UNICREDITO ITALIANO S.P.A.,HONG KONG BRANCH v. ALAN CHUNG WAH TANG AND ANOTHER

HCMP 3003/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3003 OF 2001

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DECISION

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1. This is a summons for discovery of documents. The application arises in the following circumstances.

The Company

2. Guang Xin Enterprises Ltd ("the Company") was a subsidiary of Guangdong International Trust and Investment Corporation ("GITIC"), a corporation established on the Mainland and wholly-owned by the Guangdong provincial government.

3. The Company was a conglomerate holding property interests and participating in joint ventures.

Business with the Bank

4. The Company became a customer of, amongst other banks, Unicredito Italiano S.P.A. Hong Kong Branch ("the Bank") in April 1993. It opened a HK dollar current account and a US dollar call account. It also applied for, and was granted, various facilities from the Bank, including letter of credit facilities which were backed by guarantees from companies in the GITIC group.

5. From April 1993 to October 1998, the facilities provided by the Bank included "local" letters of credit i.e. letters of credit for goods sold and delivered within Hong Kong. In the case of this Bank, there were 24 local letter of credit transactions. This was amongst hundreds of local letter of credit transactions the Company had with other banks in Hong Kong.

6. It is apparently not disputed that from April 1993 to early 1998, the Company had a "satisfactory track record" with the Bank, in that it repaid loans and advances punctually, and facilities were utilised within approved or authorised limits.

7. In late 1998, however, GITIC was subject to a forced liquidation on the Mainland. On 12 October 1998, the Company was put into creditors' voluntary liquidation. The Defendants Mr Tang and Mr Tam were appointed liquidators ("the Liquidators").

Sums outstanding

8. At the time the Company went into liquidation, two sums had been advanced to it by the Bank pursuant to local letters of credit.

LC 80356

9. The first transaction was as follows. By an application, the date of which does not appear, the Company applied to the Bank for a letter of credit for a sum of US$2,786,000 in favour of a Hong Kong company called Wah Hay (China) Ltd in respect of specified quantities of granite, carpet and sanitary fittings. The expiry date of the letter of credit was stated to be 1 August 1998. The goods were to be delivered locally not later than 25 July 1998. The documents to be presented were the beneficiary's draft drawn on the issuing bank, 3 copies of commercial invoices signed by the beneficiary, and a cargo receipt issued and signed by the applicant Company whose signature must be in conformity with the record held in the issuing bank, certifying that the goods have been received in good order and condition showing the value of the goods, delivery date not later than 25 July 1998 and the letter of credit number.

10. On the application, the number "LC 80356" was filled in in the box for "Credit No."

11. On 16 July 1998, the Bank issued letter of credit No. LC80356 in accordance with the application, save that the beneficiary's draft was not within the list of documents required to be presented.

12. The Company's trust receipt was given to the Bank the same day.

13. On 21 July 1998, the Bank advised the Company that it had received a drawing under the credit and asked the Company for instructions whether it should debit the Company's current account or trust receipt account. There was an invoice signed for and on behalf of Wah Hay (China) Ltd, the beneficiary. It was dated 15 July 1998, referred to the specified goods, "local delivery" and the Bank's letter of credit No. LC80356. The copy before the Court also bore a chop of the China State Bank's Outward Bills Department. There was also the Company's Cargo Receipt which was dated 17 July 1998 and which conformed to the requirements in the letter of credit. On their face, these documents conformed with the documents required to be presented under the letter of credit.

14. After instructions were given by the Company to debit its trust receipt account, on 22 July 1998, the Bank debited that account with the sum, to become due for payment on 19 November 1998.

LC 80374

15. The second transaction was as follow. By an application bearing a date stamp of 24 July 1998, the Company applied to the Bank for a letter of credit for a sum of US$1,092,795.14 in favour of a Hong Kong company called New Vantage International (H.K.) Ltd in respect of parts for "Allison transmission" and "Cummins diesel engine". The expiry date of the letter of credit was stated to be 15 August 1998. The goods were to be delivered locally not later than 5 August 1998. The documents to be presented were similarly the beneficiary's draft, the beneficiary's invoice and the Company's cargo receipt. The Company signed a trust receipt in favour of the Bank the same day.

16. On the application, the number "LC 80374" was filled in in the box for "Credit No."

17. On 28 July 1998, the Bank issued letter of credit No. LC80374 in accordance with the application, save that the beneficiary's draft was not within the list of documents required to be presented.

18. On 3 August 1998, having received remittance instructions from the Chiyu Banking Corporation on behalf of New Vantage the beneficiary, the Bank advised the Company that it had received a drawing under the credit and asked the Company for instructions for debit. There was an invoice signed for and on behalf of New Vantage, the beneficiary. It was dated 30 July 1998, referred to the specified goods, "local delivery" and the Bank's letter of credit No. LC80374. There was also the Company's Cargo Receipt which was dated 30 July 1998 and which conformed to the requirements in the letter of credit.

19. After instructions were given by the Company, on 4 August 1998, the Bank debited the Company's trust receipt account with the sum, to become due for payment on 2 December 1998. The sum of the two letters of credit were within the Company's credit limit of US$5m.

Bank's proof of debt in liquidation

20. Before these sums were paid, on 12 October 1998, the Company went into liquidation. In neither case were actual goods found.

21. The Bank put in a proof of debt primarily comprising the two sums under the letters of credit and a short-term loan. The liquidators admitted the proof relating to the short-term loan but rejected it in respect of the two sums under the letters of credit.

22. By an Originating Summons filed on 30 May 2001, the Bank sought an order that the rejection be overturned and that the proof be admitted in full. Directions for discovery were agreed. The Bank's list of documents was filed in mid-December 2001. The Originating Summons is due to be heard on 16-17 April 2002.

Application for discovery

23. On 22 February 2002, the liquidators issued the present summons for a further or better list, and further or alternatively, for specific discovery of 11 classes of documents included in a schedule to the summons, which included the Bank's internal procedures on banking facilities, the Bank's credit files in relation to the Company from 1993, the Bank's internal records regarding approval of the applications for the two letters of credit in question and checking for compliance with them, all correspondence between the Bank and the Company "regarding acceptance of import documents" and the Bank's letters of credit and document files in relation to the 22 previous letters of credit. The liquidators have alleged that these documents are relevant to the issue whether the Bank had been "reckless" or "had turned a blind eye" in making payment under the letters of credit.

24. The Bank has subsequently disclosed the worksheets used by its Bills Checker and Bills Officer which showed that no discrepancies were found.

25. Other than these further documents, the Bank has objected to the application for discovery, first on the ground that it has been made late, but more importantly, on the ground that on the principle of the autonomy of documentary credits, unless fraud was clearly established at the time of payment, it was obliged to pay against the documents and it was entitled to reimbursement. Since the liquidators have not alleged on the evidence that the Bank had knowledge of, or was party to, any fraud at the time it made payment, the documents sought are irrelevant to any issue between the parties and the application for discovery is a "fishing" exercise.

Principles

26. It is not disputed that the provisions of the Uniform Customs and Practice for Documentary Credits were applicable to these letters of credit. Under these provisions, credits are separate transactions from the contracts on which they may be based (Article 3) and all parties concerned with credit operations deal with the documents, not with the goods (Article 4). Banks have no liability or responsibility for the genuineness of any documents or for the existence of the goods represented by any documents (Article 15).

27. As such, a bank which has issued a letter of credit has a duty to pay against presentation of compliant documents. It would be disentitled to reimbursement only if there is clear evidence of the fact of fraud and of the bank's knowledge of it at the time of payment.

28. For the purposes of this summons for discovery under rules 3 and 7, the primary question is whether the issue of fraud has been raised in these proceedings.

29. For an issue of fraud to be properly and validly raised in proceedings, there has to be particularised allegations of fact. In proceedings begun by writ, those assertions would have to be contained in pleadings. In proceedings begun by originating summons, those assertions would have to be contained in the affidavit evidence.

30. Mr Westbrook SC, counsel for the liquidators, accepts that there is nothing in the affidavit evidence on which it could be asserted that the Bank had "positive knowledge" of fraud. However he says that the Bank had issued and paid under the documentary credits "recklessly", without caring whether the underlying transactions were true or false. He says that the Bank's "recklessness" was shown by it having "turned a blind eye to the [following] points of suspicion":-

(1) in relation to the applications for the letters of credit, that the letters of credit applied for were for a substantial sum, that the beneficiaries' offices were located near the Company, that no advising bank was involved, and that the documents required were few and simple;

(2) in relation to the letters of credit themselves, that the letters of credit were physically collected from the Bank by the beneficiaries;

(3) in relation to the documents presented, that for LC 80356, the beneficiary's invoice referred to the number of the letter of credit before it was issued and the cargo receipt was dated after the invoice and letter of credit were issued, and for LC 80374, the cargo receipt was issued on the same day as the invoice;

(4) in relation to the goods, that the cargo receipts did not show that the goods were received on trust for the Bank, and the Bank did not require the beneficiaries to certify that the goods were delivered to the Company as the Bank's agent.

The liquidators have also raised the point that in the applications, the beneficiaries were to present drafts, but this was not included in the letters of credit issued.

The test

31. In so far as Mr Westbrook SC was suggesting that in the absence of what he called "positive knowledge" of fraud, there was a lesser standard of "recklessness" against which a paying bank could be tested, the use of those terms only serve to confuse the test.

32. It is well-established law that the test is whether, standing in the shoes of the paying bank at the time of payment, the fraud was clear and obvious to it (Turkiye Is Bankasi AS v Bank of China [1998] 1 Ll LR 250 at 253, quoting Geoffrey Lane LJ in Edward Owen Engineering Ltd v Barclays Bank International Ltd (CA) [1978] 1 QB 159 at 175F). If fraud was clear and obvious, then the bank pays the beneficiary at its own peril and it is not entitled to reimbursement. But if fraud was not clear and obvious, then it is not for a banker to question why the businessmen involved in the underlying transaction had chosen to conduct their business in any particular way.

No issue of fraud

33. If, however, the liquidators' case is that the matters set out in paragraph 30 above were particulars that fraud was clear and obvious, then I would hold that no issue of fraud has been properly and validly raised.

34. In relation to the points made on the applications for the letters of credit, none of the matters referred to, whether singly or jointly, could give clear and obvious notice of fraud. The Company was a subsidiary of GITIC, a financial institution wholly owned by the Guangdong Provincial Government that engaged in a wide variety of business activities. The letters of credit in question were for amounts which were within approved or authorised credit limits for the Company. Since these were purportedly for goods sold and delivered locally, the absence of requirements for shipping documents, air way bills, insurance documents and other paraphernalia of international trade would not have been surprising. Similarly, the absence of an advising bank would not have been surprising. As for the fact that the offices of the beneficiaries were within a few hundred metres (in the case of one) and a few kilometres (in the case of the other) of the Company, I fail to see how that could have caused a banker to have notice that fraud was clear and obvious.

35. In relation to the point made on the letters of credit themselves, again I fail to see the relevance of the fact that the letters of credit were physically collected from the Bank by the beneficiaries.

36. In relation to the points made on the documents presented, it is clear that the number "LC 80356" appeared in the application form, so the fact that the beneficiary's invoice referred to that number would not have been cause for the Bank to have notice that fraud was clear and obvious. I do not see why the dates of the cargo receipts would have been cause for the Bank to have such notice.

37. In relation to the points made on the cargo receipts, the Company had signed Trust Receipts in favour of the Bank. The liquidators have not shown what further purpose would have been served by the points sought to be made, and how the lack of the endorsements could show that the Bank was aware of clear and obvious fraud.

38. Finally, as for the point that the beneficiaries' drafts were not presented (they had been referred to in the applications for letter of credit, although not in the letters of credit themselves), that may or may not be relevant to the issue at the hearing of the Originating Summons whether the Bank should have paid on the documents presented. However, I do not see how this supports the purported issue of fraud on which the discovery summons is based.

39. It is clear that fraud must only be alleged when there is sufficient evidence and then it must be alleged specifically with full particulars. It is established principle that it is not fair and just to permit a party to raise a vague unparticularised case in the hope of making it good after discovery (Deak Perera Far East Ltd v Deak and others [1995] 2 HKC 28). Although one understands the constraints placed upon liquidators and their duty to examine all claims with care, that principle nevertheless applies to them. They cannot put forward an amorphous case of fraud unsupported by proper particulars, prompting a denial by the other party and then assert that a proper issue of fraud has been joined between the parties.

40. In the circumstances, I would dismiss the summons with an order nisi that the costs follow the event, i.e. that the costs be to the Plaintiff. As for the liquidators' own costs, they are to be costs in the liquidation.