GALLERIA (HONG KONG), LTD AND ANOTHER v. DBS BANK LTD., HONG KONG BRANCH Defendant

CACV 457/2019

[2022] HKCA 852

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 457 OF 2019

(ON APPEAL FROM HCCL NO 4 OF 2016)

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J U D G M E N T

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Hon Kwan Ag CJHC (giving the Judgment of the Court):

Introduction

1.  On 30 April 2021, we handed down our judgment (“the CA Judgment”), dismissing the appeal of the plaintiffs and upholding the judgment that was handed down on 1 August 2019 by Anthony Chan J (“the Judgment”).

2.  We will adopt the expressions and terms in the CA Judgment.

3.  The plaintiffs filed a notice of motion on 28 May 2021 seeking leave to appeal to the Court of Final Appeal.

4.  The questions said to be of great general or public importance in the notice of motion are stated as follows:

1.  For the purpose of attributing knowledge to a defendant company in the context of dishonestly assisting a breach of fiduciary duty:

1.1.  Is the test in Hong Kong whether the individual whose knowledge is sought to be attributed “the sole or most senior decision maker” (as found by the CA at [159]), or the “relevant decision maker … in respect of the relevant transactions” (per Bank of India v Morris [2005] BCC 739 at [126] per UKCA)?

1.2.  How should the Court approach the inter-related questions of dishonesty, knowledge and attribution when a relevant individual did not play a material role in the events which gave rise to the complaints of dishonesty, but that individual was not the sole or most senior decision-maker (see CA Judgment at [159])?

2.  In a case of dishonestly assisting a breach of fiduciary duty, is it permissible for a trial judge to assess honesty as a jury question, or is the trial judge required to first assess the knowledge of the relevant individual(s) who is/are the relevant agent(s) of the company and then determine whether or not the relevant individual(s) was/were objectively dishonest, including by reference to the background, personal characteristics and conduct of the relevant individual(s) and the overall objective circumstances as established by evidence?

3.  Is it dishonest for a banker to continue lending to its customer when the banker:

3.1.  knows that the material question of whether that customer was guilty of fraud, in respect of suspicious transactions reported to the banker, is unresolved; and

3.2.  has means to conduct further investigation so as to find out whether there was any fraud involved before deciding whether to continue lending?

4.  In a claim for knowing receipt that is founded on a breach of fiduciary duty by the director of a company in transferring the company’s assets to the defendant, does the fact that the defendant had a valid and binding contractual right to receive those assets mean that the knowing receipt claim must fail?

Background

5.  The background facts in this case are most important and we have reviewed in detail the relevant facts before we considered the judge’s analysis of the evidence in light of the parties’ submissions (§9 of the CA Judgment). The relevant background matters have been set out in considerable detail in §§13 to 119 of the CA Judgment. A brief summary of the salient matters necessary for the proper understanding of this judgment will suffice.

6.  GHK purportedly exported wholesale home furnishings from Mainland China to the USA, by way of sale to GUSA for onward supply to American retailers. The business of the Galleria group was financed by loans from commercial banks in Hong Kong (including DBSHK) and in the USA.

7.  Due to GHK’s inability to repay loans, Bank of America, N.A., Hong Kong branch presented a petition to wind up GHK on 22 July 2009. A winding-up order was made on 8 February 2010, and liquidators (“Ls”) were appointed on 23 July 2010[1].

8.  This action was brought by Ls against DBSHK, which had lodged a proof of debt in the liquidation of GHK for US$8.3 million. The amount of damages claimed by Ls on appeal amounted to US$117 million odd.

9.  The plaintiffs claimed that DBSHK was liable to GHK on one or more of three causes of action: knowing receipt, dishonest assistance and fraudulent trading.

10.  In June 2003, DBSHK extended various facilities (including a document against payment facility, ie “the DP Loans”) to GHK of up to US$35 million.

11.  In around mid-March 2006, DBSHK was keen to confirm the “asset conversion cycle” or “trade flow” of Galleria for the purpose of ascertaining the reason for the delay in repayment of the DP Loans.

12.  In March 2006, DBSHK sent 23 bills of lading issued by GHK to the International Maritime Bureau of the International Chamber of Commerce (“ICC-IMB”) for random checking. The reports issued by IMB (“IMB Reports”) stated that 19 out of the 23 bills of lading were “false” or “not in order” and advised “extreme caution be exercised” by DBSHK.

13.  The plaintiffs alleged that DBSHK turned a blind eye to the 19 false bills of lading and/or the IMB Reports and further deliberately chose not to make obvious inquiries and meaningful investigations which any honest banker would have made, stopped the investigation while it was incomplete and continued to lend to GHK in any event.

14.  We had noted that the contemporaneous documents produced by DBSHK were extensive and comprehensive and it was clear that the judge was able to form a reasonably good, coherent and reliable picture of what went on before and after the receipt of the IMB Reports, in particular the actions of the officers of DBSHK which reflected their knowledge and thinking at the time. This was despite the fact that none of the witnesses of DBSHK had a reliable recollection, which was understandable as the material events had occurred some 13 years ago[2].

15.  The judge, upon taking a holistic view of the evidence, made the following important findings[3]:

(1)  By March 2006, DBSHK had enjoyed a successful banking relationship with GHK for three years.

(2)  There was a rigorous system of procedure and checks and balance within DBSHK for approving and reviewing credit.

(3)  While its Senior Credit Officer Albert Mak (“Albert”) was responsible for handling DBSHK’s credit to GUSA and GHK, he was not the only credit officer involved with GUSA and GHK before and after the IMB Reports. Also, Albert appeared to be a conscientious employee.

(4)  All the bank officers thought highly of Cheri Fu (the director of GHK mainly responsible for running the business) and believed that Galleria had a thriving business. DBSHK only began to reduce its lending to GHK in the latter half of 2008 due to the subprime crisis.

(5)  The ICC-IMB checks were conducted not for the purpose of verifying the authenticity of the bills of lading, but rather as a possible path of investigation to determine GHK’s trade flow, which in turn might explain the lengthening of tenor of the DP Loans.

16.  Of paramount importance was the judge’s acceptance of the evidence of DBSHK’s witnesses that they did not understand the replies in the IMB Reports to mean fraud and all of them shared a belief and conclusion that there was no foul play[4].

17.  We have repeatedly emphasized in the CA Judgment that the judge was entitled to make the above findings.

18.  Despite Mr Manzoni’s attempts to raise legal arguments during the substantive appeal[5] and for this application, ultimately, this case turned on the determination of primary facts.

19.  We were at pains to point out that the Judgment turned on the judge’s findings as to the state of mind, integrity and credibility of witnesses, whose evidence was received by him at first-hand and it was in the judge’s presence that “the whole of the evidence unfolded in its living state”[6].

20.  It is well established that this court should only interfere with the judge’s findings only if it is satisfied that his conclusion on the facts is plainly wrong; otherwise, this court should defer to the judge’s conclusion even if there is some doubt as to its correctness: Ting Kwok Keung v Tam Dick Yuen & Ors (2002) 5 HKCFAR 336 at §42.

21.  On appeal, we were not persuaded by Mr Manzoni’s submissions that this is an appropriate case for this court to interfere on account that the judge had misdirected himself as to the law in his approach to the central issues of knowledge and dishonesty, which in turn had supposedly infected his findings of fact and vitiated the Judgment as a whole[7].

22.  For the present application, we have reminded ourselves to exercise caution on disturbing the factual findings made by the judge because it appears to us that Mr Manzoni is once again attempting to cloak his challenge of the judge’s findings with questions of law.

Question 1

23.  This question relates to the correct test to be applied in deciding whose knowledge is to be attributed to a corporate defendant in a dishonest assistance claim. As acknowledged by the plaintiffs, this was not a point falling for determination in the appeal, the judge made no finding on the point, and the defendant had not raised it in the respondent’s notice. It was only raised in the defendant’s skeleton argument on appeal to address the plaintiffs’ complaint that the judge should have focussed on Albert rather than speak of the bank officers collectively and the case of Bank of India v Morris [2005] BCC 739 was cited by the defendant in that context. We dealt with this in one short paragraph in §159 of the CA Judgment and opined as an aside that “it is difficult to see why [Albert’s] knowledge should be attributed to DBSHK in the circumstances”.

24.  The plaintiffs seek to argue that we erred when we expressed the view it was difficult to see why Albert’s knowledge should be attributed to DBSHK when he “was not the sole or most senior decision-maker”. It is submitted that Albert is the “relevant decision maker … in respect of the relevant transactions” and corporate attribution is an issue which arises frequently so the formulation of the correct principles to determine whose acts and knowledge are to be attributed to a corporate defendant is of great general importance. The plaintiffs also rely on the ‘or otherwise’ limb in that intervention by the Court of Final Appeal is warranted where the judge failed to identify correctly the individuals whose knowledge ought to have been assessed.

25.  The basis of Question 1 erroneously presupposes that Albert was aware of the fraud perpetrated by the Fus.

26.  In the CA judgment, we had emphasized a number of times it was found by the judge that none of the officers of DBSHK (including Albert) had knowledge of the fraud and they did not turn a blind eye to the fraud but had treated the IMB Reports merely as inconsistencies in the bills of lading (see §3, 129-131 and 153 to 154 of the CA Judgment).

27.  On this finding of fact, it does not matter whose knowledge should be attributed to DBSHK. Whether or not Albert is “the sole or most senior decision maker” or the “relevant decision maker” becomes entirely academic, as there was no knowledge that could be attributed to the corporate defendant.

28.  Hence, the question of what is the correct test of attribution simply does not arise. We refuse to give leave to appeal in respect of Question 1.

Question 2

29.  This question is said to relate to the correct approach to be taken by a trial judge in assessing dishonesty in a dishonest assistance claim. The plaintiffs once again seek to impugn the judge’s finding for conflating “knowledge” and “dishonesty”. It is contended that this is an issue of law of great general or public importance and also justifies intervention on the ‘or otherwise’ limb.

30.  We have dealt with this in §§155 to 157 of the CA Judgment and explained why we are of the view that the judge did not conflate knowledge and dishonesty in applying the two-stage test for dishonesty (that he should find firstly what the bank officers knew and then to assess whether the sum of such knowledge meant that the officers were dishonest objectively).

31.  As we pointed out in §157, the judge rightly took a holistic approach in identifying the relevant facts at the material time for the first stage of the test, including the knowledge and beliefs of the various bank officers. In applying the second stage of the test, the judge assessed whether the officers acted as honest persons would have done and ultimately concluded there was no dishonesty.

32.  The judge had correctly applied the two-stage test for dishonesty.

33.  Mr Manzoni’s suggestion that the judge addressed dishonesty without having first assessed the knowledge of the relevant individuals and without considering the background, personal characteristics and conduct of the relevant individuals is contrary to our determination that the judge did in fact do so after thorough consideration and critical scrutiny of the contemporaneous documents in light of the relevant background, having had the opportunity to gauge the personality, the working practices, and motivations of Albert and the other officers who testified in court (see §186 of the CA Judgment).

34.  In any event, the proper approach in assessing dishonesty has been clarified in a number of authorities and there is no sufficient reason why it should be revisited by the Court of Final Appeal.

35.  We refuse to grant leave to appeal for Question 2.

Question 3

36.  Question 3 seeks to raise the question whether it is dishonest for a banker to continue lending to its customer when they know whether the customer is guilty of fraud in respect of reported suspicious transactions is unresolved. It is contended that neither the judge nor the Court of Appeal answered this question directly. The plaintiffs argue it must be dishonest for any banker with this state of mind to decide to continue lending, without having conducted further investigation, and this is a question with serious implications for the financial sector and the wider public. It is also a question for determination on the ‘or otherwise’ limb.

37.  As mentioned earlier, the judge found, and this court has affirmed, that the bank officers did not suspect fraud or foul play. Given this concurrent finding of fact, whether the officers should have conducted further investigation before deciding to continue lending is irrelevant in seeking to overturn the test of dishonesty. Carelessness and negligence are not in themselves manifestations of dishonesty.

38.  It is not appropriate to grant leave to appeal for Question 3.

Question 4

39.  This raises the question whether the existence of a valid and binding contract is a bar to a claim in knowing receipt. The judge agreed with DBSHK’s submission that a claim in knowing receipt must fail where the defendant’s receipt is pursuant to a valid and binding contract, citing Criterion Properties v Stratford UK Properties [2004] 1 WLR 1846, and held that as Ls have not sought to set aside the loan facility agreements, GHK was contractually bound to repay DBSHK and no issue of knowing receipt can arise[8]. We dealt with the plaintiffs’ arguments in §§195 to 202 of the CA Judgment.

40.  The plaintiffs intend to argue on appeal that we erred in treating the existence of a valid and binding contractual right to receive assets as a bar to recovery of those assets in knowing receipt and repeated their arguments in this court (see §196 of the CA Judgment). It is submitted that this is a question of law with far-reaching implications for knowing receipt claims and there is a reasonable prospect that the Court of Final Appeal may come to a different view as to the validity of the distinction drawn by the plaintiffs between breaches of fiduciary duty in entering into a loan agreement and breaches of fiduciary duty in transferring assets pursuant to a loan agreement.

41.  This is an academic question that does not arise on the facts. As stated in §197 of the CA Judgment, it is not strictly necessary to consider the legal arguments in respect of a claim which has been rejected on the facts.

42.  It is not appropriate to grant leave to appeal for Question 4.

The ‘or otherwise’ limb

43.  We do not consider this an exceptional case to justify departure from the usual practice of not granting leave on this limb by this court. In accordance with the usual practice, we defer to the Appeal Committee whether leave should be granted on this basis.

Conclusion

44.  For the reasons mentioned above, we decline to exercise our discretion to grant leave to appeal to the Court of Final Appeal and dismiss the plaintiffs’ notice of motion.

45.  Costs of the application should follow the event. Having considered the statement of costs of the defendant, we assess summarily the reasonable costs payable by the plaintiffs at $180,000.