THAI MERCANTILE DEVELOPMENT FINANCE LTD (IN LIQUIDATION) AND ANOTHER v. KANDA TEJAPATBULNATIONAL AND ANOTHER

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J U D G M E N T

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Kempster, J.A. :

1. On 16th November 1987, by the Official Receiver, the plaintiffs, deposit-taking companies in liquidation, obtained an order ex-parte from Sears J. restraining both defendants from removing any of their assets out of the jurisdiction and the second defendants also from making' any payment save in the ordinary course of trade or at all to the debit of the account held in the name of the first defendant. The supporting affidavit of Mr. Allen exhibited documents which appeared to show a loan of US$300,000 (HK$2,340,000) by the second plaintiffs to Greattown Ltd on 25th March 1986 from monies in their account at the Chase Manhattan Bank, New York, and remitted through Irving Trust Co to the account of Shek Siu Wah, of whom more anon, with the second defendants from monies earlier paid to the first defendant, under an alias, on behalf of United National Bank Ltd. Again it appears from the documents that this loan was applied by Greattown Ltd in partial discharge of an outstanding loan by State City Ltd. Mr. Allen also deposed to the fact that the monies in question had never been paid to Greattown Ltd and still stood to the credit of the first defendant in the books of the second defendants. I hasten to add that this tentative analysis of what I regard as a transection of Byzantine complexity should not be regarded as a finding of fact.

2. The following day the plaintiffs issued a writ claiming from the defendants, the first being a natural . person and the second another deposit-taking company, HK$2,340,000. Though the endorsement complied with the provisions of RSC Order 6 rule 2(l)(a) since the relief sought, being restitution and a declaration or alternatively damages for conversion, was specified, the cause of action was not apparent. It is not apparent to this day.

3. Albeit the defendants gave notice of intention to defend on 19th December and 21st November 1987 respectively the plaintiffs, doubtless for good reason, have failed to comply with RSC Order 18 rule 1 by serving a Statement or Points of Claim. Many of their ensuing difficulties are attributable to the absence of the intellectual stimulus which would thereby have been afforded.

4. The matter again came before Sears J. on 22nd December when further evidence was put before him. Pursuant to section 21L(l)(2) and (3) of the Supreme Court Ordinance (Cap 4) and in the exercise of his discretion he granted an order limited to the HK$2,340,000 in the first defendant's account with the second defendants. Against that order the first defendant appeals.

5. It is common ground that to grant an injunction restraining the removal of assets from the jurisdiction a judge must be satisfied that the plaintiff has shown "a good arguable case" or "a serious question to be tried." It matters not for present purposes which terminology is used. The first defendant contend that the plaintiffs, pointing only to suspicious circumstances, have demonstrated neither such a case nor such a question.

6. The judge held that the plaintiffs had discharged the necessary burden since the first defendant admitted beneficial ownership of the HK$2,340,000 in the books of the second defendants and

"the statement of facts on the writ discloses a legal consequence which gives the plaintiff a good arguable case. If it is necessary to identify the legal consequence then the first defendant is a constructive trustee of the second Plaintiffs' money. The concept and extent of constructive trusts are still uncertain but in my judgment on the stated facts equity would require the first defendant to make restitution of the second plaintiffs' money".

The fact stated 'in the writ were

".... the sum of HK$2,340,000 was purportedly loaned to Greattown Ltd on or about 25th March 1986 by the second plaintiff. The said sum was in fact paid to the second defendant for the account of the first defendant and has been wrongfully withheld from the plaintiffs".

The second plaintiffs' documents exhibited to Mr. Allen's affidavit showed that loan repaid on 10th April 1986.

7. The first defendent had deposed to an affirmation exhibiting copy documents dated 9th and 10th December 1985 purporting to request and effect the transfer' of US$500,000 from monies held to the second defendants' order but on her behalf by the Irving Trust Co, New York, to the first plaintiffs order on like behalf. No certificate of deposit from the first plaintiffs was exhibited though such a document made out in her favour under the alias "JW", by United National Bank Ltd in Vanuatu dated 10th March 1986 in the sum of US$510156=25, was. The first defendant's evidence was that the deposit with the first plaintiffs was duly made and renewed, with interest, and that she had no objection to the money being invested with the Vanuatu bank. However, when in Hong Kong during March 1986 she was given reason to doubt the solvency of the first plaintiffs to whom she still looked for repayment and in the company of Shek Siu Wah, who dealt with most of the detail, sought to withdraw her deposit. She could only secure agreement to the repayment of US$300,000 and this, it appears from exhibited documents, was effected by the second plaintiffs who required Irving Trust Co to hold that sum to the order of the second defendants who issued a certificate in the name of her usual alias "Wai Kee".

8. On one view of the law no fiduciary obligation can be imposed upon the first defendant unless she can be shown to have had knowledge that the monies credited to her account with the second defendants were those of the second plaintiffs rather than hers so as to affect her conscience. No evidence was adduced in this regard. Instead it was and is asserted that she is related to a number of persons against whom, unlike her, fraud is alleged though in other proceedings. These circumstances do not avail the plaintiff  when the first defendant 's account of the matter is not shown to be false.

9. It is not alleged in the writ or supporting affidavits that the relevant movies were paid to the second defendants by mistake or that such payment constituted a preference avoidable in the winding-up. Further, despite the invitation of Hunter J.A. the plaintiffs have not been able with any clarity to formulate a proprietary claim to the money. None the less the evidence suggests it may have been paid by reason of fraud and be the property or held to the use of the second plaintiffs. It could therefore constitute "a trust fund" to be preserved by innocent parties pending the outcome of the litigation. (Note A v. C. & Ors ⁽¹⁾; Bankers Trust Co v. Shapira ⁽²⁾ Further, I am unable to conclude that an  order for the preservation of a plaintiff's property must be dependent upon  that plaintiff joining in one action his claims against fraudulent as well as against innocent persons. After all in Bankers Trust Co v. Shapira⁽²⁾ the fraudulent defendants had not been served and in the present context an application for consolidation remains an option.

10. For these reasons, which were not explicitly spelt out by the judge, I am satisfied that a good arguable case and a serious question to be tried were shown and validate the way in which he exercised his discretion. I would dismiss this appeal.

Hunter, J.A. :

11. From the welter of evidence before the court two undisputed and indisputable facts stand out :

12. What is factually in issue are the circumstances in which this payment was made and received. In relation to payment, Sears J. concluded that "on the evidence before me at the moment" the payment was "a clear misappropriation of the second plaintiff's monies". I agree.

13. Both plaintiffs carried on business as the deposit-taking companies until winding up orders were made at the suit of the Financial Secretary on 15th September 1986 in relation to the first plaintiff, and 28th July 1986 in relation to the second plaintiff. This followed the Financial Secretary's order for an investigation in June 1986 immediately followed by the flight of the managing Thai nationals. The official receiver's investigation has revealed a deficit of nearly HK$400 million, and a prima facie case of long term fraudulent mismanagement and misuse of the plaintiffs' and depositors' funds. For this purpose the managers used a number of other corporate entities which directly or indirectly they controlled. These included Greattown Ltd, State City Ltd, and a Vanuatu company called United National Bank. A feature of both companies' affairs was a resort to what is described in evidence as "cheque churning" repeated use of circuitous cheque movements and book entries to effect or cover transactions which were not in the interests of the companies, or fictitious, or both.

14. The plaintiffs' case is that no legitimate reason existed or can be discovered for the disposition by the second plaintiffs of its funds in favour of either defendant. The covering documentation of both the second plaintiff and the Greattown Ltd which the official receiver has put before the court, purport to show that this transaction was part of the making and repayment of complex loan transections involving the second plaintiff, Greattown, United National Bank and the State City Ltd. The judge in my view was entitled to treat the accuracy and bona fides of these entries as being gravely in doubt.

15. The first defendant in her evidence did not assert any relevant relationship or dealing with the second plaintiff or indeed Greattown. She dealt only with the first plaintiff. The main burden of her evidence was to emphasize her ignorance of any fraud or misconduct on the part of the plaintiff's than managers, and her own bona fides in the transaction in question. It resulted, she said, from pressure she brought to bear upon the first plaintiff on 25th March 1986 to repay the sum of US$500,000 which she alleges she was then owed by the first defendant, although the debt is also said to be evidenced by a certificate of deposit dated 10th March 1986 and issued in her favour by United National Bank. The first plaintiff, she says, claimed then to be unable to repay her more than US$300,000, and she accepted that sum, as she then thought, from that source. She says she did not then see any of the banking documents which showed the second plaintiff as the originator of the payment. But there is simply no evidence to support the truth of the first defendant's asserted belief that the first plaintiff authorised the second plaintiff's payment and thereby reduced its alleged indebtedness to the first defendant. Further from his knowledge of both companies affairs, the official receiver asserts his belief that on 25th March both companies were insolvent and unable to pay their debts when they fell due.

16. The documentation before the court in my view reveals three actual or potential arguable questions in relation to the transfer of this fund by the second plaintiff to the first defendant, as between the plaintiffs and the first defendant. I leave out the second defendants as they are not parties to this appeal. These questions are :

(2)    whether either plaintiff can raise a proprietary claim and trace the monies into the hands of the first defendant upon the basis that either in equity, or at common law the money is the property of the second plaintiff. Recent examples of in junctions granted to preserve, pending suit, trust funds alleged to have arisen in such circumstances are A. v C.⁽¹⁾, Rankers Trust Co v Shapira⁽²⁾ and CP PCW Ltd v Dixon⁽⁵⁾ at p 163.

(3) whether in the light of the first defendant's claim that the payment to her was made by the first plaintiff, such payment by either the first plaintiff or the second plaintiff vas made "with a view to giving" preference to the first defendant : and whether such question should be brought before the court and tried at the same time as the remaining issues in this case : see Bankruptcy Ordinance (Cap 6) section 49, and Companies Ordinance (Cap 32) section 266.

17. It is a matter of regret that these questions do not seem to have been sufficiently identified or separately considered before the hearing of this appeal. I agree with Kempster J.A. that the failure to settle and serve a Points of Claim contributed to this lack of clarity. I also agree that the general endorsement upon the writ is sufficient to satisfy RSC 0. 6 r. 2(1)(a). A Points of Claim could and should have been served pleading the causes of action considered in questions one and two, without need for amendment, RSC 0. 18 r. 15(2). The judge and we have to deal with the matter on the material before us.

18. The essential differences between those two causes of action were pointed out by Sir Robert Megarry V.C. In re Montagu's Settlement Trusts⁽³⁾. First at p 276B he said this

"the core of the question .... is what suffices to constitute a recipient of trust property a constructive trustee of it. I can leave on one side the equitable doctrine of tracing : if the recipient of trust property still has the property or its traceable proceeds in his possession, he is liable to restore it unless he is a purchaser without notice. But liability as constructive trustee is wider, and does not depend upon the recipient still having the property or its traceable proceeds".

Later he commences the summary of his conclusions as follows:-

"(1) The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere proprietary rights.

(2) In considering whether a constructive trust has arisen in a case of the knowing receipt of trust property, the basic question is whether the conscience of the recipient is sufficiently affected to justify the imposition of such a trust".

19. Upon the first question, to which much of the argument was directed, I think that upon the present evidence the plaintiffs fail to make out a good arguable case of sufficient knowledge in the first defendant. Indeed they may have difficulty in going further than seeking to impute the knowledge of the second defendant to the first defendant. But upon the second question the position is reversed. There is a good arguable case of fraud, and the fund is prima facie intact and traceable both at common law and in equity. Here the first defendant in my view does not start to show that she is a purchaser for value.

20. Mr. Denis Chang Q.C. was I think right not to argue that the present absence of the alleged fraudulent managers from this suit is fatal. Consolidation of the major suit against them, with this action, will shortly be considered by the judge. But I cannot accept his submission that the principles of the Bankers Trust Co v. Shapira⁽²⁾ line of authorities cover only bankers and persons in the position of the second defendant, and not the first defendant personally. There is no valid distinction between banker and customer for this purpose. Money in a bank account is the banker's money, and the customer is only a creditor. The true limit upon this line of authority is that which applies to any rest itutionary claim, namely the bona fide purchaser for value. Further if Mr. Chang's submission were here well founded it could mean that the court could achieve indirectly what it could not do directly. The injunction would be valid against the second defendant but not against the first, but the valid order against the second defendant would prevent the first defendant from withdrawing the money.

21. In these circumstances in my judgment this injunction was properly granted against both defendants and for my part I would dismiss the first defendant's appeal.

Fuad, V.-P.:

22. I have the misfortune to disagree with Kempster and Hunter. M.A. as to the result of this appeal.

23. The Indorsement of Claim on the Plaintiffs' Writ was in the following terms:

" The Plaintiffs claim against the Defendants and both of them is for the sum of HK$2,340,000. The said sum was purportedly loaned to Greattown Limited on or about 25th March 1986 by the 2nd Plaintiff. The said sum was in fact paid to the 2nd Defendant for the account of the 1st Defendant and has been wrongfully withheld from the Plaintiffs.

24. The Plaintiffs claim:

                (i)     Restitution;

                (ii)     Declaration;

                or alternatively :

                (iii)     Damages for conversion;

                (iv)     interest pursuant to he Supreme Court Ordinance;

                (v)     such further or other relief as may be just."

It has never been amended and, as my Lords have pointed out, although the Writ was issued on 17th November 1987, Points of Claim have yet to be filed.

25. It is now well settled that "a good arguable case" must be shown before Mareva relief can be granted. But the injunction can only be ordered if the Plaintiff is able to show that he has a cause of action. The injunction is merely a remedy and not in itself a cause of action. This self-evident requirement was adverted to by Lord Diplock in The Siskina (Cargo owners) v. Distos Comopania Naviera S.A. (1979) A.C. 210 at p.256:

"A right to obtain an interlocutory injunction is not a cause of action. It cannot stand on its own. It is dependent upon there being a preexisting cause of action against the defendant arising out of an invasion, actual or threatened by him of a legal or equitable right of the plaintiff for the enforcement of which the defendant is amenable to the jurisdiction of the Court. The right to obtain an interlocutory injunction is merely ancillary and incidental to the preexisting cause of action. It is granted to preserve the status quo pending the ascertainment by the Court of the rights of the parties and the grant to the plaintiff of the relief to which his cause of action entitles him, which may or may not include a final injunction.''

26. I ventured to make the same point in Intercontinental Housing Development Ltd. v. Quek Tech Huat [1986] H.K.L.R. 1153 where at p.1153, I said: "It seems to me quite essential that a viable cause of action is identified and therefore pleaded." In that case I referred to the observations of Lord Denning M.R. in Bank Mellat v. Nikpour [1985] F.S.R. 87 at p.89 when he said speaking of the duty of an applicant for a Mareva injunction: "He ought to state the nature of his case and his cause of action."

27. I respectfully agree with the observations of Slade L.J. in the Bank Mellat case where, at pp.92-93 he said:

"I appreciate that, in some circumstances the urgency of a particular case may make it necessary for a party or his legal advisers to apply on evidence which is in a less tidy or complete form than they or the court would have preferred. In some cases of extreme urgency, it may even be necessary for counsel to apply to the court supporting his application by merely an oral statement of facts, coupled with an undertaking that those facts will be subsequently embodied in an affidavit. Nevertheless, no amount of urgency or practical difficulties can in my judgment, justify the making of a Mareva application unless the applicants have first made serious attempts to ascertain the relevant cause of action and to identify for the benefit of the court the principal facts that will be relied on in support of that cause of action." (Emphasis supplied)

28. Whatever may have been the position at the ex parte stage, by the time the matter came before the judge; inter partes, and surely by the time the appeal was heard, the Plaintiffs should have identified and put forward a viable cause of action against the Appellant (or a number of causes of action in the alternative). This they had not done and seemed unable to do even before us. Without this, they cannot, in my judgment, be said to have shown "a good arguable case" for which Mareva relief was justified.

29. I would, therefore, for my part, have allowed the appeal but in view of the conclusions of the majority, the appeal is dismissed and, in handing down this judgment, we make an order nisi that the Plaintiffs shall have the costs of the appeal.

(1) [1981] 1 QB 956

(2) [1980] 1 WLR 1274

(3) [1987] CH 264

(4) [1987] 1 WLR 987

(5) [1983] 2 All ER 158