XCHRX ASSETS INVESTMENTS PT LIMITED v. THE UNITED ISLAMIC INVESTMENTS FOUNDATION AND OTHERS

1993, No. A4392

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. On 3rd July 1992, the Plaintiff and 1st Defendant entered an asset swap agreement (the Agreement). Under the Agreement, the Plaintiff sold a portfolio of shares to the 1st Defendant subject to an option to re-purchase those shares. The Plaintiff exercised the option and with effect from 1st November 1992 commenced making to the 1st Defendant the required monthly payments of some HK$326,000.00. A total of 5 such payments were made by way of drafts to the 1st Defendant, delivered to the 2nd Defendant as required by the Agreement. On 6th January 1993, the 2nd Defendant advised the Plaintiff that the draft for the instalment due on 1st December had omitted the final letter "s" from the word "Investments" in the 1st Defendant's name. The Agreement was declared null, void and invalid. The 1st Defendant kept the shares and all the instalments paid although at least one of the instalments was set off against dividends said to be due from the Plaintiff to the 1st Defendant.

2. In May 1993, the Plaintiff issued a writ against the 1st and 2nd Defendants for wrongful repudiation of the Agreement and for damages. The 2nd Defendant was joined as controller of the 1st Defendant.

3. The Agreement contains a very comprehensive jurisdiction clause by which the Plaintiff and 1st Defendant submitted to the law and jurisdiction of the Turks and Caicos Islands where the 1st Defendant was incorporated. In June 1993, the 1st Defendant applied by summons for the proceedings to be stayed on the basis of the contractual jurisdiction clause or on the ground of forum non conveniens. The 2nd Defendant made a similar application a month later. The applications were set for hearing on 28th/29th October. The Plaintiff meanwhile had been carrying out investigations into the background of the 1st and 2nd Defendants. The results of the investigations alarmed the Plaintiff because they suggested that the Defendants were not the substantial and reputable institutions which they had purported to be, but little more than closely linked shell companies under the control of the 3rd Defendant who was not at that stage a party to the proceedings. The hearing of the applications to stay being imminent, the Plaintiff applied ex parte to Master Woolley on 11th October under section 21 of the Evidence Ordinance to inspect and take copies of the 1st Defendant's bank account with the Hong Kong & Shanghai Bank. The order was granted. Execution of the order reaped a rich harvest. On 22nd October, the Plaintiff obtained ex parte from Master Jones a further order under section 21 of the Evidence Ordinance to complete inspection and the taking of copies of the 1st Defendant's bank statements. On 26th October, the Plaintiff amended its writ and statement of claim to join the 3rd Defendant and to plead fraud against the Defendants.

4. The 1st Defendant applied to set aside the two ex parte orders. The 1st and 2nd Defendants applied for removal from the court file of the Plaintiff 's affidavits exhibiting the material which had been obtained from the bank. Those applications were heard on 28th/29th October by Master Woolley who set aside the two orders and directed that the documents be returned to the 1st Defendant and that paragraphs in the Plaintiff 's affidavit referring to those documents be struck out. Execution of Master Woolley's order was stayed on the same day by Keith J. pending appeal by the Plaintiff. Of that appeal, I am now seised.

5. Section 21 of the Evidence Ordinance provides :-

"On the application of any party to any proceedings, the court or a judge may order that such party be at liberty to inspect and make copies of any entries in a banker's record for any of the purposes of such proceedings."

6. The law was canvassed in some detail by Mr. Ronny Tong Q.C. for the Plaintiff. In the event, Mr. Tong and Mr. Westbrook, who appeared for all the Defendants, were in general agreement as to the law. The basic principle is that section 21 of the Evidence Ordinance (for the purpose of these proceedings being in substance identical to section 7 of the Bankers' Books Evidence Act 1879) does not permit a litigant to embark upon a wholesale search of bank accounts in the hope of turning up something to his advantage. In Williams v. Summerfield (1972) 2 QB 512, Lord Widgery C.J. said :-

"The courts have set their face against section 7 being used on a kind of searching enquiry or fishing expedition beyond the usual rules of discovery."

7. The procedure itself is anomalous. Whilst it is no doubt principally applicable to the trial of an action, it may be used in relation to interlocutory proceedings where there is an issue to be determined between the parties. There has not, however, been any detailed pronouncement by the courts of the criteria against which an order for inspection will be made. In some ways, it is analogous to the right of inspection consequent upon discovery under Order 24. In a number of cases, decided in the late 19th century following the introduction of the English Act, there was a suggestion that the principles relating to discovery should be followed. Analysis of the cases, however, shows that the courts were anxious to prevent a litigant obtaining by the back door that which he could not obtain through the front, so that a litigant having sworn that certain discovered documents were not relevant, the applying party could not go behind the truth and obtain copies of those documents by going to the bank under section 7 of the Act. See, e.g. South Staffordshire Tramways Co. v. Ebbsmith [1895] 2 Q.B. 669. In Parnell v. Wood [1892] P 137, Kay LJ said at page 141 :-

"The act does indeed provide by section 7 for allowing inspection where a judge thinks proper to order it, but a case must be made showing that such inspection is proper."

8. In my judgment, the matters which must be demonstrated to a court before it can consider making an order under section 21 of the Evidence Ordinance are that the other party has a bank account and that there is a probability that that account will contain material germane to an issue which is to be tried between the parties. Put shortly, perhaps, the test is relevance.

9. Crucial to an asset swap agreement are the integrity and financial substance of the parties. Significant sums of money are usually involved. In the case of shares, the party acquiring them as part of the swap arrangement may dispose of them in whole or in part. If the value of those shares increases substantially and the other party exercises the option to re-purchase, it is essential that the party who received the shares is able to purchase replacement shares. The Plaintiff took comfort from three things. First, the 1st Defendant's brochure. This document proclaimed the 1st Defendant to be a charitable organization committed to promoting Islamic ideals and values. The Islamic aspect of the 1st Defendant would appeal to a party like the Plaintiff who comes from Malaysia where Islam is widely practised. According to the brochure, one of the objectives is to earn income for charitable distribution through investments strictly adhering to Islamic principles. It was to be funded through donations and grants from prominent Moslems and by the issue of 1 million shares of US$1.00 at US$10,000.00 per share thus raising a total of US$10 billion. A board of 10 governors, apparently prominent Moslems, was named. The investment advisors were named as Oxbridge Investments Ltd., London.

10. Second, a brochure of Oxbridge Investments Ltd. This document described that company "as one of the most effective and innovative money management advisors in Europe". It stated it was retained by, amongst others, religious charities and had a high level of expertise, knowledge and experience. It was said to be located in Gibraltar for tax efficiency but gave a London address for communication purposes.

11. Third, a document marked "private and confidential" and headed with the 2nd Defendant's name. This document stated that the company was formed in 1991 to provide corporate client's services to Interbank Money Broking Company. It is at least arguable that this document states that the 2nd Defendant earned brokerage income of HK$42 million in the year ended April 1991 and concluded asset swaps with the face value of HK$700 million and fees of HK$10.5 million up to April 1992.

12. On 24th May 1993 in an application for leave to issue a concurrent writ, the Plaintiff filed an affidavit by Mr. Philip Lip Keong Chai, one of its Malaysian solicitors. He deposed that the 1st Defendant was incorporated only on 15th April 1992 and, because of the secrecy provisions of the Turks and the Caicos Islands, it had not been possible to obtain any detailed information, save that the company seemed to operate at least in part under a power of attorney given to the 3rd Defendant. In relation to Oxbridge, Mr. Lip said that enquiries at the London address indicated that that address was no more than a post box. The company's name did not anywhere appear at that address. Oxbridge is incorporated in Gibraltar at the address of a local law firm. It has a capital of ?1,000.00 Its main objects appear to be that of dealing in real property and construction. As to the 2nd Defendant, company searches show it to have a nominal share capital of HK$10,000.00, divided into 10,000 shares of HK$1.00 each. Only 2 shares have been issued, one to the 3rd Defendant who is a director of the 2nd Defendant.

13. On the basis of that and other matters mentioned in Mr. Lip's affidavit, the Plaintiff obtained leave to serve out of the jurisdiction. On 21st June 1993, the 3rd Defendant, giving a Hong Kong address, made an affirmation in support of the application to stay proceedings. He said he was a director and shareholder of the 2nd Defendant. He arranged for incorporation of the 2nd Defendant in 1991, the company to act as a broker and to receive commission in relation to international asset swaps. In 1992, he met a Mr. Ibrahim, who was honorary secretary of the 1st Defendant, set up after the Persian Gulf War in 1991. The 1st Defendant was incorporated in April 1992 in the Turks and Caicos Islands. The 3rd Defendant said he had met one of the governors briefly in Hong Kong and had spoken to another on the telephone. Otherwise, he did not know and had never met the governors. He did not know what funds had been raised by the 1st Defendant. The dealings in relation to the Agreement were conducted on the telephone with Mr. Ibrahim. Following conclusion of the Agreement, the monthly payments by the Plaintiff under the option to re-purchase, sent to the 2nd Defendant in accordance with the provisions of the Agreement, were sent on to the 1st Defendant. Hong Kong was used as a mail box and communication transmission point. All effective transactions took place outside Hong Kong. No-one from the 1st Defendant was in Hong Kong at any material time.

14. The Plaintiff next filed an affirmation by its Chief Financial Officer, Mr. Hock Chuan Goh. Mr. Goh said that the 1st Defendant's registered address proved to be no more than the premises of a company which provided secretarial services. There was no sign of any active business being undertaken at the premises and no trace of any staff of the 1st Defendant. A company search of Qwinzy Capital Group Ltd. had been carried out. This proved to be one of a multitude of companies set up and operated by the 3rd Defendant. The 1st Defendant had subscribed to 200,000 shares in that company, and the 3rd Defendant was the attorney of the 1st Defendant. Mr. Goh was not prepared to accept the allegations of the 3rd Defendant that the instalments paid by the Plaintiff were merely sent on to the 1st Defendant. He said that all the payments were by way of cheques in Hong Kong currency drawn on banks in Hong Kong. These cheques were sent to and received by the 2nd Defendant in Hong Kong. It was evident that they were meant to be paid into an account in Hong Kong. There would be no point in sending them to the 1st Defendant's registered office. The inference, therefore, was that the 2nd Defendant dealt with the cheques and assisted in obtaining payment on them.

15. With the hearing of the application to stay looming, the Plaintiff finally made ex parte its application under section 21. This application was supported by an affidavit of Mr. Robert Lindsay Thomson, one of the Plaintiff 's solicitors. He said that the Plaintiff contended that the 3rd Defendant had given a wholly misleading picture, in that the 1st Defendant was no more than a shell used by the 2nd Defendant. He said enquiry agents had carried out investigation for the Plaintiff. The agents could locate neither Mr. Ibrahim nor any of the governors of the 1st Defendant. The agents had learned from an officer in the Hong Kong office of the company housing the registered office of the 1st Defendant that the 1st Defendant had been set up by the 3rd Defendant. The 1st Defendant had no bank account in the Turks and Caicos Islands. The 1st Defendant's brochure had been printed in Hong Kong pursuant to an order placed by a company owned and operated by the 3rd Defendant. The 1st Defendant had a bank account in Hong Kong with the Hong Kong & Shanghai Bank.

16. Mr. Thomson went on to list three important factors which the court would take into account in determining the stay application. The factors were :-

(1) Whether the option payments were paid into a bank account in Hong Kong.

(2) Whether the 1st Defendant acted through and was managed and/or controlled by the 2nd Defendant in Hong Kong at all material times.

(3) Whether the evidence placed before the court by the 3rd Defendant was devoid of truth.

17. Mr. Thomson said the existence of the bank account was relevant to the jurisdictional question since it would suggest the 1st Defendant's connections with Hong Kong were closer than appeared on the surface. The identity of the individual or individuals who had signing authority, and information regarding whether the option payments were paid into the account and when, would also be highly relevant.

18. The Plaintiff obtained and executed an order for inspection. The Plaintiff must have thought it had stumbled into a gold mine. On 20th October, it applied for and obtained Mareva relief. It relied on the affirmation of Mr. Giong Seng Johnson Tan, one of the Plaintiff 's solicitors. Mr. Tan exhibited the documents which the Plaintiff had discovered as part of the bank's records in relation to the 1st Defendant's accounts. As there is a variety of appeals and applications pending, I do not think it right for me to canvass this material in too much detail. Suffice it to say that that the documents arguably show that the 1st Defendant was set up and controlled by the 3rd Defendant who was sole signatory to the bank account. The account itself was opened only in December 1992 for the purpose of this transaction because the only payments in appear to be the instalments paid by the Plaintiff. Substantial payments out were made to the 2nd Defendant. All meetings of the 1st Defendant were held at the office of the 2nd Defendant. On 29th June 1992 at a board meeting, it was reported that US$2,625.00 had been paid against shares issued.

19. For the purpose of this appeal Mr. Tong said it was permissible, and invited me, to look at all the material now before the court. He said that a strong arguable case of fraud has been demonstrated by the Plaintiff. I content myself with saying I agree. Mr. Westbrook tried to persuade me that other inferences or conjectures can be drawn from the material before the court. In the absence of any material from the Defendants, other than the affirmation of the 3rd Defendant to which I have referred and a second affirmation to which I will refer, Mr. Westbrook had no material with which to build. Plainly, the Plaintiff has a strong case, but that is not to say that it may not crumble when the Defendants deign to place an explanation or evidence before the court. I should add in fairness that Mr. Westbrook said that the Defendants have not so far placed material before the court because they considered it premature to do so until the stay application has been determined and the court has assumed jurisdiction.

20. The 3rd Defendant made a second affirmation on 27th October. He said that in relation to their being no-one from the 1st Defendant in Hong Kong at any material time "I now realise that this statement may be misleading". He said that he had only used the power of attorney from November 1992. He confirmed he was appointed director of the 1st Defendant on 26th November 1992 and until the present had been sole director. He said, however, that he did not regard himself as able to make commitments on behalf of the 1st Defendant without instructions from Mr. Ibrahim. He explained that the 1st Defendant is run by an advisory body which gives instructions to Mr. Ibrahim. Consequently, he, the 3rd Defendant, did not control the 1st Defendant.

21. For completeness, the Plaintiff appeared before Master Jones on 22nd October and obtained leave to inspect and take copies of the records of the 1st Defendant's account in the bank to date. Subsequently, on 26th October, Kaplan J. required the Plaintiff's solicitors to hand to the court documents obtained pursuant to that order. The documents were sealed up in the custody of the court pending determination of the issues between the parties.

22. Mr. Westbrook voiced three principal complaints against the making of the two inspection orders. First, he said that they were improperly obtained ex parte. Second, they were a blatant fishing exercise designed to set up the application for Mareva relief and to search for material in the hope of resisting the application to stay. Third, that the applications for the orders were anyway without merit because the evidence sought was not required for the purpose of the determination of an issue between the parties.

23. An application for inspection under section 21 may be made ex parte on affidavit. Where, however, there is reason to believe an attempt is being made to obtain discovery in any shape, the Master should direct the issue of a summons. See RSC Order 38/13/6. Mr. Westbrook said there was no reason for the application to be made ex parte. There were no time constraints nor was secrecy necessary because it could not be suggested that the bank would destroy its records. I agree that the applications would have been better made inter partes in this case. It was suggested on behalf of the Plaintiff that, because of the proximity of the original dates for the hearing of the stay applications, there was some urgency to carry out the inspection which would have been inhibited had a summons been necessary. To me, this explanation does not hold water. There would have been no difficulty, if the Plaintiff felt the applications to be at all justified, in persuading the court to adjourn the hearing of the stay applications to enable inspection to be carried out. As I take the view, however, that the Plaintiff was neither fishing nor seeking discovery, I do not regard this procedural defect as vitiating the orders which were made.

24. I also reject the submission that the Plaintiff was fishing or seeking discovery. It is true that Mr. Thomson's affidavit in support of the first order in para. 2 speaks of the application for inspection being made "for the purposes of these proceedings", which is in rather general terms. I have, however, already dealt with this affidavit in some detail. It is plain that the application was made specifically in relation to determining the stay applications. Mr. Thomson said that. In the absence of compelling evidence to the contrary, I am not prepared to doubt or disbelieve what he said. The fact that the Plaintiff uncovered material which enabled it to apply for Mareva relief was no doubt a bonus for the Plaintiff, but does not give me reason to doubt the bona fide nature of the application in the first place.

25. The crucial question, I am satisfied, is whether there was any justification for making the orders sought. Mr. Westbrook pointed out that the Agreement was denominated in Hong Kong dollars and that the 2nd Defendant had a Hong Kong bank account. Therefore, he said, the likelihood always was that the option instalments would be paid into a Hong Kong account. There was never likely to be any dispute about that and, in any event, records would be available if required. The real issue, he said, is where the proceeds of the instalments were channelled and into whose control they came. The bank records would throw no light on that issue and would not help in determining whether the 2nd Defendant was a principal or mere conduit. Insofar as inspection of the records was designed to test the credibility of the 3rd Defendant, Mr. Westbrook said that records are usually used to prove an issue between the parties not to test the credibility of witnesses.

26. It was not in dispute that the 1st Defendant had a bank account in Hong Kong. The Defendants' case was that the 1st Defendant was an entirely independent Islamic institution based in the Turks and Caicos Islands; that the 2nd Defendant was no more than an agent for receiving and confirming payment of the option instalments from the Plaintiff; and that in the words of the 3rd Defendant, the 2nd Defendant simply "sent on to the 1st Defendant" the payment of such instalments, the implication being offshore. It seems to me that the bank records would probably throw light on whether the money simply went in and out of Hong Kong, or whether it was retained here suggesting a connection with Hong Kong which was not immediately apparent. Further, the manner in which the 2nd Defendant dealt with the payments would throw light upon its connection with the 1st Defendant. What happened to the money and to whom it went could also cast doubt on the reliability of what the 3rd Defendant had said in his 1st affirmation. When a court is being asked to determine an issue at an interlocutory stage, where affidavits are commonly used, it is permissible for a party to ask the court to reject what is said in an affidavit where it is inconsistent with documentary evidence. It seems to me therefore proper for the Plaintiff to have sought to undermine the reliability of the 3rd Defendant's evidence.

27. The pending issue between the parties was the degree of connection, if any, with Hong Kong. An essential ingredient of the transaction giving rise to the dispute between the parties was the payment by instalments of substantial sums of money. If Hong Kong was no more than a post office through which the instalments quickly passed, whether or not through a bank account, the Hong Kong connection would be much diminished. If, however, these instalments came to rest in Hong Kong and were disbursed or dealt with locally, particularly by or to the 2nd Defendant, that would be evidence to support the Plaintiff 's assertion that there was a closer connection with Hong Kong and that the 2nd Defendant's role was more significant than that of mere postman. Certainly, the lie might be given to the 3rd Defendant's implied assertion that the 1st Defendant was an entirely independent institution having no obvious connection with Hong Kong or the parties in Hong Kong. Accordingly, I am satisfied that the application to inspect the bank records was properly made and properly granted in the first place.

28. I acknowledge that the Defendants have perhaps more ground for complaint in relation to the second application which was made pursuant to Mr. Tan's second affirmation in which he sought inspection of the bank records subsequent to 2nd February 1993, the date to which the first order was limited. Mr. Tan said that the application was "for the purposes, inter alia, of assisting the court to determine whether the Mareva injunction should be extended ...". Mr. Tong said correctly that that is an issue between the parties. I doubt very much, however, whether the inspection of the remaining bank statements would throw any light upon the two relevant questions of whether the Plaintiff had a good arguable case and the likelihood of dissipation of assets. Be that as it may, I think the second application must be looked at in context. And in context it was clearly part and parcel of an application relating to the stay proceedings. Further, payments into or out of the account would certainly be relevant to the issues which I have already dealt with.

29. It is not, in the circumstances, necessary for me to go on and deal with the second limb of Mr. Tong's argument, namely that even if I found against him, the information obtained from the bank records should nevertheless be allowed to remain in evidence. It is my normal practice to try and deal, usually shortly, with issues which have been argued although not necessary for the purpose of a decision. In this case, it is difficult to do so because, if I had found against the Plaintiff, much would depend upon the view I took of the Plaintiff 's conduct.

30. Mr. Tong's argument was that there is no general discretion to exclude relevant evidence however obtained. See Calcraft v. Guest [1898] 1 Q.B. 759. He conceded that there are exceptions to that rule, but contended that they do not apply in this case. He said that the principal exception is where privileged documents have been obtained by a trick or other unlawful means and have not yet been relied on in evidence. Such documents will be excluded. See, e.g. ITC Film Distributors Ltd. v. Video Exchange Ltd. [1982] 1 Ch. 431 and Goddard v. Nationwide Building Society [1987] 1 Q.B. 670. A further exception is in relation to documents or information obtained under an Anton Piller order that was itself obtained by material non- disclosure. In such circumstances, the offending party should be disciplined, subject to a balancing of the interest of justice and of the parties. A factor which will weigh heavily in the balance is the iniquity which the documents may reveal on the part of a defendant. See Brink's Mat Ltd. v. Elcombe [1988] 1 W.L.R. 1350 and Guess ? Inc. v. Lee Seck Mon [1987] F.S.R. 125.

31. For my part, I would have thought that documents or information obtained as a result of the execution of an order for inspection which should not have been made would fall into the latter category. It might well be that Anton Piller relief is improperly obtained for reasons other than material non- disclosure. I find it difficult to believe that different considerations would apply in dealing with the documents obtained in such circumstances. Assuming I am right about that then, in the present case, I would have thought that the degree of iniquity on the part of the 3rd Defendant shown by the documents obtained from the bank would outweigh all other considerations, particularly as there would have been no real offence such as material non-disclosure on the part of the Plaintiff, but simply a rather inept application.

32. Accordingly, I allow the Plaintiff 's appeal. The order of Master Woolley made on 29th October 1993 setting aside the two orders for inspection is itself set aside.

33. I make an order nisi that the Plaintiff has the costs of this appeal and of the proceedings below in any event, with a certificate for 2 counsel.

34. I also give liberty to apply.