GALLERIA (HONG KONG), LTD (IN COMPULSORY LIQUIDATION) AND OTHERS v. DBS BANK LTD., HONG KONG BRANCH

HCCL 4/2016

[2019] HKCFI 1877

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 4 OF 2016

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J U D G M E N T

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1.  This is an action brought by the Liquidators (“Ls”) of Galleria (HK) Ltd (“GHK”) against one of its largest creditors, DBS Bank Ltd, Hong Kong Branch (“DBSHK”) on 3 fraud related causes of action.

An overview

2.  It is alleged by the Ls, represented by Mr Manzoni SC and Mr Karas, that in the course of financing GHK’s business, DBSHK had discovered information which suggested that GHK was conducting a fraudulent business.  The relevant officers of DBSHK either knew of or deliberately turned a blind-eye over the fraud.  It is further alleged that DBSHK should have but failed to inform other banks who were also financing GHK’s business.  Instead, DBSHK continued to finance GHK’s business, thereby causing loss to it to the tune of about US$185.5 million (“M”).

3.  The information which allegedly suggested that GHK was conducting a fraudulent business was made up of a number of replies by the International Maritime Bureau of the International Chamber of Commerce (“ICC-IMB”) over the Bills of Lading (“B/L”) it had received from DSBHK for checking in March 2006 (“IMB Reports”).  These IMB Reports are central to the Ls’ case on knowledge of fraud, the establishment of which is fundamental to the success of their case.

4.  There is another important element of the Ls’ case.  It is alleged that although DBSHK continued to lend to GHK after having gained blind-eye knowledge (at the lowest) of the fraud, it actually managed to considerably reduce its lending, whilst at the same time other banks had substantially increased theirs.  This point is apparently run to mitigate the fact that there was no motive for DBSHK to knowingly finance a fraudulent business to its detriment.

5.  Mr Jat SC, who appeared with Mr Li SC for DBSHK, described this case as commercial suicide, if true.  DBSHK’s case is that instead of being an accessory to GHK’s fraud, it was a victim of it.

6.  Fortunately, there is a substantial amount of contemporaneous documents which will assist this court in determining the factual issues, the fundamental of which is the knowledge of fraud on the part of Mr Albert Mak (“Albert”) and Ms Monique Lau (“Monique”), DBSHK’s creditor officers, whose knowledge and conduct were attributable to DBSHK, say the Ls[1] .

Background

7.  Pursuant to the directions of this court, the parties had agreed a Statement of Agreed Facts[2] , a 34-page document, which set out much of the relevant background facts.  I shall therefore provide a brief summary of the background and focus on the important events in considering the evidence.

8.  GHK was a company incorporated in Hong Kong.  Cheri and Thomas Fu (“the Fus”) were the only directors of GHK.  The Fus owned and controlled Galleria Inc (USA) (“GUSA”) and GHK.  There was a corporate restructure in 2007.  Thereafter, these 2 companies came under the Galleria Group of companies.

9.  GHK sourced home furnishings from manufacturers in the Mainland and exported them to the USA, by way of sale to GUSA for onward supply to American retailers or by direct sale to American retailers.

10.  The Galleria Group’s business was financed by borrowings from commercial banks in Hong Kong (including DSBHK) and, in the USA, by way of a syndicated loan from commercial banks (including DBS’ Los Angeles agency (“DBSLA”)) (“Syndicated Facility”).

11.  GUSA’s payment of the purchase orders it placed with GHK (including via import Letters of Credit (“L/C”) granted to it under the Syndicated Facility) could be a direct or indirect source of repayment for the export facilities granted to GHK by its Hong Kong lenders.  The Syndicated Facility had a cross-default clause, such that a default in any of GUSA’s or GHK’s facilities with any other lender would be an event of default for the Syndicated Facility.

12.  DBS is a public limited company incorporated in Singapore.  It carries on a banking business, including through a Hong Kong branch (DBSHK).

13.  DBSHK provided finance facilities to GHK in connection with the export leg of GHK’s business from about 2003 until the collapse of the Galleria Group in 2009.  Through the Syndicated Facility, DBSLA provided facilities to GUSA in connection with the import leg of its business.

14.  The relevant personnel of DBSHK came from three different departments within the bank: (a) the Credit Department (“Credit”), which was responsible for credit assessment and lending approvals; (b) Corporate Banking (“Business”), which was responsible for client relationship and day-to-day account matters; and (c) the Trade Operations Department (“Operation”)[3] , which was responsible for back office operations. 

15.  The facilities provided by DBSHK to GHK were as follows.  From June 2003, DBSHK provided GHK with (a) a short term revolving facility of up to US$5M and (b) banking facilities of up to US$25M comprising both import and export facilities.

16.  In September 2004, the facilities were revised and increased to US$40M.

17.  In February 2006, the facilities were revised, but remained at US$40M with the internal limits changed.

18.  On about 7 March 2008, DBSHK informed Cheri Fu that it had decided to cancel GHK’s in-house DP (documents against payment) Loan limit of US$20M while maintaining the remaining US$20M limits for other lines.

19.  The entire facility was cancelled on 23 July 2009 following presentation of a winding-up petition in relation to GHK.

20.  The fact and extent of the Fus’ fraud had been admitted by DBSHK. From at least September 2004 until the collapse of the Galleria Group in 2009, the Fus orchestrated and perpetrated an ongoing fraudulent scheme involving the fabrication of B/L submitted to lenders and the books and records of GHK.

21.  In particular, the Fus: (a) created and recorded false sales transactions in GHK’s books and records; (b) created false invoices, false shipping documents and other false documentation; and (c) used falsified financial statements and falsified B/L to obtain loan facilities and other lines of credit from lenders.

22.  At least 4,975 B/L during the period from at least September 2004 until the collapse of the Galleria Group in 2009 were falsified.  The falsified B/L involved financing of US$905M.  Some goods, the subject of falsified B/L, did not exist and were the subject of false sales.

23.  The receipt of the IMB Reports and the action taken by DBSHK thereafter are also not in dispute.  The main dispute turns on the inferences to be drawn from those facts.

24.  In March 2006, IMB reported to DBSHK that 19 out of the 23 B/L submitted by the latter for checking were “false” or “not in order”.  In one case, IMB advised that “extreme caution be exercised.”

25.  In respect of these 19 B/L, IMB variously informed DBSHK that: (a) the vessels listed in the B/L were not in the relevant ports on the relevant dates as stated (they were often on the other side of the world); (b) the containers listed in the B/L were, on the listed day, on different vessels and/or in different ports to those listed; and (c) the containers listed in the B/L did not exist.

26.  I shall deal with DBSHK’s response to the IMB Reports in detail below.

27.  As at the end of March 2006 (after the receipt of the IMB Reports), GHK’s indebtedness to DBSHK was approximately US$34.9M.  It was subsequently reduced to approximately US$7.7M by the time of GHK’s winding up in February 2010.  US$21.2M of the net repayments were made prior to the presentation of GHK’s winding up petition and US$6M of the net repayments were post-petition.

28.  DBSHK had received over the years income from GHK in the form of commissions, interest and bank charges, totalling US$7.5M.

29.  GHK’s other main lenders increased their lending over the same period (end of March 2006 to winding up): (a) GHK’s indebtedness to Bank of America, N. A., Hong Kong Branch (“BOAHK”) increased from zero to US$30.5M; (b) GHK’s indebtedness to United Commercial Bank, Hong Kong Branch (“UCBHK”) (formerly East West Bank) increased by US$7.7M (from US$20.9M to US$28.6M).

30.  In about June 2009, Bank of America (“BOA”), which was by then the lead agent of the Syndicated Facility having replaced DBSLA in 2008, appointed external auditors to conduct a routine field audit relating to GUSA. As part of their routine audit, the auditors discovered that: “The shipper’s actual tracking information indicates that goods were shipped several weeks to months prior to the copies of document provided by the Borrower to the examiner as support for the goods being properly included as in-transit collateral.” The auditors concluded that 28 out of 30 B/L sampled had been tampered with.

31.  Subsequently, BOA sent security guards to GUSA’s warehouse and convened a meeting of the syndicated lenders in Los Angeles on 15 June 2009, with the aim of appointing a receiver to GUSA.  

32.  At the request of its bankers, GUSA appointed John Pelton as Chief Restructuring Officer on or about 18 July 2009.

33.  On or about 15 September 2009, the Orange County Superior Court in the USA appointed Jeffrey M Granger as Receiver to GUSA.  On 8 October 2009, the US Bankruptcy Court appointed R. Todd Neilson as trustee in the Chapter 11 bankruptcy of GUSA.

34.  GUSA’s Chapter 11 bankruptcy was converted to a Chapter 7 liquidation on 13 May 2013, and the liquidation was terminated on 10 October 2013.  During the Chapter 11 bankruptcy, Mr Neilson distributed approximately US$4.6M to GUSA’s secured lenders.

35.  BOAHK presented a petition to wind up GHK on 22 July 2009.  On 8 February 2010, a winding up order was granted against the company.  The Ls were appointed on 23 July 2010.

36.  On 10 March 2011, the Fus were indicted and subsequently arrested for nine counts of execution and attempted execution of a fraudulent scheme between October 2008 and June 2009 in the US District Court for the Central District of California, Southern Division (“Californian Criminal Court”).

37.  Following a settlement reached with the US Attorney, the Fus pleaded guilty to one count of bank fraud on 30 November 2011 and admitted, inter alia, that at least since October 2008 and continuing through to at least June 2009, they knowingly and with intent to defraud, participated in a scheme to defraud a consortium of banks in connection with a revolving line of credit for GUSA.

38.  On 25 February 2013, Cheri Fu was sentenced by the Californian Criminal Court to 36 months’ imprisonment and on 13 March 2013, Thomas Fu was sentenced to 21 months’ imprisonment.

39.  Cheri Fu has now been released from jail and Thomas Fu is deceased.  Both Ms Fu and the estate of Mr Fu remain subject to personal bankruptcy proceedings in the US.

40.  DBSHK had admitted that GHK was insolvent in each of the years ended 31 December 2005 to 31 December 2008 and throughout the year 2009.

41.  As at the commencement of these proceedings, the Ls had received proofs of debt from creditors of GHK of about US$82M.  In particular: (a) BOAHK had lodged a proof of debt in the amount of US$31.6M; (b) UCBHK had lodged a proof of debt in the amount of US$29.7M; and (c) DBSHK had lodged a proof of in the amount of US$8.3M.

Causes of action

42.  The Ls claim that DBSHK is liable to GHK on one or more of 3 causes of action: (a) knowing receipt; (b) dishonest assistance; and (c) fraudulent trading.

Dishonesty

43.  There are legal issues in respect of the ingredients of these causes of action.  However, each one of them requires the proof of a mental element on the part of the wrongdoer.  It may be said that for knowing receipt the Ls are only required to prove that DBSHK’s knowledge was such that it would be unconscionable for it to be permitted to retain the benefit of the monies received (see Akai Holdings Ltd (in liq) v Kasikorn Bank PCL [2010] 3 HKC 153, CA, [205], [206] & [243] per Cheung JA).  It may also be said that this cause of action has the lowest mental element threshold of the three.

44.  On unconscionability, Mr Manzoni drew the court attention to the dicta of BCCI v Akindele [2001] Ch 437 at 455 D-G, where the English CA approved 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 for a constructive trust”. 

45.  However, Mr Jat pointed out that the Ls’ factual case is identical regardless of the cause of action, namely, Albert and/or Monique either knew or turned a blind-eye to the fraud of the Fus[4] .

46.  Plainly, it is a case of dishonesty[5] and it is trite that such a serious allegation requires proof based on cogent evidence.  In ADS v Brothers (2000) 3 HKCFAR 70 at 96I, Lord Hoffmann NPJ referred to the evidential threshold as “compelling evidence”. 

47.  In this judgment, I shall firstly examine the issue of mental element because without the establishment of this fundamental requirement this action has no leg to stand on. 

Applicable principles

48.  The following legal principles are not in dispute :

(1)  The question of a person’s state of mind is subjective; it concerns what the person actually knows.  The moral standard, however, is objective.  Whether the person is honest or dishonest given what he knows is to be objectively assessed (Royal Brunei Airlines v Tan [1995] 2 AC 378, at 389C-E:

“… in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated … Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of dishonesty do not mean that individuals are free to set their own standards of honesty … The standard of what constitute 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.” [emphasis added]

(2)  A person is dishonest if and only if he is conscious of all the elements of an act which together, by ordinary standards, would render the act dishonest (Group Seven Ltd v Notable Services LLP [2019] EWCA Civ 614 [57]).

(3)  Careless or negligence are not in themselves manifestations of dishonesty (Royal Brunei Airlines, see above; Hui Cheung Fai v Daiwa Development Ltd, unrep, HCA No 1734 of 2009, 8 April 2014 at [134]).

(4)  One cannot aggregate the knowledge of innocent minds in different people within a company to create some “notional ‘super-mind’ of the company, which is then deemed to be dishonest or ‘on inquiry’ for the purpose of agency or ‘unconscionable’ for the purpose of establishing ‘knowing receipt” (Akai Holdings Ltd v Kasikorn Bank, unrep, HCCL No 59 of 2004, 26 May 2008 at [402] (appeal allowed but this point was not overruled); Armstrong v Strain [1952] 1 KB 232 at 246).

49.  On the issue of knowing receipt, Mr Manzoni relies on Group Seven Ltd (§60), for the proposition that knowledge falling short of blind-eye knowledge may nevertheless be relevant on the issue of honesty :

“Where the conditions for imputation of blind-eye knowledge are satisfied, a person is treated for the purposes of establishing liability for dishonest assistance as if he had actual knowledge of the relevant facts. We do not think it follows from this, however, that suspicions which fall short of constituting blind-eye knowledge are wholly irrelevant to the question whether an alleged accessory has acted dishonestly. The first stage of the test, as it is now understood, requires the court to ascertain all the relevant facts, including the knowedge and beliefs of the defendant. Even though knowledge, in this context, must now be taken to be confined to actual and blind-eye knowledge, we see no reason in principle why a person’s beliefs may not include suspicions which he harbours, but which in and of themselves fall short of constituting blind-eye knowledge. The existence of such suspicions, and the weight (if any) to be attributed to them, are then matters to be taken into account at the objective second stage of the test. Or to make the same point in a different way, the existence of a legal technique for imputing constructive knowledge, if certain conditions are satisfied, should not be taken as implicitly restricting the scope of the subjective enquiry into a person’s state of mind and beliefs at the first stage. The state of a person’s mind is in principle a pure question of fact, and suspicions of all types and degrees of probability may form part of it, and thus form part of the overall picture to which the objective standard of dishonesty is to be applied.”

Blind-eye knowledge

50.  This is a concept which has assumed some importance in this case.  Knowledge of a fact may be imputed to a person if he turns a blind eye to it, ie, he deliberately abstains from enquiry in order to avoid certain knowledge of what he already suspects to be the case.  However, it is not enough that he merely suspects something to be the case, or that he negligently refrains from making further enquiries.

51.  The imputation of blind-eye knowledge requires satisfaction of 2 conditions: (a) the defendant’s suspicion that certain facts may exist, and (b) the defendant’s conscious decision to refrain from taking any step to confirm their existence.  The existence of the suspicion is to be judged subjectively by reference to the beliefs of the defendant, and the decision to avoid obtaining confirmation must be deliberate. 

52.  Further, the suspicion must be firmly grounded and targeted on specific facts.  The deliberate decision must be one to avoid obtaining confirmation of facts in whose existence the relevant person has good reason to believe. 

(See Group Seven Ltd at [58]-[60])

53.  In Kasikorn Bank v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479, §53, Lord Neuberger NPJ quoted Lord Blackburn in Jones v Gordon :

“… At the end of that last-cited passage, Lord Blackburn provided a characteristically clear explanation of what constitutes blind eye knowledge, or turning a blind eye when he said this:

[I]f the facts and circumstances are such that the [judge comes] to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no long be my suspecting it, but my knowing it, and then I shall not be able to recover – I think that is dishonesty.” [emphasis added]

Credibility of witnesses

54.  In assessing the credibility of a witness, the court normally attaches much weight to undisputed contemporaneous documents, inherent probabilities, motive or the lack of it (especially in a case of alleged dishonesty), logic and common sense (see Hui Cheung Fai, supra, [76]-[83]).

55.  Mr Manzoni reminded the court of the dicta in Royal Brunei Airlines (391B-C).  In considering the honesty of a person, the court will consider all the circumstances known to him, have regard to his personal attributes, such as his experience and intelligence, and the reason why he acted as he did. 

Witnesses

56.  One of the Ls, Mr Borrelli, gave evidence.  He was the only witness called on his side.  The evidence of Mr Neilson (the bankruptcy trustee for GUSA), Mr Granger (the receiver of GUSA before its bankruptcy) and Mr Mukundan (a director of ICC-IMB) in the form of their witness statements was adduced by way of hearsay evidence with the agreement of DBSHK.  The evidence of Mr Neilson, Mr Granger and Mr Mukundan is not in dispute. 

57.  Various parts of Mr Borrrelli’s evidence were subject to challenge by DBSHK as irrelevant and/or inadmissible opinion evidence. 

58.  DSBHK called 6 witnesses.  To different degree, they were all involved in the critical events in March 2006.  In the order in which they testified, the witnesses were :

(1)  Ms Kitty Chik (“Kitty”), who was the Senior Relationship Manager of the GHK account during 2003 to 2010.  She is now retired;

(2)  Mr Albert Mak (“Albert”), who was a Senior Credit Officer at Greater China Credit from December 2003;

(3)  Ms Monique Law (“Monique”), who was the Chief Credit Officer for Greater China from December 2002 and Albert’s superior;

(4)  Mr Lawrence Lam (“Lawrence”), who was a Manager at Operation;

(5)  Ms Liu Po Chun (“Liu”), who was a Vice President at Operation.  Her evidence only related to certain post winding up payments obtained by DBSHK and the accounting practice of the bank;

(6)  Ms Ida Woo (“Ida”), who was the Relationship Manager of the GHK account from 2003 to 2009 working under Kitty.  She had become a full-time housewife since September 2011.

The contemporaneous documents

59.  Mr Borrelli had no first and knowledge of the material facts.  He was merely speaking from what he learned from GHK’s documents which he had access to as one of its Ls.  The challenge to his evidence was eventually not pursued, and it was agreed that no costs order should be made in respect thereof.

60.  None of DBSHK’s witnesses had a reliable independent recollection of the events which took place some 13 years ago.  They cannot be expected to do so.  All of them had to rely on the contemporaneous documents to assist them to speak about those events.

61.  Fortunately, there is a good deal of contemporaneous documents (emails, memorandums and other documents) as one may expect from a bank.  The documents are extensive and fairly comprehensive, from which one can get a reasonably good, coherent and reliable (there is no dispute over the authenticity of the documents) picture of what went on.  Despite suggestion by the Ls, there is no sound reason to believe that there is any real gap in the documentation. 

62.  Read in the proper context, the documents very much speak for themselves and may be said to constitute the most important evidence in this case.  Indeed, the Ls’ case is very much based on the documents, the inference to be drawn from them and the cross-examination of the witnesses of DBSHK with those documents.

63.  The DBSHK witnesses were subjected to extensive and searching cross-examination.  Often, they were taken to a line by line examination of the documents.  In my view, the documents should be read with sound common sense and in the commercial context.  In particular, the bank officers were not lawyers, and in some instances it is plain that the use of English was not perfect.  It is therefore not necessarily right to attribute meaning to words used as if it is an exercise of construction of a legal document. 

64.  A more realistic approach is to examine the documents in the context of the relationship between DBSHK and GHK.  Bearing in mind in particular that the officers had known this client, granted facilities to it after careful consideration and had monitored the use of such facilities over a period of some 3 years before the events of March 2006.

The evidence

65.  I shall refer below to some of the contemporaneous documents to provide a reasonably clear picture of the material events.

2003

66.  This was the year in which the relationship between GHK and DBSHK was established.  Whilst GUSA and its business had been in operation since the 1980s, GHK was established in Hong Kong in 2001 as a subsidiary and the sourcing arm of GUSA.  GUSA, GHK and their related group of companies (Galleria Group) were all ultimately owned and controlled by Cheri Fu and her husband, Thomas Fu.

67.  Galleria Group was in the business of supplying furniture and “home accent” products to retailers in the US.  Its business model was, in simple terms, for GHK to source the products from manufacturers in the Mainland, sell either directly to retailers, or sell “in-house” to GUSA, which then sold to retailers in the US.  The 2 avenues of sale were roughly equal in volume. 

68.  DBSLA first had dealings with Galleria in around 2003.  It was the lead bank in a syndicated loan with other banks for GUSA (the Syndicated Loan).  DBSLA subsequently introduced Galleria to DBSHK, so that the latter could service GHK’s financial needs.

69.  On 23 May 2003, DBSLA signed an agreement for the Syndicated Loan of up to US$75M, under which it extended facilities to GUSA of up to US$25M (“2003 GUSA Facility”).  The Syndicated Loan was secured by a first priority lien on all GUSA’s assets (including those in its warehouse) and personal guarantees by the Fus and their family trust[6] .

70.  On 6 and 14 June 2003, DBSHK extended various facilities to GHK of up to US$35M (“2003 GHK Facility”).  Such facilities included, inter alia, import L/C facility, document against payment facility (“DP Loan”) and “unadvised limit for negotiation of export bills with discrepancies under L/C” (“EBLC(D)”).  DBSHK’s facilities were only secured by the Fus’ personal guarantees[7] .

71.  It is instructive to examine DBSLA’s Credit Memo dated 4 April 2003 concerning the 2003 GUSA Facility.  It was a detailed document setting out, inter alia, an extensive analysis of GUSA’s background, its business and projections.  Amongst the reasons for positive recommendation were “long term business history for more than 20 years” and forecast of more business “if our Hong Kong branch can capture the business of GHK”.  The memo was signed off by no less than 5 bank officers.  

72.  The grant of the 2003 GHK Facility was preceded by 2 DBSHK Credit Memos dated respectively 30 May 2003 and 5 June 2003.  These were similarly detailed documents containing analysis of, inter alia, the risk for the bank in granting the Facility.  They were signed off by 7 bank officers from both Business and Credit (3 of them gave evidence in this trial, namely, Ida, Kitty and Monique). 

73.  As explained above, the facilities in the US enjoyed a higher degree of security than those in Hong Kong.  That had remained the position at all material times.

74.  There was an exchange of email between Ida and Charles Ong of DBSLA in June 2003 in which it was agreed that the 2 branches would cooperate “so that we can have a good understanding and effective monitoring of the Group’s trading flow[8] and patterns to ensure not only good customer service but also risk management”.

2004 to 2006

75.  In the course of the banking relationship, issues arose from time to time.  For instance, Galleria’s business was experiencing rapid expansion and requests were made to exceed its facility limits.  Sometimes, shipments were delayed which led to delay in repayment of loans.

76.  These issues were identified and followed-up by DBSHK’s officers (as well as those of DBSLA).  Such actions were documented in, eg, DBSHK’s Credit Memo dated 2 August 2004.  Like the other memos, it was a very detailed document.  It referred to “good experience with [GHK’s] bills transactions with majority of our conditions complied with at each operation checkpoint and fast turnaround time” in the past year.  It recorded that GHK had recently set up a subsidiary in Qingdao under toll manufacturing arrangement. 

77.  The Memo identified a “Key management risk”, which was a reference to the over reliance on 1 person (Cheri) in the management of the Group.  It was noted that the DP loans were off-balance sheet.  Under “Facility risk”, various loopholes were identified and addressed, eg, the double financing by the bank in that the export leg of a transaction would be financed by DBSHK whilst the import would be funded by DBSLA.  Further, the relative weakness of the security for DBSHK’s facility was identified and addressed. 

78.  The Memo was supported by 3 officers from Credit at different levels of seniority.  Monique, the Chief Credit Officer for Greater China, wrote some comments on the memo.  In particular, she asked for active monitoring of the DP loan period of 45 days.  She also asked for a meeting to be arranged with Cheri[9] .

79.  Albert, a Senior Credit Officer, signed the Memo with a reference to his email of 9 August 2004.  In that email, Albert referred to visiting Cheri in her Shenzhen office and visiting the new Qingdoa factory.  Albert went on to identify various structural risks, including the financing of in-house DP bills as a result of GHK selling to GUSA and key management risk.  Mitigating measures were then set out in the email.

80.  A few important points emerged from this Credit Memo.  Firstly, credit risk was at the forefront of the bank’s consideration and its officers were at pains to mitigate and monitor it.  Secondly, there was much interaction between Business and Credit with the latter serving the important function to ensure that the former was not carried away with ambitious business expansion at the cost of exposing the bank to unacceptable risk.  Thirdly, although DBSHK and DBSLA were 2 different branches, they belonged to the same bank and were required to work closely together[10] .

81.  Subsequent to the August 2004 Memo, the facility granted to GHK by DBSHK was increased from US$35M to US$40M on 17 August 2004 (“2004 GHK Facility”). 

82.  On 20 May 2005, DBSLA agreed to an increase to the Syndicated Loan of up to US$82M, wherein it increased its facility to US$28M, ie, an increase of US$3M.

83.  The August 2004 Memo was followed by an interim review Credit Memo of DBSHK dated 29 April 2005, and another DBSHK Credit Memo dated 10 November 2005.  In the interim review, it was noted that the DP collection was slow, taking an average of 60 days instead of 45, which resulted in the facility limit being exceeded.  It was also noted that the delay was due to port congestion. 

84.  In the November 2005 Credit Memo, it was decided that the in-house DP line would be reduced to avoid “over-financing for Galleria group’s inventory” by DBS.  Various key risks were identified and mitigation of the same was discussed.  As recorded, the off balance sheet treatment of the DP loans was explained by Cheri.  

85.  It is uncontroversial that in around November or December 2005, Credit became responsible also for DBSLA’s credit to GUSA (and other customers who had a supply chain business in Greater China). 

86.  On 26 January 2006, DBSHK renewed the 2004 GHK Facility at up to US$40M, but revised the constituent parts in an attempt to achieve a higher degree of security (“2006 GHK Facility”).

March 2006

87.  From 8 March 2006, there was much email traffic between DBSHK and DBSLA on the lengthening of the repayment period of the in-house DP loans.

88.  In the course of discussions between the 2 branches on that topic, DBSLA identified another issue on 15 March 2006, namely, GHK’s B/L were consigned to shipper and not the bank.  This raised a concern that goods under the bills might be released to the buyers notwithstanding that DBSHK was holding the documents.  However, that concern was allayed later that day after checking with Lawrence of Operation who advised that: “… since the full set of [B/L] is being kept at the bank, we are as good as having the title of the goods …”.

89.  In an attempt to ascertain the reason for the delay in DP repayments, Kitty and Ida asked Lawrence “whether there was a way for DBSHK to check the whereabouts of GHK’s goods[11] discreetly in view of the prolonged settlement of the [DP Loans]”.  In response, Lawrence suggested conducting ICC-IMB check on a random selection of GHK B/L.

90.  The IMB Reports constitute the lynchpin of the Ls’ case and the relevant emails are set out in more detail below. 

IMB Reports

91.  On 15 March 2006, Lawrence sent an email to ICC-IMB (“Canberra Request”) attaching 8 B/L dated 6 March 2006 relating to goods shipped on the vessel MSC Canberra.  It was stated that DBSHK was conducting a routine check on the bills and ICC-IMB was asked to confirm that they had been issued as per the details provided.

92.  Lawrence sent 2 further emails with similar request on 16 March 2006, seeking checks in relation to: (1) 4 B/L dated 22 and 24 January 2006 relating to goods shipped on the vessel CMA CGM Hugo (“Hugo Request”); and (2) 1 B/L relating to goods shipped on the vessel MSC Texas (“Texas Request”).

93.  Later that day, ICC-IMB responded to the Texas Request by email (“Texas Report”), stating that the B/L “appears not to be in order”.  Amongst others, Kitty and Ida had received the Texas Report from ICC-IMB, having been copied-in by Lawrence in the Texas Request.

94.  On 17 March 2006, ICC-IMB responded to the Hugo Request by email to Lawrence (“Hugo Report”), stating that the “documents referred are not in order” and suggested “extreme caution be exercised”.

95.  Lawrence’s evidence was that he understood the ICC-IMB replies to mean that the information on the bills were inconsistent with the data which ICC-IMB had (such evidence is consistent with his email dated 22 March 2006 at para 99 below).  There were innocent reasons for it and, in his experience, it was not an infrequent situation.  He advised his colleagues of his view, see below.

96.  Having received the first 2 responses from ICC-IMB, on the same day Lawrence sent six further emails to it on similar terms as the initial requests, seeking checks in relation to: (1) 2 B/L dated 28 February 2006 relating to goods shipped on the vessel President Wilson (“President Wilson Request”); (2) 2 B/L dated 3 March 2006 relating to goods shipped on the vessel MSC Valencia (“Valencia Request”); (3) 1 B/L dated 19 February 2006 for goods shipped on the MV Stellar Bay voyage V.0607E (“Stellar Bay V.0607E Request”); (4) 2 B/L dated 21 February 2006 relating to goods shipped on the vessel MV Mokihana (“Mokihana Request”); (5) 2 B/L dated 13 February 2006 for goods shipped on the MV Stellar Bay voyage V.0606E (“Stellar Bay V.0606E Request”); and (6) 1 B/L dated 6 February 2006 for goods shipped on the MV Yun Ji (“Yun Ji Request”).

97.  On 22 March 2006, DBSHK received a number of reports from ICC-IMB in response to the Canberra, President Wilson, Valencia and Mokihana Requests:

(1)  Canberra Report: “It appears that all eight bills of lading are false”;

(2)  President Wilson Report: “It appears that both bills of lading are false”;

(3)  Valencia Report: “It appears that both bills of lading are false”;

(4)  Mokihana Report: “It appears that both bills of lading are false”.

98.  Meanwhile, on 22 March 2006 the Canberra Report was forwarded to Albert by Kitty marked “Pls see as per request”.  In turn, Albert forwarded the document to Kin Hee Leung (“Leung”), his superior, marked “FYI”.

99.  A little later on 22 March 2006, all of the IMB Reports which had been received were disseminated to various colleagues by Lawrence marked “Suspicious Transactions of Hong Kong Branch”.  In that email, Lawrence reported that: “… [ICC-IMB] replied that their records are inconsistent with the face of the B/Ls” (emphasis added) and sought his colleagues’ comments.

100.  According to Lawrence’s evidence, reporting the transactions as “suspicions” was part of the procedure of the bank as an “escalation” in the event of discovery of inconsistencies in B/L.

101.  Little more than an hour later, Albert asked Kitty for the forwarder’s name and address in Hong Kong.

102.  About 2 hours later, Kitty sent an email to Yang Ping Choong (“Choong”), the Head of Operation, asking for her assistance.  It was stated that: “We have recently requested Trade Service to conduct ICC IMB search on a number of B/Ls.  Reports show that information provided in the B/Ls are inconsistent to their records.  … Credit now instructs me to further investigate the background and standing of this forwarder.  Are there means that we could check?  …”. 

103.  Another colleague who was copied-in Kitty’s email, Danny Liu, responded by informing Kitty that Eric Leong (“Eric”) of Operation was assigned to work on these cases immediately in the absence of Lawrence who was on business trip. 

104.  Eric then responded by providing Kitty with the website of the forwarder (“UFS”). 

105.  A little later, Choong asked Eric to assist Kitty and commented that “we need to act fast especially if there are fraud elements involved.” The evidence is that the IMB Reports were not sent to Choong. 

106.  After a few minutes, Eric formally reported the suspicious transactions to various colleagues as Lawrence was on business trip.  That email referred to “IMB pointed out that the shipping documents presented were probably false documents” and all the IMB Reports were attached. 

107.  At about 5pm on the same day, Albert forwarded the Canberra Report to Monique and Leung.  In the email, it was stated that:

“This morning we had a conference call with LA Branch, and as usual they consider the account trouble free. Nevertheless, they agree to check with the customer on the asset cycle period and to verify the possibility whether the customer can take the goods without paying the bills.

However, I would like to draw attention that we have been checking on the bills transaction through a shipping association called International Maritime Bureau. Early this morning, Trade Services received the following email from that association highlighting that some bills of lading are “false”. According to Trade Services, such findings are not unusual particularly for those cargos routed through “forwarder”. So, this does not necessarily means [sic] “fraud” yet. To dig out the truth, Trade Services has been told to further investigate.

We have discussed this with Peter[12] , and it is our view that we should handle this with special care particularly if it is proved to be a “false alarm”. So, I and HK Branch have been working together with Trade Services on a confidential basis to investigate the findings within this week (will check on the background of forwarder). At this stage, I think not appropriate to alert other parties including LA Branch.

Will keep you informed the result of our findings.”

[emphasis added]

108.  The above activities should be viewed in the context of lengthy discussions between DBSHK and DBSLA about the lengthening DP repayments.  These events were taking place in parallel. In particular, the former was keen to confirm the “asset conversion cycle” or “trade flow” of Galleria to evaluate the repayment period.  In a reply to DBSHK dated 15 March 2006, Rosie Jen (“Rosie”) of DBSLA advised that “Galleria Inc. finished a good 2005 achieving 26% sale growth from $237 million to $300 million with $9.5 million pre-tax profit.”  Further, DBSLA was in the process of evaluating a facility increase to Galleria from US$82 million to US$100 million.

109.  On 20 March 2006, Kitty sent an email to DBSLA asking for a conference discussion on primarily 2 issues: (1) port delay in the discharge of goods, which resulted in long DP repayments; and (2) the possibility of goods being released by delivery agent upon telex instruction of GHK despite DBSHK’s possession of the title documents.  Under “Our Action”, the following was stated:

“In view of the above-mentioned findings, DBS HK has paid special attention to Galleria HK’s DP bills. DBS HK Trade Services spot-check the authenticity of the bills of lading via a centralized data provider, and will run statistics on other clients’ DP payment record as a benchmarking. We also keep track of the port of loading of each bill to see if there is a concentration of goods shipped from 1 single place, or 1 single in house supplier. If the 3 parties (supplier, soucing agent, buyer) are in-house parties, we will need to pay extra attention to the bills because the intrinsic risk of fraudulence for in-house transaction is higher.”

[emphasis added]

110.  Considerable emphasis had been laid by the Ls on the reference to “authenticity” of the B/L.  However, it is not entirely clear from the email or the relevant email chain (of which the one from Rosie mentioned in para 108 above formed part) what the “findings” were.  What is quite clear from the email chain is that the focus of discussions was on the trade flow of GHK and the lengthening repayment of the DP loans (2 closely related topics).  I shall return to this email in the analysis of the evidence below. 

111.  On the next day (21 March 2006), Albert responded (copied to senior colleagues) by pointing out that the release of goods would be a structural risk which had to be rectified. 

112.  Monique responded that evening suggesting that the matter should be discussed to “make sure that we feel comfortable with this credit”. Apparently, that resulted in a conference call between the senior staff of DBSHK and DBSLA on 23 March 2006.

113.  Meanwhile, in the early hours of 22 March 2006, Ida sent an email to various DBSLA personnel summarising a telephone conference held that day between representatives of DBSHK and DBSLA.  It is apparent from the summary that the points raised in Kitty’s email of the 20 March 2006 (para 109 above) were discussed.  In respect of the release of goods, Rosie recommended a “diligent check” with the shipping company.  Should the shipping company failed to cooperate, Rosie would speak to Cheri on the issue.  However, she cautioned about customer retention “as a result of these sensitive questions, should we proof (sic) Cheri is innocent!”

114.  There is no dispute that DBSLA was not informed of the IMB Reports. Albert forwarded the email chain to Monique and Leung the following morning, 23 March 2006, with the comment “LA Branch does not know the ‘Bill of Lading’ yet.”

115.  Later that day, Albert emailed Ida, stating that: “We understand that Trade Services is investigating the bills.”  He asked for various financial information of GHK in order to derive a “whole picture.”

116.  In the evening of 23 March 2006, ICC-IMB reported in respect of the Yun Ji Request and the Stellar Bay V.0607E Request by email to Lawrence that: “Though I have dealt with few false bill of ladings issued by same NVOCC[13] however this b/l appears to be genuine.”

117.  In the morning of the 24 March 2006, DBSHK and DBSLA had a conference call with Cheri to “directly understand the detailed trade flow of the Galleria Group”.  As recorded in Ida’s email, considerable details were provided by Cheri.  The email concluded as follows: “… we reckon that Cheri is very hands-on in the operation of [GUSA] and we have grasped a better understanding on the goods flow under out DP financing. …”.  It is not disputed that the IMB Reports were not mentioned during that call.

118.  In the afternoon on 24 March 2006, Lawrence prepared a table summarising the IMB Reports received to date and sent it to Kitty, Ida and Anna Au (also of Business).

119.  On 28 March 2006 :

(1)  Stephen Au (of Credit Control Unit) reported to Albert by email that Ida had called to “… explain normalcy of the purportedly fradulent [sic] trade transaction.  Unless you are dissatisfied … credit control will consider this case closed.”

(2)  Albert replied to Stephen that: “I think the case has not been closed as I am still pending for the findings from Trade Finance (the will visit the forwarders to check the vessel route and container box soon).”

(3)  Stephen responded by asking to be kept in the loop and noted that there was “not much credit control can do except keeping the file open till we hear otherwise.”

(4)  Albert subsequently commented to Stephen: “I will keep a close watch on this case as the total exposure in HK is USD35M and USD80M in US. Nevertheless, it is my gu[t] feel that it is not a funny transaction.  Hope I am right.”

120.  On 28 March 2006, ICC-IMB reported, in respect of the final check relating to the Stellar Bay V.0606E Request, that: “Though I have dealt with few false bill of ladings issued by same NVOCC however this b/l appears to be genuine.”

121.  On 12 April 2006, Albert sent an email to Kitty and Ida in response to an email from Rosie about increasing the lending by DBSLA to Galleria.  In that email, Albert asked: “Any development on the finding of trade bills”. 

122.  Shortly afterwards, Ida informed Albert of the investigations undertaken, together with her recommendations:

“To summarise the findings of Lawrence of Trade Services, basically we found some of the bills of lading with false information (eg shipment went to somewhere else and container number went to different destinations).

Lawrence has made a call (disguised as a prospect [sic] customer) to the HK office of UFS (forwarder) to enquire about shipment from Qingdao to LA. The representative of UFS advised that there is possibility that shipment will change route after the initial issuance of B/L, and UFS will update the shipper subsequently. However, the container normally does not change destination. When asked whether UFS will accept cable instruction from shipper to release goods without B/L, the representative of UFS firmly objected this idea as this is not the practice of UFS.

From the above enquiry, we feel that UFS is a “honest” forwarder and normally it will work according to normal procedures. As for the false information of the B/L which Galleria (HK) submitted, there is a possibility that the original B/L was based on rough information which was changed and updated afterwards, and we were not informed of. However, we cannot verify the truth with UFS or other third party. Since a lot of work has been done by Trade Services on checking the bills, but it is unlikely that we can prove the customer innocence [sic] or guilty purely from this angle, we suggest to put a stop to the investigation work of Trade Services. We seek your consent to this suggestion.

We shall attempt to inspect the goods flow either at Qingdao port side or at LA port side to see if we get further understanding. We’ll arrange with DBS LA (as GRM[14] ) on this.

Lawrence - please see if you may wish to add your comment on your findings.”

123.  Lawrence was unable to recall when the anonymous call was made, and this email is the only record of the same.  Albert’s evidence was that he consented to Ida’s suggestion.

124.  Ida’s evidence was that what was stated by her about the inspection of the goods flow was not a continuation of the investigation over the IMB Reports, but to further understand the trade flow of GHK.

125.  On 13 April 2006, Albert forwarded Ida’s email to Monique and Leung and stated:

“Per below email from HK Branch, there is no further negative findings on the trade bills. At this stage, they are not able to prove the customer is innocent or guilty based on the documentation flow. But at least, the forwarder is perceived to be “honest” according to Trade Services. The next step is to see how to “coordinate” with LA Branch on site inspection of the goods at the port.”

126.  It is undisputed that no port inspection took place and no further step was undertaken to investigate the B/L in question.   

127.  Monique’s evidence on the suggested on site inspection was that she had never seen it done in her career and she could not see how it could be done.  Monique had been a banker all her working life and was about to retire. What she said obviously needs to be considered in the context of DBS being a bank. 

128.  On 17 April 2006, Credit approved a 1-month extension of a temporary increase of the Syndicated Loan (with DBSLA’s participation increased from US$28M to US$29.71M).  Amongst others, Monique and Albert approved that extension.

129.  On 20 June 2006, Rosie emailed Ida and Kitty informing them of prospective competition for Galleria’s business from BOA.  Before an anticipated meeting with Cheri, she asked “if there has been any other issues since last telephone conference for clarification on trade cycle flow and T&O investigation on BL?”

130.  Kitty then sent an email to consult with her colleagues at Business.  It was stated that: “Rosie asked if we have any outstanding issues that would like to bring up to Cheri when they next meet client.   The issues we raised last time were some how [sic] answered and I don’t think we have any new one.” 

131.  Subsequently, Kitty replied to Rosie as follows: “Last conference call with client was very helpful that we managed to clear all issues.  [GHK]’s account with us is running normal.  No issue outstanding.”  Kitty confirmed in her evidence that the call referred to was the one on 24 March 2006 with Cheri (see para 117 above).

DBSLA’s bills investigation

132.  Unknown to DBSHK, DBSLA had identified similar issues with Galleria’s B/L.  The email from Mr Aik Lim Kok, the Assistant General Manager of DBSLA, to Rosie dated 8 June 2006 encapsulated the matter:

“During the meeting with YIn Fong, we discussed about T&O’s investigation. The conclusion by T&O as presented then was that as the house BLs appears irregular, T&O was unable to conclude if there was in fact genuine trade took place, and that we do not understand the logistic and shipment pattern.

During that meeting, I recalled we all agreed that based on what we know about Galleria’s operation, we do not believe there is any phantom shipment but we need to understand the shipping pattern and logistic issue and Ying Fong asked to seek help from Wilson at GTS on the logistic question.

Subsequent to the meeting, with GTS’s clarification, the shipping logistic could be explained, however, the conclusion on accuracy of BL remains (see email from Wilson attached and his comments).”

[emphasis added]

Continuous lending by DBSHK and DBSLA

133.  Subsequent to the IMB Reports, both DBSHK and DBSLA increased their lending to Galleria:

(1)  On 31 May 2006, DBSLA signed onto an increase of the Syndicated Loan of up to US100M, wherein it increased its facility from US$28M to US$30M.

(2)  On 22 November 2006, DBSLA signed onto a further increase to the Syndicated Loan to US$130M, with BOA taking up the additional US$30M.

(3)  Between November 2006 and August 2007, Business (Ida) actively considered increasing the facilities to GHK. Credit (Albert) was more cautious.  Eventually, DBSHK renewed the 2006 GHK Facility at the same amount of up to US$40M.

134.  It can be seen from DBSHK’s Credit Memo dated 2 March 2007 that the same careful and comprehensive exercise was carried out.  The document contained details in relation to “Internal control” and “Key Risks” with “Mitigations”.  In the 29 August 2007 Credit Memo, it was noted that “the account conduct had been good, and the Group’s overall performance is stable and satisfactory, we reckon that our continuance of existing facilities to [GHK] is warranted”. 

2007 to 2009 (Subprime Crisis)

135.  The subprime crisis in the US started to surface in around August 2007. DBS became increasingly cautious, especially with US economy dependent borrowers like Galleria.  Credit reminded Business to be conservative.  There were also heightened portfolio review, closer monitoring, and tighter control.

136.  In November 2007, Ida asked Lawrence to make random checks of B/L submitted by GHK.  Two B/L were subsequently sent by Operation to ICC-IMB for checking with no adverse result. 

137.  On 11 January 2008, Albert carried out a research into the US economy, particularly the retailers who were buying from Galleria.  He concluded that Galleria would likely be affected.  He wanted Business (Ida) to ask Galleria for justifications of its positive outlook.  When the justifications failed to persuade him, he pressed for reduction and restructuring of the facilities by cutting parts of the 2006 GHK Facility whilst granting other, more secured facilities.

138.  In an email dated 13 February 2008 to his colleagues, Albert wrote: “Overall, I am not saying that the customer will be in trouble, or vice versa.  However, the uncertainty of the US economy in recent months, particularly the negative development on the property market segment, urges us to revisit why we still keep ourselves expose to such high risk under the in-house DP … The purpose of the customer meeting is to facilitate us to finalize the credit strategy, i.e. view and actions, towards this line.  We are happy to maintain our support if the facility is well structured and we are comfortable with the credit.”

139.  In early March 2008, DBSHK informed GHK that it would be cutting the in-house DP facility from the 2006 GHK Facility.  On 30 May 2008, DBSLA entered into a new Syndicated Loan, with its participation remaining at US$30M.  In his email dated 17 April 2008, Albert stated: “I have signed off your Credit Memo in respect of the USD30M facility in view of this line is secured against the pledged of [sic] trade assets, i.e. the borrowing base.”

140.  On 5 August 2008, DBSLA also extended a new L/C facility to GUSA of up to US$15M to facilitate GHK in paying down its DP facility.

141.  In a Credit Memo dated 29 August 2008, under “Account Strategy” it was stated: “After several rounds of internal discussions, we have decided to hold our exposure to GHK at the current level (especially for in-house bills limits) in view of the fact that our current exposure is considered high for the company size of GHK.  However, we shall remain open to propose facility increase to support GHK’s growth if the overall credit is justified …”.

142.  In an email dated 11 September 2008, Albert stated: “we may need to consider to fully exit the relationship if the remaining facilities in HK can not be converted into secured or well-structured line.”

143.  On 14 October 2008, Ida reported on a meeting with Cheri attended by her, Kitty and Peter Chan.  They had lengthy discussions on the financial turmoil and Galleria’s business.  It was noted by Ida:

“3) Cheri asked us about our strategy towards the facilities to Galleria HK so that she can get the company prepared for any actions to be taken. We explained to her that the current financial turmoil has been affecting the whole banking industry and banks are generally more conservative in lending and tend to review on the existing accounts and to further confine the risk. For the Galleria account, we have been in discussion with DBS LA as GRM to go for a conversion of the existing facility (US$15m) to Factoring. We believed that this is a good option for Galleria to continue having funding against its quality accounts receivables. Cheri welcomed this idea and she is keen to hear more …”

144.  On the next day, Monique wrote to Albert: “The principle we agreed on earlier should be the guiding principle: that we either put the HK line as part of the US package so that it is secured pari passu with the other facilities; or tie in the HK line directly with cash flow accessible by us …”.

145.  In a Credit Memo dated 16 December 2008, there were discussions about restructuring the facilities granted to GHK “to make our facilities in Hong Kong rank pari passu to the secured facilities in US …”.

146.  On 8 January 2009, DBSHK informed GHK that it would be cutting the export invoice financing and the packing loan facilities from the 2006 GHK Facility, leaving only the EBLC(D) facility component to continue.

147.  On 18 March 2009, DBSHK extended a new factoring facility of up to US$20M to GHK.

148.  On 5 May 2009, DBSLA participated in a new Syndicated Loan led by Cathay National Bank for GUSA to open L/C of up to US$35M partly to facilitate GHK in paying down its outstanding loans.  DBSLA’s portion was up to US$8M.

BOA’s discovery of fraud

149.  On around 15 June 2009, BOA claimed to have discovered fraudulent activities by GUSA, namely, some B/L had been altered.  Other banks in the Syndicated Loan were reluctant to jump to conclusions.

150.  The contemporaneous emails amongst DBS officers suggested that they, as well as other banks, did not view inaccurate information found in some bills as a very serious matter as BOA did.  They continued to believe that Galleria was running a genuine business.

151.  In an email from James McWalters, the General Manager of DBSLA, dated 23 June 2009, he referred to a bank group meeting that day.  He reported that: “[BOA] conducted their first field exam over the last several weeks and they discovered apparent discrepancies regarding B/L dates and invoice dates. No one else in the bank group regards these “apparent” discrepancies as material …”.  The banks had voted down BOA’s request to put Galleria in receivership.  The writer also noted that “Aik Lim said we sighted similar issue when we managed the syndication and did not consider them material”.

152.  On 22 July 2009, BOA acting on its own petitioned the Hong Kong Court to wind up GHK.  On 15 September 2009, a bank outside the Syndicated Loan, Wachovia Bank, applied in the US to put GUSA under receivership.  This led to GUSA filing for bankruptcy protection.

153.  On 8 October 2009, a bankruptcy trustee was appointed for GUSA. On 8 February 2010, the Hong Kong Court ordered GHK to be wound up.  On 23 July 2010, the Ls were appointed joint and several liquidators.

Analysis of the evidence

154.  Mr Jat submitted that the Ls’ allegation that the bank officers, reading the IMB Reports, must have known about (or turned a blind-eye to) GHK’s fraud is an overly simplistic argument.  Moreover, it is contradicted by the contemporaneous emails and the bank officers’ actions.  With respect, I agree.

Contemporaneous documents

155.  First and foremost, the undisputed contemporaneous documents provided a comprehensive picture as to what went on both before and after the receipt of the IBM Reports, in particular, the actions of the bank officers which reflected their knowledge and thinking.  I am unable to see any adequate reason to believe that they had in mind that GHK or Cheri was/were practising a fraud over DBSHK (I shall come back to the subject of the fraud below).

156.  It would be wrong to view the IMB Reports with the full benefit of hindsight.  The Ls’ case is based substantially on that.  Unless one is looking at a B/L knowing that it was fraudulent, the analysis[15] that the ship in question could not, according to the IMB Report, have been at the stated destination would not take the matter very far.  The information contained in the B/L was wrong.  Monique’s evidence was that the wrong B/L might have been provided by GHK.  The contemporaneous documents show that the bank officers did not seriously suspect any foul play.     

157.  The bank officers were clearly influenced by the information provided by Operation.  There is no reason to doubt Lawrence’s evidence that he knew of innocent explanations for the wrongful information contained in B/L. Indeed, what he told his colleagues was recorded in the documents. 

158.  This is not a case of negligence, and the court is not concerned with whether the bank officers were acting with sufficient care or competence. Further, there is no sufficient ground to say that what they did was irrational such as to reflect a lack of probity on their part. 

159.  The point that it would have been easy for DBSHK to confirm whether there was a fraud, much laboured by the Ls, cuts both ways.  The fact that DBSHK did not do so despite having no less than US$40M at stake may suggest that its officers did not have any serious suspicion of fraud. 

160.  With the benefit of examining the documents and having listened to the evidence of the bank officers with care, I believe that their actions and belief were much impelled by their knowledge (gained from the banking relationship) and trust of Galleria and Cheri.  By March 2006, DBSHK had enjoyed a successful banking relationship with GHK for 3 years.  Over that period of time, there were meetings with Cheri, visits made to understand the operation of Galleria and close monitoring of its business.  There is no adequate reason to doubt the evidence of the bank officers (in particular Albert and Monique) that they did not believe that GHK or Cheri was/were carrying on a fraudulent business.   

161.  Quite likely, the bank officers were at the material times blind-sighted by the need to understand the trade flow of GHK to enable them to grapple with the problem of the lengthening DP repayments, which was the reason for the ICC-IMB checks on the first place.  Probably, it was an unfortunate coincidence that neither Albert nor Kitty had come across any case of fraud in their experience at the time[16] , which was compounded by the lack of experience of the ICC-IMB check on the part of Ida, Kitty and Albert.  One may add that neither DBSHK nor DBSLA had, at the material times, shown sufficient acumen to the possibility of fraud arising from a finding of discrepancies in B/L.  However, (a) that may be speaking with the benefit of hindsight and (b) they were not alone with such disposition (see para 151 above).

162.  If there were knowledge or serious suspicion of fraud, one would expect the ringing of alarm bells all over the bank.  Lawrence’s evidence was telling in that he merely escalated the matter as inconsistencies found in the B/L in accordance with the bank’s procedure.

163.  It is convenient at this juncture to say a few words about some of the contentions on the evidence.  Lawrence’s unequivocal evidence, corroborated by both Kitty and Ida, was that he proposed the ICC-IMB checks not for verifying the authenticity of the B/L, but as a possible avenue for Kitty and Ida to find out more about GHK’s trade flow which might explain the lengthening of the tenor of the DP loans.  Such evidence is consistent with Lawrence’s reference to “routine check” in his emails to ICC-IMB.  Further, Lawrence’s evidence that another team of people at ICC-IMB would carry out an authenticity check is consistent with Mr Mukundan’s evidence[17] .

164.  Lawrence’s evidence that in his experience ICC-IMB had used different terminology, including false, not in order and inconsistent, interchangeably to describe discrepancies found in B/L[18] was not challenged.  Such evidence is consistent with his email to his colleagues that the ICC-IMB records were “inconsistent” with the face of the B/L (see para 99 above).

165.  In respect of Kitty’s email of the 20 March 2006 which referred to the spot-check of authenticity of B/L (see paras 109-110 above), it was a proposition which stood out in that I can find no suggestion in the documents about any suspicion which might led to the spot-check.  There is force in Mr Jat’s submission that since she knew nothing about the ICC-IMB check, it is likely that what she had put down in the email was something she was told.  The reference to authenticity check was a fertile source of cross-examination.  It is relied upon by the Ls for the propositions that the ICC-IMB checks were conducted to check the authenticity of the B/Ls in question and the negative replies meant that the bank officers had notice or suspicion of fraud.

166.  I am unable to accept that the cross-examination of Kitty on this email[19] supports the above propositions.  She repeatedly said that it was not what she meant at the time and that the focus was on why the DP repayment period was lengthened.  Such evidence is consistent with the contemporaneous documents.  I should add that there might have been confusion as to whether she was asked to express a view as of the time of cross-examination or to recall what was on her mind at the time of writing the email[20] .  I take a holistic view of the evidence.  In my assessment of the Ls’ case, I have taken these matters into account. 

167.  Fraud was only mentioned in 2 of the bank’s documents: (1) Choong’s warning that speedy action must be taken if there were fraud elements (see para 105 above); and (2) Albert’s email that he did not feel that it was a funny transaction (para 119(4) above).  Albert explained in his evidence that he thought about fraud but quickly dismissed the notion in his mind.  The documents are consistent with such evidence.  He continued with the careful scrutiny of the facilities granted to Galleria.  I do not begin to see why he would have done so if he were aware that GHK or GUSA was conducting a fraudulent business as alleged by the Ls.  What assets were there to secure the lending of DBSLA (see para 139 above)?

168.  It may be argued that there was also an indirect reference to fraud in Ida’s email of 13 April 2006 (which replied to one from Albert dated 12 April 2006 (see para 121 above)) where she stated that “it is unlikely that we can prove the customer innocence or guilty purely from this angle” (para 122 above).  However, she went on to ask for permission to stop the investigation work of Operation, which was inconsistent with a mind suspecting a serious fraud against the bank.  I must balance also Ida’s evidence of the knowledge and trust she had gained of both GHK and Cheri, having been the Relationship Manager of GHK’s account and the immediate interface between the client and the bank. 

169.  Kitty, to whom was sent Albert’s email of the 12 April 2006 and was copied-in on Ida’s reply (it is likely that the reply was discussed between the two before it was sent), said that she understood that the reference to innocence and guilt related to whether the client had changed the information on the B/Ls without informing the bank.  Ida was not cross-examined on this point.

170.  Albert’s email to Monique and Leung on the day after (by which he forwarded Ida’s email (see para 125 above)) was, quite apparently, a summary of Ida’s email.  In cross-examination, Albert said that he guessed that the reference to innocent or guilty by Ida was in respect of the innocence or guilt of fraud.  I have taken such evidence into consideration in my assessment of the Ls’ case. 

171.  One needs to bring into the balance that at the material times the bank officers were in all probabilities looking after a number of accounts at the same time, these matters were only one of the many tasks of the day and it was unlikely that they would have chewed over the words used in each of the many emails they sent everyday.  It is therefore essential for the court to take a holistic view of the evidence, to try to understand the situation prevailing at the time and to assess the inherent probabilities (see para 54 above). 

172.  Finally, there was an email from Eric, who stood-in for Lawrence, which referred to the shipping documents as “probably false documents” in his email attaching all the IMB Reports (see para 106 above).  In the context of what was going on as demonstrated by the documents, this covering email does not take the Ls’ case much further.

173.  As regards the point that DBSHK had failed to inform DBSLA about the IMB Reports, I see nothing sinister in it.  The evidence was that DBSHK did not want to raise a false alarm.  Such evidence must also be seen in light of the facts that: (a) there was tension in the relationship between the 2 branches; (b) DBSLA was informed about the check by ICC-IMB (see para 109 above); (c) DBSLA did subsequently asked about the checks and was replied to (see paras 129 and 131 above); (d) neither branch saw a need to raise an alarm bell where errors were found in B/L; and (e) Credit was in charge of DBSLA at the time and it was certainly aware of the IMB Reports.

174.  For completeness, I find little substance in the Ls’ allegation that the GHK account was a high risk account with inherent risk of fraud.  The undisputed evidence is that the risk factors (in-house sales, off-balance sheet transactions and key management risk) were identified and dealt with.  They were not seen as fraud risk.

Events after the IMB Reports

175.  I find the contemporaneous documents which came into existence after March 2006 illuminating in that they evidenced a perfectly normal and genuine relationship between a bank and a large corporate borrower.  It is not suggested that those documents are not genuine.  I simply fail to see how such documents could have emanated from bank officers who knew that GHK’s business was fraudulent.  With respect, the Ls’ suggestion that the officers had buried the fraud is unbelievable.   

176.  I am unable to agree with the Ls that the subsequent documents are irrelevant, especially when it is their case that DBSHK preferred its own illegitimate commercial interests in buying time to reduce DBS’s exposure to Galleria (see para 180 below).

177.  For completeness, in so far as it may be argued that the documents had “gone cold” from the end of March to just before 12 April 2006, I see nothing in the point.  The evidence was that the GHK account was operating normally and the loans were all repaid. 

Inherent probabilities

178.  The inherent probabilities are stacked against the Ls’ case.  The allegation that bank officers would knowingly ignore a fraud against the bank and continue to approve credit to the fraudster is, on any view, and extraordinary one.  There is no suggestion that any of the bank officers were in cahoots with Cheri or GHK.  There is no motive for such extraordinary acts of betrayal. 

179.  It should be added that the Ls are trying to blow hot and cold on this point.  On one hand, they suggested that DBSHK did not want to expose GHK’s fraud because the other syndicate banks would immediately recall the Syndicate Loan.  On the other, it was suggested that DBSHK was prepared to continue to lend to GHK despite having discovered its fraud.  I can see no reason why DBS would have behaved completely differently compared with other banks. 

180.  I reject the suggestion made in the course of cross-examination[21] of Albert and Monique that it might have been thought advantageous not to expose the fraud so that the bank could extract itself from the lending in a controlled manner to minimise its loss.  Such allegation cannot be found in the extraordinarily lengthy Statement of Claim, nor mentioned in the opening of the Ls’ case.  It is entirely speculative and without proper evidential basis.  Transparently, it was an afterthought advanced to try to counter the lack of motive, an inherent weakness in the Ls’ case which ought to have been recognised from day one.

181.  The allegation is contrary to the evidence.  Both DBSHK and DBSLA continued to lend to Galleria until the discovery of fraud by BOA in 2009 (a period of nearly 3½ years).  Insofar as the restructuring of the facilities is concerned, it was done in the context of the Subprime Crisis, and the concern over the DP line was identified long before the IMB Reports.

182.  I also agree with Mr Jat that the alleged motive means that the bank officers took a gambler’s attitude to banking: having made a bad bet in lending to Galleria, they doubled down by continued lending to Galleria in the hope of winning the money back and exiting at some later opportunity before the game was up.  This is an incredible proposition.

IMB Reports widely circulated

183.  The IMB Reports were widely circulated between officers of different seniority in 3 departments.  As Mr Jat pointed out, these documents could be subject to internal audit by a different team in Singapore headquarters.  It is inconceivable for anyone to think of turning a blind-eye to a fraud which many of his colleagues knew of.  Any suggestion that all these colleagues were at the same time turning a blind-eye is, bluntly, untenable. This is another fundamental fragility in the Ls’ case and is simply ignored by them.

Alleged decision not to investigate the fraud

184.  I do not believe that Albert (and/or Monique) would have made the decision to stop the further investigation of the B/L as alleged by the Ls if he had any knowledge or belief of fraud.  It was far too serious a matter for him (with or without the approval of Monique) to have taken the responsibility, quite apart from the fact that he had no motive to do so.  As of April 2006, DBSHK alone had lent some US$40M to GHK.  If there was, as alleged, a decision to continue to lend to GHK despite its fraud, common sense dictates that such an extraordinary decision would unlikely be made without the agreement of the highest level of management of the bank, and not by 2 officers of Credit however senior they were in that department. 

Viva voce evidence

185.  Finally, as regards the viva voce evidence of the witnesses, such evidence was admittedly based largely on the contemporaneous documents.  That is only natural given the long lapse of time.  However, as Monique pointed out, she would have remembered whether there was a suspicion of fraud.

186.  With the exception of Liu[22] , all the DBSHK witnesses were subjected to vigorous and searching cross-examination, especially Kitty and Albert.  I find each one of DBSHK’s witnesses credible.  They all tried their best to answer very detailed questions over events which had faded in their memory.  I should mention 2 points in particular. 

187.  Firstly, there were moments of embarrassment, eg, when Kitty was confronted with how the IMB Reoprts were handled and the language used in the emails.  However, a holistic view should be taken of the evidence.  It was inevitable that the witnesses were speaking with the benefit of hindsight, that the bank was indeed defaulted during their watch.  Further, it would be unrealistic to examine the documents as if they were contracts drafted by lawyers. 

188.  Secondly, both Kitty and Albert had given certain answers to the Ls when they were interviewed by the latter in 2014 which were inconsistent with those they gave in court.  I took this into consideration in assessing their evidence.  Both of them said that they were ill-prepared for the interviews.  Plainly, it would have been difficult for anyone to be cross-examined, as they were by the Ls, about events which took place many years ago without refreshing their recollection by studying the contemporaneous documents.  The knowledge of hindsight might have compounded the difficulty in that Kitty and Albert would have to insulate their minds from the same when they were asked to revisit the events of many years ago. 

189.  Lastly, in respect of the accusation by the Ls that the bank had failed to call Peter Chan (see para 107 above) and Choong to give evidence, there is nothing in the point.  All the key officers who had dealt with these matters had given evidence before this court.  Peter Chan no longer works for DBSHK.  He was interviewed by the Ls.  I agree with Mr Jat that the Ls could have subpoenaed him to give evidence if it was important.

190.  For these reasons, I reject the Ls’ case on knowledge of fraud or dishonesty on the part of any of the bank officers.  Therefore, this case must fail.  Even for knowing receipt, I agree with Mr Jat that once the Ls’ case on knowledge of fraud is rejected, it is clear that DBSHK was a victim of GHK’s fraud.  In any case, I can see nothing unconscionable on the part of DBSHK. 

191.  I shall deal with, succinctly, a few other points which are insurmountable by the Ls, and therefore further expose the fragility of this case.

Subject of the fraud

192.  Plainly, if DBSHK were aware of a fraud exposed by the IMB Reports, it was a fraud practised on it because the B/L in question were pledged to it under the facility granted by it to GHK.  I am unable to see any sufficient ground to support the quantum leap that the bank should have been aware that Galleria or GHK was conducting a fraudulent business as alleged by the Ls[23] . The evidence was that Galleria’s business had been running for over 20 years.   

193.  Even if the bank had known that GHK or Cheri was/were practising a fraud on it, that cannot support any of the causes of action now levelled against it.  In respect of fraudulent trading, it is very difficult to see: (a) how knowledge of a number of fraudulent transactions (practised on the bank) can be equated with knowledge that GHK’s business was being carried on with intent to defraud creditors or for a fraudulent purpose; and (b) how knowledge that one is being defrauded can translated into being a party to such fraud. Both of these ingredients are essential for establishing this cause of action.

194.  In respect of dishonest assistance, even assuming in favour of the Ls that there was breach of fiduciary duty on the part of Cheri in causing GHK to borrow from DBSHK, the proposition that the latter dishonestly induced or assist in such breach, ie, inducing a fraud on itself, defies all common sense. 

195.  As regards knowing receipt, it is necessary for the Ls to prove, inter alia, the beneficial receipt by DBSHK of assets which are traceable as representing the assets of GHK.  Two such assets had been identified by the Ls, namely, (a) the money received by DBSHK in reduction of its lending to GHK and (b) its charges[24] . I agree with Mr Jat that the notion that DBSHK should be liable for knowing receipt in the circumstances of this case would amount to the victim paying twice over the money it was cheated by the fraudster.  It again defies common sense to suggest that DBSHK would have knowingly lent to a fraudulent client just to earn the bank charges. 

196.  I also agree with DBSHK that a claim in knowing receipt must fail where the defendant’s receipt is pursuant to a valid and binding contract: Lewin on Trust, 19^th edn, [42-049]; Criterion Properties v Stratford UK Properties, HL,[2004] 1 WLR 1846, [4]; Akai Holdings Ltd v Kasikorn Bank [2010] 3 HKC 153, CA, [35], [37] and [248-249] (upheld by the CFA, (2010) 13 HKCFA 479).

197.  In this case, the Ls have not sought to set aside or dispute the loan facility agreements entered into by GHK and DBSHK.  Neither is there any suggestion that the Fus lacked authority to enter into the agreements on behalf of GHK.  It follows that those agreements remained valid and GHK was contractually bound to repay DBSHK.  No issue of knowing receipt can arise.

198.  In respect of any proceeds received by DBSHK (not confined to the amount of about US$6M received after the winding up of GHK) pursuant to L/C issued by another bank in favour of GHK, I agree with DBSHK that such proceeds were received by it in its own right as principal and were not assets of GHK. Such proceeds were received by DBSHK after having negotiated the L/C and made payments to GHK.

Quantum of compensation

199.  I agree with Mr Jat that the Ls’ calculations on quantum are flawed.  For L/C proceeds, I have identified the problem in the preceding paragraph. 

200.  Further, the Ls’ case on loss is based on the proofs of debt received.  However, their own case is that such proofs had not been adjudicated upon.  As pointed out by Mr Jat, such proofs included those from Cheri and her companies.  It is not clear why such proofs constitute legitimate claims against DBSHK. 

201.  Mr Manzoni complained that the objections to the Ls’ case on quantum were only taken by DBSHK in its reply submissions.  He endeavoured to answer them towards the ends of his viva voce final submission by producing to the court 3 tables said to be based on the materials in the trial bundles.  I do not find the tables to be altogether self-explanatory, and as Mr Manzoni accepted, it is not the obligation of the court to comb through the materials to see if the tables are accurate.  Mr Jat had no opportunity to make any meaningful comment on the tables.  This is no way to prove a claim in excess of US$185M.  Further, the court cannot simply rely on what was said from the Bar table as evidence. 

202.  As for the complaint of lateness of DBSHK’s challenge, the burden of proof on quantum is squarely on the Ls.  In the context of an adversarial litigation involving a claim of US$185M, one should not be surprised if the opponent adopts the strategy of letting the sleeping dog lie.  This is not to say that such strategy is endorsed by the court.

203.  Given the state of the evidence, I have to agree with DBSHK that the Ls have not proved their case on quantum.

Disposition

204.  In the premises, this action is dismissed. 

205.  In respect of the Counterclaim by DBSHK concerning its proof of debt, it has been agreed by the parties that the Counterclaim should be withdrawn with no order as to costs in light of the position of the Ls that following the outcome of these proceedings, they will adjudicate proofs of debts, including that from DBSHK, in the usual way and in accordance with the relevant provisions of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32.  Leave is granted for the withdrawal.

206.  I make an order nisi that the costs of this action be paid by the Ls with a certificate for 2 counsel.

207.  I am grateful to counsel and Mr Karas for their assistance.