CACV 457/2019
[2021] HKCA 611
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
CIVIL APPEAL NO 457 OF 2019
(ON APPEAL FROM HCCL NO 4 OF 2016)
________________________
BETWEEN
GALLERIA (HONG KONG), LIMITED
1st Plaintiff
COSIMO BORRELLI AND G JACQUELINE FANGONIL WALSH IN THEIR CAPACITY AS THE JOINT AND SEVERAL LIQUIDATORS OF GALLERIA (HONG KONG), LIMITED
2nd Plaintiffs
and
DBS BANK LTD., HONG KONG BRANCH
Defendant
________________________
Before: Hon Kwan VP, Cheung JA and Au JA in Court
Date of Hearing: 9 March 2021
Date of Judgment: 30 April 2021
________________________
J U D G M E N T
________________________
Hon Kwan VP (giving the Judgment of the Court):
Introduction
1. On 1 August 2019, Anthony Chan J handed down his judgment (“the Judgment ”) after a trial of 15 days in June and July 2019. He dismissed the action brought by Galleria (Hong Kong), Limited (“GHK ”) and its liquidators (“Ls ”) on three fraud related causes of action against DBS Bank Ltd, Hong Kong branch (“DBSHK ”), one of GHK’s largest creditors.
2. The plaintiffs claimed that DBSHK is liable to GHK on one or more of three causes of action: knowing receipt, dishonest assistance and fraudulent trading. They alleged DBSHK knew or suspected that the directors of GHK, Cheri and Thomas Fu (“the Fus ”), had perpetrated a fraud in obtaining credit by submitting 19 false bills of lading (“B/Ls ”) in March 2006 but had turned a blind eye. In March 2006, in the course of investigating delays in payment, DBSHK sent 23 B/Ls issued by GHK to the International Maritime Bureau of the International Chamber of Commerce (“ICC-IMB ”) for random checking. The reports issued by IMB (“IMB Reports ”) stated that 19 out of the 23 B/Ls were “false” or “not in order” and advised “extreme caution be exercised” by DBSHK. The plaintiffs alleged that DBSHK failed to take heed of the IMB Reports, deliberately chose not to make obvious inquiries and meaningful investigations which any honest banker would have made, stopped the investigation while it was still incomplete, and continued to lend to GHK. This enabled DBSHK to reduce its own exposure at the expense of other banks that were also financing the business of GHK, and was objectively dishonest. The plaintiffs claimed damages against DBSHK in the sum of US$117,060,849 with interest[1]
3. The judge found the witnesses of DBSHK credible and accepted their evidence that the officers of DBSHK involved with the GHK account had no knowledge of the fraud and did not turn a blind eye to the fraud but had merely treated the IMB Reports as inconsistencies found in the B/Ls. He also found it inherently improbable that the officers of DBSHK would have any motive to ignore or assist the fraud, and concluded that DBSHK had not committed any act of unconscionability on the facts of the case.
4. This is the plaintiffs’ appeal against the Judgment. It turns on the judge’s findings as to the state of mind, integrity and credibility of the witnesses, whose evidence was received by him at first-hand and it was in the judge’s presence that “the whole of the evidence unfolded in its living state”. The Court of Appeal must have regard to the advantages enjoyed by the judge. It is well established that the appeal court should only interfere with the trial judge’s findings unless it is satisfied that his conclusion on the facts is plainly wrong. If it is not so satisfied, it should defer to the trial judge’s conclusion even if in some doubt as to its correctness. (Ting Kwok Keung v Tam Dick Yuen & Ors (2002) 5 HKCFAR 336 at §42)
5. The reasons justifying the above approach are not limited to the fact that the trial judge is in a privileged position to assess the credibility of witnesses’ evidence, see the judgments of the Supreme Court of the United Kingdom in McGraddie v McGraddie [2013] UKSC 58 at §3 and of the Privy Council in Central Bank of Ecuador & Ors v Conticorp SA & Ors [2015] UKPC 11 at §6, in which both courts quoted from the judgment of the United States Supreme Court in Anderson v City of Bessemer (1985) 470 US 564 at 574 to 575:
“Duplication of the trial judge's efforts in the court of appeals would very likely contribute only negligibly to the accuracy of fact determination at a huge cost in diversion of judicial resources. In addition, the parties to a case on appeal have already been forced to concentrate their energies and resources on persuading the trial judge that their account of the facts is the correct one; requiring them to persuade three more judges at the appellate level is requiring too much. As the court has stated in a different context, the trial on the merits should be ‘the “main event” … rather than a “tryout on the road” ’ … For these reasons, review of factual findings under the clearly erroneous standard – with its deference to the trier of fact – is the rule, not the exception.”
6. In Central Bank of Ecuador & Ors v Conticorp SA & Ors at §7, Lord Mance also emphasised the need for caution when an appellate court is invited to upset the decision of a trial judge exonerating a party of a want of probity. Such a decision “should not be displaced on appeal except on the clearest grounds”, citing Akerhielm v de Mare [1959] AC 789 at 806. The reasons for this may be found in Mutual Holdings (Bermuda) Ltd & Ors v Hendricks & Ors [2013] UKPC 13 at §28, per Lord Sumption:
“An appellate court is rarely justified in overturning a finding of fact by a trial judge which turns on the credibility of a witness. There are particular reasons for caution in a case like this. The allegation was one of fraud, which fell to be proved to the high standard on which the courts have always insisted, even in civil cases. The critical issues were (i) what was said at an informal and undocumented meeting eight years before the trial, and (ii) what the four personal Defendants believed to be the exposure of the Hendricks and AMPAT to losses that penetrated through the stop loss layer. Any findings about these matters necessarily had to be based on the oral evidence of those Defendants and of Mr Bossard and Mr Agnew. The Judge had to assess their character, the honesty and candour of their evidence, and the quality of their recollection. As Lord Hoffmann observed in Biogen Inc v Medeva Plc [1997] RPC 1, 45, ‘The need for appellate caution in reversing the judge's evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans une nuance ), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation.’ ”
7. These principles assume that the trial judge has taken proper advantage of having heard and seen the witnesses, and has in that connection tested their evidence by reference to a correct understanding of the issues against the background of the material available and the inherent probabilities (Central Bank of Ecuador & Ors v Conticorp SA & Ors at §8). The Central Bank of Ecuador case is an example in which the trial judge had not taken proper advantage as assumed and the appellant successfully discharged the heavy burden of persuading the Privy Council that the finding of honesty by the courts below did not have a sound basis and the respondents were guilty of a lack of probity.
8. Mr Manzoni, SC, who appeared for the plaintiffs on appeal and below[2] Albert ”), was objectively dishonest, by reference to (a) his actual knowledge of the falsity of the 19 B/Ls; and (b) his wilful blindness to the possibility that Cheri Fu[3] [4]
9. The background facts are obviously important. In a judgment of 207 paragraphs, three-quarters of it are devoted to the facts. It is necessary to relate the facts in some detail before one begins to review the judge’s analysis of the evidence in light of the submissions made to this court. The main dispute turns on the inferences to be drawn from the IMB Reports and the action taken by DBSHK thereafter, which are not in dispute. And, as the judge has remarked, without the establishment of the mental element, this action has no leg to stand on.
10. On the ascertainment of all the relevant facts in this context, it is pertinent to note this passage in the judgment of the English Court of Appeal in Group Seven Ltd & Anr v Nasir & Ors [2020] Ch 129 at §61, which was relied on by Mr Manzoni and quoted by the judge:
“Where the conditions for imputation of blind-eye knowledge are satisfied, a person is treated for the purposes of establishing liability for dishonest assistance as if he had actual knowledge of the relevant facts. We do not think it follows from this, however, that suspicions which fall short of constituting blind-eye knowledge are wholly irrelevant to the question whether an alleged accessory has acted dishonestly. The first stage of the test, as it is now understood, requires the court to ascertain all the relevant facts, including the knowledge and beliefs of the defendant. Even though knowledge, in this context, must now be taken to be confined to actual and blind-eye knowledge, we see no reason in principle why a person’s beliefs may not include suspicions which he harbours, but which in and of themselves fall short of constituting blind-eye knowledge. The existence of such suspicions, and the weight (if any) to be attributed to them, are then matters to be taken into account at the objective second stage of the test. Or to make the same point in a different way, the existence of a legal technique for imputing constructive knowledge, if certain conditions are satisfied, should not be taken as implicitly restricting the scope of the subjective enquiry into a person’s state of mind and beliefs at the first stage. The state of a person’s mind is in principle a pure question of fact, and suspicions of all types and degrees of probability may form part of it, and thus form part of the overall picture to which the objective standard of dishonesty is to be applied.”
The facts
11. The plaintiffs did not call any witness who had first-hand knowledge of the material facts. None of the witnesses of DBSHK had a reliable recollection of the events some 13 years ago. All of them had to rely on the contemporaneous documents to assist them to speak about the events in 2006.
12. The contemporaneous documents produced by DBSHK are extensive and comprehensive, from which the judge was able to get a reasonably good, coherent and reliable picture of what went on before and after the receipt of the IMB Reports, in particular the actions of the officers of DBSHK which reflected their knowledge and thinking at the time. There is no reason to believe there is any real gap in the documentation kept by DBSHK. As the judge has noted, the documents very much speak for themselves and they constitute the most important evidence in this case. The judge emphasised that they should be read with sound common sense and in the commercial context, having regard in particular to the fact that the bank officers were not lawyers and in some instances it is plain that the use of English was not perfect. The judge sought to adopt a realistic approach in examining the documents in the context of the relationship between DBSHK and GHK, bearing in mind in particular that the officers had known this client, granted facilities to it after careful consideration and had monitored the use of such facilities over a period of some three years before the events of March 2006[5]
(1) General background
13. DBS is a public limited company incorporated in Singapore. It carries on a banking business including through a Hong Kong branch, DBSHK. It also carries on banking business in the USA through a Los Angeles agency (“DBSLA ”). Although they were separate branches, DBSLA and DBSHK belonged to the same bank. They were required to and did work closely together.
14. In the 1980s, the Fus established in the USA Galleria Inc and later Galleria USA Inc (each and both together, “GUSA ”). GHK was incorporated in Hong Kong in 2001 as a subsidiary and the sourcing arm of GUSA. The Fus, a married couple, owned and controlled GHK and GUSA. There was a corporate restructuring in 2007. Thereafter, GHK and GUSA came under the Galleria group of companies. The Fus were the only directors of GHK.
15. GHK sourced home furnishings from manufacturers in Mainland China and exported them to the USA, by way of sale to GUSA for onward supply to American retailers, or by direct sale to American retailers.
16. The business of the Galleria group was financed by borrowings from commercial banks in Hong Kong (including DBSHK) and in the USA. In the USA, the facilities were provided by a syndicate of commercial banks (including DBSLA).
17. DBSHK provided facilities to GHK in connection with the export leg of its business from about 2003 until the collapse of the Galleria group in 2009. Through the syndicated facility, DBSLA provided facilities to GUSA in connection with the import leg of its business.
18. The relevant personnel of DBSHK came from three departments within the bank: (a) the Credit Department (“Credit ”), responsible for credit assessment and lending approvals; (b) the Corporate Banking Department (“Business ”), responsible for client relationship and day-to-day account matters; and (c) the Trade Operations Department (“Operation ”), responsible for back office operations.
19. The officers in those three departments with material involvement in respect of GHK’s account were:
For Credit: Monique (Chief Credit Officer for Greater China), Albert (Senior Credit Officer)
For Business: Kitty Chik (“Kitty ”, Senior Relationship Manager), Ida Woo (“Ida ”, Relationship Manager)
For Operation: Lawrence Lam (“Lawrence ”, manager of Operation)
20. They all gave evidence for DBSHK at the trial and were subjected to extensive and searching cross-examination.
21. From June 2003, DBS provided GHK with (a) a short term revolving facility of up to US$5 million and (b) banking facilities of up to US$25 million comprising both import and export facilities.
22. In September 2004, the facilities were revised and increased to US$40 million. In February 2006, the facilities were revised, but remained at US$40 million with the internal limits changed.
23. From at least September 2004 until the collapse of the Galleria group in 2009, the Fus orchestrated and perpetrated an ongoing fraudulent scheme involving the fabrication of B/Ls submitted to lenders to obtain loan facilities and other lines of credit. They created false invoices, shipping documents and other false documentation and recorded false sales transactions in the books and records of GHK. At least 4,975 B/Ls during the aforesaid period were falsified. The goods of some of the falsified B/Ls did not exist. The falsified B/Ls involved financing of US$905 million.
24. In 2011, the Fus were indicted for bank fraud in the US District Court for the Central District of California, Southern Division. They were sentenced to terms of imprisonment in 2013. Thomas Fu is deceased. Both Cheri Fu and the estate of Thomas Fu remain subject to bankruptcy proceedings in the US.
25. As at the end of March 2006, after the receipt of the IMB Reports, GHK’s indebtedness to DBSHK was approximately US$34.9 million. It was reduced to approximately US$7.7 million by the time of GHK’s winding-up order in February 2010. In contrast, GHK’s other main lenders, which included Bank of America, N.A., Hong Kong branch (“BOAHK ”), increased their lending over the same period.
26. In about June 2009, Bank of America (“BOA ”), by then the lead agent of the syndicated facility to GUSA (having replaced DBSLA in 2008), appointed external auditors to conduct a routine field audit of GUSA. The auditors discovered that “the shipper’s actual tracking information indicates that goods were shipped several weeks to months prior to the copies of document provided by the Borrower to the examiner as support for the goods being properly included as in-transit collateral” and concluded that 28 out of 30 B/Ls sampled had been tampered with.
27. The syndicated lenders in Los Angeles held a meeting on 15 June 2009 with the aim of appointing a receiver to GUSA. On 16 July 2009, at the request of its bankers GUSA appointed a chief restructuring officer. On 15 September 2009, the Orange County Superior Court appointed a receiver to GUSA. On 8 October 2009, the US Bankruptcy Court appointed a trustee in the Chapter 11 bankruptcy of GUSA. GUSA’s Chapter 11 bankruptcy was converted to a Chapter 7 liquidation on 13 May 2013 and the liquidation was terminated on 10 October 2013. During the Chapter 11 bankruptcy, the trustee distributed US$4.6 million to GUSA’s secured creditors.
28. BOAHK presented a petition to wind up GHK on 22 July 2009. A winding-up order was made on 8 February 2010. Ls were appointed on 23 July 2010.
29. The writ in this action was issued and served on DBSHK on 16 February 2016. As at the commencement of these proceedings, Ls had received proofs of debt from creditors of GHK of about US$82 million. BOAHK lodged a proof of debt of US$31.6 million. DBSHK’s proof of debt was for US$8.3 million.
(2) 2003
30. DBSLA first had dealings with GUSA in around 2003. It was the lead bank in a syndicated loan with other banks for GUSA. On 23 May 2003, DBSLA signed an agreement for the syndicated loan of up to US$75 million, under which it extended facilities to GUSA of up to US$25 million. The syndicated loan was secured by a first priority lien on all GUSA’s assets and personal guarantees by the Fus and their family trust.
31. DBSLA introduced DBSHK to service the financial needs of GHK. On 6 and 14 June 2003, DBSHK extended various facilities to GHK of up to US$35 million. Such facilities included import L/C facility, document against payment facility (“DP Loan ”) and “unadvised limit for negotiation of export bills with discrepancies under L/C” (“EBLC(D) ”). DBSHK’s facilities were only secured by the Fus’ personal guarantees. At all material times, the facilities granted to GUSA enjoyed a higher degree of security than those granted by DBSHK to GHK.
32. There was a rigorous system of procedure and checks and balance within DBSLA and DBSHK for approving and reviewing credit. It was followed throughout the bank’s relationship with GHK and GUSA. The bank officers were mindful of the need to identify, assess and, if possible, mitigate risks. Lending to a customer was proposed internally by the relevant Relationship Manager in a Credit Memo setting out a detailed analysis of the proposed credit. The Credit Memo must be supported by the superiors of the Relationship Manager, then vetted and approved by a Credit Officer with sufficient authority for the amount, and noted by a more senior Credit Officer (a step known as “credit approval noted” or “CAN ”).
33. Thus, for the GUSA facility in 2003, there was a Credit Memo dated 4 April 2003 setting out an extensive analysis of GUSA’s background, its business and projections. Among the reasons for positive recommendation were “long term business history for more than 20 years” and forecast of more business “if our Hong Kong branch can capture the business of GHK”. The memo was signed off by five bank officers in accordance with the procedure mentioned above.
34. The GHK facility in 2003 was preceded by two Credit Memos of DBSHK dated 30 May 2003 and 5 June 2003. They were similarly detailed documents containing an analysis of, inter alia , the risk for the bank in granting the facility. They were signed off by seven bank officers from both Business and Credit (including Ida, Kitty and Monique).
35. In June 2003, there was an exchange of email between Ida and DBSLA in which it was agreed that DBSLA and DBSHK would cooperate “so that we can have a good understanding and effective monitoring of the Group’s trading flows and patterns to ensure not only good customer service but also risk management”. As noted by the judge, the issue of “trading flows” featured heavily in this case.
(3) 2004 to January 2006
36. The business of Galleria experienced rapid expansion during this period and requests were made to DBS to increase its facilities. Sometimes, shipments were delayed which led to delay in the repayment of loans.
37. Ida prepared a very detailed Credit Memo dated 2 August 2004 for an increase of US$10 million to the export facilities to GHK whilst cancelling the US$5 million revolving loan facility. It referred to “good experience with [GHK’s] bills transactions with majority of our conditions complied with at each operational checkpoint and fast turnaround time” in the past year and recorded that GHK had recently set up a subsidiary in Qingdao under toll manufacturing arrangement. It identified a “key management risk”, being the over reliance on one person, namely Cheri Fu, in the management of the group. It also noted that the DP loans were off-balance sheet[6]
38. This Credit Memo was supported by three officers from Credit at different levels of seniority, including Albert and Monique. Albert signed the Memo with a reference to his email of 9 August 2004, in which he referred to the visits made of Cheri Fu in her Shenzhen office and the new factory in Qingdao. He mentioned the key management risk and went on to identify various structural risks, including the financing of in‑house DP bills as a result of GHK selling to GUSA, and set out mitigating measures. He pointed out that DBS could only monitor the trade flow but not the cash flow, as neither DBSHK nor DBSLA was the transnational bank of GUSA in the US and GHK in Hong Kong. Monique asked for active monitoring of the DP loan period of 45 days. She also asked for a meeting to be arranged with Cheri Fu.
39. As pointed out by the judge, it could be seen from this Memo that credit risk was at the forefront of the bank’s consideration and its officers were at pains to mitigate and monitor it. Further, there was much interaction between Business and Credit with Credit serving the important function to ensure that Business was not carried away with ambitious business expansion at the cost of exposing the bank to unacceptable risk.
40. On 17 August 2004, the facility granted to GHK by DBSHK was increased from US$35 million to US$40 million.
41. On 20 May 2005, DBSLA agreed to increase the syndicated loan up to $82 million, under which the facility it extended to GUSA was increased from US$25 million to US$28 million.
42. The Credit Memo of August 2004 was followed by two interim reviews being Credit Memo dated 29 April 2005 and Credit Memo dated 10 November 2005. In the April 2005 Memo submitted by Ida, it was noted that the DP collection was slow, taking an average of 60 days instead of 45, which resulted in the facility limit being exceeded. The explanation of GHK was that the delay was due to port congestion in the US. DBSHK verified this explanation with an existing customer engaged in the manufacturing of containers and was advised by this customer that the port congestion problem in the US had started six months ago and would become worse. It was recommended to continue the facilities to GHK and a full review would be conducted in August 2005. The Memo was supported by three officers and was approved by Albert on the basis that the Relationship Managers would continue to liaise with GHK to bring down the excess drawing on the DP Loan facility.
43. In mid-2005, DBSHK conducted a trade flow due diligence in GHK’s office and held a discussion with Cheri Fu. From its inspection of the purchase orders and underlying financing record, it was noted that the trade flow was quite similar to the past and the complete trade flow of some transactions was verified.
44. In the November 2005 Credit Memo, it was decided that the in-house DP line would be reduced to avoid “over-financing for Galleria group’s inventory” by DBS. Various key risks were identified and mitigation of the same was discussed. Stronger control and monitoring by DBSLA was imposed, to ensure that GUSA was in good financial position to pay the in-house DP bills which DBSHK had financed. DBSHK was to inform DBSLA if a DP loan was outstanding for 60 days (and before a five-day grace period) so that DBSLA would liaise with GUSA.
45. In around November or December 2005, Credit became responsible also for DBSLA’s lending to GUSA.
46. On 26 January 2006, DBSHK renewed the 2004 facility to GHK at up to US$40 million, but revised the constituent parts in an attempt to achieve a higher degree of security.
(4) March 2006: events relating to the IMB Reports
47. From 8 March 2006, there was much email traffic between DBSHK and DBSLA on the lengthening of the repayment period of the in‑house DP loans. It is pertinent to note that all the relevant documents in this crucial period were circulated among the personnel of different seniority in the three departments within the bank.
48. In the course of the discussion between the two branches, DBSLA identified another issue on 15 March 2006 in that GHK’s B/Ls were consigned to shipper and not the bank and raised a concern that goods under the B/Ls might be released to the buyers notwithstanding that DBSHK was holding the documents. That concern was allayed after checking with Lawrence who advised that “since the full set of [B/L] is being kept at the bank, we are as good as having the title of the goods”.
49. In parallel to the lengthy discussions between DBSHK and DBSLA at the time, DBSLA was in the process of evaluating an increase of the syndicated loan to GUSA from US$82 million to US$100 million. On 15 March 2006, DBSLA advised DBSHK that GUSA “finished a good 2005 achieving 26% sale growth from $237 million to $300 million with $9.5 million pre-tax profit.” On 18 March 2006, an interim credit accommodation to GUSA was made, granting it a temporary one-month increase of the syndicated loan by US$5 million to US$87 million, with DBSLA’s portion increased to US$29.71 million.
50. DBSHK was keen to confirm the “asset conversion cycle” or “trade flow” of Galleria to evaluate the repayment period. In an attempt to ascertain the reason for the delay in DP repayments, Kitty and Ida asked Lawrence “whether there was a way for DBSHK to check the whereabouts of GHK’s goods discreetly in view of the prolonged settlement of the [DP Loans].” In response, Lawrence suggested selecting at random some of the B/Ls of GHK and sending them to ICC-IMB for checking.
51. On 15 March 2006, Lawrence sent an email to ICC-IMB attaching eight B/Ls dated 6 March 2006 relating to goods shipped on the vessel MSC Canberra (“Canberra Request ”). It was stated that DBSHK was conducting a routine check on the B/Ls and asked ICC-IMB to confirm that they had been issued as per the details provided.
52. On 16 March 2006, Lawrence sent two further emails with similar request to ICC-IMB in respect of (1) four B/Ls dated 22 and 24 January 2006 relating to goods shipped on the vessel CMA CGM Hugo (“Hugo Request ”); and (2) one B/L dated 20 January 2006 relating to goods shipped on the vessel MSC Texas (“Texas Request ”).
53. ICC-IMB responded to the Texas Request by email on 16 March 2006 (“Texas Report ”), stating that “B/L appears not to be in order”[7]
54. On 17 March 2006, ICC-IMB responded to the Hugo Request by email to Lawrence (“Hugo Report ”), stating that “the documents referred are not in order” and suggesting “extreme caution be exercised”[8]
55. Lawrence was the only officer who had experience with ICC‑IMB’s service. He gave evidence that he understood the replies of ICC-IMB to mean that the information on the B/Ls was inconsistent with the data which ICC-IMB had obtained. In his experience, there were innocent reasons for it and it was not an infrequent situation[9]
56. Having received the Texas Report and the Hugo Report, Lawrence sent six further emails to ICC-IMB on 17 March 2006 with similar requests in respect of: (1) two B/Ls dated 28 February 2006 relating to goods shipped on the vessel President Wilson (“President Wilson Request ”); (2) two B/Ls dated 3 March 2006 relating to goods shipped on the vessel MSC Valencia (“Valencia Request ”); (3) one B/L dated 19 February 2006 relating to goods shipped on the vessel MV Stellar Bay voyage V.0607E (“Stellar Bay V.0607E Request ”); (4) two B/Ls dated 21 February 2006 relating to goods shipped on the vessel MV Mokihana (“Mokihana Request ”); (5) two B/Ls dated 13 February 2006 relating to goods shipped on the vessel MV Stellar Bay voyage V.0606E (“Stellar Bay V.0606E Request ”); and (6) one B/L dated 6 February 2006 relating to goods shipped on the vessel MV Yun Ji (“Yun Ji Request ”).
57. On 20 March 2006, Kitty sent an email to DBSLA asking for a conference discussion on two issues: (1) port delay in the discharge of goods, which resulted in long DP repayments; and (2) the possibility of goods being released by delivery agent upon telex instruction of GHK despite DBSHK’s possession of the title documents. She stated as follows:
“DBSLA Findings & Our Questions
1) After the commencement of DP report reminder system, DBSLA Operation team has spotted the potential problems of the long unpaid in-house DP. …
So, are the goods really stuck at the pier for 1.5 months ?[10]
2) DBSLA Operation discovered that the Bill of Lading is consigned ‘to the order of the shipper’ and alerted DBSHK on this point. DBSHK Trade Services [i.e. Operation] has confirmed that since we are holding full set of bill of lading, the bank is still controlling the title of the goods. However, both DBSHK Trade Services and DBSLA Operation do not rule out the possibility that the delivery agent may act upon the telex instruction of the shipper (i.e. [GHK]) and release the goods to [GUSA] without our knowledge.
Are the goods already taken out before payment ?
3) DBSHK Trade Services have briefly checked the payment record of other client’s DP bills with shipment from China/HK to LA. The general finding is that payment is within 1 month.
Why does the port congestion problem seem to apply solely to [GUSA] but not to other clients ?
Our Action
In view of the above-mentioned findings[11]
58. On 21 March 2006, Albert responded to Kitty’s email of 20 March stating that Question 2) “will be a fatal finding if this is really the case” and requesting her to work with Operation “on rectifying that structural risk right now”. Monique suggested that the matter should be discussed among themselves “to make sure that we feel comfortable with this credit”.
59. On 22 March 2006, in response to the Canberra, President Wilson, Valencia and Mokihana Requests, DBSHK received a number of reports from ICC-IMB (“Canberra Report ”, “President Wilson Report ”, “Valencia Report ” and “Mokihana Report ”):
(1) Canberra Report: “It appears that all eight bills of lading are false”[12]
(2) President Wilson Report: “It appears that both bills of lading are false”[13]
(3) Valencia Report: “It appears that both bills of lading are false”[14]
(4) Mokihana Report: “It appears that both bills of lading are false”[15]
60. In the early hours of 22 March 2006, Ida sent an email to various DBSLA personnel summarising a telephone conference that day between representatives of DBSHK and DBSLA. It is apparent from the summary that the points raised in the email of Kitty of 20 March 2006 were discussed. Further comments were received from Rosie Jen of DBSLA[16]
61. Kitty forwarded the Canberra Report to Albert at 11:22 am on 22 March 2006, marked “Pls see as per request”. Albert forwarded the same to his superior Kin Hee Leung marked “FYI” at 11:40 am. At 11:52 am, Lawrence, who was in the Shenzhen branch that day, forwarded some of the replies of ICC-IMB to his colleagues in Operation, Anthony Leung and Eric Leong, in an email headed “Suspicious Transactions of Hong Kong Branch”, stating: “We have checked the subject B/Ls with [ICC-IMB] and they replied that their records are inconsistent with the face of the B/Ls. … Please comment the findings from IMB before passing those cases to Credit Control, Credit Approver, RM & Team Heads of CIB.” According to Lawrence’s evidence, reporting the transactions as “suspicious” was part of the procedure of the bank as an “escalation” in the event of discovery of inconsistencies in B/L[17]
62. At 1:02 pm, Albert emailed Kitty asking for the name of the forwarder and the address in Hong Kong regarding the B/Ls in the Canberra Report. In response to this, Kitty sent an email to Yang Ping Choong of Operation at 3:12 pm forwarding the emails of Lawrence and Eric Leong that day and stating as follows:
“Need yr assistance. We have recently requested [Operation] to conduced [sic] ICC IMC [sic] search on a number of B/Ls. Reports show that information provided in the B/Ls are inconsistent to their records.
The ocean B/Ls are all issued by UNIVERASL [sic] FREIGHT SYSTEM as the carrier and the delivery agent is AMERASIA SHIPPING LINE (ASL) with a USA contact address.
Credit now instructs me to further investigate the background and standing of this forwarder. Are there means that we could check? Are there any Forwarder Register that we could trace? Please advise.”
63. Danny Liu of Operation replied at 3:17 pm stating that he had assigned Eric Leong to work on those cases immediately in the absence of Lawrence and would revert once more information was obtained. Eric Leong replied to Kitty at 3:52 pm with information on the website of Universal Freight System and the address and telephone number of Amerasia Shipping Line. At 3:58 pm, Yang Ping Choong sent an email to Eric Leong suggesting that he should go through the cases with Kitty to see if other information was required to assist in the investigation and noting “we need to act fast especially if there are fraud elements involved”.
64. At 4:06 pm, Eric Leong emailed Kitty, Ida, Albert and others of Credit to “formally report the suspicious trxns to you for your attention” as Lawrence was on business trip. He stated that Operation had checked with ICC-IMB several B/Ls presented by GHK and ICC-IMB pointed out “the shipping documents presented were probably false documents”. The IMB Reports were enclosed.
65. At 5:04 pm, Albert emailed Monique and Kin Hee Leung to report the conference call with DBSLA on 22 March 2006 and the ICC‑IMB checks. The email read as follows:
“This morning we had a conference call with LA Branch, and as usual they consider the account trouble free. Nevertheless, they agree to check with the customer on the asset cycle period and to verify the possibility whether the customer can take the goods without paying the bills.
However, I would like to draw attention that we have been checking on the bills transaction through a shipping association called International Maritime Bureau. Early this morning, Trade Services [i.e. Operation] received the following email from that association highlighting that some bills of lading are ‘false’. According to Trade Services, such findings are not unusual particularly for those cargos routed through ‘forwarder’. So, this does not necessarily means [sic] ‘fraud’ yet. To dig out the truth, Trade Services has been told to further investigate.
We have discussed this with Peter[18]
Will keep you informed the result of our findings.”
66. On 23 March 2006 at 8:06 am, Albert forwarded the email exchanges with DBSLA to Monique and Kin Hee Leung with the remark “LA Branch does not know the ‘Bill of Lading’ yet.”
67. At 12:34 pm, Albert emailed Ida stating his understanding that Operation “is investigating the bills”. He asked to be provided with the management accounts of GHK for 2005, the management accounts of GUSA for 2005, the DP bills routed through DBSHK, any information on the total export bills of GHK, any information on the cash position of GUSA as of 31 December 2005 and any information on the loan outstanding of the syndicated loan in USA. He stated: “Purpose is tried [sic] to map out with each other thereby deriving a whole picture”.
68. At 10:32 pm and 10:41 pm, ICC-IMB responded to the Yun Ji Request and the Stellar Bay V.0607E Request, stating that each of the two B/Ls “appear to be genuine”, even though ICC-IMB “have dealt with few false bills of lading issued by same NVOCC[19]
69. In the morning of 24 March 2006, DBSLA and DBSHK had a conference call with Cheri Fu to “directly understand the detailed trade flow of the Galleria Group”, as recorded in Ida’s email that day at 7:17 pm. Cheri Fu explained the flow of goods and the reasons for the long settlement of DP loans in some cases. At the end of the discussion, Cheri “once again agreed to the DP payment tenor of 60 days, and she expressed her appreciation to the 5 days grace period”. The email concluded with: “From this call, we reckon that Cheri is very hands-on in the operation of [GUSA] and we have grasped a better understanding on the goods flow under our DP financing. CIB HK [i.e. the Relationship Managers] will further discuss with Credit on any other issues of this Group”. It is not disputed that the IMB Reports were not mentioned during that conference call.
70. At 5:26 pm, Lawrence emailed Kitty, Ida and Anna Au of Business enclosing a summary of the findings of ICC-IMB, and noting “there are two replies from IMB that two B/Ls appear to be genuine”.
71. On 25 March 2006, Amy Low of DBSLA Operation emailed Lawrence to report that she had checked on the internet the movement of a sample container and called the delivery agent Amerasia Shipping Line to check on four B/Ls but they were unable to provide information. She suggested to Lawrence to check with Universal Freight System in Hong Kong.
72. On 28 March 2006 at 11:41 am, Stephen Au of Credit Control Unit emailed Albert reporting that Ida had called to “explain normalcy of the purportedly fraudulent trade transaction” and stating “Unless you are dissatisfied or have other reservation, credit control will consider this case closed”.
73. Albert replied at 11:43 am stating: “I think the case has not been closed as I am still pending for the findings from Trade Finance (they will visit the forwarders to check the vessel route and container box soon).” Stephen responded at 11:43 am with: “Ok, Albert, please keep us in the loop of any new development. There is not much credit control can do except keeping the file open till we hear otherwise.” At 1:06 pm, Albert replied with: “I will keep a close watch on this case as the local exposure in HK is USD 35M and USD 80M in US. Nevertheless, it is my guy [sic] feel that it is not a funny transaction. Hope I am right.”
74. At 5:41 pm, ICC-IMB responded to the Stellar Bay V.0606E Request stating that “though [ICC-IMB] have dealt with few false bill of ladings issued by same NVOCC however this b/l appears to be genuine.”
75. On 12 April 2006 at 9:29 am, Rosie Jen emailed Kitty, Ida and Albert to report on her meeting with Cheri Fu, in which Cheri Fu gave a positive account of the continuing business growth of Galleria and had given DBSLA the mandate to continue as the lead bank to manage an increase to the US syndicated loan from US$82 million to US$100 million, with DBSLA’s portion increasing from US$28 million to US$30 million. A credit memo was prepared by DSBLA to extend the temporary one‑month increase of the facility to GUSA to the end of May 2006.
76. At 10:31 am, Albert emailed Kitty and Ida asking if there had been “any development on the finding of trade bills”.
77. Ida’s reply (which was copied to Lawrence among others) came at 11:10 am and read as follows:
“To summarise the findings of Lawrence of Trade Services, basically we found some of the bills of lading with false information (eg shipment went to somewhere else and container number went to different destinations).
Lawrence has made a call[20]
From the above enquiry, we feel that UFS is a ‘honest’ forwarder and normally it will work according to normal procedures. As for the false information of the B/L which Galleria (HK) submitted, there is a possibility that the original B/L was based on rough information which was changed and updated afterwards, and we were not informed of. However, we cannot verify the truth with UFS or other third party. Since a lot of work has been done by Trade Services on checking the bills, but it is unlikely that we can prove the customer innocence [sic] or guilty purely from this angle, we suggest to put a stop to the investigation work of Trade Services. We seek your consent to this suggestion.
We shall attempt to inspect the goods flow either at Qingdao port side or at LA port side to see if we get further understanding[21] [22]
Lawrence - please see if you may wish to add your comment on your findings.”
78. Albert’s evidence was that he consented to Ida’s suggestion. On 13 April 2006, he forwarded Ida’s email of 12 April to Kin Hee Leung and Monique stating:
“Per below email from HK Branch, there is no further negative findings on the trade bills. At this stage, they are not able to prove the customer is innocent or guilty based on the documentation flow. But at least, the forwarder is perceived to be “honest” according to Trade Services. The next step is to see how to “coordinate” with LA Branch on site inspection of the goods at the port.”
79. It is undisputed that no port inspection took place and no further step was undertaken to investigate the B/Ls. Monique’s evidence on the suggested site inspection was that she had never seen it done before in her career and she could not see how it could be done[23]
80. On 17 April 2006, Monique approved the extension of the temporary one-month increase of the GUSA facility. Albert later signed the memo in support of the extension.
81. On 21 April 2006, DBSLA prepared a Credit Memo to increase the US syndicated loan to GUSA from US$82 million to US$100 million, with DBSLA’s portion to increase from US$28 million to US$30 million. On 24 April 2006, Albert emailed Stephen He of DBSLA seeking clarification on matters arising from the financial analysis on GHK and the Credit Memo of 10 May 2005. Stephen He provided clarification on 25 April 2006. Albert replied on the same day supporting the application of DBSLA, given that the facilities “are secured by the trading assets” and stating: “But please watch the upward trend of the group’s gearing/bank debt (total bank debt as of 31/12/05 amounted to USD 108M including the in-house DP bills booked in DBSHK) and asset conversion cycle. Please continuously work with HK Branch on account monitoring.” The Credit Memo of 21 April 2006 to increase the facility to GUSA was supported by Albert, approved by Kin Hee Leung and CAN by Monique on 25 April 2006.
82. On 31 May 2006, DBSLA signed an agreement for the new US syndicated loan of up to US$100 million, wherein it increased its facility to GUSA from US$28 million to US$30 million.
(5) B/Ls investigation of DBSLA
83. Unbeknownst to DBSHK, in May 2006 DBSLA had identified similar issues with Galleria’s B/Ls and DBSLA Operation conducted an investigation. On 7 June 2006, Rosie Jen sent a memorandum to Yin Fong Lum, DBS’s Managing Director of Global Transaction Service in Singapore, on a meeting on 24 May 2006 giving the status review of Galleria’s B/Ls investigation. She recorded that the following facts were discussed and agreed among all attendees:
“House BL are proofed to be genius [sic] document
There are no suspicion of phantom shipment
However, there are presented evidence that some BLs are irregular”.
84. On follow up and recommendation, she stated:
“Follow up:
On June 9, Andrew[24]
“Recommendation:
I recommend T&O [i.e. Operation] arrive a conclusion for this investigation so that the bank can consider a proper credit and relationship handling of this account.”
85. On 8 June 2006, Aik Lim Kok[25]
“During the meeting with Yin Fong, we discussed about T&O’s investigation. The conclusion by T&O as presented then was that as the house BLs appears irregular, T&O was unable to conclude if there was in fact genuine trade took place, and that we do not understand the logistic and shipment pattern.
During that meeting, I recalled we all agreed that based on what we know about Galleria’s operation, we do not believe there is any phantom shipment but we need to understand the shipping pattern and logistic issue and Ying Fong asked to seek help from Wilson at GTS on the logistic question.
Subsequent to the meeting, with GTS’s clarification, the shipping logistic could be explained, however, the conclusion on accuracy of BL remains (see email from Wilson attached and his comments).”
86. On 9 June 2006, DBSLA had a meeting with Cheri Fu during which she brought up the subject of the B/Ls investigation and said “it is not normal for a bank to track shipments”. DBSLA requested her to ask the freight forwarder “to be more careful when preparing the house bills” as “container seal numbers cannot be the same on different containers” and “if it is possible to list the mother vessel rather than the feeder vessel” on the B/Ls.
87. On 20 June 2006, Rosie Jen emailed Kitty and Ida to inform them of the meeting with Cheri Fu on 9 June and that DBSLA closed the US$100 million syndicated revolver from US$87 million. Rosie informed them of prospective competition for Galleria’s business from BOA and BOAHK that she learned from Cheri. Before the follow up meeting with Cheri Fu, Rosie asked “if there has been any other issues since last telephone conference for clarification on trade cycle flow and T&O’s investigation on BL”.
88. Kitty consulted her colleagues in Business in an email of the same day on the threat from BOA to replace DBS in US and HK. Regarding Rosie’s request if there were outstanding issues to bring up with Cheri Fu at the next meeting, Kitty stated: “The issues we raised last time were somehow answered and I don’t think we have any new one. Furthermore, I don’t think it is appropriate to raise further questions at this juncture, unless we find it really essential. I would like to give a no reply and let GRM run the rest of the show.”
89. Kitty then sent a reply to Rosie Jen on 20 June 2006 stating: “Last conference call[26]
(6) Continuous lending in 2006 and 2007
90. On 7 November 2006, DSBLA prepared a Credit Memo to increase the US syndicated loan from US$100 million to US$130 million, with BOA taking up the additional US$30 million. This was supported by Albert, approved by Kin Hee Leung and CAN by Monique. On 22 November 2006, DSBLA signed the amendment to the US syndicated loan for the increase to US$130 million.
91. Between November 2006 and August 2007, Ida actively considered increasing the facilities to GHK. Albert was more cautious and eventually DBSHK renewed the facility to GHK at the same amount of up to US$40 million. As noted by the judge, the same careful and comprehensive exercise was carried out. The Credit Memo dated 2 March 2007 contained details in relation to “Internal control”, “Key risks” and “Mitigations”.
92. On 17 August 2007, DBS’s Greater China Risk Committee, of which Monique, Kin Hee Leung and Albert were members, discussed the issue of the impact of subprime crisis and decided to ask Relationship Managers and credit officers to identify names for more proactive monitoring. On 29 August 2007, Ida and her colleague Anna Au prepared a memorandum setting out an annual review of the GHK credit and concluded: “Given that the account conduct has been good, and the Group’s overall performance is stable and satisfactory, we reckon that our continuance of existing facilities to [GHK] is warranted.”
(7) 2007 to 2009: Subprime crisis
93. When the subprime crisis in the US surfaced in August 2007, DBS became increasingly cautious especially with borrowers who were dependent on US economy like Galleria.
94. In an email of 25 September 2007 to Ida and Anna Au, Albert noted that GHK frequently asked for excess limits. He asked them to remind GHK to “stick to the discipline” and only use the facilities when the limit was available.
95. In an email of Ida to Rosie Jen dated 24 October 2007, Ida reported a conversation she had with Cheri Fu who brought up her request for limit increase. Her email was copied to Andrew Ko of DBSLA, and her superiors in Business, Peter Chan and Kitty. Ida stated to Rosie:
“As discussed with you over the phone, we are both aware of the fact that our Credit is quite negative about this account, mainly because of the in-house DP limit and the impact of prevailing economic issue driven by sub-prime cases. Despite that we have repeated [sic] explained the client’s business, Albert Mak has been sending out emails to all of us (both to LA & HK) from time to time raising concerns over the client. He did not support any limit increase when we raised client’s request and we then went for a straight internal renewal, and even that he approved with a condition for factory visit. All along, we have not made clear to the client about our Credit’s negative view in order not to upset her thereby preserving the overall relationship and also we hope that we may buy time to persuade our Credit to gradually change mind. However, both you and me have agreed today that this may not be a good way to handle this relationship anymore because our ambiguous stance has caused Cheri’s suspicion on how we think. We are glad that over the phone you have supported us to arrange for the plant visit and bring out the case to Credit for our final appeal. Then we shall let Cheri knows [sic] our credit decision no matter it is yes or no. We shall keep you informed of our moves.”
96. In November 2007, DBS’s credit department for Greater China Credit initiated a review of all its credits, particularly those with US businesses, and worked with Relationship Managers of DBSHK to identify a list of “credit heavy accounts” to be subjected to more regular monitoring. GHK was included in the list.
97. The factory visit contemplated in Ida’s email did not materialize. On 14 November 2007, DBSLA called Albert to ask about the possibility of increase of facilities to GHK. On 15 November Albert emailed Kitty, Ida and Anna Au, copied to Monique, Kin Hee Leung and Peter Chan, to inform them of the enquiry and stated: “[I] remarked that there is not much room for further line increase given the structural risk of HK”.
98. On 20 November 2007, Ida asked Lawrence to select randomly a few B/Ls submitted by GHK for checking by ICC-IMB. Two B/Ls were sent and both matched their information according to the reply of ICC-IMB.
99. On 30 November 2007, Albert reported to Monique among other things that the GHK credit was “under close watch but with no immediate credit concern”. Monique replied with: “Given those concerns, there is an urgency to understand the business better”.
100. On 3 December 2007, following an internal meeting, it was agreed in DBS there should be a rapid portfolio review to identify “red” credits for which reduction should be actively sought and that such attitude should also be adopted for credits booked with corporate investment banking. The identified credits included GHK.
101. On 11 January 2008, Albert researched into the US economy and market and emailed Ida and Kitty (copied to Monique, Kin Hee Leung and Peter Chan) noting that the top four buyers of Galleria accounting for 40% of its sales were impacted by the economic downturn. He suggested that he should be involved in the next meeting with Cheri Fu.
102. Monique forwarded Albert’s email to headquarters, remarking: “Another example of the kind of initiatives that Albert takes in managing our credits. Quiet stuff, and may not lead to anything definitive. But if more of our CAs, and RMs, act like this, DBS would do a lot better than competition.”
103. In Albert’s email of 13 February 2008 to Andrew Ko and Kitty (copied to other colleagues) to address Cheri Fu’s displeasure with the conservative approach of DBSHK and refusal to meet DBSHK, he wrote:
“Overall, I am not saying that the customer will be in trouble, or vice versa. However, the uncertainty of the US economy in recent months, particularly the negative development on the property market segment, urges us to revisit why we still keep ourselves expose to such high risk under the in-house DP (Note: This facility is fully utilized and hard core since the start up of facility). The purpose of the customer meeting is to facilitate us to finalize the credit strategy, i.e. view and actions, towards this line. We are happy to maintain our support if the facility is well structured and we are comfortable with the credit.”
104. On 14 February 2008, Albert, Peter Chan and Kitty spoke and decided to cut the in-house DP Loan facility of GHK of US$20 million and Albert reported this to Monique and Kin Hee Leung. GHK was informed on 7 March. On 10 March 2008, Albert emailed Ida copied to other colleagues to discuss monitoring repayment and noted: “As discussed before, the reduction of USD 20M in-house D/P is just a start of the action strategy on fully exit.”
105. On 4 April 2008, Relationship Managers of DBSLA prepared a Credit Memo for a new US syndicated loan of up to the same amount of US$130 million, to be led by BOA replacing DBS, with DBSLA’s portion remaining at up to US$30 million. Albert approved the new syndicated loan and DBSLA’s facilities, stating in his email of 17 April 2008: “I have signed off your credit memo in respect of the USD 30M facility in view of this line is secured against the pledged of trading assets, ie the borrowing base.” DBSLA signed the agreement for the 2008 facility to GUSA on 30 May 2008.
106. On 7 July 2008, Relationship Managers of DBSLA prepared a Credit Memo for a new bridging facility to GUSA of up to US$15 million for LCs to GHK. This was approved by Albert and on 5 August 2008 DBSLA extended the new facility to GUSA for the purpose of helping to wind down GHK’s outstanding DP loan.
107. In September 2008, Albert had discussion with Ida and the new General Manager of DBSLA, James McWalters, about the relationship of DBSHK and DBSLA with Galleria. In his email dated 11 September 2008, Albert explained: “From my point of view, we may need to consider to fully exit the relationship if the remaining facilities in HK cannot be converted into secured or well-structured line.”
108. On 14 October 2008, Ida, Kitty and Peter Chan met with Cheri Fu and discussed the financial turmoil and Galleria’s business. Ida reported to the others that Cheri had decided to reduce Galleria’s debt level and agreed to reduce the debt in Hong Kong first because the facilities were bilateral and unsecured. Ida further noted in her email:
“3) Cheri asked us about our strategy towards the facilities to Galleria HK so that she can get the company prepared for any actions to be taken. We explained to her that the current financial turmoil has been affecting the whole banking industry and banks are generally more conservative in lending and tend to review on the existing accounts and to further confine the risk. For the Galleria account, we have been in discussion with DBS LA as GRM to go for a conversion of the existing facility (US$15m) to Factoring. We believed that this is a good option for Galleria to continue having funding against its quality accounts receivables. Cheri welcomed this idea and she is keen to hear more about the details from our Factoring Team. …”
109. In her email of 15 October 2008 to Albert, Ida and other colleagues, Monique stated: “The principle we agreed on earlier should be the guiding principle: that we either put the HK line as part of the US package so that it is secured pari passu with the other facilities; or tie in the HK line directly with cash flow accessible by us.”
110. Ida prepared a Credit Memo dated 16 December 2008 for restructuring the GHK facility by cancelling the DP Loan facility, the Export Invoice Financing facility and the Packing Loan facility, by renewing the EBLC (D) facility of up to US$5 million, and by extending a new Factoring facility of up to US$20 million (via a subsidiary of DBS, DBS Bank (HK) Ltd). The rationale for the change was “to make our facilities in HK rank pari passu to the secured facilities in the US”. The proposed restructuring was approved by Albert.
111. GHK was informed on 8 January 2009 that DBSHK would cancel the Export Invoice Financing facility and the Packing Loan facility, leaving only the EBLC (D) facility to continue. On 18 March 2009, DBS Bank (HK) Ltd extended a Factoring facility of up to US$20 million to GHK[27]
112. There were discussions between Cheri Fu and DSBHK in February and March 2009 on extension of time to pay down the facilities which were cancelled. To reduce the debt in Hong Kong, GUSA sought replacement finance in the US in a syndicated loan led by City National Bank (“CNB ”) of up to US$35 million. On 5 May 2009, DBSLA agreed to participate in the new syndicated loan led by CNB, which was on a pro-rata basis by the existing lenders in the BOA syndicated facility of US$130 million. DBSLA’s participation in the new syndicated loan was in the region of US$8 million.
(8) BOA’s discovery of fraud
113. On 15 June 2009, Ida emailed DBSLA to report that she learned from Cheri Fu that BOA had ordered a regular audit on GUSA but before the audit was completed, BOA sent security guards to the warehouse of GUSA and called a lenders’ meeting that day in the absence of Cheri Fu.
114. BOA informed the lenders’ meeting on 15 June 2009 that a field audit had been conducted since 11 May 2009. On review of a sample of 30 B/Ls, it was found that the on-board dates for 28 B/Ls were changed. BOA learned from the shipping company that the actual shipment dates were 27 to 90 days prior to the dates on the B/Ls. BOA discussed the discrepancy with Cheri Fu on 10 June 2009 and it was agreed that the field audit would continue. However, GUSA informed BOA on the next day that the audit was suspended until further notice. BOA therefore took action and posted security guards to monitor GUSA’s premises and sought approval to appoint a receiver for GUSA.
115. BOA’s request for appointment of a receiver was not supported by the required 60% of the votes at the lenders’ meeting on 18 June 2009. BOA agreed with GUSA to resume the field audit. Other banks requested a lenders’ meeting with GUSA.
116. On 18 June 2009, BOAHK served a demand on GHK for immediate and full repayment of US$30 million. Monique emailed DBSLA on 19 June 2009 noting: “BofA’s situation should be the same as DBS, in that they also have bilateral loans on top of the participation in the syndication. If we think appointing a liquidator is not the best way to get our money back, why do they think differently?”
117. On 23 June 2009, James McWalters reported on the bank group meeting hosted by CNB that day and his subsequent meeting with Cheri Fu:
“BOA conducted their first field exam over the last several weeks and they discovered apparent discrepancies regarding B/L dates and invoice dates. No one else in the bank group regards these ‘apparent’ discrepancies as material, but BOA has transferred the account out of the hands of the relationship officers and put special asset folks in charge of the credit. They asked the bank group to immediately vote to put the client in receivership and move to auction assets. The banks voted down this request (we voted no).
In all my years of banking, I have never seen this kind of behavior. Most of the banks in the syndication are puzzled at BOA behavior and suspect some other motivation. It appears that BOA also used former employees now operating as independent contractors to conduct the exam. From the meeting, knowledge of trade finance by either the examiners or the special assets people is questionable. …
To protect the bank and protect our client, we may have to move with City National Bank and ourselves to take the lead with this credit. Clearly at this juncture, BOA special assets does not have the client interests and simply wants to move to liquidation for B/L date discrepancies (Aik Lim[28]
In the bank meeting, I had to take a lead with CNB and asked CNB to nominate an auditor of world class reputation … which Cheri later agreed would be fine. …
I think by changing auditors we can satisfy BOA while at the same time working with CNB to determine a structure that will work for Galleria going forward. …”
118. James McWalters gave a further update on his meeting with CNB on 24 June 2009. They were in agreement that “BOA has an unknown agenda and is not performing to their fiduciary responsibilities within the bank group”.
119. BOA did not manage to obtain 60% of the votes required to appoint a receiver. On 16 July 2009, a chief restructuring officer was appointed for GUSA. The events leading to the liquidation of GHK and GUSA have been related earlier.
(9) A holistic approach
120. In his analysis of the evidence, the judge emphasised that it is essential to take a holistic view, to try to understand the situation prevailing at the time and to assess the inherent probabilities. Mr Jat Sew Tong, SC[29]
121. First, since 2003, first DBSLA and then DBSHK had maintained a continuous relationship with GUSA, GHK and Cheri Fu. The bank and its officers regarded the entities in the Galleria group as one client. In late 2005, the officers in Credit of DBSHK also became responsible for DBSLA’s lending to all clients with supply chain businesses in Greater China, including GUSA. By March 2006, DBSHK had enjoyed a successful banking relationship with GHK for three years.
122. Second, there was a rigorous system of procedure and checks and balance within the bank for approving and reviewing credit, followed throughout its relationship with GUSA and GHK, as borne out by the Credit Memos, periodic reviews and internal audits. The issues relating to credit were discussed and shared among departments.
123. Third, Albert, who was responsible for handling the bank’s credit to GUSA and GHK, appeared to be a conscientious employee. He took initiative at questioning the frontline officers and doing his own research. He was mindful of the need to strike a balance between business and risk.
124. Fourth, Albert was not the only credit officer involved before and after the IMB Reports. In the first place, credit proposals came from Business (Ida and Kitty in DBSHK, Rosie Jen and her colleagues in DBSLA). There were times when Monique or Kin Hee Leung approved the credit to GHK and GUSA[30]
125. Fifth, all the bank officers all along thought highly of Cheri Fu as a very capable business person and believed Galleria to be a thriving business. The banking relationship continued to be good until 2009. The bank through DBSHK and DBSLA increased or maintained its lending to GHK and GUSA throughout the years. DBSHK only started to reduce its lending to GHK in the latter half of 2008 due to the subprime crisis. Even then, the bank through DBSHK, DBSLA and a subsidiary DBS Bank (Hong Kong) Ltd offered alternative financings to GUSA and GHK.
126. Sixth, the main concern of DBSHK in relation to its lending to GHK was that part of the credit to Galleria was unsecured, which led to a related concern about when and how goods in the export leg might be released. That was the reason for the trade flow due diligence in mid‑2005 and the focus in the bank officers’ minds in March 2006 when they sought to confirm the “asset conversion cycle” or “trade flow” of Galleria to ascertain the reason for delay in DP repayments.
The judge’s reasons for rejecting the plaintiffs’ claim
127. Ls’ case at the trial is that in March 2006, DBSHK’s officers either knew or deliberately turned a blind eye that GHK was defrauding the bank, but they dishonestly did not want to expose GHK’s fraud so as to avoid causing Galleria to collapse and continued to finance Galleria so that the bank could extract itself from the lending in a controlled manner to minimise its loss.
128. The judge rejected Ls’ case because he found the inherent probabilities “stacked against Ls’ case” and “the allegation that bank officers would knowingly ignore a fraud against the bank and continue to approve credit to the fraudster is, on any view, an extraordinary one”[31] [32]
129. The judge did not believe that Albert (and/or Monique) would have made the decision to stop the further investigation of the B/Ls if Albert had any knowledge or belief of fraud. “It was far too serious a matter for him (with or without the approval of Monique) to have taken the responsibility, quite apart from the fact that he had no motive to do so”. And if there was a decision to continue to lend to GHK despite its fraud, “common sense dictates that such an extraordinary decision would unlikely be made without the agreement of the highest level of management of the bank, and not by 2 officers of Credit however senior they were in that department”[33]
130. The judge noted that the IMB Reports were widely circulated between officers of different seniority in three departments. He regarded it “inconceivable for anyone to think of turning a blind-eye to a fraud which many of his colleagues knew of” and “any suggestion that all these colleagues were at the same time turning a blind-eye is, bluntly, untenable”[34]
131. The five officers of DBSHK who were primarily involved at the time gave evidence that they did not understand the replies in the IMB Reports to mean fraud and all shared a belief and conclusion that there was no foul play after some further investigation and considering all the information they knew about Galleria. The judge accepted their evidence. His reasons for so doing have been summarised by Mr Jat as follows.
132. First, the contemporaneous documents show that the bank officers did not have any serious suspicion of foul play[35]
133. Second, Lawrence, who suggested checking with ICC-IMB, was the only person to have any experience with its service. He advised his colleagues that the replies meant that the information on the bills was “inconsistent” with the data which ICC- IMB had, that this was “not an infrequent situation”, and this was “not unusual particularly for those cargoes routed through forwarder”. There were innocent reasons for such inconsistency. Lawrence’s advice and his colleagues’ reliance thereon can be seen in the contemporaneous documents. There is no reason to doubt his evidence that he knew of innocent explanations for the wrong information contained in B/L. Lawrence’s evidence that in his experience, ICC-IMB had used different terminology, including false, not in order and inconsistent, interchangeably to describe discrepancies found in B/Ls was not challenged[36]
134. Third, the checking with ICC-IMB was not to check the authenticity of the B/Ls. Lawrence’s unequivocal evidence, corroborated by Kitty and Ida, was that he proposed the checks not for verifying the authenticity of the B/Ls, but as a possible avenue for Kitty and Ida to find out more about GHK’s trade flow which might explain the lengthening of the tenor of the DP loans. His evidence is consistent with his reference to “routine check” in his emails to ICC-IMB and with his evidence (confirmed by ICC-IMB) that another team at ICC-IMB would carry out an authenticity check[37]
135. Fourth, the reason for sending the B/Ls to ICC-IMB for checking and the focus of the bank officers at the time was a perceived need to understand how and when goods might be released in order to grapple with the problem of the lengthening DP repayments. It was quite likely that this concern had “blind-sighted” the bank officers at the time[38]
136. Fifth, if there were knowledge or serious suspicion of fraud, one would expect the ringing of alarm bells all over the bank. Lawrence’s evidence was telling in that he merely escalated the matter as inconsistencies found in the B/Ls in accordance with the bank’s procedure[39]
137. Sixth, there had been a successful relationship with Cheri Fu and Galleria for three years, during which period there were many meetings with Cheri Fu and visits to the facilities of Galleria in Shenzhen and Qingdao to understand the operation of Galleria and close monitoring of its business. The bank officers had accumulated favourable knowledge and come to trust this client. The lack of prior experience of fraud meant that the officers were less sensitive to the possibility of fraud.[40]
138. Seventh, after March 2006 and up to the exposure of the fraud in 2009, the bank officers continued to manage the credit to Galleria in a normal way much the same as before. Albert and others approved renewals and even increases in lending, whilst continuing to insist on discipline. All these actions were inconsistent with having a serious suspicion of fraud. The suggestion that the officers had buried the fraud is unbelievable[41]
139. Eighth, it was inherently improbable that multiple officers would, with neither personal motive nor collective interest nor discussion, choose to sweep a fraud or suspicion of a fraud under the carpet. It is entirely speculative and without proper evidential basis[42]
This appeal
140. The notice of appeal is a document of 22 pages setting out headings numbered A to Q for the grounds of appeal. There are 60 paragraphs with sub-paragraphs for all the grounds of appeal. Mr Manzoni has grouped all these grounds methodically under five broad headings in his submission and Mr Jat has responded to them in a similar direction. The same scheme will be adopted in this judgment in dealing with the issues on appeal.
141. The five broad headings and the broad contentions under each of them are as follows:
(1) fundamental error in the approach to knowledge (Grounds C, G, H and O)
The judge mischaracterised the plaintiffs’ case, failed to deal with the plaintiffs’ case on knowledge, erroneously conflated knowledge and dishonesty, and failed to make specific findings on Albert’s knowledge and suspicions.
(2) absence of enquiries (Grounds A, D and E)
The judge failed to infer from Albert’s failure to make obvious and easy enquiries that he was dishonest. He failed to consider the possibility that Albert was wilfully blind to the fraud. He impermissibly used Albert’s subsequent conduct to inform his assessment of Albert’s earlier knowledge.
(3) misunderstanding the significance of IMB Reports (Grounds B and D)
The judge erred in his conclusion of what the IMB Reports signified on their face, which tell the reader that 19 B/Ls were “false” or “not in order”. He erred in his consideration of what Albert subjectively understood to be the significance of the IMB Reports and his finding was plainly wrong.
(4) inherent probabilities and motive (Grounds A, D, F and G)
The judge wrongly treated the general inherent improbability that a bank would act dishonestly as the decisive factor in concluding that the defendant was not dishonest. He was wrong to conclude there was no motive for Albert not to expose the fraud of GHK. He was wrong to ascribe significance to the fact that the IMB Reports were widely circulated among many officers of DBSHK.
(5) other errors (Grounds I, J, L, M, N, P, Q)
(a) On the claim for knowing receipt, the judge wrongly treated the lower standard of unconscionability as if it was the same as the higher standard of dishonesty. (b) He was wrong in holding that setting aside the loan agreements was a precondition to establishing liability for knowing receipt. (c) For the claim in fraudulent trading, he applied the wrong test in finding that “knowledge of a number of fraudulent transactions” was insufficient, and was wrong in finding that the defendant was not a party to carrying on GHK’s business for a fraudulent purpose. (d) The judge was wrong to find that Ls’ calculations on quantum are flawed.
142. The defendant filed a respondent’s notice raising two additional grounds upon which it contended that the Judgment should be affirmed:
(1) the plaintiffs’ claims are time-barred under the Limitation Ordinance, Cap 347 (“the limitation issue ”); and
(2) the plaintiffs failed to prove that the alleged misconduct of the defendant caused the loss of US$177,060,949 (“the causation issue ”).
143. The issues raised in the notice of appeal and the respondent’s notice will be considered in the order as stated above.
Fundamental error in the approach to knowledge
144. Mr Manzoni submitted that in considering the central issue whether Albert’s conduct was objectively dishonest in light of his knowledge and suspicions, the judge made a fundamental error to the threshold question: “knowledge of what, and suspicions of what?” In a nutshell, the plaintiffs’ case was that the defendant, through Albert, had actual knowledge that Cheri Fu, in breach of her fiduciary duties, had used 19 false B/Ls to obtain financing from DBSHK. This actual knowledge was coupled with at least suspicion that fraud was a possible explanation for the issues raised by the IMB Reports. Albert made a deliberate decision to stop investigations into the possibility of fraud at a time when the innocence or guilt of Cheri Fu of fraud remained unresolved, without any further reference to ICC-IMB, and without the port inspection to be coordinated with DBSLA that he had mentioned. Hence, his conduct was objectively dishonest in light of his knowledge and suspicions.
145. The plaintiffs’ complaint is that the judge failed to deal with or make findings in relation to the plaintiffs’ case as mentioned above. Mr Manzoni emphasised it had never been part of the plaintiffs’ case that the defendant knew exactly how widespread the fraud was within Galleria. The judge however regarded the hurdle the plaintiffs were required to overcome as being that Albert was “aware that Galleria or GHK was conducting a fraudulent business”[43] [44]
146. Mr Manzoni submitted further that this error led the judge to consider wrongly that the plaintiffs’ case was based substantially on viewing the IMB Reports “with the full benefit of hindsight”[45]
147. He contended that the judge had failed to address the precise breach of fiduciary duties and this is essential for determining liability in dishonest assistance. Had he done so, first he should have concluded that Cheri Fu had breached her fiduciary duties to GHK in obtaining finance by using false B/Ls and next he should have enquired whether the defendant had sufficient knowledge or suspicion of the facts indicating that Cheri Fu was, or might have been, using false B/Ls to obtain finance for GHK, so as to be liable for dishonest assistance of the breach of fiduciary duties of Cheri Fu.
148. He argued that the judge’s statement “a person is dishonest if and only if he is conscious of all the elements of an act which together, by ordinary standards, would render the act dishonest”[46] Barlow Clowes Ltd v Eurotrust Ltd [2006] 1 WLR 1476 at §28; Akai Holdings Ltd v Kasikorn Bank PCL [2010] 3 HKC 153 (“Akai (CA) ”) at §246(12); Menno Leendert Vos v Global Fair Industrial Ltd & Ors , CACV 281/2009, 6 October 2014, at §78; Group Seven Ltd & Anr v Nasir at 174B to C, §104.
149. The judge was further criticised for having conflated knowledge and dishonesty. Instead of applying the two-stage test for dishonesty in Royal Brunei Airlines v Tan [1995] 2 AC 378 at 389C to E[47] [48]
150. Lastly, it was contended that the judge erred in speaking generally about the bank officers and failed to make specific findings as to Albert’s knowledge and suspicions, and had conflated and aggregated the bank officers’ knowledge and suspicions to exonerate Albert.
151. The judge could not possibly have failed to understand the plaintiffs’ case on knowledge as summarised above, as the plaintiffs’ case is obvious to anyone involved in the trial. From the start, Mr Manzoni had these exchanges with the judge in his opening submissions:
“Mr Manzoni:
This summary table is quite a useful summary because it shows that these can’t really be described discrepancies. There is an accumulation of detail and the picture that it paints is really, quite a compelling picture. 19 out of the 23 that have been sent for testing, in fact by this time 19 out of 21, but 19 out of 23 is over 80 per cent of the bills tested were false. …
There are two obvious points that come to mind about that. The first is that anybody would have realised the possibility that the sample of these 23 was representative of the entire business of Galleria. That possibility --
Court:
I don’t know. I suspect that’s spoken with a lot of hindsight. … I’ve been biting my tongue. A lot of this material bites both ways. You are not dealing with people simply not sitting on their hands, or unless you are saying that these are very sophisticated fraudsters, who created this documents to generate some misleading picture, I can understand that. Hence I’m waiting for you to tell me at the end of the day what I should make out of these documents that may cut both ways.
Mr Manzoni:
What you make out, my Lord, ultimately, I can tell you now, is that DBSHK were told, in no uncertain terms, that these bills were false, they represented transactions which did not, and could not, have taken place and, from that, then they need to investigate and get to the bottom of it. What we will see is that they did a little bit, but then it all stopped and they never did get to the bottom of it. The whole thing was left unresolved.
The reason I’m saying that two obvious points arise, one is that, at this stage, when you get 19 out of 23 being false, you know that you have 700 going through your business the year before; if that 19 is representative, you have a major problem. The second point which is obvious is that on your record or at your disposal you have a huge quantity of bills that you could so easily have checked, not necessarily all 700, but you could have checked and they never did it. Had they done so, the whole thing would have demonstrated that the sample was, indeed, representative.
DBSHK’s case, in this respect, is that all they thought this was discrepancies. That’s what they say, that they were common and that they quickly dismissed the possibility of fraud. That is their case. That, we say, simply can’t be right.”[49]
152. Albert was then cross-examined at length on the IMB Reports with the view to demonstrate that on a plain or even cursory reading of the reports, the voyages described in the B/Ls could not have occurred and the only rational conclusion was that the B/Ls were not authentic. Albert gave answers that he treated them as discrepancies, that such thinking did not occur to him at the time and his thinking then was that the information on the B/Ls was wrong, that it was not his understanding at the time the B/Ls were not authentic, and that he just found the two pieces of information inconsistent[50]
“Q. I suggest to you that from this report we have been looking at, the only rational conclusion is that the bills of lading were not authentic.
Mr Jat: My Lord, this is rather argumentative. I’m not sure this witness can help on that sort of question. ‘The only rational conclusion’.
Court: I think all the witnesses -- let me reformulate it. I think this exercise can be rather difficult in the sense that the witnesses now clearly have a lot of hindsight, but they are going back to --
Mr Jat: So do we.
Court: More than once, in fact a number of times, this witness has already told me that in 2006, he didn’t see X, Y, Z. I don’t want to repeat the evidence which is already recorded.
Mr Jat: If my learned friend wanted to put to the witness that this was what he knew and so on, as a fact, that’s fine. That’s fair enough.
Court: That actually was the thinking I had in -- it is actually an opinion, isn’t it? The only rational --
Mr Jat: Yes, exactly.
Court: Because he is a factual witness. … I’m more interested in his state of mind at the time when he was in receipt of this information.”[51]
“Court: I think you have asked enough about these kind of jury points. I’m not a jury, I keep telling you. I know the point.
Mr Manzoni: Very well. By the time you got the e-mail which forwarded the suspicious transactions to you, 19 out of 19 bills of lading were false, weren’t they? That was the report.
Court: I think, again, it may be that it is quite an innocuous point, but on the other hand the way in which you drill on every little thing, I think you should put it more accurately, because that is not how it is described. It is not all 19 were described as false. I don’t know if anything turns on it.
Mr Manzoni: Let’s go back to the e-mail.
Court: If you think this is worthwhile investment of the time. Because the point is -- I think you have more or less beaten the point to death twice. The information was not accurate, the witness accepted that. Whether or not he turned a blind eye over the fraud, that’s the issue.”[52]
153. It is clear from the exchanges of the judge with counsel and from the Judgment that the judge rejected the plaintiffs’ case on knowledge because he accepted the evidence of the witnesses of DBSHK that they did not understand the replies in the IMB Reports to mean that the B/Ls were false in the sense that they were not authentic. There is no substance in the complaint that the judge did not understand the plaintiffs’ case on knowledge, or that he failed to make findings in relation to the plaintiffs’ case on knowledge. There can be no doubt that when the judge referred to “fraud” or “GHK’s fraud”, what he referred to was fraud against the bank, see Judgment at §§155, 168, 178, 182, 192, 193.
154. The judge did not mistake the plaintiffs’ case to be alleging knowledge of a widespread fraud when it was only alleging knowledge or suspicion of fraudulent B/Ls. His analysis showed that he first considered knowledge or suspicion of fraudulent B/Ls, and then later he turned to consider knowledge or suspicion of a more widespread fraud, see Judgment at §§155 and 192. His reference to “fraudulent business” was in the context of Ls’ contention that DBSHK was a knowing party to a fraudulent business, see Judgment at §§192 to 193 and footnote 23. He did not impose a wider hurdle on knowledge requiring the plaintiffs to prove that Albert had knowledge of the fraud more widely, as contended by Mr Manzoni. In any event, the judge found that the contemporaneous documents showed that the bank officers “did not seriously suspect any foul play”[53]
155. Nor did the judge conflate knowledge and dishonesty in applying the two-stage test for dishonesty, in failing to find firstly what the bank officers knew and then to assess whether the sum of such knowledge meant that the officers were dishonest objectively. Prior to his analysis of the evidence, the judge had set out in great detail the matters which the officers knew, as recorded in the contemporaneous documents. As noted in §62 of the Judgment, the contemporaneous documents very much speak for themselves, they may be said to constitute the most important evidence in this case, and Ls’ case is very much based on the documents.
156. As to the statement in §48(2) of the Judgment (that a person is dishonest if and only if he is conscious of “all the elements of an act” which together, by ordinary standards, would render the act dishonest), which the judge attributed to §57 of Group Seven Ltd & Anr v Nasir , Mr Manzoni would appear to be correct that the attribution was wrongly made and that statement would seem to be contrary to the proposition which is supported by the cases he cited that it is not necessary the defendant should know all the details before it had grounds to suspect fraud. Granted there may be an error in this respect, this does not seem to be a matter of consequence; as was rightly submitted by Mr Jat, the plaintiffs have not shown the judge had erred in any material respect in assessing the evidence because of such an error.
157. What is important is whether the judge had correctly applied the two-stage test for dishonesty, having quoted the relevant passages from Royal Brunei Airlines v Tan at389C to E and Group Seven Ltd & Anr v Nasir at §61 in §§48(1) and 49 of the Judgment. It has not been demonstrated that he had erred in applying the law. As mentioned earlier, the judge had taken a holistic approach to try to understand the situation prevailing at the time in ascertaining all the relevant facts for the first stage of the test, including the knowledge and beliefs of the bank officers. He then applied the objective second stage of the test. Inability and even incompetence to see what others may reasonably or readily see is not a manifestation of dishonesty. As submitted by Mr Jat, there is no objective test for whether a person subjectively “connects the dots” of what he knows and comes to see the true picture of fraud. The judge said in §158 of the Judgment:
“This is not a case of negligence, and the court is not concerned with whether the bank officers were acting with sufficient care or competence. Further, there is no sufficient ground to say that what they did was irrational such as to reflect a lack of probity on their part.”
158. Mr Manzoni’s contention that Albert had “actual knowledge” Cheri Fu had, in breach of her fiduciary duties, submitted 19 false B/Ls to obtain bank financing is a challenge to the factual finding of the judge that the bank officers did not have in mind any serious suspicion of fraud, given their knowledge and beliefs at the time. The judge’s reasons for accepting the evidence of the bank officers have been summarised earlier. It would be more convenient to deal with the challenge on the factual finding in considering the other broad grounds of appeal.
159. The remaining complaint is that the judge should have focused on Albert rather than the bank officers collectively and that he had conflated and aggregated the knowledge and suspicions of the bank officers to exonerate Albert. There is no substance in this complaint. As noted by the judge, the allegation of knowledge was put to most of the bank officers in cross-examination. It was the plaintiffs’ case that the knowledge and conduct of DBSHK’s credit officers should be attributable to the bank[54]
160. For the above reasons, it has not been shown that the judge had made any error of law in his approach to knowledge. The first broad ground of appeal must fail.
Absence of enquiries
161. Mr Manzoni submitted that the absence of obvious and easy enquiries by Albert, particularly those he himself identified as necessary, is evidence from which the defendant’s dishonesty can be inferred, because any honest person would have made those enquiries. He prayed in aid Cheung JA’s statement in Akai (CA) at §246(10) (said in the context the fact that the bank in that case was dealing directly with the chairman and chief executive of the company “could not have possibly justified its conduct”): “If the Bank chose not to inquire in unusual circumstances because of fear of offending its customer, they must take with the benefit of not annoying their customer the risk of liability because they do not inquire”.
162. Mr Manzoni argued that the judge should have inferred dishonesty from at least the following: the decision of Albert and Peter Chan not to raise the IMB Reports with DBSLA or Cheri Fu; the decision of Albert not to pursue the port inspection that he regarded as necessary; the decision of Albert to stop the investigation with the innocence or guilt of the fraud of Cheri Fu unresolved; the absence of any report within the bank recording the IMB Reports and their investigation. He referred to Civil Fraud: Law, Practice & Procedure by Grant & Mumford (1st ed) at §34-072: “It is important to have in mind that it is of the essence of establishing a case based on inference from circumstantial evidence that the whole is greater than the individual parts: an allegation of (for example) a dishonest state of mind can therefore be made out by inference from an accumulation of primary facts, none of which on their own would prove the allegation to the requisite standard.”
163. He submitted that the judge’s misconception as to the relevance of absence of enquiries also led to an error on wilful blindness, in that the judge failed to consider the possibility of wilful blindness even though the test for imputing blind-eye knowledge was mentioned in §51 of the Judgment.
164. He also contended that the judge impermissibly used Albert’s subsequent conduct to inform his assessment of Albert’s earlier knowledge and this “retrospective approach” was a significant error. The judge was required to assess knowledge by looking at its accumulation chronologically through the contemporaneous documents; instead, he looked at knowledge in a “conclusionary way” only by reference to the subsequent conduct, and as a result failed to make the conclusions of fact as to Albert’s precise state of knowledge required to assess dishonesty.
165. The above contentions seek to challenge the judge’s finding of fact and his weighing of the evidence. Mr Manzoni had made the submissions before the judge on the inference that should be drawn from the absence of enquiries and blind-eye knowledge[55]
“The point that it would have been easy for DBSHK to confirm whether there was a fraud, much laboured by the Ls, cuts both ways. The fact that DBSHK did not do so despite having no less than US$40M at stake may suggest that its officers did not have any serious suspicion of fraud.”
166. This is a view that the judge was entitled to take. There is no sufficient basis to interfere with the judge’s weighing and evaluation of the evidence. The judge had considered the possibility of wilful blindness but decided on the evidence not to accept Mr Manzoni’s submission there was wilful blindness, finding that “the contemporaneous documents show that the bank officers did not seriously suspect any foul play” (at §156), that the bank officers were “at the material times blind-sighted by the need to understand the trade flow of GHK to enable them to grapple with the problem of the lengthening DP repayments” (at §161), and “there is no adequate reason to doubt the evidence of the bank officers (in particular Albert and Monique) that they did not believe that GHK or Cheri was/were carrying on a fraudulent business” (at §160).
167. As for the complaint that the judge impermissibly used Albert’s subsequent conduct to inform his assessment of Albert’s earlier knowledge, there is no rule in law that prohibits looking at a person’s subsequent conduct to assist in assessing his earlier knowledge. This accords with common sense. The judge was entitled to take into account how the bank officers conducted the banking relationship with Galleria after March 2006 in assessing whether they knew of or suspected fraud on the part of GHK.
168. There is nothing in the complaint that the judge had looked at knowledge in a “conclusionary way” only by reference to the subsequent conduct. As mentioned earlier, the judge had first considered the contemporaneous documents and what they showed to be the bank officers’ knowledge at the time, and then he turned to the subsequent conduct of the bank, finding that such conduct “revealed a perfectly normal and genuine relationship between a bank and a large corporate borrower” (at §175). That was a facet of the relevant circumstances that the judge took into consideration in a holistic approach.
169. For the above reasons, the second broad ground of appeal is rejected.
Misunderstanding the significance of IMB Reports
170. Mr Manzoni submitted that the judge misunderstood the significance of the IMB Reports in two ways. First, he erred in his conclusion of what the reports signified on their face in that he said at §156 of the Judgment:
“It would be wrong to view the IMB Reports with the full benefit of hindsight. The Ls’ case is based substantially on that. Unless one is looking at a B/L knowing that it was fraudulent, the analysis (repeatedly put in cross-examination of DBSHK’s witnesses) that the ship in question could not, according to the IMB Report, have been at the stated destination would not take the matter very far. The information contained in the B/L was wrong. Monique’s evidence was that the wrong B/L might have been provided by GHK. …”
171. Mr Manzoni submitted that the above finding is plainly wrong because on the face of the reports, they told the reader that 19 B/Ls were “false” or “not in order”.
172. Second, he submitted that the judge erred in his consideration of what Albert subjectively understood to be the significance of the reports. In support of this, he referred to parts of Albert’s cross-examination in court[56] [57]
173. This is again a challenge of the factual findings for which Mr Manzoni repeated his submissions before the judge.
174. I agree with Mr Jat the judge did not overlook the IMB Reports had stated that the B/Ls appeared to be “false” or “not in order”. This was mentioned repeatedly in the Judgment at §§93, 94, 97, 116, 122. He accepted the evidence of Lawrence, which was unchallenged, that in Lawrence’s experience, “ICC-IMB had used different terminology, including false, not in order and inconsistent, interchangeably to describe discrepancies found in B/L” (at §164). There is no sufficient basis to find fault with the finding in §156 quoted above.
175. As for the finding that Albert did not know or suspect fraud and that he was a credible witness, there is nothing in Mr Manzoni’s criticism. Albert’s evidence must be considered as a whole, in the proper context and in light of all relevant circumstances, not just selective passages in his cross-examination singled out by Mr Manzoni. The judge had focused on the key issue as guided by the relevant legal principles and given detailed reasons why he accepted the evidence of the bank officers (Judgment, §§43 to 47, 154 to 174, 183 to 184). He had considered the inconsistencies in their evidence, including their testimony in court and their cross-examination by Ls in private examination. He took into account the difficulty of the bank officers in being cross-examined about events which took place many years ago, and that knowledge of hindsight might have compounded that difficulty in that they would have to insulate their minds from the same when they were asked to revisit those events. (Judgment, §§186 to 188) As stated by Leggatt J in Gestmin SGPS S.A. v Credit Suisse (UK) Ltd & Anr [2013] EWHC 3560 (Comm) at §22:
“… the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross‑examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. …”
176. I reject the suggestion that the answers given in the private examination may be more reliable than the testimony of Albert in court. For one thing, the mere fact that “allegations of dishonesty” had not been “made in proceedings against [the defendant]” is immaterial. Another thing is that the manner in which the cross-examination was conducted by Mr Borrelli gives me cause for concern.
177. It is clear from the transcript of the private examination that Ls had been provided with the records of ICC-IMB and the records of DBSHK including the contemporaneous emails. The impression I gather from the transcript of the private examination of Albert over one and a half days is that this was not so much an exercise to ascertain further information from this witness but an attempt to test his responses to the IMB Reports that could be gathered from the contemporaneous documents and to elicit from him a response to Ls’ position which was the plaintiffs’ case in this action[58] [59] [60]
178. The judge was entitled to find on the evidence that the bank officers did not know or suspect a fraud, nor did they turn a blind eye. There is no justification in overturning his assessment of Albert’s evidence.
179. The third broad ground of appeal also fails.
Inherent probabilities and motive
180. Mr Manzoni mounted an attack on the judge’s view that “the inherent probabilities are stacked against the Ls’ case”, that “the allegation that bank officers would knowingly ignore a fraud against the bank and continue to approve credit to the fraudster” is extraordinary, and that “there is no motive for such extraordinary acts of betrayal” by the bank officers (at §178).
181. He contended that an inherent improbability can be “swiftly dispelled by other compelling evidence” and is only a matter to be taken into account when weighing the probabilities. It was submitted that the judge erred in treating the general inherent improbability that a bank would act dishonestly as “the decisive factor in concluding that [the defendant] was not dishonest”. He argued that the judge should have had regard to “countervailing evidence”, which pointed in favour of a conclusion that the defendant was dishonest, and emphasised that the standard of dishonesty is objective. The evidence relied on and the arguments arising may be summarised as follows:
(1) Albert was an experienced and intelligent senior credit officer, and had an otherwise sceptical approach to the credit to GHK. These personal characteristics should be considered in the assessment of his knowledge/dishonesty.
(2) Albert had knowledge that 19 of the B/Ls were false.
(3) Albert had knowledge that fraud having been perpetrated by Cheri Fu was a possibility.
(4) Albert’s actual knowledge was limited to 19 B/Ls, in circumstances where several hundreds of B/Ls were being financed by the defendant each year.
(5) He had a “gut feel” and a “hope” that the 19 false B/Ls were not “funny transaction” (email of Albert to Stephen Au on 28 March 2006 at 1:06 pm) and gave evidence that he trusted Cheri Fu.
(6) He knew on 12 April 2006 (from Ida’s email to him) that the investigation into the IMB Reports and Cheri Fu’s innocence or guilt of fraud, remained unresolved. Although there was no contemporaneous record of the decision to stop the investigation into the IMB Reports, Albert was responsible for bringing the investigation to an end. The “overwhelming inference” in these circumstances is that he did so because he preferred “not to run the risk of discovering the truth”, namely, whether there were issues with GHK beyond the 19 false B/Ls of which he had actual knowledge.
(7) He knew that the syndicated facility of GUSA was dependent on the participation of DBSLA and he was asked to approve its participation with an increase from US$28 million to US$30 million on 22 April 2006.
(8) Monique accepted that it would not be possible to approve DBSLA’s participation when an investigation into fraud was ongoing and Albert must have known about this.
(9) He knew that if he withheld his approval of DBSLA’s participation, the syndicated facility would be unable to proceed, resulting in Galleria being cut off from funding and inevitably collapsing.
(10) He knew that if Galleria collapsed, the defendant’s total exposure to Galleria would have been realised as an actual and immediate loss.
(11) He knew that his role as credit officer was to protect the defendant from sustaining losses.
(12) He knew that it would take time for the defendant to reduce its exposure to Galleria without triggering its liquidation and adopted an approach to the GHK credit in the years after March 2006 consistent with that knowledge. The judge erred in concluding that there was no motive for “such extraordinary acts of betrayal” by the bank officers. Albert was acting in the financial interests of the bank, albeit dishonestly. By the time of Galleria’s collapse in 2009, DBSHK’s exposure to GHK was reduced to about US$7 million.
182. Mr Manzoni submitted that the judge was wrong to state in §180 of the Judgment that the plaintiffs’ case on motive as mentioned above was an afterthought and that such allegation cannot be found in the statement of claim or in the opening of Ls’ case and was only suggested to Albert and Monique in cross-examination. He maintained that this was pleaded in the statement of claim (at §§9 and 214.9, and Sections M.2 and M.3) and the reply (at §§22.2, 154.1 and 154.4), and was mentioned in the plaintiffs’ case summary (at §4) and his oral opening submission[61]
183. Further, he submitted that the judge was wrong to find it “inconceivable for anyone to think of turning a blind-eye to a fraud” in light of the fact that the IMB Reports “were widely circulated between officers of different seniority in 3 departments” (at §183). This was not a case of conspiracy among a group of bank officers. It was just the dishonest decision of Albert to stop investigating and continuing the lending. Monique saw no reason to override his decision. And the judge’s finding that the IMB Reports “could be subject to internal audit by a different team in Singapore headquarters” (at §183) was not supported by evidence.
184. On a proper reading of the Judgment, I do not agree with Mr Manzoni that the judge had treated the general inherent improbability that a bank would act dishonestly as a decisive factor in concluding that the defendant was not dishonest. As has been mentioned before, the judge had considered carefully the contemporaneous documents in chronological order before he turned to a detailed analysis of the evidence, in the course of which he discussed inherent probability and the lack of motive of the officers at §§178 to 184.
185. I agree with the judge that the motive as alleged was not pleaded in the extensive pleadings of the plaintiffs, whether in the statement of claim or the reply. Nor was this raised squarely in those parts of the plaintiffs’ case summary or the plaintiffs’ opening oral submission, to which our attention was drawn. What was mentioned in the pleadings, case summary and opening submission was simply that the defendant reduced its lending exposure to GHK after it learned of the Fus’ fraudulent scheme in March 2006, either by way of actual knowledge alternatively by wilfully being blind to the truth, and encouraged the Fus to procure other banks to increase their lending, thereby giving assistance to and facilitating the ongoing perpetration of the Fus’ fraudulent scheme. There was no allegation that the investigation was stopped as it would not be possible to approve DBSLA’s participation in the syndicated facility with an ongoing investigation, and that the officers did so to avoid bringing about the collapse of Galleria so as to enable DBSHK to exit the lending relationship with GHK in a controlled manner. The alleged motive was only put to Albert and Monique in cross-examination[62]
186. The “countervailing evidence” relied on by Mr Manzoni to support an inference of dishonesty is insufficient for the appeal court to overturn the judge’s primary findings of fact and the inferences he drew from the primary findings. The judge was entitled to and did not make the primary finding that Albert knew 19 of the B/Ls were false. He did so after a thorough consideration and critical scrutiny of the contemporaneous documents in light of the relevant background, having had the opportunity to gauge the personality, the working practices, and motivations of Albert and the other officers who testified in court. The email of Albert to Stephen Au on 28 March 2006 at 1:06 pm that he had a “gut feeling” “it is not a funny business. Hope I am right” is contrary to the suggestion that he knew there was fraud or suspecting fraud but turning a blind eye. It was confirmed to the judge that GHK never defaulted and the loans relating to the 19 B/Ls being the subject matter of the IMB Reports were all repaid[63]
187. As for the decision to stop the investigation, this was proposed by Ida (who also sought Lawrence’s comments), to which Albert consented and Monique endorsed (Judgment, §§121 to 123). The judge found that Ida’s proposal to stop the investigation of Operation was inconsistent with a mind suspecting a serious fraud against the bank. This was balanced with Ida’s evidence of the knowledge and trust she had gained of GHK and Cheri Fu, as she was the Relationship Manager of GHK’s account and the immediate interface between the client and the bank (Judgment, §168). The suggestion that Albert alone was responsible for bringing the investigation to an end does not accord with the evidence. Albert had two seniors in his credit department, to whom he reported his consent to Ida’s proposal to close the investigation. Stephen Au of the Credit Control Unit (separate from the credit department) would also have made a decision to close his file on the matter (Judgment, §§119, 122 and 125).
188. The judge gave valid reasons in §§178 to 182 why he rejected the alleged motive of stopping the investigation to avoid Galleria collapsing so DBSHK could exit from the lending to GHK in a controlled manner to minimise loss. As he had reasoned, this is an extraordinary allegation and it is entirely speculative that any of the bank officers were cahoots with Cheri Fu or GHK. He pointed out that Ls were trying to blow hot and cold, suggesting on the one hand DBSHK did not want to expose the fraud because the other banks would immediately recall the syndicated loan and on the other hand DBSHK was prepared to continue to lend to GHK despite having discovered its fraud. More importantly, the allegation is contrary to the evidence in that DBSHK and DBSLA continued to lend to Galleria for nearly three and a half years until the discovery of fraud by BOA in 2009, that the structuring of the facilities was done in the context of the Subprime crisis, and that the concern over the DP line was identified long before the IMB Reports.
189. The plaintiffs’ present submission that this is not a case of conspiracy among a group of bank officers would seem to be contrary to their pleaded case in the further and better particulars of the statement of claim[64]
190. The criticism made of the finding that the IMB Reports “could be subject to internal audit by a different team in Singapore headquarters” is countered by evidence in the emails showing that there was internal audit by the review team in Singapore of the credit files of DBSHK[65]
191. I reject the contentions under the fourth broad ground of appeal.
Other errors
192. Having failed on the first four broad grounds of appeal on the central issues of knowledge and dishonesty, the plaintiffs’ appeal must be dismissed. The errors complained of in the fifth broad ground do not add anything of significance that may alter the outcome. I will endeavour to deal with them succinctly for the sake of completeness.
(a) and (b) Errors relating to the claim for knowing receipt
193. The alleged error in (a) relates to the state of knowledge for the cause of action in knowing receipt. As stated by Nourse LJ in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 at 455F, “the recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt”. This was recognised by the judge to be “the lowest mental element”[66]
194. I do not think the judge had treated the state of knowledge for knowing receipt as if this is the same for the standard of dishonesty in the other causes of action. The factual case of the plaintiffs is the same regardless of the cause of action. The judge had reasoned as follows in §190: once the plaintiffs’ case on knowledge of fraud or dishonesty is rejected, it is clear that DBSHK was a victim of GHK’s fraud and in any case there is nothing unconscionable on the part of DBSHK. The judge must be right, there is nothing unconscionable for a victim of a fraud to receive back part of its own money. There is no merit in the plaintiffs’ submission.
195. The alleged error in (b) relates to the holding in §§196 and 197 of the Judgment that a claim in knowing receipt must fail where the defendant’s receipt is pursuant to a valid and binding contract; as Ls have not sought to set aside or dispute the loan facility agreements entered into by GHK and DBSHK, it follows that those agreements remained valid and GHK was contractually bound to repay DBSHK.
196. Mr Manzoni argued that the judge was wrong to hold that the setting aside of the loan facility agreements is a precondition for a claim in knowing receipt. He contended that a distinction should be drawn between (a) Cheri Fu entering into the loan agreements whether in breach of fiduciary duty to GHK or without authority; and (b) breach of fiduciary duty of Cheri Fu in transferring GHK’s assets to DBSHK pursuant to the loan agreements. The plaintiffs’ case is based on the latter and it is the knowledge of DBSHK that the transfers of GHK’s assets were effected in breach of fiduciary duty which rendered DBSHK’s retention of those assets unconscionable. Whether the transfers of assets were made pursuant to valid loan agreements is irrelevant to whether the knowledge of DBSHK rendered the retention of GHK’s assets unconscionable.
197. The plaintiffs’ case premised on knowledge of DBSHK that the transfers of GHK’s assets, namely, the repayments of the loans made by DBSHK, were effected in breach of Cheri Fu’s fiduciary duty to GHK is not made out on the facts. It is not strictly necessary to consider the legal arguments in respect of a claim which has been rejected on the facts.
198. In any event, I fail to see where the unconscionability lies. Pursuant to the loan facility agreements, which were validly entered into, DBSHK had made advances to GHK. It had an enforceable legal right to be repaid the loans it had made to GHK. Nor did the plaintiffs impugn the loan facilities extended by DBSHK to GHK after March 2006. There is nothing unconscionable for DBSHK to be repaid the loans it had actually lent to GHK with its own money. There is no question of GHK’s assets having been misapplied in discharging the enforceable liabilities to DBSHK.
199. I do not think the judge had misunderstood the law as explained by Lord Nicholls and Lord Scott in Criterion Properties Plc v Stratford UK Properties LLC [2004] 1 WLR 1846 at §§4 and 27:
“4 … If a company (A) enters into an agreement with B under which B acquires benefits from A, A’s ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A’s ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of “knowing receipt” by B do not arise. So far as B is concerned there can be no question of A's assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. …” (per Lord Nicholls)
“27 … The word ‘receipt’ in the expression ‘knowing receipt’ refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a ‘receipt’ of assets when the contract is completed and the question whether there is ‘knowing receipt’ may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a ‘receipt’ of assets in the sense that a ‘knowing receipt’ involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a ‘knowing receipt’ are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion. …” (per Lord Scott)
200. Contrary to Mr Manzoni’s submission, there is no inconsistency between the above statements of Lord Nicholl and Lord Scott. As stated by Tang VP in Akai (CA) at §35:
“Lord Nicholls’s judgment supports the view taken by Stone J that if the underlying contract was enforceable on the application of familiar principles of agency and company law, questions of ‘knowing receipt’ would not arise because so far as the recipient is concerned there can be no question of the claimant’s assets having been misapplied. Lord Nicholls said in his judgment, that he agreed with Lord Scott and that for the reasons Lord Scott gave, he would dismiss the appeal. It is clear that Lord Nicholls did not regard the judgment of Lord Scott as being in any way inconsistent with his view. Lord Walker agreed with the judgments of both Lord Nicholls and Lord Scott.”
201. See also the judgment of Cheung JA at §§248 and 249. On appeal, the Court of Final Appeal in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479 did not disagree with the above analysis.
202. The loan facility agreements here were not executory contracts and there was receipt of assets pursuant to the completed contracts. The statements of principle of Lord Nicholls and Lord Scott would apply to the present situation. The distinction drawn by Mr Manzoni between entering into the agreements and transferring assets pursuant to the agreements is not a valid one and does not have the support of authorities. The tentative statement of Lord Neuberger NPJ in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) at the end of §147 (that a different result might obtain if the potential recipient acquired knowledge between contracting with the agent and receiving the property) does not provide cogent support for the distinction that Mr Manzoni seeks to draw.
(c) Errors relating to the claim for fraudulent trading
203. The judge stated in §193 of the Judgment that “it is very difficult to see: (a) how knowledge of a number of fraudulent transactions (practised on the bank) can be equated with knowledge that GHK’s business was being carried on with intent to defraud creditors or for a fraudulent purpose; and (b) how knowledge that one is being defrauded can [be] translated into being a party to such fraud”. The plaintiffs contended that the judge had made two errors in law in the above statement.
204. First, in respect of the statement that “knowledge of a number of fraudulent transactions” was insufficient, it was submitted that the judge had applied the wrong test, as the defendant did not have to know every detail of the Fus’ fraud or the precise mechanics of how it was carried out, citing In re Cooper Chemicals Ltd [1978] 1 Ch 262 at 268A to B; Morphitis v Bernasconi [2003] Ch 552 at §46; Morris v Bank of India [2004] BCC 404 at §13.
205. Second, in respect of the statement that the defendant was not a party to the fraud, it was submitted that the judge had misunderstood the plaintiffs’ case. Being party to a fraudulent business means no more than taking part in or concurring in the fraudulent transactions.
206. As I see it, the judge’s statement in §193 is not so much a ruling in law but observations on the facts of this case on a common sense view. Whether knowledge of a single fraudulent transaction or defrauding one creditor could or could not be held to constitute knowledge of a business being carried on with intent to defraud creditors must depend on the nature and context of the transaction. As for the judge doubting how knowledge of being defrauded could translate DBSHK into a party of fraud, he is saying no more that the bank was a victim of the fraud practised on it and it could hardly be said that the bank participated in and concurred with a fraud on itself.
(d) Errors relating to quantum
207. In §199, the judge agreed with Mr Jat’s submission that Ls’ calculations on quantum are flawed. In §198, the judge identified the problem for L/C proceeds and held that in respect of any proceeds received by DBSHK (not confined to the amount of about US$6 million received after its winding up) pursuant to L/C issued by another bank in favour of GHK, they were received by DBSHK in its own right as principal and were not assets of GHK. In §200, the judge pointed out that insofar as Ls’ case on loss is based on proofs of debt received, on Ls’ own case such proofs had not been adjudicated upon and they included the proofs from Cheri Fu and her companies. He expressed the view that it is not clear why such proofs should constitute legitimate claims against DBSHK.
208. The claim advanced before the judge was in excess of US$185 million, summarised in three tables with cross-references to the evidence, and they were produced to the court towards the end of Mr Manzoni’s closing oral submissions. The judge did not find the tables self-explanatory and noted that Mr Jat had no opportunity to make meaningful comment on them. Hence, the judge did not deal with the tables. He found that the plaintiffs have not proved their case on quantum.
209. On appeal, the quantum for the claim in dishonest assistance has been reduced to US$117,060,849, said to comprise the debts owed to creditors of GHK (US$82,314,705) and the amount received by DBSHK (US$34,746,144). Mr Manzoni submitted that the evidence on quantum was largely uncontested and the judge failed to deal with such evidence. He also submitted that the judge was wrong in law in finding that monies received by DBSHK were not recoverable because they were not assets of GHK. He contended they were recoverable because they were assets traceable as representing the assets of GHK.
210. Like the judge, we have received little to no assistance on the tables which are said to summarise the evidence in support of quantum. It would not be appropriate for this court to deal with the submissions relating to quantum. I would only express my agreement with the judge that the assets received by DBSHK in its own right as principal after having negotiated the L/Cs and made payments to GHK are not recoverable as damages. I fail to see how they could be treated as assets traceable as representing the assets of GHK.
211. That deals with all the issues raised by the plaintiffs in this appeal.
212. Mr Jat made brief submissions regarding the two matters raised in the respondent’s notice. They have not been addressed in the Judgment. I will deal with them equally briefly.
The limitation issue
213. On limitation, the defendant’s submission is that Ls cannot avail themselves of section 26 of the Limitation Ordinance, as the plaintiffs have not adduced evidence on how any relevant wrongdoing was concealed, or how it could not have been discovered earlier. Further, as for the Tolling Agreement dated 5 March 2014 made between the plaintiffs and DBSHK[67]
214. The plaintiffs rely on section 26(1)(a) to extend time, contending that the defendant’s fraud is a necessary allegation to each cause of action. Knowledge of the defendant’s dishonesty required at the minimum knowledge of the IMB Reports and the earliest point in time when the plaintiffs learned of the reports was when they were produced to Ls on 3 June 2011. Hence, the proceedings commenced on 16 February 2016 were within time.
215. I am inclined to agree with the plaintiffs on this. It is unnecessary to consider the mutual undertakings in the Tolling Agreement.
The causation issue
216. The defendant’s submission is that the plaintiffs have never explained how the loss of US$117,060,849 as at the date of liquidation on 23 October 2016 can or should be related to the wrongdoing in March 2006. The evidence indicated that even if DBSHK had ceased lending in March 2006, other banks would likely have been willing to continue to lend to GHK.
217. Mr Manzoni submitted there is no requirement in law for any of the three causes of action that the plaintiffs are required to establish the alleged misconduct of the defendant caused the loss of GHK. For dishonest assistance, the defendant would be liable for the losses that resulted from the breach of fiduciary duty it assisted and it is unnecessary to become involved in attempts to assess “the precise causative significance of the dishonest assistance in respect of either the breach of trust or fiduciary duty or the resulting loss” (Grupo Torras SA v Al-Sabah & Anr [2001] CLC 221 at §119; Group Seven Ltd v Nasir at §110(1)). For knowing receipt, the defendant’s liability is to account for the value of the property received from GHK. As the focus is on the defendant’s receipt not GHK’s loss, there is no element of causation involved (Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 at §82). For the claim in fraudulent trading, it requires at most “some nexus” between the loss caused to the creditors by the Fus carrying on of GHK’s business for a fraudulent purpose and the amount for which the defendant is liable (Morphitis v Bernasconi at §§53, 55), so the question is what loss flowed from the Fus carrying on of business for a fraudulent purpose and not what loss flowed from the defendant’s participation.
218. As this contention is unnecessary to the resolution of this appeal, I would only say my tentative view is that the plaintiffs’ submissions relating to the claims for dishonest assistance and knowing receipt would appear to be supported by the authorities cited. I have reservations about the correctness of the plaintiffs’ submission for fraudulent trading.
Conclusion and costs
219. For the above reasons, there is no basis to disturb the judge’s findings of fact on the crucial issue of knowledge and dishonesty. We therefore dismiss this appeal.
220. We have heard submissions on costs. We order the plaintiffs to pay the defendant’s costs of this appeal, save for the costs relating to the respondent’s notice, with a certificate for two counsel.
Postscript
221. I have mentioned earlier that the manner in which the private examination of Albert was conducted gives the court some cause for concern. On 11 December 2013, Ls sent a draft writ of the claims they would bring against DBSHK to the latter. They entered into the Tolling Agreement with DBSHK on 5 March 2014. By the time they conducted private examination of DBSHK’s officers (Lawrence (half day), Kitty (two days), Albert (one and a half days), Monique (half day), Ida (two days), Peter Chan (half day)) in July 2014 and January 2015, Ls had been provided with the IMB Reports and the contemporaneous records of DBSHK including the relevant email exchanges. The writ in this action was issued on 16 February 2016.
222. It is appropriate to serve a timely reminder to liquidators and trustees in bankruptcy that the statutory power given to office holders to conduct private examination must not be abused and should be fairly exercised by them as officers of the court, particularly when such examination is conducted without a presiding judicial officer and the officer-holders have greater liberty to ask questions that might not be permitted in cross-examination in court.
223. The purpose of the private examination is not to give office holders an advantage beyond that available to an ordinary litigant. This wide power given by statute is to enable them to reconstitute the knowledge they should possess in order to discharge their duties to the creditors and contributories. As the courts have emphasised, this power should not be deployed if the office holder is seeking merely to dot the i’s and cross the t’s of a fairly clear claim by examining the witness in an attempt to discover the defence or test the strength of the defence.
(Susan Kwan)
(Peter Cheung)
(Thomas Au)
Mr Charles Manzoni SC, instructed by Lipman Karas and Mr Jason Karas, Solicitor Advocate, of Lipman Karas, for the Plaintiffs (Appellants)
Mr Jat Sew Tong SC and Mr Laurence Li SC, instructed by Herbert Smith Freehills, for the Defendant (Respondent)
[1] The amount claimed before the judge was in the region of US$185 million, see Judgment at §§2 and 201. On appeal, the quantum is reduced to US$117,060,849 according to the notice of appeal.
[2] With Mr Jason Karas
[3] As noted by the judge, no reference was made to Thomas Fu’s wrongdoings in the course of the evidence, probably due to Cheri Fu’s central role in the running of GHK.
[4] In cross-examination, the allegation of knowledge was put to most of DBSHK’s witnesses, but the focus of the allegations of knowledge of fraud before the judge was on the part of Albert and Monique Lau (“Monique ”), the Chief Credit Officer for Greater China. See Judgment, §6. On appeal, the plaintiffs further narrowed the focus on Albert as the “relevant decision maker” for the purpose of assessing dishonesty. Mr Manzoni said in his oral submission that the plaintiffs have not abandoned their case against Monique.
[5] Judgment, §§63, 64
[6] An explanation was provided by Cheri Fu in a discussion with Ida and Kitty in mid-2005 that the D/P loans and associated sales did not appear on the balance sheets because shipping documents under a DP loan belonged to the bank. The Relationship Managers did not agree with this practice. They reached a consensus with Cheri Fu that GHK should provide DBSHK the outstanding D/P loans on a monthly basis so that the figures could be added back to give the whole picture of the trading assets position.
[7] According to the B/L, the port and date of loading was Yantian, China on 20 January 2006 and the port of discharge was Long Beach, CA USA. According to the Texas Report, the container listed in the B/L had been shipped from Chiwan port, China on 4 January 2006 to Europe and was discharged at Fos Sur Mer, France on 10 February 2006.
[8] According to the two B/Ls dated 22 January 2006, the port and date of loading was Yantian, China on 22 January 2006 and the port of discharge was Long Beach, CA USA. According to the Hugo Report, the vessel CMA CGM Hugo was at Long Beach, USA between 23 and 26 January 2006. However, the container listed in the two B/Ls was loaded on board the vessel MSC Queensland at the port of Qingdao and was discharged at Istanbul, Turkey on 1 March 2006.
According to the two B/Ls dated 24 January 2006, the port and date of loading was Yantian, China on 24 January 2006 and the port of discharge was Long Beach, CA USA. However, the container listed in the two B/Ls was loaded on board the vessel MSC Maeva at Shanghai, China on 30 January 2006 and was discharged in Turkey on 23 February 2006.
[9] Judgment, §95
[10] The question of DBSHK following each finding of DBSLA is italicised.
[11] The “above-mentioned findings” would appear to be the findings of DBSLA as mentioned, not the findings in the IMB Reports.
[12] According to the eight B/Ls, the port and date of loading was Qingdao, China on 6 March 2006 and the port of discharge was Los Angeles, CA USA. According to the Canberra Report, MSC Canberra sailed from Manzanillo, Mexico on 5 March and was bound for Shanghai and could not be at the port of Qingdao on 6 March 2006. One container was loaded on MSC Alexa at the port of Rotterdam on 24 February 2006 and discharged at Santos, Brazil on 11 March 2006; one container was delivered to consignee at Savannah, USA on 14 March 2006; one container was an import container and was discharged at Chiwan, China on 10 March 2006; one container does not exist; and one container was delivered to consignee at New York on 8 March 2006.
[13] According to the two B/Ls, the port and date of loading was Qingdao, China on 28 February 2006 and the port of discharge was Los Angeles, CA USA. According to the President Wilson Report, the vessel was in the port of Los Angeles between 27 February 2006 to 1 March 2006 and was not at Qingdao, China on 28 February 2006. One container was loaded on board MOL Evolution on 25 February 2006 at Nagoya, Japan and was discharged at Shanghai, China on 1 March 2006. One container was loaded on board Kota Berlin at Singapore on 26 February 2006.
[14] According to the two B/Ls, the port and date of loading was Qingdao, China on 3 March 2006 and the port of discharge was Los Angeles, CA USA. According to the Valencia Report, MSC Valencia sailed from Singapore on 27 February 2006 and was bound for Valencia, Spain where she arrived on 11 March 2006 and she was not at Qingdao, China on 3 March 2006. One container was an import container and arrived at Shanghai, China on 15 March 2006. One container was discharged at Tokyo on 1 March 2006 and it was impossible for the same container to reach Qingdao, be re-stuffed and loaded for export.
[15] According to the two B/Ls, the port and date of loading was Qingdao, China on 21 February 2006 and the port of discharge was Los Angeles, CA USA. According to the Mokihana Report, MV Mokihana was in the port of Honolulu, USA between 19 and 21 February 2006 and was not at Qingdao, China on 21 February 2006. One of the containers does not exist. One container was laying in the container yard in USA on 21 February 2006.
[16] Head of Corporate Banking of DBSLA
[17] Judgment, §100
[18] Peter Chan, the Head of Business and supervisor of Kitty.
[19] Non-vessel operating common carrier
[20] Lawrence was unable to recall when his call to Universal Freight System was made, see Judgment at §123.
[21] Ida’s evidence was that what was stated about the inspection of the goods flow was not a continuation of the investigation over the IMB Reports, it was to further understand the trade flow of GHK, see Judgment at §124.
[22] Global Relationship Manager.
[23] Judgment, §127
[24] Andrew Ko, General Manager of DBSLA
[25] Assistant General Manager of DBSLA
[26] The conference call on 24 March 2006
[27] The new factoring facility was ultimately not accepted by GHK, see Agreed Facts §92.
[28] Aik Lim Kok, Assistant General Manager of DBSLA
[29] With Mr Laurence Li, SC
[30] Credit Memos re GHK dated 30 May 2003, 5 June 2003, 2 August 2004, 12 April 2006, July/August 2007; Credit Memos re GUSA dated April 2006, 7 November 2006
[31] Judgment, §178
[32] Judgment, §§181, 182
[33] Judgment, §184
[34] Judgment, §183
[35] Judgment, §156
[36] Judgment, §§95, 99, 107, 122, 157, 164
[37] Judgment, §163
[38] Judgment, §161
[39] Judgment, §162
[40] Judgment, §§160, 161
[41] Judgment, §§155, 175
[42] Judgment, §§178, 180
[43] Judgment, §192
[44] Judgment, §§2 to 4
[45] Judgment, §156
[46] Judgment, §48(2), which the judge adopted from the defendant’s opening submissions.
[47] Quoted in the Judgment at §48(1)
[48] Judgment, §47
[49] Transcript, Day 1, p 147 line 17 to p 150 line 9
[50] Transcript, Day 8, p 4 lines 19 to 20; p 5 line 14; p 6 lines 11 to 12; p 7 lines 2 to 3, 17 to 18, 22 to p 8 line1; p 8 lines 23 to 24; p 10 lines 11 to 12; p 12 lines 1 to 3; p 14 lines 14, 24 to p 16 line 19; p 20 lines 10 to 12; p 27 lines 2 to 4, 20 to p 28 line 3
[51] Transcript, Day 8 p 13 line 9 to p 14 line 9
[52] Transcript, Day 8 p 42 line 17 to p 43 line 11
[53] Judgment, §156
[54] Judgment, §6
[55] Transcript, Day 14, p 75 line 6 to p 78 line 23, p 83 line 21 to p 85 line 3
[56] Transcript, Day 8, p 4 line 1 to p 11 line 2; p 44 lines 3 to 7; p 60 lines 8 to 10; p 102 lines 4 to 15
[57] Transcript of 7 July 2014, p 109 line 13 to p 110 line 5
[58] The private examination was not conducted pursuant to a court order, apparently it was done with the consent of DBSHK. Although a solicitor was engaged by the bank to attend the private examination of its officers, he said very little by way of intervening in the process.
[59] Transcript of 7 July 2014, p 89 lines 1 to 14; p 90 lines 1 to 4; p 91 line 25 to p 92 line 1; p 93 line 9 to p 94 line 1.
[60] Transcript of 7 July 2014, p 98 line 3 to p 100 line 3
[61] Transcript, Day 2 p 20 line 15 to p 25 line 1
[62] Transcript, Day 8, p 51 line 24 to p 52 line 11; Day 9, p 39 line 15 to p 40 line 1; Day 10, p 46 lines 6 to 16; p 70 lines 15 to 24
[63] Transcript, Day 9, p 100 line 17 to p 101 line 1
[64] §§20(i), 23(ii), 26(iv), 27, 31, 33, 35, 37, 39, 42, 45, 48, 51, 53 and 56
[65] Email of the Credit Risk Review team in Singapore dated 9 June 2005 and the response of Ida on 13 June 2005.
[66] Judgment, §43
[67] By the Tolling Agreement, GHK undertakes not to issue proceedings against DBSHK in respect of the claims in the draft writ in this action during the tolling period. In return, DBSHK undertakes provided proceedings are brought within one month after the expiration date, not to assert any limitation defence. The tolling period means the period from and including 1 March 2014 until and including the expiration date which falls one month after the date of service of the first termination notice.