SHANGHAI INTERNATIONAL CAPITAL LTD. v. CHINA FINANCE TRUST AND INVESTMENT CORPORATION

1995, No. A994

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H E A D N O T E

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The Plaintiff, a British Virgin Island Company, with no apparent assets, obtained on a Saturday morning from the duty Judge an 'ex parte' Mareva Injunction against the Defendant, a large Chinese company for US$10 million. The affirmation in support sworn by Mr. Quon falsely described the Plaintiff as a merchant bank and financially sound.

No fortification of the undertaking in damages was offered or sought.

The Defendant applied to set aside the injunction and the Plaintiff discontinued.

The Defendant sought costs under Ord. 62 r. 8 from the Plaintiff's solicitors. The Plaintiff was worth a few hundred dollars.

Held

1. As the solicitor did not know Mr. Quon, nor the Plaintiff, nor anything about them he was under a duty to make reasonable enquiries about their financial position.

2. The solicitor admitted that he did nothing to verify or check any of the statements made to him by Mr. Quon.

3. On the particular facts, the solicitor was in serious default in presenting the 'ex parte' application, and therefore liable to indemnify the Defendant for their costs.

1995, No. A994

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This was a hearing for solicitors K.B. Chau & Co. to show cause why they should not indemnify the Plaintiffs against the costs incurred by them and occasioned by the grant and subsequent discharge of a Mareva Injunction.

2. Jurisdiction of the Court over solicitors is regulated by Order 62 r. 8.

"Personal liability of solicitor for costs

(1) Subject to the following provisions of this rule, where in any proceedings costs are incurred improperly or without reasonable cause or are wasted by undue delay or by any other misconduct or default, the Court may make against any solicitor whom it considers to be responsible whether personally or through a servant or agent an order -

(a) disallowing the costs as between the solicitor and his client; and

(b) directing the solicitor to repay to his client costs which the client has been ordered to pay to other parties to the proceedings; or

(c) directing the solicitor personally to indemnify such other parties against costs payable by them."

3. The rules in Hong Kong are somewhat different from England where the new section 51(7) of the Supreme Court Act 1981 is now in force, I do not set that out. The Court of Appeal in Hong Kong recently stated the need for caution when considering costs orders against solicitors, Ho Lee Man v. Wong Wai Kai [1992] Civil Appeal No. 183.

4. I was a member of that Court and Litton J.A. giving the judgment of the Court set out what he said were the principles involved.

"Although this inherent jurisdiction to make solicitors personally liable for the costs of proceedings has existed for a very long time, it has been seldom exercised. This can be seen from the rarity of authorities. The reason is obvious. In litigation, there is almost invariably a winner and the loser. The losing party often feels disgruntled - sometimes against his own solicitors. In the course of civil litigation, there are usually many interlocutory steps - sometimes too many. The outcome cannot be always predicted with accuracy. If a solicitor should run the risk of being personally liable for the costs every time his client takes a wrong step, this would have a profoundly harmful effect upon the normal conduct of civil litigation. A solicitor, instead of doing his best in the circumstances for his client, would tremulously be looking to his own pocket, fearful of the consequences if he loses. Such an attitude would also have a harmful effect upon the organisation of the profession. Often, litigation is put in the charge of an employed solicitor. It would be a most unfortunate development if firms, in employing young solicitors, should adopt a practice of requiring an indemnity from the young solicitor to cover the situation where the firm might incur liability for costs as a result of some erroneous step taken in litigation. It is probably for reasons such as these that Sir John Donaldson MR in Orchard v. S.E. Electricity Board (supra) at 572 cautioned against an over-zealous use of the jurisdiction under RSC Order 62 r8(1). In that passage the Master of the Rolls referred to the judgment of Sachs J in Edwards v. Edwards [1958] p235 and said :

'Sachs J examined the authorities and stated that it was axiomatic that the mere fact that the litigation failed was no reason for invoking the jurisdiction, nor was an error of judgment, nor even the mere fact that an error was of an order which constituted or was equivalent to negligence. There had to be something which amounted to a serious dereliction of duty : see p.248. The decision of this court in Davy-Chiesman v. Davy-Chiesman [1984] Fam 48 was to the like effect. The jurisdiction could only be invoked in the case of serious misconduct and the initiation of continuance of an action when it had no or substantially no chance of success might constitute such misconduct : per Dillon LJ at p.67.'

Sir John Donaldson MR went on at 572-E to emphasise that the jurisdiction had to be exercised with care and discretion, and only in clear cases :

'...... it must never be forgotten that it is not for solicitors or counsel to impose a pre-trial screen through which a litigant must pass before he can put his complaint or defence to the court'."

I have also considered the very recent decision of the English Court of Appeal inRidehalgh v. Horsefield & Anr [1994] Ch. 205.

FACTS

5. On 24th January 1995, a barrister friend of Mr. Keung, a partner of K.B. Chau & Co. telephoned and said he had a friend, a Mr. Lam, who had someone who wanted to make an urgent application. He was looking for a solicitor and would Mr. Keung act. Mr. Keung said he would. Later on Mr. Lam brought along a gentleman called Mr. Quon who produced a visiting card which is set out annexed to Mr. Quon's 3rd affidavit. The text on the top of it is "First Shanghai Capital Ltd." and on the bottom "Randolph Quon, Managing Director, Bank Syndication Division".

6. Mr. Keung took instructions and Mr. Quon said he wanted to apply for a Mareva Injunction. Mr. Keung looked at the documents and said that the Plaintiff should be Shanghai International Capital Ltd. He was told it was a British Virgin Island (BVI) company. He took no costs on account from the client. An affidavit was prepared by counsel and signed by Mr. Quon.

7. On 28th January which was a Saturday morning, an 'ex parte' Mareva Injunction was granted by Gall J., freezing the assets of the Defendant, a large Chinese company for US$10 m. A large sum of money was used by the Defendant for trading in the Ka Wah Bank in Hong Kong. Although the Plaintiffs were only a $50 company, no fortification of the undertaking of the damages was offered or sought by the judge.

8. On 8th February, a call over day, the injunction was continued by Deputy Judge Pang and no fortification of the undertaking was sought or given.

9. On 15th February, there would have been before me a hearing of an application brought by the Defendants to strike out the writ and discharge the injunction on a variety of grounds. On that day, the Plaintiffs discontinued the action and I made a number of orders. The action was discontinued. The Plaintiffs were ordered to pay the Defendants costs of the action to be taxed on a common fund basis. I had taken the view that the initiation of proceedings was wholly irregular. The injunction was discharged, and an inquiry ordered as to the amount of damages which the Plaintiff ought to pay the Defendant by having its assets frozen for that period of time. I also ordered the senior partner of K.B. Chau & Co. to attend and to give evidence with regard to the instructions given by the Plaintiff and the deponent of the affidavit, Mr. Quon Shih Shung should attend.

10. The position was that Mr. Quon did attend and put in a short affidavit which showed the total assets of his company were some HK$55 and US$180, and the company therefore which managed to freeze the assets of another company for US$10 m. was worth only a few dollars.

11. Mr. Ching, Q.C. appearing for the Defendants was naturally incensed that his client, a large Chinese company which had US$10 m. injunction freezing its assets, then found the Plaintiffs not only discontinued but were worthless. I wanted to know how this had all come about, because on its face a grave injustice had been caused to the Defendants, and the process of the Court appeared to have been seriously abused.

12. Mr. Ching wished the costs of his client to be paid by the Plaintiff's solicitors, K.B. Chau & Co.

13. I then adjourned the matter, so Mr. Keung, the senior partner could appear and show cause why such an order should not be made. I also ordered Mr. Quon to appear as 'prima facie' serious inaccuracies appeared in the sworn affidavit.

14. The solicitors acting for the Defendant, Messrs. Iu, Lai & Li, sent a letter to K.B. Chau, (dated 11th March) identifying the matters which the Defendant say justify the solicitors paying its costs.

THE AFFIRMATION

15. The affirmation which was filed by Mr. Quon in support of the 'ex parte' application makes startling reading. It stated :

"I am a Director of the above named Plaintiff and also the Managing Director of First Shanghai Capital Ltd. (which is a subsidiary of First Shanghai Investment Ltd.)"

16. First Shanghai Investment Ltd. is a well known listed company with substantial assets. First Shanghai Capital Ltd. is also a reputable company which is a subsidiary of First Shanghai Investment Ltd. and therefore also is financially very sound.

17. Mr. Quon is not and never has been the Managing Director of First Shanghai Capital Ltd. That was a deliberate untruth. On his visiting card, he was described as managing director bank syndication division.

18. Paragraph 2 sets out that the Plaintiff company is a special-purpose company, incorporated in British Virgin Islands, "which was at all material times and still is under the direct control of First Shanghai Capital Ltd." That is also untrue.

19. Paragraph 3 says "The Plaintiff at all material times carried and still carries on business as a merchant bank in Hong Kong." That was also untrue.

20. At the end of the affidavit, in para. 30, are found these words :

"...... Being a reputable merchant bank, the Plaintiff is financially sound and is certainly in a position to offer and give the said undertaking as to damages."

21. As I said, it subsequently transpired that the Plaintiff company is only worth a few dollars. Not only can it not pay the costs of the action, it obviously cannot and never has been in the position to give an undertaking as to damages.

22. This affirmation, sworn by Mr. Quon, was as a result of Mr. Keung taking instructions and the drafting was done by a barrister, Mr. Rimsky Yuen.

23. The letter from Mr. Ching's solicitors sets out a number of paragraphs of the actions or inactions of Mr. Chau which they say demonstrate that his conduct was sufficiently serious default within the ambit of Ord. 68.

24. I should say at the outset that I have found the actions of Mr. Keung to be extremely naive. I have been provided with a full transcript of the evidence given before me at the hearing.

25. Mr. Quon was unknown to him. He knew nothing about his business, or his activities, other than the so-called claim. Some of Mr. Keung's answers in evidence and cross-examination, I found to be very odd. For example, he was asked whether he had made a search on First Shanghai Capital Ltd. to see whether Mr. Quon was or was not the Managing Director. Mr. Ching was cross-examining him and I interposed and said :

"But it says here 'I am Director and Managing Director of First Shanghai Capital Ltd.' and what Mr. Ching is asking you is did you verify that he was in fact the Managing Director? "

Mr. Keung's answer :

"No, I relied on his representation from his name card. I have never come across a man coming into my office saying that I am a Director of so and so company and it will not be the case. This is the first time that I come across that when I initiated the action, act for the client and then coming in with all kinds of these allegations."

Court "But you have never met this man before."

Mr. Keung "But he was introduced to me by a barrister. I suppose that it's a trustworthy connection, isn't it?"

26. I found Mr. Quon's affidavit to be grossly misleading and some of the matters he swore to were clearly untrue. It had been deliberately tailored to give the judge the impression, when reading the papers, that he was dealing with a reputable, financially sound merchant bank which had the assets of First Shanghai Investment Ltd. behind it.

27. ISSUE

Is then Mr. Keung responsible for the costs which the Defendants have incurred in seeking to discharge this injunction? I say nothing about the damages which the Defendants may have suffered by being deprived of their working money in the Ka Wah Bank to an extent of US$10 m. It is not necessary for me to decide who should be responsible by virtue of the undertaking to pay those damages. I am concerned here solely with the costs.

28. The first group of complaints in the Defendant's solicitors' letter relate to the Plaintiffs' authorisation to commence proceedings, no resolution was produced.

Mr. Keung was asked :

"But did you also see the resolution from the company to proceed with the litigation to justify issuing a writ on behalf of a limited company ? Where was the resolution of the Board ?"

29. In my judgment, the whole approach of Mr. Keung in this matter was slipshod and negligent. He should have made inquiries about the Plaintiff's company. He should have sought the resolution. He knew it was a BVI company, specially set up for the purpose of the claim he was dealing with. However, resolutions can be produced at a later time, ratifying the issue of proceedings. Although I am naturally startled that this solicitor of some 10 years standing can launch proceedings for US$10 m. for someone he knows little about, I do not consider that his conduct on this aspect can be described as improper. It was foolhardy and the obtaining of what he obviously thought was a profitable large action may have blinded his common sense and his natural caution.

30. He obtained no costs on behalf of his own firm and he obtained no costs for the liability he was going to be under for counsel's fees. His actions I would describe as reckless and unworthy of a responsible solicitor but I do not consider that this complaint justifies the Defendant's obtaining their costs against him.

31. The more important matters are (i) the inaccurate and misleading facts set out in the affirmation concerning the Plaintiff company and (ii) the ability of the Plaintiff to satisfy the undertaking in damages.

32. As to (i). Mr. Quon on behalf of the Plaintiff asserted that it was a merchant bank. Mr. Chan, Q.C., for Mr. Keung, sought to justify this assertion on the basis the Plaintiffs carried out the sort of business done by merchant banks.

33. The effect of para. 3 of the affidavit is to make a reasonable reader believe that the Plaintiffs are a merchant bank and therefore reliable and of substance.

34. Further, in the concluding paragraph, the words are "being a reputable merchant bank."

35. How, the Plaintiffs could be described as this I fail to understand as they had not carried on any previous business. They had no general reputation at all.

36. Secondly, Mr. Quon was described as the Managing Director of First Shanghai Capital Ltd. This was untrue. He was indeed, however, a Managing Director of the Banking Division of that company which had provided him with the name card.

37. These matters were sworn to by Mr. Quon. Mr. Keung blindly accepted them as being true. I find Mr. Keung's attitude on this aspect to be negligent in that he caused no enquiries to be made but I do not consider that it was of such a degree as to justify an order for costs against him.

38. As to (ii), the ability of the Plaintiff to satisfy the undertaking as the damages, it must be remembered that the obtaining of an injunction in Mareva form necessitates the applicant giving to the Court an undertaking that if the injunction is wrongly granted, then he will have to pay damages to the persons against whom the injunction is given. The obtaining of a Mareva Injunction 'ex parte' necessitates a full and frank disclosure of all material facts. Such an injunction has been described as a "nuclear weapon" because its effect can be dramatic. It effectively prevents people from trading. In this case it froze the assets which this Chinese company had in Hong Kong and prevented it from using them.

39. There is no doubt that Mr. Keung told Mr. Quon about the undertaking as to damages and such an undertaking is indeed included in the affirmation.

40. The Plaintiffs were a BVI company and therefore liable for the undertaking to be fortified, that is supported by some matter which shows that the company has assets.

41. Mr. Keung, however, knew the problems because he was asked :

"Did you not discover whether or not they had money to pay damages on an undertaking if the Mareva was discharged ?"

42. Mr. Keung knew, therefore, that the Plaintiff could not give any fortification. In my judgment, on a fair reading of the affirmation, it is deliberately phrased to persuade the judge that it was unnecessary to have fortification.

43. Speaking for myself, if I had been presented as duty judge with this affirmation and having considerable experience in this branch of the law, I would consider that I was dealing with a reputable merchant bank that was controlled by a publicly listed company. It is not surprising, therefore, that Gall J., and I mean no disrespect to him, who is a criminal judge practising in the criminal jurisdiction, did not call for fortification.

44. I do not consider that Mr. Keung can hide behind the client swearing to the facts of the affirmation. He must have known that the Plaintiff company had financial problems, such as not to be able to fortify the undertaking. In those circumstances, therefore, was Mr. Keung in serious default if he did not take any or any reasonable steps to satisfy himself that the Plaintiffs were at any rate in a position to give an undertaking as to damages?

45. In order to answer this difficult question, I must first consider whether there is a duty on a solicitor to make inquiries as to his client's financial position. I must stress, however, that I am only concerned with the duty on this solicitor in the factual position that he was.

46. The facts are :

(1) Mr. Keung did not know the client.

(2) He knew nothing of the Plaintiffs'     background other than it was a BVI company,     specially set up.

(3) The amount subject to the Mareva Injunction     was huge, some US$10 m.

(4) This was an 'ex parte' application, where     there is an obligation to be frank with the     Court and the undertaking is given to the     Court.

(5) Mr. Keung had not taken any money on account     himself.

47. In my judgment, on the factual position this solicitor found himself in, there was a clear and foreseeable risk of the Plaintiff not being able to meet his obligation as to the undertaking to the Court.

48. Secondly, I must consider what this solicitor actually did. The fact as I find is that he did nothing. He was asked.

49. In my judgment, this solicitor was in serious default in not taking any reasonable steps to satisfy himself that the Plaintiffs were in a position to satisfy an undertaking in damages and in those circumstances, he should have refused to present an 'ex parte' application to the Court for a Mareva Injunction.

50. This is a dramatically different position from a solicitor not having a duty to satisfy himself as to the strength or success of his client's case. This was an undertaking to the Court. The affirmation was by the client, but in my judgment, this solicitor deliberately took the risk of doing nothing to check the financial position of the Plaintiffs and the affirmation was disguised to hide the true position.

51. Although counsel settled the affirmation and the client swore to it, Mr. Keung knew full well that the Plaintiff had no assets. Even if I am being uncharitable to Mr. Keung's motives and I confess that I was not impressed with him as a witness, then he deliberately made no inquiries. He did nothing to verify, or check any matters relating to the Plaintiffs.

52. As I said earlier, I am not seeking to say that in every application for an injunction, a solicitor should carry out a check on his client, but the circumstances here were highly unusual.

53. Mr. Quon had, as it were, stepped straight off the street, and for Mr. Keung to say that as the introduction came from a barrister, it was a "trustworthy connection," is not only naive, but demonstrates to me that Mr. Keung's whole attitude was irresponsible. Mr. Keung should not have permitted the application for the 'ex parte' injunction to be presented to the Court, and on the facts as I find them this was misconduct by the solicitor.

54. I have not dealt with all the other grounds raised by Mr. Ching, with regard to the post injunction actions of Mr. Keung and although some of them are surprising, they would not in themselves warrant the Court ordering costs against him.

55. I have had regard to the three stage test set out in Ridehalgh. I find first, the solicitor, Mr. Keung, did act improperly by his misconduct in permitting the 'ex parte' application to be made. Secondly, such conduct did cause the Defendants to incur unnecessary costs and thirdly, in all the circumstances, it is just to order K.B. Chau & Co. to compensate the Defendants for the whole of their costs.

56. I have also considered the position of Mr. Quon. As I said I find a number of the matters he set out to be deliberate untruths. Swearing an affirmation is like giving evidence and false affirmation may amount to perjury. I have considered whether I should send the papers to the Attorney General for the consideration of a prosecution for perjury. However, having considered the matter for some time, I do not think the public interest would be served by so doing. So as far as Mr. Quon is concerned, I make no order.