FALCON PRIVATE BANK LTD v. BORRY BERNARD EDOUARD CHARLES LTD AND ANOTHER

HCA 1934/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1934 OF 2011

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REASONS  FOR  DECISION

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INTRODUCTION

1.  On 7 June 2012, I heard six summonses: five were issued by the Defendants and one by the Plaintiff.  At the conclusion of the hearing, I made various orders essentially in favour of the Plaintiff, including a costs order (the “First Costs Order”).  On 13 November 2012, I dismissed the Defendants’ application for leave to appeal my orders made on 7 June 2012 with costs (the “Second Costs Order”).  Those costs were ordered to be paid forthwith and were subsequently assessed summarily by this court on 13 November 2012 and 12 December 2012 in the total sum of HK$3,014,346.  Those costs were not paid.

2.  The Plaintiff now applies for an order that unless the Defendants pay the said costs within three days, the Defendants’ defence be struck out and judgment be entered in favour of the Plaintiff in the sum of US$10 million.  On the other hand, the Defendants apply for  extension of time within which to pay the said costs for a period of 14 days after the determination of their application to the Court of Appeal for leave to appeal against the order dated 7 June 2012 and, if leave is granted, until 14 days after the final determination of the appeal.  Alternatively, they apply for a stay of execution of the two costs orders.

The background

3.  The Plaintiff is a licensed bank in Switzerland with a branch office in Hong Kong.  The 1^st Defendant is a company incorporated in Hong Kong with a paid up share capital of HK$10.  The 2^nd Defendant, a Swiss national apparently resident in Vietnam, is its sole shareholder and director. 

4.  In July 2011, a Mr Morrison acting on behalf of an English incorporated company known as Bawa Financial Limited (“Bawa”) opened an account with the Plaintiff (“Bawa Account”) and deposited certain floating rate bonds with the Plaintiff.  The Plaintiff placed the bonds with a reputable Swiss custodian known as SIX SIS AG (“SIX”).

5.  On 27 September 2011, SIX erroneously advised the Plaintiff of a repayment of principal on the bonds in the amount of US$15,760,320. As a result, the Plaintiff credited the Bawa Account with the principal repayment as well as an interest payment on the bonds on 29 September 2011.

6.  On 30 September 2011, Morrison informed the Plaintiff that he would be instructing the Plaintiff to transfer US$10 million to a third party in relation to a private equity placement.  By letters dated 2 October 2011, Bawa instructed the Plaintiff to make a series of immediate cash transfers in different currencies to different recipients from funds out of the Bawa Account and to transfer the bonds to a securities firm in Canada. Pursuant to that instruction, the Plaintiff made the transfers, including a sum of US$10 million to the 1^st Defendant’s account with Standard Chartered Bank in Hong Kong (“SCB HK”).  This transfer of US$10 million formed the subject matter of this action.

7.  On 7 October 2011, SIX informed the Plaintiff of its mistake.  The Plaintiff sought return of the money from Bawa and the Defendants.  Morrison and Bawa declined, while the 1^st Defendant did not respond. 

8.  The Plaintiff commenced this action in Hong Kong against the two Defendants.  On 10 November 2011, it obtained an ex parte Mareva order from Deputy High Court Judge Au-Yeung, as she then was, restraining the 1^st Defendant from disposing of or removing any of its assets within Hong Kong up to the value of HK$78 million and to make certain disclosures within specified time limit.  The 1^st Defendant did not comply with the disclosure order.  The Plaintiff made three other inter parte applications for discovery.  Despite four orders given by various judges, no meaningful discovery was obtained.  The 2^nd Defendant gave various explanations for the 1^st Defendant’s right to the sum of US$10 million and some less than half-hearted disclosure.

9.  Then, the matter came before me.  On 27 January 2012, I ordered the Defendants to make further discovery, failing which they shall be precluded from calling evidence in any application for summary judgment or at trial.  In the course of the hearing, I criticised Mr Wright, counsel for the Defendants, for misleading the court in submitting that any order requiring the Defendants to disclose documents in their possession, custody or control did not require them to produce bank statements which they did not have possession of.  Despite the strong criticism, the Defendants still ignored the disclosure order.    

10.  As a result, the Plaintiff issued a summons seeking further discovery.  Then the Defendants took out the five summonses seeking (1) to strike out the Plaintiff’s statement of claim (the “Strike Out Summons”); (2) to discharge the ex parte order of Deputy High Court Judge Au-Yeung (the “Discharge Summons”); (3) my recusal from hearing the above summonses (the “Recusal Summons”); and (4) leave to file two affidavits made by the Defendants’ solicitors, Stephenson Harwood (“SH”).   All the summonses were listed before me for hearing on 7 June 2012.  At the conclusion of the hearing, I made various orders substantially in favour of the Plaintiff, including an unless order against the Defendants for further discovery with summary judgment as the sanction for non-compliance and the First Costs Order. 

Further development subsequent to the discovery

11.  This is a peculiar case.  SIX made an inexplicable mistake informing the Plaintiff that BAWA was entitled to a payment of principal in an amount in excess of US$15 million.  There was a window of a ten days during which the mistake was not discovered and the funds were transferred.  Before the window opened, Morrison positioned himself in Switzerland and caused BAWA to deposit the bond with the Plaintiff, while the 2^nd Defendant positioned himself in Hong Kong, incorporated the 1^st Defendant, a HK$10 company, caused it to open a bank account with SCB HK to receive the funds.  And as soon as the funds were deposited into the 1^st Defendant’s account, they were dissipated and BAWA promptly withdrew the bonds.  

12.  As a result of the discovery, the Plaintiff’s legal team was able to trace the following movement of the funds.  Upon receipt of the funds in the 1^st Defendant’s account in SCB HK, the 2^nd Defendant caused them to be transferred to his own account with Standard Chartered Bank Singapore (“SCB Singapore”) on 7 October 2011.  By a number of transfers between 6 October 2011 and 18 November 2011, he transferred US$5 million to a Mr Jager’s account in Switzerland.  The 2^nd Defendant converted the remaining US$5 million into about NZ$6.381 million and caused it to be transferred to his personal account with ANZ Bank New Zealand (“ANZ Bank”) on 17 October 2011.  Two days later, he transferred NZ$6 million into his joint account with a Mr Malik in ANZ Bank.  On 25 November 2011, he transferred NZ$3 million (approximately US$2.5 million) to Jager’s account in Switzerland.  The balance of NZ$381,620 in his own account and the balance of NZ$3 million in his joint account with Malik with ANZ Bank were transferred to various unknown recipients or spent by himself and Malik.

13.  In summary, of the sum of US$10 million received by the   1^st Defendant, US$7.5 million were transferred to Jager’s account in Switzerland.  The balance of US$2.5 million which had been converted into about NZ$3.381 million were transferred to Malik or dissipated by the 2^nd Defendant.  Some notable expenditures include about NZ$411,472 as part payments for a Bentley, an Audi S8 Quattro, a Porsche Cayenne, a Porsche Panamera, and a Mercedes ML AMG for himself and Malik; NZ$30,000 for his son’s helicopter pilot training; and NZ$268,041 as legal fees to SH.  In addition, he gave various sums to his children, paid their school fees and motor cars, paid his household expenses and weekly rental of NZ$1,400 for his luxurious villa. 

14.  Jager, Morrison and his partner Brenner were arrested by the Swiss authority.  The 2^nd Defendant claimed that he was entitled to US$2.5 million for his services as the Chief Intake Treasury Officer of Sunesko LLC in a complicated financial deal among BAWA, Sunesko LLC and AMDG International LLC.   He said that Malik was his boss in Sunesko LLC.

THE PLAINTIFF’S APPLICATION FOR UNLESS ORDER

Jurisdiction to make unless order to enforce orders for payment of costs

15.  Mr Lam, counsel for the Plaintiff, quotes the English Court of Appeal decision in JSC BTA Bank v Mukhtar Ablyazov [2012] EWCA Civ 1411 as the authority for the proposition that an unless order debarring a litigant whose conduct had created a risk to justice from proceeding to trial or in order to prevent an unfair trial may be made it is necessary, proportionate and fair. Mr Wright, counsel for the Defendants, argues that in the circumstances of the present case such an order is unnecessary, disproportionate and unfair for the just resolution of the parties’ disputes in accordance with their substantive rights.

16.  The court’s jurisdiction to make such unless orders with the very draconian effect of debarring a litigant from proceeding to trial for the purpose of enforcing an order of the court has never been doubted. Such jurisdiction has often been invoked for the purpose of enforcing the court’s order requiring a litigant to perform certain act, such as discovery.  Indeed this court has repeatedly exercised such jurisdiction against the Defendants.  However, such jurisdiction has rarely been exercised for the purpose of enforcing a costs order.  At least, I have not been referred to any such decisions by counsel.  JSC BTA Bank v Mukhtar Ablyazov is not a decision which is precisely on this issue.Though the court’s jurisdiction to exercise its coercive power to enforce a costs order is not even disputed by Mr Wright, I still feel obliged to consider this jurisdictional issue in view of the draconian effect of the sanction and the somewhat novel circumstance in which such power is sought to be exercised. 

17.  JSC BTA Bank v Mukhtar Ablyazov is a convenient starting point.  In that case, the defendant was alleged to have defrauded the Plaintiff bank of US$5 billion.  In an action brought by the bank, he was ordered to make disclosures.  He refused and absconded from jurisdiction.  He continued the conduct of his defence through his lawyers while outside the jurisdiction.  He was found guilty of contempt for failing to comply with the disclosure order, lied to the court about his assets and disposing of his assets in breach of a freezing order.  He was sentenced to 22 months of imprisonment by the court in his absence.  Teare J granted an order that unless he both surrenders himself to custody and makes proper disclosure he will be debarred from defending the claim against him and his defence will be struck out.  The unless order was upheld on appeal.  Rix LJ said at paragraph 171 that the question in that case was whether the power to commit for contempt of court included a power to order the contemnor to surrender to the tipstaff and to make that a condition of something else.  Thus, the issue in the present case is whether the power to order costs includes a power to order the party liable to pay and to make payment a condition of that party being allowed to continue with the conduct of his defence.

18.  As part of the system of justice, court orders are made for the parties to comply.  Various orders are made in the course of civil litigation.  All orders, including costs orders, are made for the ultimate purpose of achieving justice as between the parties.  It is therefore in the interests of justice that all orders are complied with.  In JSC BTA Bank v Mukhtar Ablyazov, Rix LJ said in paragraphs 168 and 171, the jurisprudence is replete with confirmation of the court’s power to make such orders as are necessary to make its own orders effective and it is impossible to argue that the court lacks jurisdiction under its own inherent jurisdiction to do what is just and convenient and necessary to protect its own orders and to give effect to the interest of justice.  Though the issue in that case was about the court’s power to make ancillary orders to enforce compliance of a disclosure order, I can see no reason why the principle does not apply with the same force in ensuring compliance of a costs order.  In JSC BTA Bank v Mukhtar Ablyazov, the sanction of loss of freedom was more draconian than summary judgment.  Hence, I think this court has inherent jurisdiction to make ancillary orders to enforce compliance of its costs orders.  Such ancillary jurisdiction includes a power to order a party to pay the costs which he was ordered to pay as a condition of his being allowed to continue with the conduct of his defence or claim. 

19.  It is difficult to formulate any criteria on which such jurisdiction may be exercised.  Factors which affect the exercise of this jurisdiction includes the facts of the case, the type of order which the court seeks to protect or enforce, the conduct of the parties and the court’s perception of where the balance of justice lies. Ultimately, this jurisdiction is to be exercised as a matter of the court’s discretion.  I think the phrase, “fairness, necessity and proportionality” says it all.  Before considering the question whether such jurisdiction should be exercised in the present case, I shall first set out some of the circumstances of the present case and the Defendants’ conduct in the litigation.

Some provisional views of the parties’ case

20.  It is trite principle that it never is the function of the court in interlocutory proceedings to make finding of facts on affidavit.  However, that does not mean it is not open to the court to form some provisional views of the parties’ case for the purpose of assisting the court in the exercise of its discretion in balancing the interest of justice between the parties.  This is particularly so in the present case where the Plaintiff is seeking summary judgment as the sanction for the Defendants’ non-compliance of costs orders made in connection with some interlocutory applications.  If a party has a good defence, the court will be less inclined to order the sanction against that party.  But that does not mean the sanction will be applied if a party does not appear to have a good defence.  It only means that the court need not have regard to the defence when exercising its discretion.  Similarly, if the Plaintiff does not appear to have a good case, the court will be less inclined to exercise such jurisdiction.

21.  During the four days’ hearing of the six summonses last May and June, Mr Wright left no stone unturned.  He made numerous criticism of the weakness of the Plaintiff’s pleaded case based on the statement of claim and fully argued the strength of the Defendants’ defences in seeking to discharge the Mareva injunction.  For reasons as already explained in my Decision dated 9 July 2012, I rejected his arguments.  I was of the view that the Plaintiff has a good case and I was not impressed with the defence.  This view is further fortified by the disclosure obtained pursuant to the further discovery order.  The evidence suggests that this is a case of fraud against SIX and the Plaintiff.

22.  Without SIX’s mistake, Morrison and the 2^nd Defendant could not and would not have known there would be US$10 million in the 1^st Defendant’s account available for their disposal.  It would then appear that they positioned themselves in Switzerland and in Hong Kong waiting for the mistake to occur and, when that occurred, to transfer the funds immediately before the mistake was discovered and to remove the bonds out of reach of the Plaintiff.  The 2^nd Defendant immediately caused the funds transferred to the 1^st Defendant’s account to be transferred to his own personal account.  Then, also very promptly, he transferred US$7.5 million to Jager and dissipated the balance of US$2.5 million between himself and Malik.  The additional facts arising from the disclosures and the 2^nd Defendant’s conduct in delaying and obstructing disclosure suggests that the defence is very shadowy.  The Defendants’ defence is therefore not anything that I would take into consideration in the exercise of my discretion.

The Defendants’ conduct in not complying with the court’s orders for disclosure

23.  On 10 November 2011, Deputy High Court Judge Au-Yeung granted a Mareva order restraining the 1^st Defendant from disposing of or removing any of its assets within Hong Kong up to the value of HK$78 million and to make certain disclosures.   By that time, the 2^nd Defendant had already caused the 1^st Defendant to transfer the entire sum of US$10 million to his personal account with SCB Singapore.  The Plaintiff was kept in the dark as to where the funds had gone.

24.  On 30 November 2011, at an inter parte hearing Suffiad J ordered the 1^st Defendant to comply with the disclosure order of Deputy High Court Judge Au-Yeung within 14 days.  By that time, the 2^nd Defendant had caused half of the said sum of US$10 million transferred to his personal account with SCB Singapore to be transferred to Jager’s account and the other half to his own account with ANZ Bank.   The     2^nd Defendant on behalf of the 1^st Defendant gave partial disclosure, which was less than truthful.

25.  On 9 December 2011, Reyes J ordered the 1^st Defendant to fully comply with the disclosure order of Suffiad J by 7 pm that day.   Again, the 2^nd Defendant gave partial disclosure only.

26.  On 6 January 2012, Deputy High Court Judge Lok ordered the 1^st and 2^nd Defendants to file a further affidavit in full and proper compliance with the order of Deputy High Court Judge Au-Yeung.  Again that order was not complied with.

27.  On 27 January 2012, I ordered the Defendants to provide the disclosure failing which they will be precluded from calling evidence in any application for summary judgment or at trial.   Again, that unless order was ignored.

28.  On 22 February 2012, I made a further unless order, at the request of the Plaintiff, instead of entering judgment for breach of the unless order made on 27 January 2012.  In justifying the Defendants' non-disclosure, Mr Wright, who is a very member of the bar, submitted that the Defendants’ obligation to disclose documents in their custody, power or possession did not include bank statements which the Defendants no longer possessed.  It was against this backdrop of five deliberate non-compliance with the court’s disclosure orders and blatantly misleading submission that I criticised counsel for pulling wool over the court’s eyes.  The criticism was intended to exert more pressure on the Defendants’ legal team to be more forthcoming in compliance with the court’s order.   

29.  Hitherto, the Defendants had a history of breach of six of the courts’ disclosure orders, including two unless orders.  The above chronology shows that at the time of making of the first order on 10 November 2011, entire sum of US$10 million had been transferred to the 2^nd Defendant’s own personal account with SCB Singapore.  By the time of the making of the second disclosure order on 30 November 2011 the 2^nd Defendant had also removed the said sum from his account with SCB Singapore.  Yet, in the three months that followed, the Defendants adopted a “catch me if you can” tactic.  They kept on delaying disclosure and the 2^nd Defendant kept lying on oath in his affidavit.  The Plaintiff was kept in the dark and was caused to incur legal costs in chasing the fund’s shadow.  Assuming the Defendants had a rightful claim to the funds and a perfectly good defence, why couldn’t they have on 30 November 2011 honestly disclosed to the Plaintiff where the funds had gone?  Further, assuming there was a reason, legitimate or otherwise, to delay disclosure until the funds had been transferred to where they were subsequently transferred, all transfers had been effected by 28 November 2011.  There was no reason whatever to play hide and seek with the Plaintiff on 30 November 2011 before Suffiad J and to cause the Plaintiff to incur all the costs for the five subsequent applications for discovery.  If that was not malicious conduct, what conduct could be malicious, one rhetorically asks?

30.  Mr Wright sings and dances on the fact that the Plaintiff had not sought any order restraining the 2^nd Defendant from transferring the funds, suggesting that the 2^nd Defendant was not to be blamed or criticised for dissipating the funds.  At the material time, the Plaintiff could not have known that the 2^nd Defendant had caused the funds to be transferred to his account with SCB Singapore and the Defendants deliberately kept the Plaintiff in the dark.  For Mr Wright to seriously put the blame on the Plaintiff is just rubbing salt on the wound.  The 1^st Defendant is the alter ego of the 2^nd Defendant.  The 2^nd Defendant is its sole shareholder and director.  His dissipation of the funds with knowledge of the restrain order against the 1^st Defendant is as much a dishonest act and contemptuous conduct as if the restrain order had been timeously made against him.  His conduct and non-disclosure reflects his dishonesty and lack of good faith in the conduct of this litigation.     

31.  Apart from obstructing discovery, when the stage was reached when they could delay no more, the Defendants resorted to attack the Plaintiff’s case as their best means of defence.  In response to the Plaintiff’s summons seeking further discovery, they issued three summonses, namely the Strike Out Summons, the Discharge Summons and the Recusal Summons.  These summonses were all dismissed: see my decision dated 9 July 2012.  In my view, the applications in those summonses were attempts to abuse the court’s process by resorting to attack as their means of defence: see Wo Fung Paper Making Factory Ltd And Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346 at 357.  I consider the recusal application hopelessly groundless, frivolous and vexatious and were made to provoke and for the purpose of forum shopping.

32.  That is one of the basis on which the present applications are to be considered.  I also refused the Defendants’ application for leave to appeal against my decision in dismissing those three summonses.  But for completeness and in fairness to the Defendants, their argument that I was biased found favour with the Court of Appeal and leave to appeal my decision in dismissing the Recusal Summons was granted.  As remarked by the Court of Appeal, that appeal has a bearing on my decision on the Strike Out Summons and Discharge Summons as well as, I shall add, the present two summonses.

The 2^nd Defendant’s lying on oath

33.  The 2^nd Defendant gave incomplete or misleading disclosures. He was caught lying on oath in his affidavit.  In paragraph 253 of my decision dated 7 July 2012, I held: 

“… In essence, Napthali demonstrated [in her Fifth Affidavit] that the 2^nd defendant lied on oath such that in sums of NZ$3,000,000, NZ$381,620.93 and other sums transferred from the 2^nd defendant’s account were unaccounted for. Upon inspection of the account records of SCB-Singapore, it was also discovered that the 2^nd defendant edited, as opposed to redacted, the documents produced. It appears from the correspondence received from ANZ Bank and SCB-HK that neither bank received the 2^nd defendant’s original requests dated 24 February 2012 for production of the documents as required in paragraphs 1.1 to 1.3 of my order dated 22 February 2012. KL sent three letters to SH in April 2012 demanding an explanation as to what steps were being taken to obtain the documents. SH did not respond. No affidavit has been filed by the defendants to contest the application or to explain the Napthali’s allegations.”

34.  Recently, the Plaintiff’s solicitors, Lipman Karas (“LK”), discovered that 2^nd Defendant lied in his 1^st to 5^th Affidavits.  In those affidavits, he averred that the affidavits were sworn before his notary, Jager, at Turtmann in Switzerland (as had been stated in the jurats).  In fact Jager testified under oath in Switzerland that he and the 2^nd Defendant had never met.  Obviously, all of the affidavits the 2^nd Defendant presented for use by this court were not sworn, not to mention whether before Jager or anyone else or anywhere.  He has no qualm lying on oath or otherwise.  What weight could this court place on his affidavits?

The non compliance with the costs orders

35.  The costs under the two costs orders were assessed on 13 November and 12 December 2012.  Shortly after the assessment in respect of the First Costs Order, SH wrote to LK on 22 November 2012 as follows:

“On 13/11/12, the Honourable Mr Justice To assessed the Plaintiff’s costs pursuant to his Order dated 07/06/12 in the sum of HK$2,942,346. We are instructed that funds are being made available to pay this sum but that our clients could require a further 7 days to pay the same after the permitted 14 day period expires (ie on or before 04/12/12). Kindly inform us if this will be an issue.”

The tone of this letter suggests that SH had been informed by the Defendants that they would put SH in funds before 4 December 2012 to pay the Plaintiff’s costs.  By 7 December 2012, the costs were not paid.  LK wrote to SH giving the Defendants four more days to pay.  SH did not respond.  After the costs under the Second Costs Order were assessed, LK wrote to SH again on 20 December 2012 demanding payment of the aggregate sum of HK$3,014,346 by 12 pm on 24 December 2012. 

36.  SH responded on 23 December 2012 as follows:

“As to the payment of your clients’ costs and also the request for our clients to consent to the release of your client from paragraph 4 of To J’s Order dated 27/01/12, please note that we are awaiting the receipt of our clients’ funds and their instructions.”

Thus, despite having instructed SH to negotiate with LK for time to pay and indicated that funds will be made available by 4 December 2012, the Defendants have by conduct retracted from their undertaking.

37.  Not only that, a month later, the Defendants took out a summons on 23 January 2013 seeking extension of time to pay until after final determination of the appeal against my decision in dismissing their Recusal Summons.  The grounds for the application is that if ordered to pay the costs immediately the Defendants will face financial ruin before their application to the Court of Appeal for leave to appeal would be determined. The Defendants drastically changed from their position of November 2012 when they said they were in a position to put in funds to meet the First Costs Order to now asserting financial ruin.   Back in November 2012, they had contemplated an appeal.  As the disclosures indicate, they had paid over HK$2 million to SH in connection with these proceedings from the funds transferred by the Plaintiff by mistake.  The 2^nd Defendant pocketed US$2.5 million from those funds and dissipated or transferred them to unknown accounts.  He had funds to conduct these proceedings whenever he wanted.  No evidence was advanced as to his other income and resources before being involved in this litigation.  No evidence was advanced as to how he would suffer financial ruin.  On his account, he would be in a far worse position after paying his costs of the appeal.  That would give him a further reason for not paying after the appeal.  Given his fraudulent conduct in connection with the swearing of his five affidavits, his various lies which were proved against him, his unexplained change of position, and his repeated defiance of the court’s orders, I can give no weight on his bald assertion of financial ruin.  I can place no weight on his assurance that he will pay the costs after the appeal.  In addition, the 2^nd Defendant is out of the jurisdiction while the 1^st Defendant is only a HK$10 company with US$2,201.07 only in its account with SCB HK.  The course taken by the Defendants evinced they have no intention to pay the costs. 

Necessity, proportionality and fairness

38.  Necessity, proportionality and fairness are often merged and overlap.  It is best to deal with them globally.  The costs under the two costs orders were assessed in November and December 2012.  For reasons as stated above, the Defendants had no intention of paying them  until after the conclusion of the appeal against my decision, and most probably not to pay at all.  The 1^st Defendant has asset of US$2,201.07 only. The 2^nd Defendant is out of the jurisdiction.  His available resources are unknown or out of the jurisdiction.  The question is how to enforce the costs orders made against him and the 1^st Defendant.  The Plaintiff seeks an order that unless the costs are paid, judgment for the claim in the amount of US$10 million be entered against both Defendants.  This is a very draconian remedy.

39.  Mr Wright argues that as stated in Order 1A rule 2(2) of the Rules of the High Court, the primary aim for the court in exercising its power is to secure the just resolution of disputes in accordance with the substantive rights of the parties.  He therefore submits that granting the unless order sought by the Plaintiff would bring about a result directly contrary to the court’s primary aim of securing the just resolution of disputes.  Indeed, he argues, the result would be to dispense with the trial and prevent the court from resolving the present dispute in accordance with the substantive rights of the parties.  He refers to the following dicta from Ma CJ in The Liquidator of Wing Fai Construction Company Ltd v Yip Kwong Robert [2012] 1 HKLRD 589 at 606, paragraph 33:

“… in the armoury of the Court’s powers, striking out must be the ultimate weapon, to be used only where it is plainly and obviously the appropriate remedy. There are many orders that can be made before striking out should be considered. In other words, the court is not left with a choice of not doing anything at all on the one hand or striking out on the other; it is now encouraged to consider the many possibilities that lie in between these two extremes.”

40.  These principles are binding on me.  There is no question of departure from these principles but how to apply them to the facts of the present case.  The Defendants are not first offenders.  They had a record of defying the court’s orders on six previous occasions, including two unless orders.  On the first two occasions when I made an unless order against the Defendants, I gave them the benefit of doubt that they innocently failed to recognise their responsibilities.  I therefore refrained from applying the most draconian sanction of entering judgment for breach.  That did not work.   Those two orders were ignored at will.   On 7 June 2012, I had to secure compliance of my discovery orders by using summary judgment as the sanction for non-compliance.  I was able to command some degree of compliance.  I said in paragraph 256 of my decision dated 9 July 2012:

“256. I have always been exceptionally cautious in the exercise of such unless jurisdiction. I was particularly tolerable to the defendants. Despite plaintiff’s counsel’s plea for summary judgment as a sanction for non-compliance, on 27 January 2012 on my own initiative I only ordered debarring the defendants from filing evidence in any application for summary judgment or at trial. Despite breach of that unless order, I did not exercise the sanction and granted the defendants a second chance. Judicial restraint and good sense is not a quality to be taken advantage of by recalcitrant defendants. It is now time for tougher sanction. On the previous two occasions, contrary to Mr Wright’s accusation of my bias against him and the defendants, I gave great respect to Mr Wright for his submission on the defendants’ defences and the weakness of the plaintiff’s cause of action. Now, having spent four days hearing arguments on those very matters, I am in a better position to consider the parties’ case and appropriate sanction. I disagree with most of Mr Wright’s submissions. Having regard to the history of defaults, Mr Wright’s submission on the weakness of the plaintiff’s case and the strength of the defendants’ defence, I think balance of justice requires that judgment be entered against the defendants for non-compliance. Up to now, the plaintiff has incurred to my estimate no less than $2 million on costs in seeking to trace its lost money of US$10 million. That is understandable. The defendants must have spend no less than that amount in resisting the plaintiff’s application for discovery in respect of funds which the defendants claim they have a legitimate reason to deal with. If the defendants have a good case and have nothing to fear or hide, they should, with total candour, provide the discovery and disclosure so that the case can promptly proceed to trial. The amount of costs they incurred and they made the plaintiff to incur are out of all proportion with what is in dispute. If the defendants continue with their present tactic of delay and obstruction, it is most likely because they do not have any good defence. Justice would require that their case be brought to an end as quickly as possible. Justice delayed is justice denied. Accordingly, I make an unless order with summary judgment as the sanction for non-compliance.”

The record has shown that the Defendants are recalcitrant offenders.  They will not comply unless under the pain of summary judgment.  For these recalcitrant Defendants, summary judgment appears to be the only effective weapon left in the court’s armoury.

41.  Mr Wright further argues that unless order is a remedy of last resort not to be made unless there is a history of failure to comply with other orders.  An unless order is the last chance to put his case in order.  He quotes Hytec v Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 at 1674 per Ward LJ; Ping Kai Engineering Company Ltd v Hong Kong Teakwood Works Ltd HCCT 2/2001 (unreported, 6 February 2002) per Ma J, as he then was, and KM Cheung & Co v Kung Ching HCA 831/2011 (unreported, 26 October 2012) per Deputy High Court Judge Le Pichon. He submits that an unless order becomes meaningless if it is made on the first application for relief or as a matter of routine.   He complains that it is wrong for the Plaintiff to seek this relief without first resorting to any means of execution set out in Order 45 of the Rules of the High Court.

42.  The Defendants were ordered to pay costs forthwith.  The costs were not paid three months after assessment.  They were already in breach of the costs orders.  Now, they even vow not to pay until after conclusion of their appeal.  Hence, the Plaintiff seeks the unless order to secure payment.  This is not strictly a case of first application.  Besides, the Defendants have a history of non-compliance with six court orders, including two unless orders.  It is unrealistic to treat that history as spent or as irrelevant on the basis that those were breaches of the court’s disclosure orders but not costs orders.  In my view, that makes no difference.  The 1^st Defendant is a HK$10 company with US$2,201.07 cash only but no other assets here or abroad.  The 2^nd Defendant is out of the jurisdiction and six months of discovery proceedings have not yielded a full picture of where the US$10 million had gone and where the 2^nd Defendant’s asserts are.  Even summary judgment is likely to be empty.  The means of enforcement under Order 45 as suggested by Mr Wright are illusory.  This further points to an unless order backed by summary judgment as the only effective weapon left.

43.  Next, Mr Wright argues that the sanction of summary judgment in the amount of US$10 million sought for enforcing a costs order of HK$3 million is contrary to the indemnity principle which governs the making of interlocutory costs orders.  With respect, Mr Wright is seeking to erroneously apply the indemnity principle applicable to assessment of costs to the issue of proportionality of the sanction of summary judgment in enforcing a costs order.  The costs under the two costs orders have been assessed in accordance with the indemnity principle.  The issue now is what sanction should be used to enforce compliance with the costs orders. 

44.  It may well appear on a cursory view that the sanction of summary judgment is disproportionate.  But if one looks at what this case is about and the Defendants’ conduct in obstructing discovery, it certainly is not.  There is no dispute that the Defendants appropriated the sum of US$10 million transferred into the 1^st Defendant’s account by mistake.   They filed a shadowy defence.  As I have said, if they had a valid defence and rightful claim to the funds, why did the Defendants not disclose the whereabouts of the funds on 30 November 2011.  Instead, the 1^st Defendant, through the 2^nd Defendant, chose to engage the Plaintiff in some very costly discovery proceedings necessitating the making of seven disclosure orders including three unless orders.  For that end, they spent more than HK$2 million, using the funds appropriated from the Plaintiff, to prevent the Plaintiff from knowing where the funds had gone.   That necessitated the Plaintiff spending more than HK$3 million in the discovery proceedings.  A court order is meant to be obeyed.  Even if the Defendants had a valid defence, in the face of a court order, their obligation is to comply.   If they suffer loss as a result of compliance, they may turn to the Plaintiff’s undertaking or seek further remedy through proper legal proceedings.  The way they resisted and delayed discovery was unreasonable.  The amount of costs they spent towards that end was out of proportion with the interest they wish to protect.  What they did was inexplicable except on the basis that they were using the court’s process to protect some illegitimate interest or to obstruct justice.  The way the Defendants delayed and obstructed the discovery proceedings is clear abuse of the legal process.  If a litigant conducts his litigation in a manner constituting an abuse of process of the court, apart from preventing the court’s machinery of justice from being abused, the court will try its best to minimize the damage in terms of wasted costs which the innocent party was made to suffer as a result of such abuse.  The court will be vigilant to protect its costs orders so that the innocent party’s costs are secured.  Under such circumstances, the use of summary judgment as the sanction to enforce its costs order is not disproportionate.

45.  As for Mr Wright’s argument that an unless order would defeat the court’s primary aim of just resolution of the parties’ disputes in accordance with their substantive rights, I think that argument is illusory in view of the Defendants’ conduct.  The word “just” does not apply to resolution of dispute only, but applies also to the manner in resolving the dispute.  It is therefore also the court’s aim to ensure that litigations are conducted in a just and fair manner.  If a party conducts his litigation in an abusive manner, in manner amounting to abuse of legal process, or in a manner causing unnecessary waste of the other party’s costs, it shall be the court’s duty to right the wrong.  The court may make such order as the circumstances so require to restore justice and fairness between the parties in the resolution of their dispute.  Such orders include, in an appropriate case, to deprive that litigant of his right to have the dispute determined in accordance with its merit.  It is not just for such a party to ask the court to protect him from being sanctioned for the injustice he has done to the other party.  JSC BTA Bank and Mukhtar Ablyazov is an extreme example of the court enforcing an order of the defendant’s imprisonment with the sanction of depriving him of a trial.  For reasons as already explained, the conduct of the Defendants makes it just for such an order to be made.  It lies ill in their mouths to seek the court’s protection when they never conducted this litigation with clean hands.

46.  Furthermore, the sanction is not going to deprive the Defendants of anything.  If they want to prosecute their defence, what they have to do is to pay the costs ordered and defend.   Having engaged the Plaintiff in such costly and wasteful proceedings, they should not be allowed to delay their payment obligation for having lost and evade it altogether.  Lesser sanction has proved to be ineffective.  Given its shadowy nature, the defence is not anything which weighs heavily in my mind when balancing the interest of justice between the parties.  Thus, there is no question of the summary judgment being out of proportion with the costs awarded.  This is not a case that the Defendants had no funds at all to pay the costs.  They have the funds to pay, but only want to reserve them for their appeal.  Even if what they say is true, what they have to do to avoid the sanction is just to pay the costs ordered and conduct their appeal in person.  There is nothing to suggest that they will suffer any personal or juridical disadvantage in the appeal due to lack of legal representation.

47.  Mr Wright argues that in determining whether to grant the unless order, it is material to take into account the Plaintiff’s wholesale disregard of the time limits for it to file and serve its list of documents.  The defence was served on 15 June 2012 and the Plaintiff elected not to serve a reply.  He says that the Plaintiff did not take out any case management summons, failed to file and serve its list of documents and had to be ordered by the court to do so by 16 November 2012.  But he made no mention of the fact that the Defendants did not serve their own list of document until 31 October 2012.  I consider the Plaintiff’s failure to meet those time limits has little bearing in an application of this sort.

48.  Next, Mr Wright says that the list of documents contains no documents relating to the steps taken by the Plaintiff to recover from SIX, Bawa and Morrison the amount credited to Bawa’s account as a result of the Plaintiff’s mistake.  He argues that rather than candidly disclosing to the court the amount that the Plaintiff expects to recover from SIX, Bawa and Morrison, the Plaintiff instead sought to obtain judgment against the Defendants for the full amount of US$10 million.  He argues that the inference to be drawn is that the present application is part of a strategy by the Plaintiff to obtain judgment against the Defendants for the full amount of its claim without a detailed examination of the merits of its case at trial. Similar criticism has been advanced by Mr Wright in a different context and dismissed.  It is not for the defendant or wrongdoer to dictate against whom the Plaintiff should pursue his remedy.  All evidence suggests that SIX was the victim of a fraud of which at least Morrison and Bawa were parties.  While SIX is under a civil liability to indemnify the Plaintiff’s loss, it is up to the Plaintiff and SIX to agree as between themselves the extent of that indemnity.  It is also up to them to agree to turn to SIX only as the last resort when the Plaintiff has exhausted all remedies against the Defendants and other parties to the fraud.  I was informed by counsel that Bawa was or is in the course of winding up.  It is also doubtful if recovery against Morrison and, I should add, Jager would prove to be sufficient to compensate the Plaintiff’s loss.   Provided the Plaintiff is not seeking double recovery, there is nothing wrong to seek judgment against the Plaintiff for the entire sum.  The 2^nd Defendant has confirmed that the 1^st Defendant has no asset except for the sum of US$2,201.07 in its bank account with SCB HK.  As the discovery indicates, any judgment against the Defendants is likely to be empty.  In my view, the Plaintiff’s neglect in providing a fuller list of documents weighs little in balancing where the interest of justice lies.  The Defendants are only repeating their tactics of resorting to attack as their means of defence in a hopeless situation.

49.  Lastly, Mr Wright argues that four of the ten bills of costs under the First Costs Order relate exclusively to costs incurred in applications which did not involve the 2^nd Defendant and which took place before the 2^nd Defendant was made a party to these proceedings.  Mr Wright is technically right.  Though the 1^st Defendant is the alter ego of the 2^nd Defendant, in absolute fairness to the 2^nd Defendant, it may be appropriate to split the ten bills under the First Costs Order.

50.  Having regard to the history of the case, I come to the conclusion that in the absence of an effective sanction, it would be impossible to enforce the costs orders.   Lesser sanction has proved to be ineffective.  Summary judgment is the only sanction open to the court.  Having regard to all the circumstances, I consider that sanction necessary, proportionate and fair.  Accordingly, subject to splitting the ten bills under the First Costs Order, I grant the unless order sought by the Plaintiff. 

THE DEFENDANTS’ APPLICATION FOR EXTENSION OF TIME

51.  I now turn to the Defendants’ application for extension of time to pay the costs ordered. 

The applicable legal principles

52.  The court has broad discretion under Order 3 rule 5 of the Rules of the High Court to extend the time within which any person is required to do any act.  Mr Wright relies on the principles stated by the Court of Appeal in two recent decisions.  There is no dispute that these principles are applicable in this application.  The question is how these principles apply to the facts of the present case.

53.  In The Decurion [2012] 1 HKLRD 1063 at 1068, paragraph 11, Cheung JA said there are two conflicting principles at play.  First, a party is required to observe procedural rules.  Second, a party should not be deprived of an adjudication on the merits due to a procedural default unless there is prejudice to the other party which cannot be compensated by costs.

54.  In Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84, Ma J, as he then was, held that (1) unless the defendant can justify a stay of execution, one will not be ordered; (2) that an appeal would be rendered nugatory without a stay may afford a justification; (3) the existence of an arguable appeal is the minimum requirement before a court will even consider granting a stay; and (4) ultimately, the court embarks on a balancing exercise bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success.

Prejudice to the Plaintiff

55.  Mr Wright argues that extension of time has no detrimental effect whatsoever on the just resolution of the dispute.  He said that the Defendants’ failure to observe the time for payment under the first principle in The Decurion carries no weight in deciding whether extension should be granted while the application of the second principle requires extension of time to be granted.  This is because, without an extension, the Defendants will face financial ruin and will face a liability for an amount of US$10 million despite the total absence of any trial determining the substantive rights of the parties.  Further, he argues that the Plaintiff, being a bank, would not be in need of the amount of the costs in order to prosecute the claim against the Defendants and therefore would suffer no prejudice.

56.  With respect, Mr Wright has misapplied the principles in The Decurion.  Basically, what that case says is that the court has to balance a party’s obligation to observe procedural rules against the prejudice which the other party would suffer if the procedural rules are not observed.  Cheung JA was not balancing between a party’s obligation to observe procedural rules against the prejudice suffered by the same party which cannot be compensated by costs if the procedural rules are to be observed.  I am not saying that the prejudice suffered by the party in default is unimportant. That is something which was decided in Star Play Development Ltd, but not in The Decurion.

57.  On the fact, this is not a case as if there is nothing to be put on the balance against the Defendants’ default in paying costs.  The Defendants unreasonably resisted and delayed discovery which made it necessary for seven court orders, including three unless orders, to enforce compliance.  As I have said earlier, the Defendants’ defence to the action is shadowy.  Even if they had a valid defence, there was no good reason for them to resist the application for discovery and no good reason to resist in the way they did, causing the Plaintiff hefty costs.  If they conduct their litigation in such an abusive manner, it lies ill in their mouths to say they need not comply with procedural rules or with orders to pay costs.

58.  On the facts, if the costs are not paid, the Plaintiff will suffer prejudice which cannot be compensated by costs.  The 2^nd Defendant has confirmed that the 1^st Defendant has no asset but US$2,201.07 in its bank account.  Obviously, the 1^st Defendant has no means to pay the costs ordered.  The 2^nd Defendant himself has also effectively said he has no money to pay costs, but hopes to win the appeal and thereby relieve him of his liability to pay.  He appropriated the sum of US$10 million mistakenly deposited into the 1^st Defendant’s bank account.  He caused US$7.5 million to be transferred to Jager and he dissipated the balance of US$2.5 million within a year.  He transferred some money to Malik and some other unknown bank accounts.  He spent the rest on himself and his children, his household expenses, five luxurious motor cars, cars for his children, helicopter lessons for his son etc.  He did not disclose what his asserts were other than how he dissipated the US$10 million.  He did not identify the source of funds which could be used to pay if extension is granted.  He lied repeatedly on oath in his affidavits.  Even if he did identify a source of funds, what weight can this court give to the affidavit of someone who has no qualm lying on oath?  What weight can this court give to his assurance that he will pay after the appeal?  How will he be able to pay the costs awarded and the costs of the appeal if he loses in his appeal?  All that Mr Wright submits about “no prejudice which cannot be compensated by costs” is just a cheque from an empty account.  The Plaintiff will suffer real prejudice if extension of time is given.

Financial ruin

59.  The principles in Star Play Development Ltd are of no assistance to the Defendants either.  At the time of this application, I have refused the Defendants’ application for leave to appeal against my various orders.  Thus, in my view, they do not even have an arguable appeal which is the minimum requirement before this court will even consider granting an extension.  That apart, the other principles are also against the grant of extension of time.  (In fairness to the Defendants, I must say that subsequent to my decision leave to appeal has been granted by the Court of Appeal.) 

60.  The real issue raised by the other principles is whether the Defendants can show that their appeal would be rendered nugatory if extension of time is not granted.  They rely on financial ruin.  As I have said, that is a bald assertion.  It is not supported by any evidence.  The Defendants have only accounted for how they had dissipated the sum of US$10 million mistakenly transferred into the account of the 1^st Defendant and confirmed that the 1^st Defendant only had US$2,201.07 in its account.  The 2^nd Defendant has not provided any credible evidence of his personal net worth, what asset he had and his income other than the US$10 million.  Besides, he has lied repeatedly on his affidavits.  At the highest, their case is that they have funds to pay but only wish to reserve the funds to pay their legal costs in the appeal instead.  There is nothing to prevent them from appealing in person.  There is nothing to suggest they will suffer any personal or juridical disadvantage in the appeal due to lack of legal representation.  The Defendants have badly failed to discharge the burden of showing that they would suffer financial ruin if extension of time is not granted.

61.  Accordingly, the Defendants’ summons applying for extension of time is dismissed with costs to be assessed by gross sum assessment on indemnity basis.

CONCLUSION

62.  I allow the Plaintiff’s application by summons dated 27 December 2012.  I order that unless the Defendants pay both the costs awarded to the Plaintiff by my order dated 13 November 2012 and by my order dated 12 December 2012 on or before 4 pm on 25 February 2013, the Defendants’ defence shall be struck out and judgment entered against the Defendants in terms of paragraph 3 of the prayer of the Plaintiff’s statement of claim.  The above order applies to the 1^st Defendant in respect of all the ten bills of costs under the First Costs Order and the costs under the Second Costs Order. The unless order applies to both Defendants in respect of the remaining six bills of costs under the First Costs Order and the costs under the Second Costs Order.  I also order the Defendants to pay the Plaintiff’s costs of this application to be assessed by gross sum assessment on indemnity basis.

63.  The Defendants’ summons dated 23 January 2013, applying for extension of time is dismissed with costs to be assessed by gross sum assessment on indemnity basis.