this company is referred to as Interpac. Although it might have been thought the roles would be reversed, it was apparently nevertheless the case, that Interpac was the main contractor and ITP was the sub-contractor with the CRP project.

3. There now enters upon the scene Mr Reinchenbach, the 1st defendant. Like ITP he also has incorporated a Hong Kong company, North Channel Enterprises Ltd., which I shall call North Channel, the 2nd defendant. Mr Reichenbach, it appears, was Mr Jarvis' key man at least for the disbursements from time to time of funds reaching the Interpac Account. Funds reached that Interpac account as and when funds were needed to be disbursed and as and when payment from the Philippine Government for the CRP project were received. Neither Mr Reichenbach nor North Channel were the direct receptacle for funds in either direction. Interpac was the direct receptacle. Not only was Mr Reichenbach not the direct receptacle of what may loosely be termed CRP funds but the signatory powers for Interpac were held in the hands of a Mr Cardiff, a personal appointee of Mr Jarvis and a Mr Suarez directly representing Interpac's interests.

4. Mr Reichenbach, it was noted above, had from time to time responsibility for disbursing the CRP funds held by Interpac. He did so by virtue of his employment by Mr Jarvis' company ITP or by being the agent of Mr Jarvis or, as set out in Mr Reichenbach's defence, as a consultant to another of Mr Jarvis' firms referred to as Airspace. It matters not in what capacity Mr Reichenbach disbursed CRP funds, because nothing in my view turned on that in these applications. In so far as he disbursed funds he did so for and on behalf of Mr Jarvis in one capacity or another.

5. As originally pleaded there were two specific instances when, it is alleged, CRP funds entrusted to Mr Reichenbach were not fully distributed for the benefit of ITP but, it is alleged, were partially retained by Mr Reichenbach for his own benefit and were so retained either by him personally or by his company North Channel.

6. Brief details of those alleged unauthorized retentions are as follows. After the sum of US$87,200 was paid out from this special CRP account of Interpac in August 1984 US$21,000 was allegedly so retained after Mr Reichenbach had caused the two Interpac signatories Mr Cardiff and Mr Suarez to disburse the full sum of US$87,200. In November 1984 it is alleged Mr Reichenbach caused the same Interpac signatories to disburse US$373,000 out of CRP funds and, allegedly, wrongly retained US$176,378 of such disbursement for his own benefit.

7. To these two specific unauthorized retentions was added another allegedly unauthorized retention amounting to US$48,836 at a date unknown. I will have more to say about this allegedly unauthorized retention later but for the present suffice if to say that such details as were pleaded in relation to this matter first appeared in a new paragraph 19 of an amended Statement of Claim, amended pursuant to rules of Supreme Court Order 20, rule 3 on the 27th July 1985, that is to say on the last court day before the hearing on these applications was due to commence.

8. In addition to these two specific occasions of unauthorized retentions, or three if the later amended sum is added, there was a general allegation by ITP that Mr Reichenbach stood in a fiduciary relationship to ITP. Added to that was the suggestion that, having retained in an unauthorized manner sums totalling US$197,378, or US$48,836 more if the late amended sum is to be included, there was a likelihood that some further and unspecific sums might also have been retained by Mr Reichenbach without ITP authority.

9. I say that, it was a suggestion that these funds were retained, because in the unamended Statement of Claim it is hard to see which paragraph specifically makes this allegation. In the amended Statement of Claim a new paragraph 18 has been added where this allegation is given some body for the first time.

10. I now come to the two summonses for discovery. First, I should add to the background picture the fact that Mr Reichenbach's company North Channel, the 2nd defendant, maintained a bank account with the Bank of Nova Scotia in Hong Kong. The first summons in order of time is one directed to Bank of Nova Scotia seeking to order them to produce a copy of the bank's statement of North Channel. Originally this was worded in such a way as to seek to order the Bank to produce such a statement from the opening of the account of North Channel up to the time of the application. In the course of submissions before me Mr Graham, on behalf of ITP, confined the order he was seeking to the opening of north Channel account from October 1978 or later, if not opened until later, upto the end of November 1984. Mr Graham has abandoned some other orders for discovery which ITP was originally seeking to be served on the bank. Still later in the course of hearing before me, Mr Graham further confined the period, if it had to be so confined, to the period when the US$48,836 allegedly disappeared, that is to say, February 1982, or if that was not going to be allowed as a starting point, from August 1984 when the US$21,000 was allegedly wrongly retained.

11. The second summons is one directed to Mr Reichenbach to make disclosure of certain particulars in relation to a company called Ka-Ka Trading Company Ltd., which I shall call Ka-Ka. Although originally framed differently, the disclosures sought before me at the hearing were three-fold. First, Mr Reichenbach should give details of any interest or beneficial ownership he may have in Ka-Ka, secondly, he should give particulars sufficient to identify the bank accounts or deposits held on behalf of Ka-Ka and thirdly, he should supply details of any other assets owned beneficially or otherwise by Ka-Ka.

12. In addition to these two summonses, I was also faced with two further summonses issued on behalf of the two defendants both issued on the last court date before the hearing, 27th July 1985. One summons was merely a time abridgement summons in order to bring the other summons on for hearing. The other summons was to strike out the amended Statement of Claim.

13. I should add that by the 27th of July the following pleadings had in this order been filed. Statement of Claim dated 11th of April 1985; Defence of 1st and 2nd defendants and counterclaim of 1st defendant dated 28th May 1985; Defence to counterclaim and set off dated 25th July 1985; and the amended Statement of Claim dated 27th July 1985.

14. Mr Reichenbach's Defence to this, not of course to the amended Statement of Claim, is to plead first of all that from March 1984 onwards he was neither an employee nor agent of ITP but was a consultant to another of Mr Jarvis' companies referred to as Airspace. Secondly, that the whole of the US$87,200 was properly disbursed and he itemizes the actual disbursements made. Thirdly that the US$373,000 was not even enough to satisfy the legitimate requirements of the plaintiff's obligations to him. Those legitimate requirements as itemized were all in respect of moneys allegedly owed to Mr Reichenbach by way of such matters as salary, travel expenses, commission and a stock option purchase agreement plus interest. By a Defence to counterclaim the plaintiff denies Mr Reichenbach's entitlement to all of those items except for the stock option purchase agreement plus the interest on it.

15. Although it might have appeared logical for me first to hear the striking-out summons which, depending on the outcome, might have obviated the need to hear the two summonses for discovery, I was initially not at all ready to accede to what seemed like a last minute manoeuvre by the defendants so that, by possibly taking up all the court time set down for the discovery summonses, thereby to avoid any hearing on discovery. I was more certain that such might be the motive considering the fact that the 1st and 2nd defendants had already pleaded to the original Statement of Claim without complaint over two months ago. On hearing Mr Allman-Brown however, who was urging me to hear his summonses in priority to those on discovery, I came to realise that his real complaint centred on the last minute amendments to the Statement of Claim introduced for the first time on the 27th of July. I could see no reason why the arguments he was opening on that front could not equally well be advanced in opposition to the summonses on discovery. I accordingly ruled that his two summonses would not have priority and would only be hears by me at all if there were sufficient time after the conclusion of the hearing on the summonses for discovery.

16. In connection with the striking-out summons I would note in passing that being unsupported by any affidavit it would have to be argued on the sole basis of there being no reasonable course of action disclosed by the plaintiff's pleading. If such an attack were to be advanced against the whole of the amended Statement of Claim, for my part I cannot see how such a submission could even be allowed to be started without itself becoming an abuse of the process of court. Aliter, perhaps, if selected parts of the amended Statement of Claim were to be attacked.

17. Before proceeding to the arguments that were addressed to me by both parties on the two summonses for discovery, I must observe that there are some oddities with regard to the steps taken in the action so far. Some steps have been instituted which normally, one would have thought, would not have been taken by this stage, whilst other steps have not been pursued which one would have thought undoubtedly would have been pursued. In the first category of course come the two summonses for discovery, initiated way back in May before even a Defence had been served. In the latter category must be noted the fact that the plaintiff obtained an ex parte injunction as far back as 11th April 1985, the date of the writ, and there has still not been an inter-party hearing on that injunction.

18. After Mr Graham had opened to me on the facts I asked him to address me on three aspects. In no special order of priority, I asked him to address me on :

I hope I do no disservice to Mr Graham if I re-capitulate his submission on these points in the following summary form.

19. On point a), i.e. such reasons as he could advance for the widness of the applications, he took as his starting point the difference between a fishing expedition and a proper line of enquiry and cited the following case to illustrate his point. The case he cited was Williams & Ors. v. Summerfield (1972) 2 All E.R. 1334. The Williams Case was a criminal appeal by way of case stated after a Bench of Magistrates had ordered inspection of Banker's books under section 7 of the Bankers Books Evidence Act 1877, this section 7 corresponds to section 21(1) of the Evidence Ordinance - Cap. 8. The Magistrate's order was upheld on appeal despite the possibility of self incrimination but Widgery, C.J/ noted that the Courts have set their face against section 7 being used as a kind of searching enquiry or fishing expedition beyond the ordinary rules of discovery. Mr Graham accepted that he, too, must satisfy the Court that he was not on such a fishing expedition. He claimed that as there were at least two cited instances of what he termed misappropriation, and three if the amended paragraph 19 were to be included, and suspicions of further misappropriations, it was no mere fishing expedition to try to turn up such other instances as might become evident from inspection of the bank statements.

20. On b), i.e. such reasons as he could advance for the timing of the applications, he cited the case of A. and Anor. v. C. and Ors. [1980] 2 AER 347. From the headnote to this decision of Robert Goff, J. he drew my attention to those parts of the headnote which are numbered (2) and (3). Recognizing that in this case, The A v. C Case, was one where the order for tracing property arose after a Mareva Injunction and that the instant case was also one involving a Mareva Injunction, he hastened to disclaim any necessity to rely on a Mareva case to support the kind of discovery order he was seeking on the Nova Scotia Bank, but drew inspiration from this case by saying that the Courts have over the last few years been helpful to litigants and have broadened the scope for discovery in situations where the plaintiff has lost money but does not necessarily know where or how he has lost it.

21. On c), the area of oppressiveness, he agreed that there was a possibility of oppressive requests following on a sighting of the relevant bank statements but expressed the view that, if requests were made that were oppressive, it would be a matter for the Court to put a stop to any such oppressive moves when they were made. That would be the moment for the Court to decide whether the actions of the plaintiff were oppressive or not. It was too speculative, he argued, for the Court to withhold making such an order for discovery now simply because the end result might be oppressive. He advanced one further point in his favour along these lines. There was nothing to prevent the plaintiff at trial from issuing a subpoena to the bank to produce these statements and the cross-examination of the first defendant on the production of such a document would start from that point. Why, he says, should not the plaintiff's legitimate enquiry be allowed to start now.

22. On the Ka-Ka summons, Mr Graham argued that it was a disclosure already in effect ordered by paragraph 3(c) of Clough, J.'s Order of 11th April 1985. On being pressed by me as to how the words in that sub-paragraph "identity and location" could give rise to the discovery now sought, he argued that, merely giving the name and registered address of Ka-Ka would not be compliance because the plaintiff would need to know the assetsof Ka-Ka as well.

23. Mr Allman-Brown for Mr Reichenbach and North Channel characterised the Nova Scotia Bank summons as a fishing expedition unmerited and unfounded.

24. He enlarged on that by drawing attention to the fact that the Statement of Claim, at least in its unamended form, made reference to two sums and two sums only totalling US$197,378. In respect of that total, he observed, the plaintiff has already secured a Mareva injunction over North Channel's  account with the Nova Scotia Bank and from affidavit evidence, it is known that the said account is in credit to the sum of US$100 more than the US$197,378 claimed. Thus, he says there is no need to trace these sums or any proceeds to which they might have been applied because there they are, locked in a known account and one which he assured the Court is in fact an interest bearing account.

25. So far as the US$48,836 sum was concerned, Mr Allman-Brown drew attention to the amended paragraph 19 of the Statement of Claim which, apart from the bare allegation that Mr Reichenhach and/or  North Channel appropriated this sum shows clearly that the last heard of this sum, so far as the plaintiff was concerned, was that it was in a reserve account with the Nova Scotia Bank in Interpac's name. How then, it is asked, could such a sum be disbursed without the authority of Mr Jarvis’ two choosen signatories? As further evidence that the mystery of the disposal of these funds was something which Mr Jarvis or his advisors are alone in a position to unravel, he drew my attention to what might be referred to as the initial revelation of these missing funds. This is contained, so he says, in the copy of a telex exhibited as "RAM-15" and exhibited to an affidavit by the solicitor in charge of the case for ITP.

26. Paragraphs 3 and 4 of that telex showed that the sum in question was apparently put into a special reserve account of the Nova Scotia Bank for payment out to a named entity but was never apparently received by the intended entity. No mention is made in that telex of who had control of that special reserve account but the telex goes on -

"Inspection of the North Channel Bank Account (details of which we understand are already in your possession) should provide prima facie evidence of diversion of funds if that sum was paid into that account."

 

The words in brackets are premature because that knowledge would only become available to ITP on the successful outcome of this summons. This telex shows, so he argued, how unmerited and how unfounded was the summons when looked at if only for discovering the possible whereabouts of the missing US$48,836.

27. For handling the type of tracing action sought by Mr Jarvis for ITP, precedent was cited from the case of the PCW Underwriting Agencies Ltd. v. Dixon & Anor. [1983] BCLC 105. This is a judgment of Lloyd, J. For the most part it is dealing with an application for variation of a Mareva injunction to enable the defendant Dixon to meet his normal living expenses. The claim in that case centered on the alleged breach of fiduciary duty by the defendant Dixon, a director and major shareholder of the plaintiff company in making secret profits on reinsurance underwriting allegedly placed with reinsurers in which Dixon had beneficial interests.

28. The original injunction included an order, paragraph 3 thereof, ordering Dixon to disclose the identity and whereabouts of all his assets wherever located representing or derived from the reinsurance premiums. Lloyd, J. found this far too wide an injunction and he had this to say -

"It seems to me obvious in those circumstances that it is and always was for the plaintiff to start the tracing process by identifying the relevant reinsurance premiums which it says have been misappropriated."

 

So here it is argued ITP must identify with precision what amounts have allegedly gone astray and not look to the defendant by way of disclosing details of a bank account to help ITP to prepare its claim or discover what its claim truly is.

29. The authority for me to take action sought on the Nova Scotia Dank summons springs from section 21(1) of the Evidence Ordinance (Cap. 8). It is a discretionary power and must be exercised as I see it in accordance with the following principles and I have listed four.

30. Looking at the Statement of Claim, and I am for these purposes looking at it in its amended form, it is clear that Mr Reichenbach had no power to order any disbursement from the Interpac account. Paragraphs 8 and 12 are extremely vague as to how it is alleged Mr Reichenbach persuaded Mr Jarvis' two appointed signatories to disburse the funds in question.

31. So far as amended paragraph 19 is concerned, there is even less detail as to how Mr Reichenbach could have disbursed funds from an unidentified reserve account, Who, one must ask, were the signatories for that account? The difficulties which Mr Jarvis faces in finding out what happened to that sum is clearly shown by the copy talex "RAM-15" to which reference has already been made. This is surely a classic example of what Mr Justice Lloyd had to say in The PCW Underwriting Case, at page 113 -

"Counsel for the plaintiff submitted that the ex-parte injunction should be maintained at least until the defendant has disclosed what part of his assets can be traced to the original reinsurance premiums so that the trust fund can then be limited and identified. I can see no merit at all in that submission. The tracing of assets back to the reinsurance premiums will be one of the main issues to be investigated at the trial."

 

And at page 114 he cites an argument addressed to him and rejects it. The argument was that the defendant ought to be in a good position to help the plaintiff prepare its claim or discover what its plaim truly is. And he goes on after rejecting that by saying -

"The first step of the tracing process is to identify the reinsurance premiums in question."

32. In this case, ITP would seem to be seeking assistance in building up its own case in order to find out what its own claim truly is by looking into the account of North Channel, the 2nd defendant. In fact I echo a passage from Mayo, J.'s Judgment in High Court Action 10014/5 (unreported). At page 15 of that case Fong Mine v. Yat Ming Investment Co. Ltd. & Anor. (1983) HCA 10014/83, a passage from Kerr, L.J. is cited from the Minemir Maritime Corporation v. Trave Case which runs as follows :-

"A defendant has no obligation to disclose their financial affairs simply to answer a challenge from the plaintiffs which is unsupported by solid evidence.''

33. Here, even expressed at its highest with the amended paragraph 18, we are considering a situation where Mr Jarvis thinks or suspects other unspecified sums might have gone astray but cannot say for sure when or how much but he wants the defendant company North Channel to bare its bank account in order to let him find out whether or not his suspicions are well founded. As I see the plaintiff's case in simplified form it is really at present no more than this.

34. US$21,000 out of US$87,200 put into Mr Reichenbach's hands in August 1984 has gone astray. Mr Reichenbach in his defence alleges that this sum was disbursed as to US$1,000 for travel expenses and US$20,000 for repayment of employee loan in lieu of bonus. At trial the issue as to whether those were or could have been authorised disbursements will be fully ventilated. Additionally US$176,378 was appropriated by Reichenbach in November 1984. In his defence, Reichenbach said this was wholly accounted for by moneys due to him. By the plaintiff's defence to counterclaim, his entitlement to US$209,750 is disputed. These disputed sums turn on Mr Reichenbach saying he was entitled to salary, travel expenses and commission and Mr Jarvis saying he was not so entitled. All of these moneys, and a hundred dollars more, is now by virtue of a Mareva injunction locked up in a known and interest-bearing account. In my view the plaintiff's present endeavours to trace further unspecified sums is precisely what Lloyd, J. set himself against in The PCW Case.

35. It may be that further amendments to the Statement of Claim, if allowed, would justify the kind of order now sought. But as the plaintiff's claim stands at present, in my view, he is not entitled to the order sought on the Nova Scotia Bank summons. For completeness on this matter I would say I do not think the plaintiff is at present entitled to the order sought for any sighting of any period of North Channel's bank account with the Bank of Nova Scotia. What course is taken if and when that Bank statement or any part of that statement is subpoened and produced at trial must be left to the trial judge then handling the case. Accordingly I dismissed the summons of the 10th of May which I have referred to as the Nova Scotia Bank summons.

36. The same kind of observations apply to the Ka-Ka summons. This is not an examination of a debtor nor a matrimonial dispute over financial provisions. In both such cases full and frank disclosure of every asset wherever situated is demanded and has to be given. Here as at present claimed, there is an issue to be tried on the alleged wrongful disposal by Mr Reichenbach of specific sums coming to him through his connection with Mr Jarvis whether as employee, agent or consultant for one or other of his companies. Upon resolution of that issue ITP may or may not be entitled to its tracing claim. The Ka-Ka Trading Company may or may not be an asset of Mr Reichenbach. It may or may not have or have had assets, but it is no business of ITP to enquire further at this stage. The application of the 23rd of May is therefore also dismissed.