UBS AG v. STAND FORD INTERNATIONAL ENTERPRISES LTD. AND OTHERS

HCCL 45/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 45 OF 2000

NO. 45 OF 2000

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J U D G M E N T

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Introduction

1. In this case the plaintiff, a Swiss bank, seeks to recover damages consequent upon a fraud that was practised upon it some two years ago.

2. On 16 January 2000 the Zurich branch of the plaintiff received what is now known to be a forged letter of introduction purporting to come from one of its clients, the National Bank of Ethiopia. This instruction requested closure of the Ethiopian Bank's account with UBS, and required the closing balance therein to be transferred to a US dollar account No. 004-2-607523 with the Hongkong and Shanghai Bank in Hong Kong in favour of Stand Ford International Enterprises Ltd. The amount so transferred was some US$1.958 million.

3. These events precipitated this action. Prior to this case coming to trial, various interlocutory orders were granted by the Commercial Court. These took the form of worldwide Mareva relief and disclosure orders against the defendants, more particularly against the 1st and 2nd defendants on 14 April 2000 (which order was served on the 3rd defendant in his capacity as director of the 1st defendant), and against the 3rd defendant personally on 6 September 2000. In addition Norwich Pharmacal orders were made against the two Hong Kong banks which unwittingly had become involved in the transmission and handling of this money, namely HSBC and the Chekiang First Bank.

4. The proceedings herein were issued against four defendants, but the trial which now has been conducted before this court has involved the 3rd defendant only, Mr Wong Chee King.

5. Default judgment earlier was entered against the 1st defendant, Stand Ford International, a BVI company incorporated on 7 May 1997 and of which the 3rd defendant was the sole director. Accounts held by Stand Ford in Hong Kong with HSBC were garnisheed in execution of that judgment, the plaintiff thereby receiving approximately US$34,000.

6. As to the 2nd and 4th defendants, Messrs Petr Vyplel and his associate, Miroslav Kriz, a Settlement Agreement was entered into with them by the plaintiff on 5 January 2001, which compromise yielded a sum of US$1.3 million, inclusive of interest and costs. A further sum of approximately US$60,000 was also recovered in May 2001 from a Liechtenstein entity, ABC Promotion Establishment, the payee of a remittance from Hong Kong deriving from the monies which had been sent to the Stand Ford account.

7. Accordingly it was the 3rd defendant, Mr Wong, who represented the outstanding target of the plaintiff's efforts to recoup such losses as remain unrecovered. I turn, therefore, to deal with the factual background in terms of his involvement.

The primary facts

8. Mr Wong Chee King, the 3rd defendant, is an accountant and financial controller of a Hong Kong company, Technology Research Co Ltd. He came to know the 2nd defendant, Mr Petr Vyplel, and his associate, Mr Roman Doubrava, in about 1990. They were senior officials in a Czech computer company called Vikomt, which was a customer of the Dutch subsidiary of Mr Wong's employer. Contact having been established, Mr Vyplel is said to have visited Mr Wong about twice per year whenever he came to Hong Kong on business.

9. In May 1997 Mr Vyplel and Mr Doubrava came to Hong Kong, and told Mr Wong that they had purchased a BVI company, the 1st defendant in these proceedings. I shall refer to it simply as Stand Ford. They informed Mr Wong that he had been appointed by them to be the first director of this company. Mr Wong says that although they had not consulted him, nevertheless he did not object.

10. Bank accounts in Hong Kong were required to be established for Stand Ford, one to be operated by Mr Vyplel and one by Mr Doubrava. So on 29 May 1997 Mr Wong took these gentlemen to the HSBC branch in King's Road to open these accounts. Mr Wong in fact completed the account-opening documentation, and two accounts were duly opened: No. 004-3-607522, of which Mr Doubrava was the authorized signatory, and No. 004-2-607523, of which Mr Vyplel was sole signatory. This latter account, 'the 523 account', figures large in the story which emerges in this case.

11. On 14 January 2000 Mr Wong received an email from Mr Vyplel. This was the start of a sequence of email correspondence, in particular between mid-January and 4 February, which has been the subject of detailed analysis and vigorous argument. For present purposes, suffice to say that from the outset Mr Vyplel made it clear to Mr Wong that he needed to transfer money to the 523 account of Stand Ford in Hong Kong, that he needed to open an account at another bank into which cash was to be placed, and that from that new account the monies so deposited in cash were to be transferred out on the same day. Mr Vyplel's email timed at 16.32 on 14 January requests Mr Wong to "check for me which bank is best for cash operation", and prophetically concludes: "I know it will be stranged, if I will open new account and put to the account a lot of cash money and will be transferred in the same day to another country!"

12. Further email exchanges followed, and advice was tendered periodically by Mr Wong in terms of practical detail as to how best to effect that which Mr Vyplel required; in addition other matters were seen to by Mr Wong, such as Mr Vyplel's reservation at the Newton Hotel in Wanchai. An additional practical complication in terms of monetary transmission arose because the Chinese New Year holiday for that year fell on 4 to 7 February 2000.

13. In the event, Mr Vyplel arrived in Hong Kong from Frankfurt on 7 February, and Mr Wong met him on that day for about half an hour. By the date of this first meeting Mr Wong, the custodian of the passbook for the 523 account, a multicurrency savings account, had caused the passbook to be updated on no less than seven occasions - on 17, 26, 29 and 31 January and on the 1, 2, and 3 February 2000 - only to find that the like balance remained on each date, namely US$410.10, and that no money had been transferred to this account as Mr Vyplel had indicated would be occurring.

14. On 8 February 2000 Mr Wong met Mr Vyplel again. On this occasion both men visited the King's Road branch of HSBC to see if the expected funds had arrived. An initial updating of the passbook revealed that this had not occurred, but a second entry on the same date indicated that the balance in the 523 account of Stand Ford now stood at US$1,959,087.76, thereby signifying a telegraphic transfer remittance of US$1,958,677.66.

15. At this stage, upon Mr Vyplel informing Mr Wong that he intended to withdraw the entire sum, and in particular US$757,000 in cash, Mr Wong says that he did two things: first, he telephoned a Miss Ki of Chekiang First Bank (which was the bank used by his employer) in order to confirm that it was possible to open a private US dollar account with that bank, and second, he contacted the HSBC King's Road branch by telephone to order cash in the sum of US$757,000 to be available for withdrawal from the 523 account the following day.

16. The monetary transactions which took place on 9 February 2000, involving physical movement between the two banks, occupied Mr Vyplel and Mr Wong between 10.45am and 3.45pm on that day. As to what objectively was achieved, there is no dispute.

17. The first stop on 9 February was at HSBC King's Road, where Mr Vyplel arranged for the disposition from the 523 account of a total of US$1.2 million in the following manner: first, he remitted a total of US$600,000 in two tranches of US$250,000 and US$350,000 to the account of an entity known as 'ABC Promotion Establishment Schaan' with LGT Bank in Liechtenstein; second, a total of $600,000 in two separate amounts of US$200,000 and US$400,000 was sent to one Vaclav Velesy at an account with Banco Bancrecen in Costa Rica; and third, Mr Vyplel executed two cash withdrawal forms in the sums of US$628,000 and US$129,000 respectively. All of the paperwork for these transactions was written by Mr Wong for Mr Vyplel's signature.

18. Some time thereafter, in all probability after an initial visit to the Chekiang First Bank, Mr Vyplel and Mr Wong went to the Head Office of HSBC in Queen's Road Central. Once there, Mr Vyplel presented the cash withdrawal form for US$628,000 and received this sum in cash. Carrying the cash in a bag, the two men then returned to the Chekiang First Bank in Duddell Street, and there the entire sum was deposited by Mr Vyplel into a new account which had been opened in Mr Vyplel's personal name. This was Multi-Currency Savings Account No. 08-91-00408-9, which subsequently was subject to a Norwich Pharmacal Order granted against the Bank.

19. Immediately after the cash deposit into this newly-opened account, Mr Vyplel remitted the sum of US$626,700 to his own personal account with LGT Bank in Liechtenstein. Once more, all necessary paperwork, both for the initial opening of the account and for the telegraphic transfer, was completed by Mr Wong for Mr Vyplel's signature.

20. Later on the same day, at about 2.00pm, Mr Wong and Mr Vyplel returned to the Head Office of HSBC, where the remaining cash withdrawal form for the amount of US$129,000 was presented for delivery of that sum in cash, which as before was physically removed from the bank. One of the intriguing facets of this case is that there are in evidence photographs, extracted from internal HSBC video, of Mr Vyplel and Mr Wong waiting at the HSBC counter upon the two occasions on 9 February 2000 when they attended to collect the two tranches of cash.

The causes of action

21. Against this background, the plaintiff spreads its net wide against the 3rd defendant. It claims against Mr Wong in conspiracy, alternatively in terms of knowing receipt of part of the funds remitted to Hong Kong, alternatively it is alleged that the 3rd defendant knowingly and/or dishonestly assisted in the disposal of the monies remitted to Stand Ford's 523 account, which monies were, as a matter of law, impressed with a constructive trust.

22. Whilst I appreciate why this broad approach was taken, I am in no doubt that the crux of this case lies under what I will simply describe as the 'knowing assistance' head, and it is this element of the case which provides the focus of this judgment.

'Knowing assistance': the relevant approach

23. Equity imposes a remedial constructive trust upon stolen monies, and a stranger will be liable to account as constructive trustee if he knowingly assists in furtherance of a fraudulent and dishonest breach of such trust.

24. In Royal Brunei Airlines v Tan, [1995] 2AC 378 (PC), Lord Nicholls observed (at 392) that "a liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation". He concluded (at 389), that in this context acting dishonestly "means simply not acting as an honest person would in the circumstances", that is, the application of an objective standard, although he stressed that when thus evaluating honesty a court would look at all the circumstances known to the third party accessory at the time, in addition to having regard to his personal attributes "such as his experience and intelligence, and the reason why he acted as he did."

25. On this approach, application of an objective standard avoids consideration of anything akin to a 'mens rea' element. However, some six years after Lord Nicholls' seminal judgment in Royal Brunei Airlines, op.cit., a different view appears to have been taken by the House of Lords in Twinsectra Ltd. v Yardley, [2002] 2WLR 802 wherein it was held (Lord Millett dissenting) that for a person to be liable as an accessory to a breach of trust, he had to have been acting dishonestly by the ordinary standards of reasonable and honest people and to have been himself aware that by those standards he was acting dishonestly - a test described by Lord Hutton as "the combined test".

26. The question thus arises in this case as to the appropriate basis upon which to assess the conduct of the 3rd defendant, Mr Wong, and to decide whether such is sufficient to found accessory liability. Should the Royal Brunei Airlines approach be adopted, or should the issue be approached in terms of the gloss to established principle as now adumbrated in Twinsectra?

27. Unsurprisingly, on this issue the views of counsel differ. On behalf of Mr Wong, Mr Pow urges adoption of the Twinsectra benchmark, whilst Mr Sussex canvassed the objective standard for the assessment of dishonesty, albeit both counsel accept that this court is bound by neither decision. Mr Sussex submitted that his researches indicated that although Royal Brunei has been cited in 14 reported cases, at present there is yet no binding authority in Hong Kong on the point.

28. Whilst ultimately it may not matter greatly in the circumstances of this particular case, in principle I have no hesitation in preferring the approach of Lord Nicholls in Royal Brunei Airlines, as supported in the dissenting judgment of Lord Millett in Twinsectra. In my view the adoption of the objective standard of dishonesty - wherein the defendant is expected to attain the standard which would be observed by an honest person in similar circumstances - is the more consonant with equitable principles underpinning attribution of liability as an accessory to a breach of trust, liability which extends to anyone consciously assisting in the continuing diversion of stolen monies. Given that the guiding principle in this area sounds to identification of unconscionable conduct in the misapplication of the plaintiff's funds, it is not easy to see why the 'dishonesty' element within 'dishonest assistance' now should be subjected to an enhanced 'consciousness of wrongdoing' threshold; as Lord Millett observed in Twinsectra, op.cit., (at 836), in this area of the law it is not necessary that the third party accessory actually should have appreciated that he was acting dishonestly, "it is sufficient that he was".

29. The tension now existing between the two approaches in terms of the identification of dishonesty in this area of the law clearly requires appellate clarification in Hong Kong. For present purposes, however, I consider that it should be the objective standard that provides the primary touchstone against which to judge the plaintiff's allegations against Mr Wong.

The 3rd defendant's case

30. Reduced to its essentials the 3rd defendant's case was disarmingly simple. It was that Mr Vyplel was a trusted business associate whom he had never once suspected of wrongdoing, and it was unjust now to accuse him of participation in what, he now realized, was a highly dubious scheme in terms of the transmission of, and dealing with, these monies. On this basis, therefore, Mr Wong strenuously denied liability to the plaintiff.

31. There is force in Mr Sussex's submission that this case turns upon an assessment of Mr Wong's credibility. The actual assistance Mr Wong furnished to Mr Vyplel is clear - save for what occurred at the Chekiang First Bank, and when, there is little real controversy about what in reality he did - and the question for the court is whether the 3rd defendant should be regarded as, in effect, an innocent na?f unsuspectingly caught up in the web woven by his erstwhile friend?

32. I did not find Mr Wong to be an impressive witness. To the contrary, I found his evidence frequently to be evasive and non-responsive, and at times simply disingenuous, and looked at in the round I am inclined to agree with the plaintiff's submission that in giving his version of events Mr Wong sought to exploit in his favour every ambiguity which might be discerned to exist on the face of the available documentation.

33. Several matters stood out in the course of the evidence which seemed to me to provide reliable indicators as to the truth of Mr Wong's account of events. I did not, for example, believe Mr Wong when he asserted that it was only "at a late stage, around 1st or 2nd of February" that he realized that Mr Vyplel was going to remit money into the 523 account, not least because this statement is distinctly at odds with the manifestly clear purpose in so frequently updating the account passbook prior to that date, actions which Mr Wong maintained were merely aimed at checking the balance in order that he could be in a position to inform Mr Vyplel when and if he was asked.

34. However, in terms of the assessment of truth, perhaps the most important aspect of the case centered upon Mr Wong's dealings, on behalf of Mr Vyplel, with the Chekiang First Bank, and in particular a striking difference in recollection as between Mr Wong, the 3rd defendant, and Mr Wong Kwai-man, an officer of the Chekiang First Bank, as to what there occurred.

35. After the 3rd defendant and Mr Vyplel had on 9 February 2000 completed the transactions at the Chekiang Bank - involving the deposit of cash into a newly-opened account in Mr Vyplel's name and the immediate telegraphic transfers out of that account - the following day the bank had filed a Report to the Joint Financial Intelligence Unit pursuant to s25A of the Drug Trafficking (Recovery of Proceeds) Ordinance and the Organized and Serious Crimes Ordinance. A Miss Ki Pui Lin was the Reporting Officer of record, and under the heading 'SUSPICION' the Report read thus :

"On Feb.9, 2000, one of our customer introduced his client to open a Multi-Currency Savings A/C with us. Mr Vyplel is holding a CZECH REPUBLIC passport. He deposited cash for USD$628,000.00 and then applied a T/T for USD$626,700.00 to his account in LIECHTENSTEIN.

As explained by Mr Vyplel, the said funds was withdrawn from his Account with HSBC, HK which he has been trading business for years. He exported goods from Taiwan to CZECH. In order to avoid the profit tax, he marked down the price of those goods imported to CZECH. The difference of the buying and selling price was then maintained in his account with HSBC, HK. These accumulated funds are his trading profits."

36. The evidence of Mr Wong Kwai-man, Assistant Chief Manager of the Chekiang First Bank who was called by the plaintiff, was to the effect that he had asked Miss Ki to file the Report shortly after the dealing with the 3rd defendant and Mr Vyplel, and that actually what had occurred was that the 'Taiwanese trading profits' story had come from the 3rd defendant when he had introduced Mr Vyplel to him at the time when the two men first had attended at the bank to open an account. In other words, that this account had been the 3rd defendant's initial explanation in Cantonese, thereafter translated for Mr Vyplel's benefit and concurrence. Thus, argued Mr Sussex, on this version of events the 3rd defendant could not be regarded simply as a passive interpreter, but as someone who was taking the initiative in propounding that which clearly he knew to be an untrue account as to the origin of this money.

37. In his evidence the 3rd defendant denied that events had taken place as Mr Wong Kwai-man of Chekiang First Bank had described, although he could posit no explanation as to why the bank officer had given evidence in the terms that he had. In any event, the 3rd defendant maintained that what apparently had passed between Mr Vyplel and Mr Wong Kwai-man must have taken place between them when the 3rd defendant was no longer in the bank reception room to which the pair had been taken, and at a time when he had gone outside to deal with the account-opening formalities; moreover, he said, the Report to the JIFU itself had attributed the explanation to Mr Vyplel.

38. I do not believe this explanation, and I accept in its entirety the evidence given by Mr Wong Kwai-man, who had a clear recollection of the events which had stimulated the contemporaneous Report, and who gave his evidence in the assured manner of someone who had no axe to grind in these proceedings. I note, moreover, that this evidence was consistent with responses provided on 16 June 2002 by the Chekiang Bank to the solicitors then acting for the plaintiff, when it was stated that the explanations as to the origin of the money were given through Mr Wong, the 3rd defendant. Nor do I perceive any difficulty in the ascription, in the JIFU Report, of the 'Taiwanese profits' explanation to Mr Vyplel. I apprehend that this was an example of one of the ambiguities to which Mr Sussex made reference in characterizing the 3rd defendant's evidence, and in my view there is no necessary inconsistency in such attribution to Mr Vyplel, who was the actual customer for the transactions in question and who evidently did not gainsay what was being said by the 3rd defendant on his behalf.

39. I therefore find as a fact that, as Mr Wong Kwai-man described, it was the 3rd defendant who first proffered, on behalf of Mr Vyplel, the explanation as to the source of the cash deposited at the Chekiang First Bank, a finding which in itself casts severe doubt upon the 3rd defendant's evidence that Mr Vyplel had told him that the monies which had arrived in Stand Ford's account in the Hongkong Bank had originated from the closing down of a friend's company: if such indeed was what Mr Vyplel had told the 3rd defendant, the question then arises as to why the Chekiang First Bank was given the story that it was.

40. Other subsidiary evidential conflicts arise from the Chekiang First Bank transactions. The 3rd defendant's case appears to be that the opening of a private US$ account with the Chekiang Bank and the deposit of cash into that account took place on the same occasion. He further maintains that he did not know that there was going to be a telegraphic transfer out from that account until deposit of the cash from HSBC. However, Mr Wong Kwai-man's recollection is different. His evidence was that when he met Mr Wong and Mr Vyplel on 9 February at about noon, the 3rd defendant had explained the intention to open a multi-currency savings account with the Chekiang bank and deposit into that account a large sum in cash, that Mr Wong had explained the source of the funds (the Taiwanese trading profits), and that Mr Wong had indicated that Mr Vyplel intended telegraphically to transfer to Liechtenstein the monies so deposited. He further says that the 3rd defendant showed him a completed withdrawal slip in the sum of US$628,000, and said that if the bank agreed to open an account for Mr Vyplel the money would be withdrawn from HSBC.

41. Mr Wong Kwai-man was unshaken in cross-examination, and was adamant that when he met the 3rd defendant and Mr Vyplel they had no cash yet with them. He added that he was away at lunch and was not present when the two men returned with the cash from HSBC. On this factual dispute, I again prefer the evidence of the independent bank officer, and disbelieve the different account put forward by the 3rd defendant. In my view the 3rd defendant knew full well what was going to happen to the cash once it was deposited in the Chekiang Bank, and he knew it before that account had been opened.

42. Looked at in its totality I have great difficulty in accepting, and I do not accept, the 3rd defendant as a witness of truth in his explanation of his involvement with Mr Vyplel and the considerable practical assistance which he gave to Mr Vyplel in terms of the sum of US$1.958 million which had been transferred into the Stand Ford 523 account. Putting it at its lowest, I cannot believe that he was not suspicious about the provenance of these funds or as to what was going on, particularly given the serious attempt to break the 'paper trail' - a well known 'money laundering' technique - when cash physically was transported from the Hongkong Bank for deposit into the new account at the Chekiang First Bank. The basic ingredients of what ultimately took place were set out in the initial email exchanges between Mr Vyplel and the 3rd defendant, who demonstrated a degree of prescience when, in his email reply of 16 January 2000, he stated that he was concerned as to the large sum of money which was to go into the account of Stand Ford, a BVI company: "It like 'BACK MONEY'" was his comment, a phrase the 3rd defendant confirmed in his evidence was meant to read 'BLACK MONEY'.

Liability

43. At the end of this trial counsel requested that this court make a primary finding as to liability, if any, pending argument as to the precise quantum of damage claimed by the plaintiff to be recoverable from the 3rd defendant, a difficulty having been identified by Mr Pow in terms of the constituent elements of the sum of money recovered in the settlement between the plaintiff and Messrs Vyplel and Kriz.

44. After consideration of the available evidence (save for the hearsay evidence of Mr Vyplel and Mr Doubrava, to which I have accorded no weight whatever), and in particular the Wong/Vyplel email exchanges wherein the 3rd defendant tendered advice to Mr Vyplel as to the best method of transmission of monies into Hong Kong and the opening of new accounts, I am left in little doubt that on the balance of probabilities the plaintiff has proved its case on 'knowing assistance'.

45. I say this with regret given the implication of such a finding, and I have reflected at length upon it, but in my judgment this conclusion is unavoidable. It would be stretching credibility beyond reasonable bounds to accept the 3rd defendant's contention that in terms of the events which transpired he never once had suspected what was going on, nor had he questioned Stand Ford's entitlement to the funds which came into, and then out of, its 523 account. Mr Wong must have realized or suspected that this money was not Stand Ford's, and at the least he confidently can be regarded as turning a Nelsonian 'blind eye' in relation to Stand Ford's right to deal with these monies.

46. At the end of the day, I am prepared to hold, and now so do, that the plaintiff succeeds under the 'dishonest assistance' head whether the case is judged according to the objective test in Royal Brunei Airlines, op.cit. or whether the 'combined test' approach in Twinsectra, op.cit. is adopted.

47. In my view it is as plain as a pikestaff that Mr Wong was aware of, or chose to ignore, the basic facts giving rise to the constructive trust imposed upon these monies, and further, that that which he did in connection with these monies in the course of assisting Mr Vyplel amounted to conduct falling short of the standard which would be observed by an honest commercial person in like circumstances. I make this assessment in light of the 3rd defendant's own circumstances and experience, in particular his position as an accountant and finance director. He is a man who palpably understands money and finance, not only in his professional capacity but also as an individual who, on his own evidence, maintains his own BVI company for the purpose of monetary deposit. In short, in my judgment he is both highly intelligent and financially sophisticated.

48. In the context of this assessment, if and in so far as I am wrong in choosing to apply the principles laid down in Royal Brunei Airlines for the purposes of determining accessory liability for dishonest assistance in a breach of trust, I have little difficulty in finding, on the evidence and in the circumstances of this case, that liability should accrue under the Twinsectra test also, in that not only must the 3rd defendant be regarded as having acted dishonestly by the ordinary standards of honest commercial people, but that in addition he himself must have been aware that by those standards he was acting dishonestly.

49. I recognize, of course, that this higher threshold is the more difficult to attain - which may, perhaps, be thought to provide sound reason why in this area of dishonest assistance the objective approach to assessing dishonesty should be adhered to - but in my judgment on these facts the necessary inference as to dishonest knowledge is hard to resist. In this case the existence of a plethora of suspicious circumstances surrounding and attaching to these monetary transactions lead inexorably to the conclusion that as a financial sophisticate the 3rd defendant knew or suspected what he was engaged in, and further that he knew that what he was doing fell short of ordinary acceptable commercial standards.

50. I therefore find the 3rd defendant liable to the plaintiff under this head. So far as the other causes of action are concerned, on the evidence before the court I decline to find liability in terms of 'knowing receipt', nor do I make any finding in terms of the other potential heads of liability - namely conspiracy and the lifting of the corporate veil - which were but faintly trailed by Mr Sussex. In my view Mr Pow, who argued the case on behalf of the 3rd defendant with restraint and good sense, was correct in his submission that the true battleground in this case was that of knowing/dishonest assistance.

51. Liability of the 3rd defendant to the plaintiff thus having been established, absent agreement thereon I await further submissions by the parties on the issues of quantum of damage, interest and costs.