NOKIA FRANCE SA v. IBERICATEL 38 SL AND OTHERS

HCA 3487/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3487 OF 2003

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D E C I S I O N

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1. I propose to continue the Mareva injunctions against the 3rd to 6th Defendants (collectively, "the Defendants"). I set out my reasons briefly below.

2. In my view the Plaintiff's tracing exercise strongly suggests at least 2 inferences:-

(1)	Some of the proceeds from the alleged fraud perpetrated by Ibericatel found their way via the Hong Kong HSBC account of Global Finance Enterprises Ltd. ("Global Finance") to the 3rd and 4th Defendants' Joint Account ("the Joint Account"). I refer here to:-
	(a)	￡399,979.99 of the ￡439,900 credited to the Joint Account on 15 May 2003; and,
	(b)	the ￡39,000 credited to the Joint Account on 17 May 2003.
(2)	Other monies which were deposited by Interstone Trading Ltd. ("Interstone") with Global Finance and which may also represent the proceeds of Ibericatel's alleged fraud, found their way by a circuitous route via PHA Co. Ltd. ("PHA") into the Joint Account. I refer here to:-
	(a)	￡2,763,991.99 of the ￡3,800,000 credited to the Joint Account on 23 May 2003;
	(b)	￡2,791,291 of the ￡3,816,000 credited to the Joint Account on 27 May 2003; and,
	(c)	the ￡1,237,300 credited to the Joint Account on 30 May 2003.

3. Although the Defendants have advanced explanations both for the inflows just identified and the subsequent outflows from the Joint Account, I do not find the Defendant's explanation for the inflows satisfactory. The Defendants say that the inflows are legitimate payments for mobile phones sold by the 5th Defendant and Wealth Link Holdings Ltd. ("Wealth Link") to undisclosed Mainland buyers. The Defendants do not wish to identify the relevant Mainland buyers by name. According to their counsel (Mr Clifford Smith SC), the Defendants believe that disclosure would kill of their business even faster than the continuation of the Mareva injunctions. Mr Smith indicates that Mainland customers such as the undisclosed buyers in this case comprise a substantial portion of the Defendants' business.

4. The 3rd Defendant expressly states in his 5th Affirmation:-

"	35.	I appreciate that this will not look good but the fact is that when I sell to PRC customers I do not ask too many questions. They place orders with me, they arrange payments into my account and their drivers collect the phones from us in Hong Kong. We do not export the phones ourselves and we do not ask the customers about how they do so. As I indicated in my 4th Affirmation, a large number of Hong Kong companies are engaged in this trade. For the period January - November 2003 33,042,590 units of mobile phones were declared as having been imported into Hong Kong and 16,890,271 units were declared as having been re-exported. These figures were taken from the Hong Kong Trade Development Council web-site. They suggest that during an 11 month period 16,152,319 mobile phones were imported into Hong Kong and not re-exported. The reality is that most of them were re-exported to the PRC but were not declared. Where I believe we differ from many of the other Hong Kong companies in the industry is that we are not just traders. We also have manufacturing and refurbishing plants as set out in my 4th Affirmation.
	36.	In view of the above, I believe it will be obvious why I am so reluctant to disclose the identities of our PRC customers. For all I know, it could result in their being arrested, imprisoned and possibly worse in the PRC. I humbly ask the Court for its indulgence in this regard. If it is critical for me to disclose the identities of the PRC customers, I ask that the Court direct the parties as to the terms upon which I should do so, bearing in mind the matters referred to above. I believe that it should not be necessary to disclose the PRC customers' identities given that we were also parties to fully documented back-to-back transactions with third party suppliers in Europe in which we purchased the phones for sale to the PRC customers. I exhibited to my 4th Affirmation the documents relating to those back-to-back transactions. They show that the amounts correspond and that the dates tie in."

5. I expressed concern over the non-disclosure of the Mainland customers' identities at the hearing yesterday. Despite this, the Defendants maintained their stance that disclosure would be fatal to their business and, in any event, was unnecessary in light of the evidence adduced by them.

6. I disagree with the Defendants' contention that disclosure is not necessary. Given that the Plaintiff has raised a serious question as to the laundering of the proceeds from the alleged fraud by Ibericatel, it seems incumbent on the Defendants to identify precisely whom they say provided the funds which were eventually remitted to the Joint Account via the intermediary of Global Finance or PHA. Naming the Mainland buyers would enable the Plaintiff (and thereby this Court) further to investigate and test the Defendants' case that the inflows into the Joint Account were bona fide remittances from legitimate customers. In my judgment, without the vital information of the Mainland customers' names, the Court does not have a reasonably adequate picture of the Defendants' case and is unable to evaluate its strength with any confidence.

7. I note Mr Smith's suggestion that the Defendants' reluctance to name its Mainland customers arises from the fact that these may be involved in unauthorised parallel imports or in violations of Mainland foreign exchange regulations. More bluntly, Mr Robert Whitehead SC (appearing for the Plaintiff) says that the Defendants appear to be aiding and abetting the smuggling of mobile phones into the Mainland. Whatever the case may be, Mr Smith submits that the Defendants sell the mobile phones legally in Hong Kong and should not be held liable for any offences which their customers may commit under Mainland law. Mr Smith argues that any illegal acts under Mainland law committed by the Defendants' customers are unrelated to the fraud of which the Plaintiff complains. The fact that the Defendants' customers may be acting illegally should not mean (Mr Smith concludes) that the Mareva injunction imposed in consequence of the Plaintiff's allegations of fraud should be maintained.

8. But my concern is more fundamental. I do not say that, simply because the Defendants' customers are involved in possibly illegal acts, therefore the Plaintiff's case is made out. If the Defendants wish to protect the names of their customers at this stage, that is their decision. They must, however, take the consequences. One consequence is the Court is unable to assess what credence or weight to give to their defence that the monies paid into the Joint Account represent the proceeds of bona fide sales negotiated at arm's length.

9. I should not be taken to have accepted the proposition that the Defendants are not acting illegally under Hong Kong law by turning a blind eye to the likely activities of their customers. In this connection, I refer (for instance) to the offences created by Organized and Serious Crimes Ordinance (Cap. 455) ss. 25 and 25A. It is unnecessary for me to determine this point at this stage and I expressly do not do so.

10. Mr Smith relies heavily on the fact that, the identity of the Mainland buyers apart, the inflows and outflows into the Joint Account are supported by apparently bone fide, contemporary documents. I am unable to attach significant weight on this factor for the purposes of these interlocutory proceedings. As Mr Pilkington mentions in his 11th Affidavit (at §3), "[o]ne of the key features of money laundering is an attempt to clean dirty money by using it to fund otherwise legitimate business transactions, as well as passing the monies through a large number of bank accounts to try to defeat any tracing exercise." In this case one plainly has funds passing through a labyrinth of accounts in a short period of time. If the Defendants were engaged in money laundering as the Plaintiff alleges, one would expect to see that fund outflows from a suspect account are matched by apparently genuine commercial documentation. Indeed, the Plaintiff does not contend that the Defendants are engaged in businesses which are all illegal. It is conceivable that the Defendant used the proceeds received into the Joint Account to finance legitimate business ventures. The real query in my mind arises in respect of the original receipt of the funds into the Joint Account and it is here that the Defendants have been coy in providing information.

11. There was some debate at the hearing before me as to whether Interstone was or was not a dormant company. I do not believe that it is necessary or advisable for me to determine now whether Interstone was or was not dormant at the time of the alleged Ibericatel fraud as one side or the other alleges. I think that it is sufficient at this stage if I simply state my agreement with Mr Whitehead's point that there are suspicious circumstances surrounding Interstone and its business. I refer in particular to Interstone's failure to file up-to-date returns with Companies House in London. The records that have been filed suggest that Interstone is dormant. On the other hand, it seems from a Day Book obtained by the Plaintiff in the course of executing an Anton Piller order in London against Interstone, that the company has been engaged in significant business (including with Ibericatel) in May 2003. The Defendants say that Interstone is a big player in the European mobile phone market. The records at Companies House would indicate otherwise. By any reckoning, there must be questions over Interstone's status and the role it played in the alleged Ibericatel fraud. Those questions can only be resolved at trial.

12. There was also some debate at the hearing on the validity in French law of the one-sentence retention of title clause relied on by the Plaintiff to found its proprietary claim. I cannot resolve that debate now. All I can say is that, on the available evidence, I cannot discount the Plaintiff's case on the clause as one that is bound to fail.

13. Mr Smith says that there is no compelling evidence of a real risk of dissipation by the Defendants. The proof of the pudding (he says) is in the eating. When (a few weeks before the Mareva was obtained but while the Plaintiff was conducting its tracing exercise with the cooperation of HSBC and other banks) HSBC informed the Defendants that HSBC was withdrawing their credit lines and closing all their accounts, the Defendants (Mr Smith points out) did not take their money and run while they could. Instead they wrote to HSBC, including correspondence through the Defendants' then solicitors, in an attempt to understand any problem and restore their credit. That (Mr Smith suggests) would not have been the conduct of someone who was engaged in money laundering.

14. I am unable to read much into the incident highlighted by Mr Smith. There may be many explanations for the position taken by the Defendants. For example, as Mr Whitehead argues, it may simply have been over-confidence that any engagement by the Defendants in money-laundering would never be discovered and that HSBC must have had in mind some other concern which could be resolved by negotiation. Mr Whitehead comments that most litigants would not in fact have been able to conduct the substantial and detailed tracing exercise undertaken by the Plaintiff here. It was only because the Plaintiff's perseverance and its substantial financial resources worldwide that the complex history of the proceeds from Ibericatel's alleged fraud has been unravelled.

15. Given (as I have concluded) that the Plaintiff's allegations of criminal fraud and money laundering against the Defendants are serious issues, it must follow that there is a real risk that if the Mareva injunctions are lifted the Defendants will seek to make themselves judgment proof by dissipating assets.

16. The 3rd Defendant's 5th Affirmation alleges that the Plaintiff failed to make a number of material disclosures when applying for a Mareva injunction ex parte. At the hearing before me, Mr Smith relied on just 2 allegations of material non-disclosure, one of which has not previously been raised in any affirmation filed by the Defendants. That was because Mr Smith only noticed the point on the night before the hearing in the course of his preparation.

17. First, it is said that the Plaintiff failed to point out that funds were remitted to Global Finance pursuant to Interstone's instructions on 8 and 9 May 2003 prior to the dates of the 3 Ibericatel invoices (12 and 13 May 2003) exhibited to the Court at the time of the ex parte application. Here I am satisfied by the explanation given by Mr Pilkington in his 12th Affidavit (at §§16-22) that there has been no material non-disclosure on the part of the Plaintiff.

18. Second, as a new allegation of material non-disclosure, Mr Smith notes that an analysis of the HSBC Hong Kong accounts of Interstone and PHA shows that, prior to transfers from PHA to the Joint Account, funds regularly flowed from Interstone's into PHA's account. That (Mr Smith says) would have suggested to the Court at the ex parte stage that there was nothing unusual about funds moving in or out of Interstone's and PHA's HSBC accounts respectively. Any flows from the former to the latter, including those highlighted by the Plaintiff, must have related to normal commercial transactions.

19. This allegation of material non-disclosure was in effect a variation on the more general submission of Mr Smith. That submission relied on evidence that in the past the Defendants had received funds from Global Finance or Amoisonic Technology Ltd. (as PHA used to be known). The inference which Mr Smith sought to draw from this was that there was nothing unusual about the Defendants receiving money from Global Finance or PHA, so that the remittances into the Joint Account which the Plaintiff now attacks in all likelihood constituted bona fide business payments as in the past.

20. I am unable to draw the inference for which Mr Smith contends. The specific transactions underlying previous dealings between the Defendant and Global Finance or PHA have not been identified or analysed in the evidence. Even the Defendants' expert Mr Poole explicitly states that he has not looked into the previous transactions between the Defendants on the one hand and Global Finance and PHA on the other. Such past history may or may not relate to bona fide business transactions. At present, I cannot say that the evidence on which Mr Smith relies supports his conclusion on the balance of probabilities.

21. All the more, I cannot conclude that evidence of previous direct transfers from Interstone's to PHA's HSBC account without more means that the remittances to the Joint Account by PHA which the Plaintiff here attacks are genuinely motivated. Accordingly, I do not think that there has been any material non-disclosure as alleged by Mr Smith on this score.

22. Both parties have invited me to vary the Mareva injunctions.

23. Mr Whitehead argued that the weekly amount permitted to the 5th Defendant should be reduced as being too generous. On the basis of a schedule of the 5th Defendant's monthly expenses, Mr Whitehead submits that there is unnecessary duplication. The 5th Defendant is currently allowed to withdraw $1,000,000 per month; the 3rd and 4th Defendants $100,000 per month each. The monthly expenses indicate that some $167,353.60 per month would be paid to the 3rd and 4th Defendants by way of directors' remuneration and emolument out of the $1,000,000 allowed under the Mareva injunction covering the 5th Defendant. This would be on top of the $100,000 each already allowed to the 3rd and 4th Defendants monthly under the Mareva injunctions covering them. Mr Whitehead says that this double maintenance is needlessly whittling down the value of the Mareva injunctions obtained by the Plaintiff.

24. While I accept that there may be some double benefit to the 3rd and 4th Defendants, a Mareva injunction is inevitably an intrusion into the normal orderly process of a person's life. Pending final determination at trial, the inconvenience caused by a Mareva to a party should be minimised as much as reasonably possible. I do not think that the allowances now being paid out are excessive, especially given the 3rd and 4th Defendants' apparent lifestyle prior to the imposition of the Mareva injunction (as disclosed by the evidence). I therefore decline to reduce the allowances allowed under the injunctions. As for the contention that the funds subject to the Mareva injunctions are being depleted, that seems to be an inevitable corollary of the asset value (approximately $20 million) which the Plaintiff has managed to freeze and the time taken to bring the action to trial. To vary the Mareva allowance down by $167,000 or so per month, will not in the scale of things substantially assist the Plaintiff by way of security for its action. The practical answer to the problem seems to be for the Plaintiff to bring its claim to trial as speedily as possible.

25. By way of a fallback position if I were not minded to lift the Mareva in its entirety, Mr Smith urged me to vary the Marevas obtained in 2 ways:-

(1)	To lift the injunction on Standard Chartered Bank Account
	No. 569-201-43325 ("the Standard Chartered Account") (holding some $3,905,279.79) in the name of the 4th Defendant; and,
(2)	To allow the 5th Defendant to tap the Joint Account for its monthly allowance of $1,000,000.

Mr Smith said that for now he was only foreshadowing the 2nd variation. He accepted that he may have to file affidavit evidence in support of the 2nd variation and give the Plaintiff an opportunity to respond with any appropriate evidence in reply. I therefore do not need to consider the 2nd variation for now.

26. In respect of the 1st variation sought, Mr Smith submitted that the 4th Defendant's role was minor. Although a director of the 5th Defendant and various related companies, she would only sign cheques or arrange payments when her husband (the 3rd Defendant) was away. Most of the time, the 4th Defendant was only a housewife.

27. The Plaintiff's claim against the Defendants (including the 4th Defendant) essentially has 2 limbs. The 1st is a proprietary claim against the amounts transferred into the Joint Account and from there into other accounts controlled by the Defendants. The 2nd is a personal claim to account for monies representing the proceeds from the alleged Ibericatel fraud. If the Plaintiff succeeds in its claim against the 4th Defendant, she would have an obligation to account for the proceeds from any fraud or pay damages in respect of conversion of the Plaintiff's phones. The proprietary remedy would not affect the Standard Chartered Account as it seems no funds received into the Joint Account were transferred there. However, if the Plaintiff should prevail on its personal claim, I doubt that the 4th Defendant would be able to shelter behind the excuse that she was only a housewife and therefore had no notice of any fraud engaged in by (say) the 5th Defendant.

28. Housewife or not, a person who agrees to act as a director accepts certain duties. One of those duties would self-evidently be to take reasonable steps to ensure that the company of which the person is a director does not knowingly engage in fraud. A director cannot be inactive. Accordingly, I am unable to conclude that the Mareva over the Standard Chartered Account should be lifted by reason of the 4th Defendant's alleged minimal role.

29. Finally, I deal with the Defendants' contention that the continuation of the Marevas would ruin their business irretrievably. Wealthy though the Plaintiff may be, no amount of money (it is said) could compensate the Defendants for the loss of their business. While I have sympathy with this argument, I am constrained by the evidence currently before me. On the available evidence, I agree with Mr Whitehead that the Defendants' claims appear exaggerated.

30. The 5th and 6th Defendants form part of a group of companies. There is evidence that funding for a company X within the group is obtained from whichever company Y happens to have funds. Appropriate intra-company accounting entries are then made to keep track of the transfer of funds from Y to X. I am not satisfied that the Defendants could not maintain their business from funds provided by companies within the group not subject to any Mareva.

31. I refer, for example, to Global Telecom Distribution Plc ("GTD"). The evidence suggests that as at 31 March 2003 GTD had turnover of almost ￡60,000,000 and profit on ordinary activities before taxation of ￡309,343. Mr Smith suggests that in fact GTD currently has cashflow difficulties. But there is no affidavit evidence supporting this. The latest audited account for GTD which has been exhibited is that for the financial year ended 31 March 2003. The Defendants say that between 24 May and 3 June 2003 they advanced ￡10,603,200 to GTD to help it pay for a large order of 35,500 mobile phones placed by GTD with Interstone in March and April 2003. That would have given rise to an obligation on the part of GTD to reimburse the Defendants. It is unclear to me on the available evidence why the Defendants in order to fund their business in the short term should not be able to rely on repayments by GTD (whether by instalment of otherwise) of the amount advanced.

32. I add that I am by no means certain that the mere lifting of the Marevas would restore the Defendants' credit lines as the Plaintiff's proceedings against them for fraud and money laundering would continue. In such circumstance, customers and banks may still refuse to have dealings with the Defendant until this dispute is resolved one way or the other at trial. Mr Smith says that there is a letter from an unnamed bank which indicates that the lifting of the Mareva may lead to the provision of credit by that bank. But that letter does not form part of the evidence adduced by the Defendants. Nor was it produced to the Court yesterday.

33. For the above reasons, I think that the Mareva injunctions should remain in effect unvaried until conclusion of the trial or further order. I shall now hear counsel on costs.