KBC BANK N.V. v. AUTOMOTIVE COMMUNICATIONS LTD AND OTHERS

HCA542/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 542 OF 2005

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BETWEEN

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J U D G M E N T

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1.  The plaintiff is a Belgian bank having a branch bank in Shenzhen.

2.  The present proceedings were commenced in 2005.

3.  A default judgment was entered against the 1^st defendant for money owed as a borrower from the plaintiff and as guarantor for East Sector International Ltd (“East Sector”) in the sum of US$1,983,675.80 on 14 September 2007.

4.  A default judgment was also entered against the 2^nd defendant in the sum of US$2 million on account of its failure to comply with court orders on 23 April 2010.

5.  It is the plaintiff’s case that the 3^rd defendant was at all material times a director of Internet Appliances Hong Kong Limited (“IAHK”) and the 2^nd defendant and that he made a number of fraudulent misrepresentations which they acted upon to their detriment thus occasioning their loss.

6.  IAHK was granted loan facilities on 20 June 2001.  It was a condition for granting the facilities that a cross-guarantee to and from East Sector which was signed by IAHK on 21 June 2001 be obtained (“the IAHK Guarantee”).

7.  The plaintiff contends that the 3^rd defendant signed this guarantee for and on behalf of IAHK and that by so doing he represented that he was duly authorised to sign and execute the guarantee and accept the terms and conditions contained within it. 

8.  This has been referred to as “the 1^st representation”.

9.  As a consequence of this representation the plaintiff granted to East Sector banking facilities of US$2 million.  East Sector is an associated company within IAHK.

10.  The plaintiff also contends that the 3^rd defendant signed a banking facilities letter dated 20 June 2001 and its amendment dated 26 June 2001 granting banking facilities to IAHK.  By so doing the 3^rd defendant represented to the plaintiff that he was authorised by the company to sign the letter and that company would comply with its terms.  This has been referred to as “the 2^nd representation”.

11.  On account of this representation the plaintiff granted banking facilities of US$2 million to IAHK.

12.  In July 2005 a decision was made to transfer the banking facilities enjoyed by IAHK to the 1^st defendant. 

13.  The 1^st defendant executed the guarantee to guarantee moneys owed by East Sector to the plaintiff (“the Automotive Guarantee”).

14.  The plaintiff required the 2^nd defendant to enter into a guarantee to guarantee the facilities granted to the 1^st defendant.  It is the plaintiff’s case that the 3^rd defendant signed this guarantee and thereby represented to them that he was authorised to enter into the commitment and that the company would comply with the terms of the guarantee.  This has been referred to as “the 3^rd representation”.

15.  In reliance of these representations the plaintiff granted a facility of US$2 million to the 1^st defendant and cancelled the IAHK Guarantee.  The Automotive Guarantee was then executed by the 1^st defendant to guarantee payment of all moneys due from East Sector to the plaintiff.

16.  By a facilities letter dated 22 July 2003 the plaintiff agreed to extend the facilities granted to the 1^st defendant to 31 July 2004 provided the 2^nd defendant entered into a Continuing Guarantee.  This was signed by the 3^rd defendant on behalf of the 2^nd defendant and guaranteed the facilities of the 1^st defendant up to US$2 million.

17.  This Continuing Guarantee was provided to the plaintiff together with minutes of a board meeting of the 2^nd defendant in which the 3^rd defendant was authorised to execute the Continuing Guarantee.

18.  Mr Zimmern, for the plaintiff, helpfully summarised the factual matrix in these terms :

(a) East Sector is guaranteed by the 1^st defendant and the Automotive Guarantee.

(b) A separate facility of US$2 million was granted to the 1^st defendant.

(c) The liabilities of the 1^st defendant (i.e. those in (a) and (b) were guaranteed and all moneys guaranteed by the 2^nd defendant initially under the IA Guarantee for the full amount and later under the Continuing Guarantee for up to US$2 million.

19.  The plaintiff contends that the 3^rd defendant by signing the Minutes of the Continuing Guarantee on behalf of the 2^nd defendant represented that he had authority to represent the 2^nd defendant and sign the Continuing Guarantee and for the 2^nd defendant to comply with its terms and he intended that they, the plaintiff, would continue granting facilities to the 1^st defendant.  This has been referred to as “the 4^th representation”.

20.  The plaintiff in reliance upon the representations made by the 3^rd defendant advanced moneys to the 1^st defendant and to East Sector.

21.  As at 18 March 2005 the 1^st defendant owed US$1,398,895.20 and East Sector US$1,983,675.80 plus interest accruing at prime rate plus 3%.  None of these moneys have been recovered.

22.  The 3^rd defendant in his amended defence admits that he has been a Director of IAHK and the 2^nd defendant at all material times.

23.  However he claims that he had no knowledge of any banking relationship with the plaintiff and denies that he signed any of the documents which have been adduced as evidence by the plaintiff.

24.  Indeed he goes on to assert that any documents which it is claimed that he has signed must be forgeries.

25.  The main witness to give evidence for the plaintiff was Madam Jennifer Fang Xin (“Ms Fang”).

26.  She was from November 1998 to February 2002 the Head of the Commercial Banking Division of the Shenzhen branch of the plaintiff.

27.  In the course of her duties she came into contact with Mr Zhang Longjun (“Mr Zhang”) who was a Director of China Shenzhen Colour Television Corporation (“CSCTV”), a state owned enterprise.  It was her understanding that state owned enterprises were not allowed to have dealings with foreign banks and that it was often their practice when they want to do business with foreign banks that they would do so through what was known as window companies. 

28.  These were companies often incorporated in Hong Kong which could thereby circumvent the prohibition referred to.

29.  Mr Zhang informed her that CSCTV used the services of two window companies, East Sector and Internet Appliances Corporation Ltd (“IAC”) which subsequently changed its name to Internet Appliances Hong Kong Ltd.

30.  Towards the end of 2000 or early 2001, Mr Zhang informed her that he wanted to become a customer of the bank.

31.  Ms Fang undertook relevant inquiries and investigations and when she established that CSCTV had a satisfactory credit record she prepared a submission to Mr David Tang Yuk Wah (“Mr Tang”), the Branch Manager, for his consideration.

32.  Mr Tang, who also gave evidence, approved the submission and arrangements were then made first for East Sector to open an account and then IAC.

33.  The idea was that an ad hoc facility would be granted to IAC on condition that it would be secured by export credit insurance which would be assigned by IAC to the plaintiff.

34.  On or around 10 January 2001 Mr Zhang attended at the bank.  He was accompanied by the 3^rd defendant.  Mr Zhang introduced her to the 3^rd defendant.  The purpose of the visit was for an account to be opened for IAC with the bank.

35.  Ms Fang requested the 3^rd defendant to produce his identity card for the purpose of identification, and when he did so she took it and arranged for a photostat copy of it to be made.  The chop of IAC was affixed to the copy, and this was exhibited as part of Ms Fang’s evidence.

36.  It is pertinent to add that the identity card number is the same as the identity card number given on the Annual Return of the 2^nd defendant which bears the 3^rd defendant’s signature.

37.  Mr Zhang and the 3^rd defendant then signed :

(1) Mandate for corporate accounts. This was signed by Mr Zhang and the 3^rd defendant and an IAC chop was affixed with the 3^rd defendant’s signature.

(2) The account rules-general. This was signed by the 3^rd defendant and an IAC chop was affixed to it.

(3) The authorisation and indemnity in relation to the use of facsimile signatures. This was signed by both Mr Zhang and the 3^rd defendant and an IAC chop was affixed with the signatories.

(4) General Agreement for Trade Financing. The 2^nd Schedule of this Agreement which is headed “Specimen facsimile signatures” was signed by Mr Zhang and the 3^rd defendant and an IAC chop was affixed to the 3^rd defendant’s signature.

38.  All of the bank documents were signed in Ms Fang’s presence.

39.  Ms Fang said that shortly after this she prepared credit proposals for both IAC and East Sector for the approval of the plaintiff’s local credit sub­committee.

40.  While this was being done she was informed that IAC was going to change its name to Internet Application Hong Kong Ltd on 16 February 2001.

41.  This change necessitated the amendment of the banking documents earlier referred to and other consequential requirements.

42.  One of these was for there to be an assignment of receivables in respect of the proceeds of insurance from the Hong Kong Export Credit Insurance Corporation. 

43.  Both Mr Zhang and the 3^rd defendant signed the deed which was dated 1 March 2001.

44.  Some time in early March 2001, Mr Zhang and the 3^rd defendant again attended at the bank.

45.  The 3^rd defendant was requested to provide a specimen signature in relation to IAHK.  He did so in her presence.

46.  This specimen signature card was dated 13 March 2001.  

47.  Although this date was recorded on the card she could not recollect that it was in fact on 13 March that the card was signed by the 3^rd defendant.

48.  In cross-examination by the 3^rd defendant, she said that where the date of the document was not of critical importance it would often be the case that the date may be left in blank and members of the bank staff may at a later date complete it on some subsequent date.  This would be done within a few days of the actual signing.

49.  This was a matter of some importance in this case.

50.  As will be apparent when commenting upon the 3^rd defendant’s defence he attaches great weight to the fact that according to the transcript he obtained from the Director of Immigration it appeared that he was in Hong Kong on 13 March 2001.

51.  Ms Fang supported her recollection by stating that this had been the second occasion she had witnessed the 3^rd defendant signing documents.

52.  The ad hoc facilities were set up in March 2001.  Following this she had a number of communications with the 3^rd defendant. None of these were face to face.

53.  However, shortly after this, the 3^rd defendant attended at the plaintiff’s Shenzhen bank to give a power point presentation.  She was physically present at this.  She remembered that the purpose of the demonstration was to inform the plaintiff of the type of business activities IAHK was engaged in.

54.  At around this time she and Mr Tang attended at IAHK’s offices at Tsimshatsui or Jordon in Hong Kong.

55.  They were accompanied by Mr Zhang and met the 3^rd defendant there.  They were shown around the offices.  Her overall impression was that there were not many people working in the office.  The explanation the 3^rd defendant gave for this was that the business had only been operating for a relatively short period of time and it was anticipated that more staff would come on strength in due course.

56.  On 25 April 2001 she received back from the 3^rd defendant the mandate for corporate accounts and other documents required when opening an account which had been signed by the 3^rd defendant on IAHK’s behalf.

57.  On 8 June 2001 she finalised here credit proposals for IAHK and submitted them to the plaintiff’s credit department for approval.

58.  On or around 14 June 2001 approval was forthcoming.

59.  Thereafter Ms Fang prepared facility letters.  IAHK’s facility letter was countersigned by the 3^rd defendant.

60.  One of the requirements of the facility letter was that there must be cross-guarantees between East Sector and IAHK.  The 3^rd defendant signed the cross-guarantee for IAHK.

61.  This was provided together with a written board resolution of IAHK which was signed by the 3^rd defendant amongst others.

62.  Banking facilities were then made available to IAHK and they made good use of them up to the time of her departure on28 February 2002 from the plaintiff.

63.  I formed a favourable view of Ms Fang as a witness.

64.  Her evidence was coherent and made sense as a whole.  I believe it to be truthful and honest.

65.  Certainly she was not shaken in any way by the lengthy cross-examination conducted by the 3^rd defendant.

66.  What is very clear is that she had abundant opportunity to observe the 3^rd defendant and that the possibility of her making a mistaken identification of the 3^rd defendant is remote in the extreme.

67.  Mr Tang gave evidence.  He was the General Manager of the Shenzhen Branch of the plaintiff from 1998 to 2006.  He engaged the services of Ms Fang in 1998 and she subsequently became Head of the Commercial Banking Division of the bank.

68.  In late 2000, Ms Fang introduced him to Mr Zhang, a director of CSCTV.

69.  Mr Tang’s evidence concerning the development of the relationship with Mr Zhang, CSCTV and the 3^rd defendant is very similar.

70.  In particular, he testified that he had met Mr Zhang and the 3^rd defendant on a number of occasions at the plaintiff’s Shenzhen Branch.  The 3^rd defendant had been introduced to him as a director of IAHK.

71.  While he had not himself been physically present at the meeting that had taken place on 10 January 2001, he was aware that the meeting had been arranged so as to enable the necessary documentation to be signed to enable IAC to become a customer and in due course to be granted banking facilities.

72.  He received copies of the documents which had been signed by the 3^rd defendant on IAC’s behalf.  These were the mandate for corporate accounts, a general agreement for trade financing, an account rules-general and an authorisation and indemnity in respect of the use of facsimile signatories.

73.  He was aware that IAC changed its name to IAHK on or about 13 March 2001 and that Mr Zhang and the 3^rd defendant had signed the necessary documentation to take account of this.

74.  Following this he had together with Ms Fang attended at IAHK’s office in Tsimshatsui.  They had been shown around the offices and he also had been surprised by the comparatively small number of employees present.

75.  Shortly after this Ms Fang submitted to him the credit proposals she had prepared for IAHK and he had approved him.

76.  Subsequent to this banking facilities had been granted to IAHK.

77.  In February 2003 Ms Fang left the bank’s employment and her position was taken by Dela On Yang (“Ms Yang”).

78.  In or about May 2002 Ms Yang informed him that she had received a request from Mr Zhang to transfer the facilities provided to IAHK to the 1^st defendant.

79.  This was agreed and Ms Yang prepared the necessary documentation to implement it.

80.  One of the requirements for this was that the 2^nd defendant would provide a corporate guarantee to the plaintiff in respect of the facilities granted to the 1^st defendant.

81.  Ms Yang was in charge of these arrangements and required there to be an annual review of the outstanding facilities.

82.  Such a review was undertaken in 2003 and relevant documentation was executed as required.

83.  Towards the end of 2004 or the beginning of 2005, he had heard in the market that Mr Zhang had been arrested by the Chinese authorities.

84.  As Mr Zhang was a pivotal figure in all these companies Mr Tang called in the facilities and loans which had been extended to the 1^st defendant and East Sector. 

85.  He also wrote a letter to the 2^nd defendant requiring it to comply with the terms of the said guarantee and he required the 2^nd defendant to pay US$1,511,621.24 plus interest which was due from the 1^st defendant.

86.  The amount outstanding from the 1^st defendant as at 18 March 2005 was US$1,398,895.24 and from East Sector US$1,983,675.80.

87.  These moneys remain outstanding.

88.  The 3^rd defendant cross-examined Mr Tang at some length.  He mainly dealt with the nature of his duties and the extent of the due diligence which had been undertaken by him.

89.  What emerged from this was that a considerable measure of responsibility had been delegated to Ms Fang and Ms Yang and that they were the ones to prepare various proposals which were produced to him for approval.

90.  Mr Tang agreed that he had from time to time communicated with Mr Zhang.  One of his concerns had been to ensure that the plaintiff had a comfort letter from CSCTV and this had been obtained. 

91.  The 3^rd defendant pressed Mr Tang on the dating of the specimen signature card and the fact that the information from the Immigration Department indicated that he had been in Hong Kong on 13 March 2001.

92.  Mr Tang’s explanation was similar to Ms Fang’s.

93.  He said that although he had not been physically present at the meeting on or about that time he emphasised that undue weight should not be attached to the date on the card as it was by no means unusual for such a document to be dated by a member of the bank’s staff after the conclusion of the signing thereof. 

94.  Mr Tang was also able to provide details of what had transpired after Ms Fang had left the bank’s employment.

95.  Mr Tang was not shaken in any way in his cross-examination.  His evidence in all respects complemented Ms Fang’s and there can be no doubt whatever that the 3^rd defendant did assume a principle role in satisfying the plaintiff that the various facilities should be extended to various companies within the group of companies which have been referred to in this judgment.

96.  In conclusion I was satisfied that Mr Tang was a truthful and reliable witness.

97.  A short witness to give evidence for the plaintiff was Ms Lui Mi Ping (“Ms Lui”).  She was able to give evidence concerning all the bank documents adduced as evidence and accordingly the requirements of the Evidence Ordinance, Cap. 8 were complied with.

98.  The final witness to give evidence for the plaintiff was a handwriting expert Dr Daniel Wong (“Dr Wong”).

99.  Dr Wong is a very experienced handwriting expert who has given evidence before these courts on numerous occasions.

100.  In the witness box he expanded upon the evidence contained in his report and gave an explanation of the methodology he adopts enabling him to form an opinion whether a document is genuine or the work of someone other than the purported writer of a document.

101.  What is of particular importance are what are described as being the control signatures from which comparisons are made.

102.  Elsewhere I have given my reasons for accepting the evidence of Ms Fang and rejecting the evidence of the 3^rd defendant on the issue as to whether he signed the documents on 10 January and on or about 13 March 2001.

103.  The consequence of this finding is to eliminate conjecture as to whether the documents which were signed on those days were or were not signed by the 3^rd defendant.

104.  Further, these documents can be regarded as control documents with all the implications flowing from this.

105.  This can also be taken further.  During his cross-examination the 3^rd defendant admitted that he had placed his signature on the affirmation made on 20 September 2005 which signature could also be analysed by Dr Wong as emanating from the 3^rd defendant’s hand.

106.  The method adopted by Dr Wong was to undertake an examination of all of these signatures and pay particular regard to the personal writing attributes, e.g. fluency of writing documents, relative alignment of strokes, proportion of strokes, stroke connections, angularity, start of a stroke, ending of a stroke and pen pressure.

107.  It may be helpful to particularise the documents examined by Dr Wong :

“F. Exhibits to Expert Reports

Exhibits to Forensic Handwriting Report by Daniel In-jea Wong

75.	Bundle 1		Date	528
	DW-1sm	Copy of a Signatory Page of Guarantee I (also exhibited as part of ‘JF-17’)	21.06.2001	529
	DW-2sm	Copy of a Signatory Page of Guarantee I (also exhibited as part of ‘TYWD-12’)	25.07.2002	530
	DW-3sm	Copy of a Signatory Page of Continuing Guarantee (also exhibited as part of ‘TYWD-13’)	29.07.2003	531
76.	Bundle 2			532
	DW-4sm	Copy of 2 Signatory Pages of Mandate for Corporate Accounts (also exhibited as part of ‘JF-2’)	10.01.2001	533-534
	DW-5sm	Copy of a Signatory Page of General Agreement for Trade Financing (also exhibited as part of ‘JF-2’)	10.01.2001	535
	DW-6sm	Copy of a Signatory Page of Account Rules-General (also exhibited as part of ‘JF-2’)	10.01.2001	536
	DW-7sm	Copy of 2 Signatory Pages of Authorization and Indemnity (also exhibited as part of ‘JF-2’)	10.01.2001	537-538
	DW-8sm	Copies of 2 Specimen Signature Cards (also exhibited as part of ‘JF-6’)	13.03.2001	539-542
77.	Bundle 3			543
	DW-9sm	Copies of Signatory Pages of 5 Affirmations	Between September 2005 and December 2005	544-548
	DW-10sm	Copy of Signatory Page of Articles of Association of 深圳毅兴科技企业有限公司(in Chinese)	25.12.2000	549
	DW-11sm	Copy of a Board Resolution of Internet Appliances (Shenzhen) Limited (in Chinese)	19.09.2003	550
	DW-12sm	Copy of a Buyback Mandate of IA International Holdings Limited	18.10.2001	551
	DW-13sm	Copy of 2 Signatory Pages of Report of the Directors and Audited Financial Statements (also exhibited as part of ‘JF-16’	17.06.2002	552-553
	DW-23sm	Copy of General Letter of Set-Off (also exhibited as ‘JF-19’)	21.06.2001	568
	DW-24sm	Copy of Written Resolution of Internet Appliances (Hong Kong) Ltd. (also exhibited as part of ‘JF-17’)	25.06.2001	569
	DW-25sm	Copy of a Signatory Page of Amendment of Banking Facilities Letter (also exhibited as part of ‘JF-21’)	26.06.2001	570
	DW-26sm	Copy of Minutes of Meeting of Internet Appliances (Holdings) Limited (in Chinese) (with certified English translation)”	29.07.2003	571-578

108.  The documents in Bundle 2, that is, nos 4 to 8, are the documents which I find were signed in Ms Fang’s presence.

109.  Document DW-9 being the 1^st document in Bundle 3 is the document the 3^rd defendant admitted during his cross-examination he had signed.

110.  Adopting the methodology he described and his overall analysis of all the documents Dr Wong expressed the opinion that it was highly probable that all of the signatures submitted to him had a common author.

111.  He said that highly probable was the 2^nd highest probability on a scale of 1 to 11.

112.  One possible factor for it not being the highest possible probability was that the documents in Bundle 3 were photostat copies which meant that there could not be complete certainty.

113.  There is one important matter which has to be considered in relation to this exercise.

114.  Dr Wong pointed out that the signature he was considering was most unusual in that half the signature consists of an English component and half consists of a Chinese character.

115.  Dr Wong expressed the opinion that such signatures are very rare.

116.  In addition to this he expressed the view that particular difficulties would be encountered by person who attempted to copy the signature.

117.  He said this at para. 28 of his results of his examination of all the signatures :

“28. In relation to the similarities in design, writing movements and rhythm of the three questioned signatures in items 1-3 [BUNDLE 1], the English component was located to the left-hand side whilst the Chinese character is located to the right-hand side. These two components were connected via a horizontal stroke. Although both components were written in the cursive manner, it must be stressed that the writing movements of English letters are very much different from those for the Chinese character. Maintaining the fluency and rhythm in the initial English component of the signature would be relatively straight forward, the difficulty would be that no ‘pauses’ or ‘stopping’ was observed before the signatory continued to write the Chinese component; the two components were connected via a ‘bridging’ upward tilting horizontal stroke. Despite a change in the rhythm in the writing movements from English to Chinese, the fluency of execution of the entire signature was evident in all three questioned signatures in items 1-3 [BUNDLE 1] and in the twelve witnessed signatures of Cheng Kwong Chung in items 4-8 [BUNDLE 2].”

118.  In his evidence in court Dr Wong went further.  He said that for all practical purposes it would be impossible for anyone to fluently produce a signature linking the English and Chinese components of the signature.

119.  This opinion is of relevance if one comes to consider the 3^rd defendant’s conjecture that someone masquerading as him signed the documents in the presence of Ms Fang.

120.  I found on considering Dr Wong’s report and his evidence before me that it is a virtual certainty that the 3^rd defendant signed all 26 documents which were produced to him.

121.  I propose to deal fairly shortly with the 3^rd defendant’s evidence on account of the fact that this case will almost entirely be determined on the question as to whether he signed the various documents.

122.  The basis of his defence is that he never did so and had no knowledge of the relationship between IAC, IAHK, the 1^st defendant and the 2^nd defendant on the one part and the plaintiff on the other.

123.  There is also his contention that because the signature card was dated 13 March 2001 and the information obtained from the Director of Immigration indicated that he was in Hong Kong on that day it was impossible that Ms Fang could have been telling the truth.

124.  We have her evidence in this connection.  She did not claim that the documents were signed on that day.  Her explanation which was supported by Mr Tang was that it was by no means certain that simply because the date is recorded as 13 March 2001 that it was necessarily signed on that day.  It was often the case that bank staff would complete blank spaces on documents after a customer had left the bank, that is assuming that the date of the document is not of crucial importance.

125.  In this connection it is clear from the Director of Immigration’s record that the 3^rd defendant left Hong Kong on a number of occasions on dates in close proximity of 13 March 2001.

126.  On considering the matter carefully I have come to the conclusion that the explanation offered by Ms Fang is credible and that the 3^rd defendant did indeed sign the documents as claimed by Ms Fang.

127.  There are other matters that have to be weighed in the balance.  The 3^rd defendant’s evidence in relation to his identity card was unconvincing.

128.  In cross-examination Mr Zimmern pressed him on why he had given his Hong Kong identity card to Ms Fang at the meeting on 10 January 2001. All he was able to come up with was that it was “simply for convenience”.

129.  I do not believe that he would just hand his identity card to Ms Fang if he was not attempting to open an account for either IAC or IAHK.  In this connection the chop of IAC was affixed to the photostat copy of the identity card.

130.  On the evidence it was not until mid‑February 2001 that IAC’s name was changed to IAHK.  This cast some doubt on the 3^rd defendant’s evidence that it was not until early March that he ever attended at the bank’s premises.

131.  Another highly unsatisfactory aspect of the 3^rd defendant’s evidence was his assertion that all of the signatures on the documents were forgeries.

132.  He did not base his surmise or conjecture on any proven facts.  This being the case no weight whatever can be attached to it.

133.  In weighing the evidence of the 3rd defendant against the evidence of Ms Fang and Mr Tang, I have no hesitation in rejecting the 3^rd defendant’s evidence.  I find as a fact that all of the signatures produced to Dr Wong were the genuine signatures of the 3^rd defendant and that the signatures which Ms Fang said were signed before her were indeed so signed.

134.  In coming to this conclusion I have borne in mind the fact that the 3^rd defendant has not adduced any expert evidence of handwriting.

135.  Mr Zimmern informed me that the 3^rd defendant had approached three different handwriting experts.

136.  The first prepared a draft report but this was never adduced as evidence notwithstanding the fact that the 3^rd defendant was himself alleging forgery.

137.  It is not known what happened in respect of the 2^nd expert.

138.  The 3^rd expert examined the original documents at the plaintiff’s solicitors’ office but no report was ever produced to the plaintiff.  It should be added that legal aid was withdrawn shortly after this.

139.  However, the fact remains that no expert report was produced which might cast any doubt upon Dr Wong’s expert evidence.

140.  As indicated in the early part of this judgment the plaintiff’s claim against the 3^rd defendant is for fraudulent misrepresentation.

141.  The four misrepresentations claimed have been outlined earlier in this judgment.

142.  It is now necessary to consider the law to ascertain whether the plaintiff’s claim can succeed.

143.  The law on the Tort of Fraudulent Misrepresentation is conveniently set out in Chapter 18 of the 20^th Edition of Clerk & Lindsell on Torts, Sweet & Maxwell.

144.  The definition is contained in 18-01 :

“ Definition The modern development of the tort of deceit (sometimes called simply ‘fraud’) dates from Pasley v Freeman in 1789. There, the defendant falsely represented to the claimant that a third party was creditworthy when he knew he was not; the claimant suffered loss as a result of extending credit to him. The claimant was held to have an action. The tort involves a perfectly general principle : where a defendant makes a false representation, knowing it to be untrue, or being reckless as whether it is true, and intends that the claimant should act in reliance on it, then in so far as the latter does so and suffers loss the defendant is liable. Each aspect of the tort is discussed in detail below.”

145.  Having regard to the circumstances of this case the commentary at para. 18-08 is helpful :

“ Active conduct or concealment Active non-verbal conduct can amount to misrepresentation, and hence deceit, just as much as words can. So, for instance, pledging goods knowing one has no title to them is deceit, as is ordering goods on credit for someone known to be insolvent or presenting company accounts to a buyer in the knowledge that they have been doctored. No doubt the same would apply to an agent knowingly contracting without authority to do so. Another straightforward example is positive steps taken to conceal defects in something being sold (as against merely keeping silent about them). So in Gordon v Selico Ltd, the Court of Appeal awarded damages for deceit where a defendant fraudulently arranged to cover up infestations of dry rot in a flat before letting it. Similarly, in the antique case of Schneider v Heath a seller of a ship was held liable when he deliberately floated it so as to hide sub-waterline defects when the buyer came to inspect it.

146.  In the present case it is not so much what the 3^rd defendant said as what he did.  By signing the various documents he was clearly representing that he was authorised to do so and that the terms and conditions contained in the documents would be complied with.

147.  The 1^st representation was the signing of the IAHK Guarantee.  The consequence of this representation was that the plaintiff granted banking facilities to East Sector its associated company.

148.  The 2^nd representation made by the 3^rd defendant was the signing of a banking facilities letter dated 20 June 2001 and its amendment dated 26 June 2001.  By signing it he represented that he was authorised to do so and that the company would comply with the terms and conditions contained in the documents.  The plaintiff granted facilities to IAHK to its detriment and loss.

149.  The 3^rd representation made by the 3^rd defendant was the signing of the IA Guarantee dated 25 June 2002 when the decision was made to transfer the facilities extended to IAHK to the 1^st defendant. Similar consequences flowed from this as from the first two representations.

150.  The 3^rd defendant’s 4^th representation was the signing of the minutes of a board meeting of 29 June 2003 where he represented that he had authority to sign the minutes and that the minutes authorised the 2^nd defendant to enter into the Continuing Guarantee dated 29 July 2003 which guaranteed the facilities granted to the 1^st defendant.  It was as a result of this that the facilities were extended by the plaintiff to the 1^st defendant.

151.  The final matter that has to be considered is the state of mind of the 3^rd defendant and whether these representations can accurately be characterised as fraudulent misrepresentations

152.  The classic definition of what constitutes fraud in this context is contained in the passage at 339 of Derry v Peek (1889) 14 App. Cas 337 :

“ March 28, 29; April 5, 9, 11. Sir Horace Davey Q.C. and Moulton Q.C. (M. Muir Mackenzie with them) for the appellants :

The law as laid down by the Court of Appeal goes much further than any previous decision and is unsound. To support an action of deceit it always was necessary at common law and still is both there and in Chancery to prove fraud, i.e., that the thing was done fraudulently. Fraud never has been and never will be exhaustively defined, the forms which deceit may take being so many and various. There is a negative characteristic : it must be something which an honest man would not do; not merely what a logical or clear-headed man would not do. However unbusinesslike a man may be he is not fraudulent if he acts honestly. The natural consequences of words or acts must be taken to have been intended, but not so as to impute fraud to honesty. No honest mistake, no mistake not prompted by a dishonest intention, is fraud. The shape of the mistake does not make it more or less a fraud if it is a mistake. Once establish that a man honestly intended to do his duty, the consequences cannot turn his words or acts into a fraud. There may be an obligation to see that no untrue statement is made, but the failure to meet that obligation is not fraud, if there is no dishonest intention. The statement may be inaccurate, yet if the defendants honestly—though mistakenly—believed that it is substantially represented the truth, there is no fraud, and an action of deceit will not lie. The decision of the Court of Appeal is that to such a statement the law attaches a meaning which makes it fraudulent. A material misstatement may be a ground for rescinding the contract, but the consequences of fraud and of breach of contract are widely different. In an action for breach of contract the defendant must make good his words. In an action founded on fraud he must bear the whole of the consequences which have been induced by the fraudulent statement, which may be very extensive. The essence of fraud is the tricking a person into the bargain. If the fact that the consent of the Board of Trade was necessary was suppressed by these defendants in order to make the bait more alluring there was fraud…”

153.  If this test is adopted it is clear that the representations were fraudulent.

154.  For the reasons given in this judgment I find that the plaintiff has proved its case against the 3^rd defendant and judgment must be entered for it in the sums claimed, namely :

(1) Damages in the sums of US$1,398,895.24 and US$1,983,675.80.

(2) I follow the principles enunciated by Cons JA, as he then was, in The Petamina [1984] HKLR 219. Interest will be payable at the commercial rate plus 1% from the date of default to the date of judgment. Thereafter it will be payable at the judgment rate.

(3) I make an order nisi that the plaintiff will have its costs on an indemnity basis.