UBS AG v. STAND FORD INTERNATIONAL ENTERPRISES LTD. AND OTHERS

CACV 350/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 350 OF 2002

(ON APPEAL FROM HCCL NO. 45 OF 2000)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a judgment of Stone J of 28 June 2002 whereby he ordered that the 3rd defendant should pay the plaintiff damages to be assessed for knowing/dishonest assistance in breaches of a constructive trust. In a subsequent judgment dated 6 August 2002 the judge assessed the damages as US$559,176.56 together with interest. At the conclusion of the hearing, this appeal was dismissed and this court said that it would give its reasons in writing, which we now do.

Background facts

2. The facts have been fully set out in the judgment below. Except in respect of one matter the history of the events as recorded by the judge is not challenged. It is unnecessary therefore to set out more than a brief summary.

3. The 3rd defendant was the financial controller of Technology Research Company Limited. As far back as about 1990 he had become acquainted with the 2nd defendant who was the general manager of a Czech company which was engaged in selling and distributing computer products. The 2nd defendant apparently met the 3rd defendant from time to time when he came to Hong Kong. In 1997, the 2nd defendant told the 3rd defendant that together one of his colleagues, a Mr Roman Doubrava, he had purchased a B.V.I. company, namely the 1st defendant, and had appointed the 3rd defendant the first director. The 3rd defendant did not object to this and indeed took the 2nd defendant and Mr Doubrava to an HSBC branch in the King's Road in order to open two accounts.

4. In January 2000, there was a series of e-mail exchanges between the 2nd and 3rd defendants in which the 3rd defendant was asked for assistance with a view to money being transferred into one of the two HSBC accounts. Money would then be transferred to another bank so that it could be transmitted out of Hong Kong. Commencing on 17 January and continuing through early February 2000, the 3rd defendant updated the bank passbook of one of the HSBC accounts on no less than seven occasions. On each occasion the balance remained at US$410. However on 8 February 2000, after the 2nd defendant had arrived in Hong Kong, it was found that there had been a telegraphic transfer of US$1,958,677.66 into that account. The 2nd defendant told the 3rd defendant that he wanted to withdraw US$757,000 in cash and also to open a bank account in a personal name where cash could be deposited. As a result, the 3rd defendant did two things. He telephoned a Miss Ki of Chekiang First Bank in Central and confirmed that it was possible to open a US dollar account in a personal name and he also telephoned the HSBC branch in the King's Road and requested that the sum of US$757,000 should be withdrawn from their Central office the next day.

5. On the next day the 3rd defendant accompanied the 2nd defendant to the HSBC branch in the King's Road and on his own admission completed four telegraphic transfer forms. There was a total of US$600,000 which was transmitted to a bank account in Liechtenstein held in the name of ABC Promotion Establishment Schaan and a further US$600,000 which was sent to a bank in Costa Rica. There were two cash withdrawal forms one for US$628,000 and the other for US$129,000. Thereafter the 2nd and 3rd defendants proceeded to Central. There was some dispute as to whether they proceeded first to the Chekiang First Bank branch in Duddell Street or whether they went to the HSBC Head Office. The judge found that they went to the Chekiang First Bank and after that went to the HSBC Head Office and withdrew US$628,000 in cash. They then took the cash along the road to the Chekiang First Bank where it was deposited into an account opened in the 2nd defendant's name. US$626,700 out of the money that was deposited was then remitted to another bank account in Liechtenstein, this time in the 2nd defendant's own name. Later on the same day the 2nd and 3rd defendants returned to the HSBC Head Office and withdrew the remaining amount of US$129,000 in cash.

6. The reality of the situation transpired to be that a forged letter had been sent to the plaintiff's Zurich branch on 16 January 2000. That letter purported to come from the National Bank of Ethiopia and gave instructions that its bank account with the plaintiff should be closed and the balance transferred to the 1st defendant's HSBC account into which the US dollar amount was credited on 8 February 2000.

7. After proceedings had been commenced, the plaintiff had been able to recover US$34,532.20 from the 1st defendant, US$1,302,413.61 from the 2nd and 4th defendants and US$62,500.29 from ABC Promotion Establishment. There thus remained a balance of US$559,176.56 which had not been recovered.

The judgment below

8. The judge approached the matter on the basis that the crux of the plaintiff's case was that the 3rd defendant had knowingly and/or dishonestly assisted in the disposal of monies which were impressed with a constructive trust. He had no hesitation in coming to the conclusion that the plaintiff succeeded on the basis that the 3rd defendant had dishonestly assisted the 2nd defendant in the disposal of the monies and was therefore liable.

9. The judge referred to the Privy Council decision in Royal Brunei Airlines v Tan [1995] 2 AC 378 and the recent House of Lords' decision in Twinsectra Limited v Yardley [2002] 2 WLR 802. In the former case Lord Nicholls had said that dishonesty in the context meant simply not acting as an honest person would in the circumstances and that the test was an objective one albeit applied in the circumstances and in relation to the particular persons concerned. In the Twinsectra case, Lord Hutton had referred to what was called a combined test. That test was not only that the person concerned should have been acting dishonestly by the ordinary standards of reasonable and honest people but he should have been aware that by those standards he was acting dishonestly. On the facts of this case the judge considered that the distinction was irrelevant. He held that the 3rd defendant was liable on whichever test was applied. He had found the 3rd defendant's evidence "frequently to be evasive and non-responsive, and at times simply disingenuous".

10. One matter which was relied upon in this court by Mr Reyes SC, in his submissions on behalf of the 3rd defendant, was that the judge was wrong in holding that the 3rd defendant had himself told Mr Wong Kwai-man ("Mr Wong"), the Assistant Chief Manager of the Chekiang First Bank, when the 3rd defendant introduced the 2nd defendant to Mr Wong on the opening of the account, that the 2nd defendant had been engaged in exporting goods from Taiwan to Czechoslovakia and had avoided profits tax by marking down the price of the goods which were to be imported. The money represented his so-called trading profits but was an attempt to avoid profits tax. It was said that the judge should instead have relied upon a report which had been made to the Joint Financial Intelligence Unit pursuant to section 25A of the Drug Trafficking (Recovery of Proceeds) Ordinance and the Organized and Serious Crimes Ordinance. That report did not mention the 3rd defendant as providing that explanation, rather it said that the information came from the 2nd defendant.

11. However, this was a matter which the judge considered in substantial detail. Not only did he set out in full the body of the report to the Joint Financial Intelligence Unit but he devoted a significant part of the judgment to a consideration as to whether Mr Wong Kwai-man's evidence had been correct in that it had been the 3rd defendant who had first proffered the explanation as to the source of the money deposited at the Chekiang First Bank. I see no grounds for disturbing the conclusion to which the judge arrived after his careful analysis.

12. In those circumstances, as the judge pointed out, the 3rd defendant's explanation in his evidence as to the money in the 1st defendant's account originating from the closure of a friend's company is one of the ingredients which led the judge to say at paragraph 42:

"Looked at in its totality I have great difficulty in accepting, and I do not accept, the 3rd defendant as a witness of truth in his explanation of his involvement with Mr Vyplel and the considerable practical assistance which he gave to Mr Vyplel in terms of the sum of US$1.958 million which had been transferred into the Stand Ford 523 account. Putting it at its lowest, I cannot believe that he was not suspicious about the provenance of these funds or as to what was going on, particularly given the serious attempt to break the 'paper trail' - a well known 'money laundering' technique - when cash physically was transported from the Hongkong Bank for deposit into the new account at the Chekiang First Bank."

13. Mr Reyes, both in argument and in his skeleton argument, raised a number of points which he said showed that the judge had taken into account irrelevant material when considering the 3rd defendant's state of mind. Mr Reyes took issue, for example, with the fact that the judge considered it was relevant that the 3rd defendant was both highly intelligent and financially sophisticated. In my view, this cannot be a valid criticism of the judge's approach. Whilst such facts are relevant in relation to an objective test it is also relevant when the judge comes to consider what the 3rd defendant actually knew. It seems to me that once the judge had come to the conclusion that he could not rely upon the 3rd defendant's own evidence he had to take into account the facts which he found and which were relevant to a consideration of the 3rd defendant's state of mind.

14. Neither do I consider that there is any validity in the other points. The judge might have come to the conclusion that the 3rd defendant had believed what he said in the witness box he had been told by the 2nd defendant. It was also open to the judge to hold that the 3rd defendant had been duped by the 2nd defendant, as submitted by Mr Reyes. However, the judge did not do so and I do not consider that his reasons for not doing so have been shown to be erroneous.

15. A further point which was taken on behalf of the 3rd defendant was that there was no evidence that the 3rd defendant was aware of the trust which was impressed upon the monies which had been paid into the HSBC account in King's Road. It may be true that the 3rd defendant was unaware that the monies came from an account of the National Bank of Ethiopia, nevertheless, in the circumstances of this case, once the judge had come to the conclusion that the 3rd defendant was aware that the 2nd defendant was not entitled, either through the 1st defendant or otherwise, to deal with the monies that had been paid in, knowledge of the exact details of the constructive trust became irrelevant. Taken to its extreme an argument such as that raised would mean that there would be no liability in respect of monies impressed with a constructive trust if those involved in assisting a fraudulent handler mistook the identity of the person entitled to the funds.

16. Finally, Mr Reyes attempted to raise the argument that there had been no relevant assistance by the 3rd defendant which could bring him within realms which would make him liable for having assisted in the breach of trust. Whilst it was by no means clear that this point was open to be taken on behalf of the 3rd defendant at this stage, Mr Reyes was permitted to outline the point which had been set out in his skeleton argument. This point, however, seems to be entirely without merit. Not only was the 3rd defendant, a director, and in particular the first director, of the 1st defendant but from the day after the date of the forged letter, which resulted in the funds of the National Bank of Ethiopia being extracted from the bank account with the plaintiff, the 3rd defendant was clearly checking to see whether funds had been paid into the HSBC account. The history of the events in Hong Kong put the 3rd defendant in a position of taking a very active part in the transfer of the monies overseas. He accompanied the 2nd defendant to the HSBC bank. He wrote out the transfer forms for the 2nd defendant to sign. He arranged the opening of the account at the Chekiang First Bank. He was intimately involved in the withdrawal of the cash from the HSBC Head Office and the payment of it into the Chekiang First Bank. The judge found that he had lied in that process in an attempt to cover up what was being done. The 3rd defendant even returned to the HSBC Head Office with the 2nd defendant to withdraw the remaining cash. He could not pray in aid any of his evidence because the judge held that he was not telling the truth. In those circumstances I do not consider that the judge could have come to any conclusion other than the fact that the 3rd defendant had given relevant knowing assistance to the breach of trust.

Hon Le Pichon JA:

17. I agree.

Hon Yuen JA:

18. I agree.