HCA 1475/2006
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 1475 OF 2006
____________
BETWEEN
QUESTNET LTD
Plaintiff
and
KURT GEORG ROCCO RINCK
1 st Defendant
WILFRED ROYCE LANE
2nd Defendant
____________
Before: Deputy High Court Judge A. Chow, SC in Chambers
Date of Hearing: 25 February 2009
Date of Handing Down Decision: 17 March 2009
_____________
D E C I S I O N
_____________
1. There are two matters before the court:-
(1) an appeal by the 2nd Defendant by a Notice of Appeal to Judge in Chambers dated 30 April 2008 against the decision of Master Roy Yu made on 16 April 2008 dismissing the 2nd Defendant’s application to set aside a default judgment entered against him by Master de Souza on 4 September 2007 in the amount of US$737,600.31 together with interest thereon and costs of the action;
(2) an application by the 2nd Defendant by a Summons dated 17 February 2009 for leave to adduce his 20th Affidavit (the “20th Affidavit”) as evidence in the appeal.
2. At the hearing of the appeal, Mr Maurellet, who appeared on behalf of the Plaintiff, informed the court that the Plaintiff did not object to the 2nd Defendant’s application for leave to adduce the 20th Affidavit as evidence in the appeal. Accordingly, the contents of the 20th Affidavit will be taken into account when I consider the 2nd Defendant’s appeal.
Background facts
3. The background facts giving rise to the Plaintiff’s claim against the 2nd Defendant have been clearly set out in a judgment of Madam Justice Chu given in this action on 23 June 2008 (“Chu J’s Judgment”) in relation to a motion taken out by the Plaintiff against the 2nd Defendant for contempt of court. Chu J’s Judgment was extensively referred to by Mr Maurellet in the course of his submissions at the hearing of the appeal.
4. No useful purpose will be served by my seeking to state the facts in my own words in this judgment. I shall gratefully adopt and, for ease of reference, set out below various paragraphs of Chu J’s Judgment which are relevant to the present appeal:-
“The action
2. The plaintiff is a BVI company registered under Part XI of the Companies Ordinance, cap.32. The 1st defendant was one of its founders and, until early July 2006, a director and employee of the plaintiff. The 2nd defendant was between May 1999 and June 2005 the Chief Legal Officer of the plaintiff in charge of the Legal Affairs Department.
3. The plaintiff commenced this action against the 1st defendant on 12 July 2006. The dispute relates to certain funds of the plaintiff that were held by the 1st defendant on trust. The funds were held in six bank accounts maintained in the 1st defendant’s name with Citibank, Hong Kong and another bank account also maintained in the 1st defendant’s name with Dominick Co in Zurich, Switzerland (collectively referred to as “the Trust Accounts”). The 1st defendant had made two Declarations of Trust dated 18 November 2003 and 13 December 2005 in respect of the funds in the Citibank Bank account and the Swiss account respectively.
4. The plaintiff claims that the 1st defendant had, in breach of his duties as trustee, misappropriated and converted the trust funds to his own personal use. The acts complained of include, inter alia , the removal on 30 June 2006, of a sum of Euro 582,806.44 from one of the six Citibank accounts into his personal account maintained with Citibank. The sum was then transferred into one of the 1st defendant’s Swiss accounts with the Dominick Co. The plaintiff seeks an account of and the return by the 1st defendant of the trust funds that had been misappropriated and converted, in addition to damages and declaratory and injunctive relief. Summary judgment was entered against the 1st defendant on 30 November 2006.
Mareva Injunction against the 1st defendant
5. Shortly after the plaintiff issued the Writ and on 21 July 2006, the plaintiff applied and obtained from Deputy High Court Judge Poon (as he then was) a Mareva Injunction to restrain the 1st defendant from disposing, transferring or dealing with the trust funds that were initially held by him in the Trust Accounts (“Poon J’s Order”). The Order further required the 1st defendant to make disclosure by affidavit of the balances in the Trust Accounts and his dealings with the funds in them since 1 March 2006, including details of every amount withdrawn or transferred and the identity of the recipient of each withdrawal or transfer.
6. Subsequently, the 1st defendant made four affirmations purporting to comply with the order for disclosure. On 16 August 2006, the 1st defendant made his fourth affirmation, which was filed with the court on 17 August 2006. In it, he disclosed, for the first time, that the sum of Euro 582,806.44, after being transferred into his Swiss bank account, was placed on trust with the 2nd defendant and the 2nd defendant had on his instruction paid debts owed to his creditors. The relevant part of the 1st defendant’s Fourth Affirmation reads:
‘2. In paragraph 3 of my Second Affirmation dated 4th August 2006 I stated that on 30th June 2006 EUR$582,806.44 was transferred into my other Citibank account No.0083084339. I should add that on the same day I transferred the said sum of EUR$582,806.44 into one of my Swiss Bank accounts of Dominic Bank (from my recollection the account No. is 800.782) and thereafter the funds were placed in trust with a person whom I have known to be my ‘lawyer’ but not a solicitor or barrister since first consulting him for advice in a Canadian law firm with an office in Hong Kong from 1991 to now, Mr. W Royce Lane. He has on my instructions debited my ledger with him to pay debts owed to my creditors.’
The Mareva Injunction against the 2nd defendant
8. In light of the disclosure made by the 1st defendant in his fourth affirmation, the plaintiff’s solicitor moved for and obtained ex parte on 17 August 2006, a Mareva Injunction against the 2nd defendant restraining him from dealing with or disposing of his assets and any funds derived from the 1st defendant up to Euro 582,806.44.
9. Of particular relevance to this application is paragraph 1(3) of the Order, which provides:
‘The Intended 2nd defendant must not dispose of or deal with or diminish the value of any of the funds derived from, or placed with him by Mr Kurt Georg Rocco Rinck (“Mr Rinck”) or anyone on behalf of Mr Rinck, limited to Euro 582,806.44.’
10. Paragraph 2 of the order further required the 2nd defendant to make disclosure in relation to the whereabouts of and his dealings with the Euro 582,806.44.
11. A copy of the 1st Defendant’s Fourth Affirmation was attached to the ex parte Order. The Order as re-amended on 19 August 2006 was continued by the Order of 1 September 2006.
12. On the same day, a prohibition order was also issued against the 2nd defendant prohibiting him from leaving the jurisdiction. Since then, the 2nd defendant has been subject to successive sets of prohibition orders. His first application to discharge the prohibition order was dismissed in February 2008. On 10 June 2008, the 2nd defendant filed another summons to apply for the discharge of the prohibition order. The determination of the summons is pending.
13. With leave of the Court granted on 23 August 2006, the 2nd defendant was joined as a defendant to this action.
14. By the order of Master Ho of 23 August 2006, the Mareva Injunction and the prohibition order were permitted to be served on the 2nd defendant by substituted service. This was duly done.
15. On 25 April 2007, Messrs Au Yeung, Cheng Ho & Tin filed a notice to act for the 2nd defendant. The plaintiff’s solicitors immediately on 26 April 2007 served a copy of the Mareva Injunction on this firm together with the other court documents.
The plaintiff’s case
22. The plaintiff’s case is that the 2nd defendant had disposed of, dealt with and diminished the value of funds that were placed with him by the 1st defendant, in breach of the terms of and, in particular, paragraph 1(3) of the 17-8-2006 Order.
23. Specifically, the plaintiff relies on the contents of the 2nd defendant’s First Affidavit that was filed on 13 June 2007. The relevant part of the affidavit states:
‘7. … During the first week of July 2006, [the 1st defendant] called on or about July 08, 2007 and asked if he could place funds in trust with me. I made clear to him that I would not be accepting any of his funds from Citibank Hong Kong, as during my time with the Plaintiff company, I recall advising the company to have officer’s holding company funds, at Citibank to execute a Deed of Trust in favour of the company. He agreed, and said that it was his Euro Monies, which would be coming to me out of his bank account at Switzerland.
Disclosure compliance
7. [sic ] On 11 July 2006, Euro funds arrived at my American Dollar bank account at the Kingdom of Bahrain for my personal British Virgin Island (hereinafter referred as “BVI”) Company in the amount of US$737,600.31. Duly annexed is Exhibit Marked “A1” the original edition of the bank statement for my BVI Company, Landbase Corporation. My bank, the Ahli United Bank of Bahrain, confirmed that these funds had come from Switzerland. No longer having any further need for this account, I have since closed my Bahrain account as at the end of February 2007.
8. [The 1st defendant] directed that I disburse funds to his investment project with the A.O.G. Company at Austria. The first disbursement was for US$105,000 on or about 27 July 2006 and again for a further US$100,000 on or about 21 August 2006. Duly annexed, is Exhibit Marked “B1”, consisting of three pages all marked “B1”. Page one is from the Alpha Omega Group of Austria confirming receipt of these funds and page two ad three, is from their bank, confirming the credits to their account.
9. [The 1st defendant] directed that the remainder of his funds, plus interest, be distributed to himself, at his wife’s bank account with Bank International Indonesia. Accordingly, on or about 28 August 2006 US$535,477.50 was duly disbursed to this account. Duly annexed is Exhibit Marked “C1” consisting of one page from Bank International Indonesia controlled by [the 1st defendant], but in his wife’s name.’
24. In essence, the acts complained of are that the 2nd defendant had on 11 July 2006 through Landbase Corporation, a BVI company controlled by him, received from the 1st defendant US$737,600.31, and that out of the money received, the 2nd defendant had on 27 July and 21 August 2006 paid two sums of US$105,000 and US$100,000 to Alpha Omega Group (AOG) of Austria and on about 28 August 2006, paid US$535,477.50, being the remainder of the funds with interest, to the 1st defendant’s wife. It is the plaintiff case that the 2nd defendant, in transferring these sums to Alpha Omega Group in Austria and the 1st defendant’s wife, acted in breach of the 17-8-2006 Order. It is also the plaintiff’s case that the only reasonable inference to be drawn on the totality of the evidence is that when the 2nd defendant dealt with the money on 21 and 28 August 2006, he was well aware of the existence of an order which prohibits him from so doing. Mr Duncan SC who appears for the plaintiff regards the last point as fundamental to the plaintiff’s application.
25. The plaintiff further says that the 2nd defendant has failed or refused to return or account to the plaintiff the funds that the 1st defendant had placed with him. In this regard, the plaintiff relies on a “without prejudice” meeting between the 2nd defendant and Mr Donegan on 27 November 2006. It was the 2nd defendant himself who first made reference to this meeting in his Third Affidavit filed in opposition to the present application. The 2nd defendant had gone into some details of what, according to him, was mentioned and discussed at the meeting, in an effort to dispute that he has been evading service.
The 2nd defendant’s case
26. The 2nd defendant does not dispute the receipt of US$737,600.31 from the 1st defendant and the payment out of the funds as stated in his First Affidavit. There is therefore no dispute that he had done the acts complained of.
27. In his third affidavit, the 2nd defendant said that he was misled by the 1st defendant into believing that the funds placed on trust with him were the 1st defendant’s personal funds. His evidence in cross-examination is that the 1st defendant had confirmed to him that the money in the Swiss account was the 1st defendant’s own money and that he himself had further taken the caution of confirming with his bank in Bahrain that the funds that came to his account did come from Swiss account. According to the 2nd defendant, when he later found out that he had been misled, he was angry and had a heated discussion with the 1st defendant regarding getting the funds back into court.
28. The 2nd defendant also said in the Third Affidavit that he did not have notice or knowledge of the 17-8-2006 Order or any Mareva injunction order until 25 April 2007. He also complained that the plaintiff had failed to serve the 17-8-2006 Order on him.
29. In summary, the 2nd defendant contests the application on the basis that he did not know that the funds he received from the 1st defendant were trust funds belonging to the plaintiff and that when he paid them out on 21 and 28 August 2006, he did not know or have notice of the 17-8-2006 Order.”
5. As mentioned in paragraph 13 of Chu J’s Judgment, on 23 August 2006, the 2nd Defendant was joined as a party to this action. A Statement of Claim was filed on 7 September 2006.
6. On 26 October 2006, Master Roy Yu made an order that substituted service of the Re-Amended Writ of Summons and the Statement of Claim on the 2nd Defendant could be effected by (i) leaving them with Messrs John M Pickavant & Co, solicitors for the 1st Defendant of Rooms 1503-5, Two Grand Tower, No 625 Nathan Road, Kowloon, Hong Kong, and (ii) inserting an advertisement of those documents once in a local English newspaper published and circulating in Hong Kong.
7. The Re-Amended Writ of Summons and the Statement of Claim were so served on the 2nd Defendant on 3 November 2006.
8. On 25 April 2007, Messrs Au-Yeung, Cheng, Ho & Tin filed a Notice to Act for the 2nd Defendant in this action.
9. On 26 April 2007, the Plaintiff through its solicitors gave copies of, inter alia, the Re-Amended Writ of Summons and the Statement of Claim to Messrs Au-Yeung, Cheng, Ho & Tin.
10. On 11 July 2007, Messrs Au-Yeung, Cheng, Ho & Tin confirmed in writing that they no longer acted for the 2nd Defendant.
11. On 6 August 2007, the Plaintiff took out a summons for judgment against the 2nd Defendant (the “Summons”) on the ground of his default in giving notice of intention to defend. The Summons was supported by the 36th Affidavit of Li Adrienne May filed also on 6 August 2007.
12. On 17 August 2007, Master Ho made an order that substituted service of the Summons and the 36th Affidavit of Li Adrienne May on the 2nd Defendant could be effected by advertising those documents once in an English Newspaper published and widely circulated in Hong Kong and by posting those documents to an address of the 2nd Defendant in New Zealand.
13. The Summons and the 36th Affidavit of Li Adrienne May were so served on the 2nd Defendant between 22 and 24 August 2007.
14. On 4 September 2007, Master de Souza gave the Plaintiff default judgment against the 2nd Defendant in this action, the 2nd Defendant having failed to turn up for the hearing. There is, however, no doubt that the 2nd Defendant was aware of the hearing before Master de Souza on 4 September 2007, because he had sent a letter dated 3 September 2007 to the court in reference to the hearing of the Plaintiff’s application for default judgment against him scheduled to take place on 4September 2007.
15. On 18 December 2007, the 2nd Defendant took out a summons to set aside the default judgment, and made his 5th Affidavit in support of the setting aside application.
16. On 16 April 2008, Master Roy Yu dismissed the 2nd Defendant’s summons to set aside the default judgment. Hence the present appeal.
17. At the hearing of the appeal, the 2nd Defendant argued that (i) the default judgment was irregular and ought to be set aside on that ground, and (ii) in any event, he had a defence on the merits to the Plaintiff’s claim.
Default judgment is regular
18. Notwithstanding the 2nd Defendant’s denial that he had been duly served with the proceedings at the time that the default judgment was entered against him on 4 September 2007, it is clear that the default judgment is a regular one. There is no dispute that the Re-amended Writ of Summons and the Statement of Claim were served in accordance with the order for substituted service given by Master Roy Yu on 26 October 2006, and the Summons and the 36th Affidavit of Li Adrienne May were served in accordance with the order for substituted service given by Master Ho on 17 August 2007. There has not been any application to set aside, or appeal against, the said orders for substituted service.
19. It is also beyond dispute that the 2nd Defendant had notice of the claim brought by the Plaintiff against him prior to the hearing before Master de Souza on 4 September 2007 which led to the default judgment. In particular:-
(1) The 2nd Defendant had knowledge that the Plaintiff had obtained a prohibition order against him in this action on 17 August 2006. Apparently, he was prevented from leaving Hong Kong on 18 August 2006 and was told by an Immigration officer about the prohibition order. That was why he then went to the court on 18 August 2006 to search the court file for the prohibition order.
(2) In connection with his application to search the court file, he appeared before Master B Kwan on 18 August 2006 and was told that the court had granted leave to the Plaintiff to add him as a defendant to the action.
(3) On 16 February 2007, the 2nd Defendant personally conducted another search of the court file.
(4) On 25 April 2007, the 2nd Defendant’s solicitors, Messrs Au-Yeung, Cheng, Ho & Tin, filed a Notice to Act for him in this action.
(5) On 26 April 2007, the Plaintiff through its solicitors gave copies of, inter alia, the Re-Amended Writ of Summons and the Statement of Claim to Messrs Au-Yeung, Cheng, Ho & Tin. It is inconceivable that the 2nd Defendant’s solicitors would not have told him about the proceedings, or given or shown him copies of those documents.
(6) On 29 June 2007, the 2nd Defendant wrote a letter to the Plaintiff’s solicitors complaining that “all the process served at [the office of his solicitors] were not brought to [his] attention”. There cannot therefore be any doubt that he knew that court papers had been served on his former solicitors and he could easily have obtained copies of those court papers if he had not already received them previously.
(7) In purported compliance with the disclosure order in the Mareva injunction granted by the court against him, the 2nd Defendant filed an affidavit on 13 June 2007 in which he gave an account of his dealings with and the whereabouts of the money that the 1st Defendant had transferred to him.
(8) Lastly, the 2nd Defendant sent a letter dated 3 September 2007 to the court which referred to the hearing of the Plaintiff’s application for default judgment against him scheduled to take place on 4September 2007.
20. It is also significant that the 2nd Defendant has been found to have evaded service of the Mareva injunction order against him (see paragraphs 47, 48, 49, 50 and 54 of Chu J’s Judgment). The facts and matters mentioned in those paragraphs of Chu J’s Judgment equally demonstrate that the 2nd Defendant was not willing to be served with the Re-amended Writ of Summons and Statement of Claim.
21. In all, I conclude that the default judgment entered against the 2nd Defendant by Master de Souza is a regular judgment.
2nd Defendant has failed to show a defence on merits
22. It is well established that where the default judgment is regular, the defendant must at least show that he has a defence with “a real prospect of success”, which means a defence that carries “some degree of conviction”, before the court will consider exercising its discretion to set aside the default judgment. This burden is higher than what is needed to justify leave to defend being given under Order 14 (Premier Fashion Wears Ltd and Broadway Sportswear Ltd v Chow Chuk Man and Li Hing Chung [1994] 1 HKLR 377 at 383 per Godfrey JA).
23. At the hearing below, the 2nd Defendant made no submission to Master Roy Yu on the merits of his defence, and the only issue was whether the default judgment was regular or irregular. In this appeal, the 2nd Defendant contended that he had a defence to the Plaintiff’s claim on the merits. The 20th Affidavit was filed for the purpose of showing his defence. The only paragraph of substance in that affidavit is paragraph 6, which states, so far as material, as follows:-
“In brief, if so granted, the brief merits of this matter, is that I acted as a mere handling agent for monies which at that time (July to August 2006), belonged to the First Defendant, and that these funds were duly disbursed in accordance with the First Defendants instructions, plus the interest earned. It is common ground, that the funds, plus interest, were duly paid out by me and that I had no benefit nor gain from the funds, during my handling of the same. There being no trustee agreement in place, thus weakening any Constructive Trustee argument, for a Plaintiff to be granted judgment in their favour, would set the precedent that all Solicitors and Bankers be held guilty for the same act, in their daily work as handling agents of third party funds. There was, an apparent dispute as to the ownership of these funds, which the Court had not ruled on, in the Plaintiff’s favour, until later, on 30th November 2006 , long after my disbursement of the funds in late August 2006 ”.
24. In short, the 2nd Defendant seems to be saying that:-
(1) the funds which he handled belonged, or apparently belonged, to the 1st Defendant;
(2) he was a mere innocent handling agent without notice that the funds he dealt with were trust money belonging to the Plaintiff; and
(3) he derived no personal benefit or gain from handling the funds in accordance with the 1st Defendant’s instructions.
25. In respect of (1), it is clear from the 1st Defendant’s fourth affirmation filed on 17 August 2006 that the money which he transferred to the 2nd Defendant came from the trust accounts held in his name for the benefit of the Plaintiff. Summary judgment in this action has since been entered by Saunders J against the 1st Defendant on 30 November 2006.
26. In respect of (2), the critical issue is whether the 2nd Defendant had knowledge or notice that the funds that he received from the 1st Defendant were money held by the latter on trust for the Plaintiff. In this regard, the findings by Chu J in paragraphs 44, 45 and 54 of Chu J’s Judgment are important:-
“44. Most importantly, the 2nd defendant was present when the 1st defendant went to CWL on 16 August 2006, when the 1st defendant made his fourth affirmation. According to the 2nd defendant’s evidence in cross-examination, during that visit to CWL, the 1st defendant had asked him if he could say he had transferred money from the Swiss account to the 2nd defendant, and he gave his agreement to the 1st defendant saying this in his affirmation. This is a revealing piece of admission because, as the 2nd defendant knew, the affirmation was in connection with the order of disclosure against the 1st defendant. Even accepting that prior to this visit, the 2nd defendant did not know that the funds from the 1st defendant’s Swiss account were funds of the plaintiff, the 2nd defendant would by then became alerted and put on enquiry that the funds from the 1st defendant’s Swiss account were funds of the plaintiff and/or subject matter of the plaintiff’s claim herein.
45. This is not to mention that it must strike a reasonable man that it is very odd that the 1st defendant have to channel funds through the 2nd defendant to his wife if indeed this were his personal funds. The 2nd defendant claims to have no knowledge that the 1st defendant was subject to a Mareva Injunction. If this were true, which I do not accept, then the request and arrangement to remit funds from a Swiss account to a Bahrain corporate bank account for onward transfer to the wife’s bank account in Indonesia would be even odder. Given the 2nd defendant’s legal background, his previous experience in law enforcement in New Zealand and as the plaintiff’s Chief Legal Adviser together with his knowledge that the [1st ] defendant held funds on trust for the plaintiff and the plaintiff was claiming against the 1st defendant about the trust funds, he ought reasonably to find the request to place funds with him and the instructions to pay them out highly unusual and to have suspected that the 1st defendant had something to hide. Having regard to the circumstances analysed above, I find it inherently hard to believe the 2nd defendant’s assertion that he was misled by the 1st defendant and that he had no notice that the funds the 1st defendant passed to him were trust funds of the plaintiff.
54. … I also do not accept his evidence that he was misled by the 1st defendant to believe and that he did believe the funds were the personal funds of the 1st defendant.”
27. In view of these findings, I do not accept that the 2nd Defendant was a mere innocent handling agent of the trust funds.
28. Lastly, in respect of point (3), even if the 2nd Defendant has not derived any personal benefit or gain from handling the trust funds in accordance with the 1st Defendant’s instructions, that is not a defence to the Plaintiff’s claim against him for knowing receipt or knowing assistance of a breach of trust. In any event, I do not accept that the 2nd Defendant has not derived any personal benefit or gain as he alleged. Apparently, he once told the Plaintiff’s solicitor, Mr Donegan, that the 1st Defendant had been taking care of him financially (see paragraph 46 of Chu J’s Judgment).
29. In all, I do not consider that the 2nd Defendant has demonstrated that he has a defence to the Plaintiff’s claim with a real prospect of success. It follows that I shall dismiss his appeal against the decision of Master Roy Yu made on 16 April 2008 with costs. I also order that the costs of the 2nd Defendant’s application for leave to adduce the 20th Affidavit as evidence in this appeal be borne by the 2nd Defendant.
Costs
30. Mr Maurellet on behalf of the Plaintiff requested that I should make a gross sum costs assessment should I decide to dismiss the appeal. The Plaintiff’s solicitors submitted a proposed statement of costs for this purpose on 26 February 2009, and the same was commented upon by the 2nd Defendant on 2 March 2009. I consider that it is appropriate to make a gross sum costs assessment in this case. Looking at the matter broadly, I assess the Plaintiff’s costs at $85,000.
(Anderson Chow SC)
Deputy Judge of the Court of First Instance
Mr Jose-Antonio Maurellet, instructed by Messrs Barlow Lyde & Gilbert, for the Plaintiff
2nd Defendant in person: Wilfred Royee Lane
Application by the 2nd defendant for an adjournment / withdrawal of the appeal to Court of Appeal refused. Please refer to CACV103/2009 dated 26 March 2010