DEROCHEMONT SOCIETE ANONYME v. KENT INTERNATIONAL FILMS LIMITED (IN LIQUIDATION) AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

___________

BETWEEN

___________

JUDGMENT

___________

BACKGROUND

1. This is a claim in substance for the return of US$95,000 invested by the Plaintiff in the production of a film by the Defendants, which, in the event was never produced. The 1st Defendant is in liquidation and the proceedings against it have been stayed. In default of the 3rd and 4th Defendants making discovery as ordered, judgment was entered against them. The action has accordingly proceeded against the 2nd Defendant, Mr. Roy McAree, alone.

2. The Plaintiff ("DER") is a Liberian corporation with a Swiss domicile. In its participation in the subject matter of these proceedings, it was advised and represented by Mr. Robert Citroen an American attorney of the State of California, who conducts an international commercial practice from Los Angeles. On behalf of the Plaintiff he invested in a project undertaken by the 1st Defendant ("Kent") to produce a firm called ''Kwailo". The corresponding person acting on the other side, for the 1st Defendant, was Mr. Roy McAree. He has been in the film business, mostly it seems in the United Kingdom and America, for over thirty years. Together with the 3rd Defendant, a Chinese gentleman from Singapore, he was at all material times a shareholder and director of Kent and of the 4th Defendant ("Cultand"); the other minor and transitory shareholdings and directorships in Kent and Cutland are of no significance. To all intents and purposes the two corporations were owned and controlled by Messrs. McAree and Lim. Mr. McAree provided the expertise and of the two directors was by far the more active, Mr. Lim apparently being concerned only with negotiating and dealing with Chinese interests and Chinese speaking contacts, particularly in Taiwan.

3. In 1982 Messrs. Citroen and McAree came into contact and exchanged visits between Los Angeles and Hong Kong. They discussed investment by Mr. Citroen in a film called Kwailo which was to be produced in Zimbabwe. I shall refer to that film as the original Kwailo as it was resusitated or superseded by a film of the same name which was to be produced in Hong Kong and Taiwan in the following year, 1983. It is that subsequent film that has given rise to these proceedings and to which I shall refer as Kwailo. For reasons into which I need not enter the original Kwailo did not get off the ground and attention shifted to a film called Horatio IPI (subsequently renamed Heroes Three). An investment was made in Horatio IPI by Mr. Citroen on behalf of a Liechtenstein corporation called Commercial Enterprises Corporation ("CEC").

4. About January 1983, when Horatio IPI was nearing completion, Mr. Citroen visited Taiwan and Hong Kong and discussed the production of Kwailo with Mr. McAree. Mr. Citroen was not sure if Mr. Lim was present but says that he was introduced to a Chinese gentleman who did not speak English and who, he was told, would be investing US$350,000 in the production of Kwailo by way of local financing in Taiwan. Mr. Citroen also says that he accompanied Mr. McAree and others on a tour of Taiwan looking at likely locations for filming Kwailo. Mr. McAree for his part insists that Mr. Lim was present, that the Chinese gentleman was not represented as an investor who had agreed to put up US$350,000, but as a person with whom such an investment was being negotiated. He also denied that the trip around Taiwan was anything more than a holiday visit. Mr. Citroen and Mr. McAree subsequently went on to Hong Kong.

5. Mr. Citroen agreed to invest US$90,000 in the production of Kwailo in return for a share of the profits. That amount was subsequently increased to US$140,000. On or about the 15th February 1983 Mr. Citroen, who had other interests in the area opened an account with Barclays Bank in Hong Kong in the name of DER. He claims that the account was opened primarily for the purpose of financing the firm Kwailo although it was to be used for other purposes later. Because of the high interest rates then prevailing, which was not disputed, he claims that he decided to make Mr. McAree one of the signatories who could independently effect withdrawals, so that the funds could be retained as long as possible in the account and so maximize the interest earnings. It was clearly established and, in any case, was not disputed that Mr. McAree was made a signatory who could effect withdrawals on his own. But the purpose of the power to make withdrawals and consequently the trusts attaching to the amounts withdrawn is disputed and is the central factual issue between the parties. It is claimed in paragraph 8 of the Plaintiff's Statement of Claim that "by agreement with the Plaintiff the 2nd Defendant was an authorised signatory to the said account as agent for the Plaintiff and for the sole purpose of withdrawing funds therefrom to meet production expenses actually incurred in the production of the Picture" (Kwailo).

6. Mr. Citroen testified that he had a conversation with Mr. McAree in regard to his use of the power to sign. The conversation, he claimed, took place at the Regent Hotel in Kowloon and continued while he and Mr. McAree walked over the overpass to Salisbury Road. He says he expressed to Mr. McAree his client's intent that the funds provided would remain at interest in its account at Barclays and that he anticipated that Mr. McAree would make "hard funding disbursements" from the account as necessity therefor arose, such as paying actors or paying a director or whatever hard financing payments were required. He told Mr. McAree that he trusted him. He says he very specifically remembers stating to Mr. McAree that he trusted him to look after his client's money diligently.

7. Mr. McAree for his part says he cannot recall such a conversation. He is not sure why the account was opened but he understood Mr. Citroen had future business with mainland China and other business matters one of which involved Brazil. Mr. Citroen just asked him to be a signatory, he did not know why and did not see any problem. As to the time of availability of the funds, these had to be assured to the producer before shooting commenced. Once that commenced it was virtually irreversible and heavy commitments could not be avoided. He would accordingly not have agreed to any situation which left control of the funds in the hands of the investor, once shooting was about to commence. In that context it is not disputed that he informed Mr. Citroen in writing that the funds should be in place by 16 April 1983 as it was intended to commence shooting in June. The funds arrived about that time. They were needed. He had no reason to believe that the DER account was other than a conduit and he withdrew the amounts and credited them to Kent. US$45,000 was withdrawn on 18 April 1983 and US$50,000 on 16th June 1983.

8. Shooting did not commence in June as projected and there were delays. On the 16th August 1983 Mr. McAree wrote to Mr. Citroen mentioning that Kent was experiencing cash flow problems. On 25th October 1983 he wrote to Mr. Citroen informing him that Kent's situation was critical and that it was unable to repay the investment in Kwailo. That in short order led to these proceedings.

ASSESSMENT OF EVIDENCE

9. Not only the conflict of evidence between Messrs. Citroen and McAree but also various allegations levelled at the Defendants, particularly Mr. McAree, have to be resolved. I have already referred to the alleged misrepresentation that the Chinese gentleman in Taiwan was to invest US$350,000 in Kwailo. In addition the other main allegations against Mr. McAree were that he failed to disclose the information that no such Taiwanese investment was being made, that the Defendants themselves had assumed that responsibility although they knew they could not discharge it, and that Kent was later in financial difficulty and in no position to complete Kwailo or even commence shooting. It was also alleged that the US$95,000 was not needed for Kwailo but for another film known as BLAM; that in fact no action to produce Kwailo was taken; that no expenditure had been incurred for the production of Kwailo; and that extravagant amounts were improperly debited to the accounts for the production of Kwailo.

10. A considerable volume ofdocumentary evidence was adduced. Understandably, where it was of a decisive nature there was little dispute; no less understandably, upon most of the matters disputed it is of no great value in resolving the truth of the conflicting oral testimony, primarily because it was explained away or because of its ambiguous nature which according to each side supported its own version. It does, however, assist in regard to Mr. Citroen's allegation that no production work was done and no expenditure incurred on Kwailo.Video tapes produced and proffered by Mr. McAree as evidence were not challenged. The implication of that together with the substantial documentary evidence produced by him, in my finding, amply establish the falsity of that allegation. That inevitably tended to diminish the reliability of Mr. Citroen's evidence.

11. Both Messrs. Citroen and McAree were subjected to searching and protracted cross-examination. It is not surprising that their memories have faded in the four to five years that have elapsed. This is more apparent in the case of Mr. McAree since he was personally concerned with far more of the matters disputed and in a much closer way. Nonetheless, having closely observed his demeanour and considered his evidence carefully, I must say that he impressed me as an honest and truthful witness. I consider that his evidence is to be preferred to that of Mr. Citroen and in general I accept it. I do not believe he was dishonest in the way alleged. In my finding he did not personally profit from the payment of the $95,000 to Kent's account. I find that he believed at the time he paid that amount into Kent's account, and even after that, that Kent would be able to produce Kwailo. I accept his evidence that after such payment he and Mr. Lim sold property they personally owned and put the funds into Kent. In doing so they must have believed that they could weather the financial difficulties and complete the production of the films upon which they were engaged. I accept Mr. McAree's evidence that Kent's financial difficulties arose out of the termination of its credit facilities by Barclays Bank upon the fall in the value of the flat provided as security, compounded by the effects of the increased value of the U.S. dollar. In accepting Mr. McAree as a truthful witness I have not overlooked the criticism of his procurement and use in his letters of withdrawal to Barclays Bank of a rubber stamp with the words "For and on behalf of De Rochemont Societe Anonyme" and a typed letter head giving his address as that of the Plaintiff. I find nothing sinister about that in the circumstances. Mr. McAree was in fact acting as the agent of the Plaintiff at the time and I accept he regarded that as conforming to the requirements of the Bank and to normal practice. Nor have I overlooked the Plaintiff's moral condemnation of Mr. McAree's failure to make full disclosure to Mr. Citroen of Kent's difficulties. I accept that Mr. McAree could have told Mr. Citroen more and somewhat sooner, but unfounded optimism is not necessarily an indication of untruthfulness, nor in any event, do the circumstances suggest to me any dishonesty or deliberate suppression in that regard on the part of Mr. McAree. Of more concern to me was the comparatively high expenditure that the Defendants claimed in their Defence was incurred in the production of Kwailo. I refer in particular to the producers fees (US$40,000), service fees (HK$75,800), overheads (HK$112,000) and costs incurred by agent (US$6,000 which in the course of the trial was reduced to US$2,000). While I do not make a finding on that claim, it not being necessary for me to do that, I have come to the conclusion that it does not in all the circumstances, undermine Mr. McAree's credibility.

12. A passing reference has to be made to discussions between Messrs. Citroen and McAree which the latter claims were without prejudice on the express instructions of his solicitor, but which the former denies were upon that basis. I believe that was indeed the basis upon which Mr. McAree intended to proceed. However, little turns upon that question as Mr. McAree does not dispute that the $95,000 or the bulk of that sum was on its own initiative applied by Barclays Bank in reduction of its credit facility to Kent, and I do not doubt that he would feel morally bound to try and repay the Plaintiff the sum in question if he could, Kent not being in a position to produce the film Kwailo. Those are the admissions upon which the Plaintiff seeks to rely. They do not in my view provide support for the Plaintiff's version or undermine that of Mr. McAree significantly.

PLAINTIFFS LOCUS STANDI

13. Before I come to consideration of the Plaintiff's claims there is one preliminary matter that should be disposed of. As I have said the investment in the earlier film Horatio IPI was made on behalf of CEC, and as one of its terms Mr. Citroen sought and received an option to invest in subsequent films. The investment in Kwailo, which was made in pursuance of that option, should have therefore been made by CEC. By their pleadings the Defendants attempted to nonsuit the Plaintiff by putting it to strict proof of its claim that it was party to the agreement. As I have noted, Mr. McAree said that he assumed that DER was merely a means or channel for effecting payment. Mr. Citroen in response submits that if DER was not originally a party to the agreement, there was oral novation. It is not disputed that on 27th July 1982 Mr. McAree wrote to Mr. Citroen recording the agreed recoupment and profit sharing amounts and percentages and that a copy of that letter was returned to Kent with references to DER substituted for references to CEC. Mr. McAree says that was when he first learned that DER and not CEC was the party investing in Kwailo (as opposed to simply channelling the moneys). Yet he did not object and indeed continued to act in pursuance of the agreement. I think on the probabilities there was novation as contended for by Mr. Citroen. Furthermore, in my view Mr. McAree is now estopped from denying that DER was a party to the agreement even if he purports to do so by putting the Plaintiff to strict proof. Upon the former basis, however, I think it was DER on whose behalf Mr. Citroen made the agreement and investment.

GROUNDS OF CLAIM

14. I proceed then to the Plaintiff's claim which is for a declaration that Mr. McAree holds the US$95,000 in trust for the Plaintiff, and for the return of that sum. That claim was pursued upon 4 legal grounds, restitution, agency, constructive trust and lifting the corporate veil of Kent. Originally a fifth ground was pleaded i.e. misrepresentation. The misrepresentation alleged was that the Plaintiff entered into the agreement in reliance upon the representation that finance would also be provided by Taiwanese interests. In the event, this ground was abandoned at the trial.

AGENCY

15. I will accordingly begin first with agency, which Mr. Maxwell Lewis for the Plaintiff submits can be expressed or implied from the facts. I need not dwell upon this submission since it is conceded on Mr. McAree's behalf that there was an agency to withdraw the two sums in question and pay them to Kent. But it is resolutely denied that the agency went beyond that, and in particular that it extended to any obligation to ensure that the sums were actually spent upon the production of Kwailo.

16. Before I come to the legal basis of the Plaintiff's claim it is necessary to examine the factual nature and scope of the agency which is in dispute. The Defendants sought further and better particulars from the Plaintiff of the agreement which allegedly restricted withdrawals from the bank account solely to the purpose of meeting production expenses actually incurred. Where and when, they asked, was the alleged agreement made. Backcame the answer, "in or about February 1983 when Dr. Robert L Citroen and the Second Defendant visited Barclays for the purpose of opening a bank account in the name of the Plaintiff." That of course is not wholly consistent with Mr. Citroen's evidence. When taxed about this in cross-examination Mr. Citroen seemed unsure and claimed that that was where the final discussion took place and there might have been more than one place where the matter was discussed. Under cross-examination Mr. Citroen was also asked about his failure to react when he first learned that the US$95,000 had been withdrawn totally in just two sums. I did not find his answer that it was merely withdrawn, and not spent to his knowledge, wholly convincing. Furthermore one of his letters to Mr. McAree suggests that he would have been content if the US$95,000 had been placed in a "segregated account" which, inevitably, would have been in Kent's name. That, also, I find not wholly consistent with the assertion that withdrawals were only to be made to cover disbursement of expenditure.

17. It is not disputed that Kwailo was to be proceeded with in a manner similar to that adopted in Horatio IPI. In Horatio the total investment was paid directly to Kent in one sum. While, of course, this would not prevent the Plaintiff or Mr. Citroen from making other arrangements as to the manner in which the Kwailo funds would be provided, I think it is yet another factor that does tend to support the 2nd Defendant's version.

18. Of course, if the amounts were to be paid in total immediately, there would be little point in opening an account and making Mr. McAree one of the signatories who could operate it independently. However I think that consideration is countered by Mr. McAree's assertion, which was not denied, that the account was also intended for other business purposes of Mr. Citroen, and, indeed, that he received payments from that account.

19. As I have already recorded, in general I prefer Mr. McAree's evidence to that of Mr. Citroen. I certainly do so upon this specific issue of agency. I should add that apart from demeanour,it seemed to me that in being drawn out of the dimmer recesses of his memory, Mr. Citroen's evidence emerged rather too favourably formulated to meet the legal concepts of agency and trusts particularly (and in another context, misrepresentation). That may have been the unconscious result of his legal training and occupation. Nonetheless it is another reason why his evidence must be approached with caution.

20. In the result I have no difficulty in accepting Mr. McAree's version and finding upon the probabilities, that the Plaintiff upon whom the onus lies, has failed to establish the specific agency it contended for i.e. that the money was to be withdrawn only for the purpose of meeting expenditure that had already been incurred in the production of Kwailo. In my finding the agency was no more than to withdraw the funds and to pay them over to Kent when they were needed. I am satisfied that Mr. McAree believed they were needed, as he testified, when he withdrew them and paid them over to Kent.

21. I turn then to the legal aspect of Mr. Maxwell Lewis's submissions. In reliance upon North American Land v. Watkins (1904) 1CH 242 and English v. Dedham Vale Properties (1978) 1 All ER 382, he submits that there is a fiduciary duty upon an agent first to see that monies advanced by the principal are used for the purposes specified, and second to make disclosure. The first point can quite shortly be disposed of upon the facts. In my finding the obligation was simply to withdraw the money and pay it to Kent. Although the object of those payments i.e. the production of Kwailo, was quite clear, there was in point of fact no express stipulation or undertaking to see that the monies were thereafter actually expended upon the production of Kent. Nor am I able to see anything in the two cases cited or in any of the other authorities to which Mr. Maxwell Lewis referred me, that would so extend the agency as to impose or imply that obligation.

22. As to the duty of disclosure, the legal extent of this is by no means clear and, as is observed at page 159 of the 15th Edition of Bowstead on Agency, some of the formulations should be viewed with caution. Furthermore the very limited nature of Mr. McAree's agency must be crucial to that question. I do not think it necessary to explore its legal limits since, upon the facts as I find them, at the time of withdrawal and payment there was no intention to divert them to other purposes, nor did Mr. McAree have any knowlege that they would in the event he diverted or not be used in the production of Kwailo but be swallowed up in the unforeseen realization by the bank of its security in consequence of the collapse of the property market. So that even if there was in terms of legal principle duty to disclose such matters, there were none in existence and so nothing to disclose. The Plaintiff's claim upon this aspect of agency must therefore fail.

CONSTRUCTIVE TRUSTS

23. I turn to the next legal ground upon which Mr. Maxwell Lewis sought to rest the Plaintiff's claim i.e. constructive trust. This, it is submitted, attaches to specific property held by a person, in circumstances where it would be inequitable for him to assert beneficial ownership. I was referred to p.584 Halsbury's Laws, Volume 84, and again the case of English v. Dedham Vale Properties (1978) 1 All ER 382 as authority for the proposition that a person can be treated constructively as if he had been a trustee, so that like an express trustee he can be made personally liable to account to the beneficiaries for any losses or gains resulting from his unlawful activities. Proceeding from that general position, it was on the Plaintiff's behalf also sought to rely upon Carl Zeiss Stiftung v. Herbert Smith & Co. (1969) 2Ch 276 for the proposition that a person who receives property which he knows or ought to know is trust property, and applies it in a manner which is inconsistent with the terms of the trust, is accountable for that application of the property. However that would not avail the Plaintiff since in my finding Mr. McAree fully discharged his obligation as trustee on paying the monies into Kent's account, there being at that time no reason to believe that they would not be used for the production of Kent, nor any obligation to see that they were so used, moreover there being a genuine and reasonable belief on the part of the and Defendant that the money would be so used. I therefore simply do not see how in these circumstances, equity could impose a constructive trust, notwithstanding the 2nd Defendant's apparent control of Kent, and his subsequent inability to prevent Kent collapsing. Nor is it possible to find a resulting trust as in the case of Hussy v. Palmer (1972) 3 All ER 744, also urged upon me, in which the plaintiff was able to recover the money she had put into an extension of her son-in-law's house in anticipation of living in it, when she was in fact excluded. I was referred next to Barclays Bank v. Quistclose Investments Ltd. (1970) AC 567 and Carreras Rothmans Ltd. v. Freeman Mathews Treasure Ltd. (1984) 3 WLR 1016. In the former a loan was made to Rolls Razor Ltd. for a specific purpose which created a primary trust, and upon that failing, a secondary trust in favour of the lender. In the present case there was simply venture capital advanced, and I am not able to infer any primary trust requiring those moneys to be used only for the purpose of producing Kwailo. Likewise in Carreras v. Freeman, moneys were paid into a special account for a specific purpose and did create a trust. It is significant that in both those cases it was the proper destination or disposal of trust monies that was concerned, the primary trusts having failed. The moneys given to the companies were never intended to become the property of those companies; they remained trust moneys. In the present case, in my finding, the moneys had ceased to be trust moneys upon being properly paid to Kent, with the intention that the same should become the property of Kent. I do not think that where in return for a share of the profits, venture capital is provided in the context of such a project, there is by that alone necessarily created a trust that the money is to be used only for the project. Furthermore if such a trust had been created between the Plaintiff and Kent, the directors of the latter would not by reason only of their directorships, be personally responsible for a breach of it (Wilson v. Lord Bury (1880) QBD 518).

LIFTING THE CORPORATE VEIL

24. Proceeding then to Mr. Maxwell Lewis' next ground, it is urged on behalf of the Plaintiff, that as Kent was the creature of the 2nd Defendant, he cannot hide behind Kent and simply say that the money was given to Kent. The independent existence of a company, separate from its shareholders and directors is trite law, but there are exceptional circumstances in which the courts will "lift the veil" of incorporation. It said in para. 8-22 of the 23rd Edition of Palmer's Company Law, they are more inclined to do so where questions of control rather than of ownership arise. The Plaintiff has not been able to bring its case directly within any of the exceptions in which the veil of corporateness has been lifted, and which are recited at pp.201-205 of that Edition. Nevertheless it has sought to rely upon Gilford Motor Co. Ltd. v. Horn (1933) Ch 933 and Jones v. Lipman (1962) 1 WLR 832. In the former, a managing director who had agreed not to compete with his company, formed his own company as "a device, a stratagem in order to mask" the carrying on of the business by him. And in the latter, the defendant having agreed to sell certain land, transferred it to a company he acquired and controlled solely for the purpose of defeating the plaintiff's right to specific performance. In both cases it was held that the corporate entity was a sham or mask to avoid recognition by the eye of equity. In the present case however, Kent was a genuine company for the production of films and certainly not a sham or mask.

25. The Plaintiff also sought to rely upon Smith, Stone & Knight Ltd. v. Lord Mayor, Aldermen and Citizens of the City of Birmingham. In that case a parent company was held to be carrying on business through its subsidary company and entitled to compensation when the latter was put out of business. There was no doubt upon the facts in that case that the subsidiary company was acting as the agent of its parent company. As Atkinson J said in his judgment, that is a question of fact in each case. In the present case the evidence does not indicate to me that Kent was acting as the agent of Mr. McAree.

26. I therefore cannot find any justification at all to warrant the lifting of Kent's veil of incorporation.

RESTITUTION

27. I proceed to the final head upon which the Plaintiff has rested its claim i.e. restitution, aspects of which have already been touched upon. The Plaintiff says first, that as Kwailo has not been produced, there therefore has been total failure of consideration. It relies upon The Fibrosa (1943) AC 32, Comptoir D'Achat etc. v. Luis de Ridder (1949) AC 293, Royal Bank of Canada v. R. (1913) AC 283 and Branwhite v. Worcester Works Finance Ltd.(1969) 1 AC 552. All these cases can be distinguished from the present case; two concern sale of goods, one relates to parties to a contract of hire purchase who were not at idem and the last case concerns money subscribed for a specific purpose that failed. The facts in the present case are much more akin to those in Hyundai Heavy Industries Co., Ltd. v. Papadopoulos & Ors. (1980) 1 WLR 1129. In that case the sellers agreed to build and sell a ship. The buyers failed to pay the 2nd instalment and the sellers rescinded the agreement and sued the guarantors. The House of Lords in distinguishing the case before them from sales of land and goods held that the Plaintiff was not simply confined to selling a ship but had also to design and build it. Similarly in this case the film had not only to be produced but services and much planning had to go into it. Mr. Citroen was by no means aloof from these matters, and involved himself in the quality of the script as it was being produced, who wrote it, and the selection of some of the proposed cast. Likewise the progress of production and the cash flow or availability of finance concerned both parties. In my view therefore a similar distinction must be drawn between this case and cases of the sale of goods and land. Furthermore the agreement in this case was not simply for the production of Kwailo but also for the sharing of the profits of that film which would presumably remain the property of the Defendants. Even if only in respect of modifying the script to meet Mr. Citroen's criticism, work was performed to meet the Plaintiff's wishes; that would be consideration. In my judgment there was no total failure of consideration.

28. But had there been such failure, it would be Kent as the contracting party which received the moneys that would be liable to repay them, unless the 2nd Defendant could be made liable in one of the several aspects of unjust enrichment sought to be established by the Plaintiff. In my judgment the Plaintiff has failed to establish any. That is not surprising for in substance this case is a simple one of investment in a film producing venture by provision of venture capital. The venture failed, not because of any dishonesty or wrongfully diversion of funds but, as Mr. McAree testified, because Kent was under capitalized and was not able to survive the curtailment.of its bank credit facilities, when that was done in consequence of the collapse of property prices which reduced the value of the flat charged as security. Whether money to be invested could in any case have been made the subject of a trust in the sort of transaction concerned, was questioned by Mr. Lee for the 2nd Defendant. However that may be, the fact is, in my finding, that the money invested was not made the subject of the trust alleged. For these reasons the Plaintiff's claim fails and is dismissed. I will now hear Counsel as to costs.