CTO (HK) LTD v. LI MAN CHIU AND OTHERS

HCA5165/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5165 OF 2001

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REASONS FOR DECISION

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Introduction

1. This is an application for discovery in aid of a Mareva injunction.

2. On 1 December 2001, the plaintiff obtained an ex parte Mareva injunction against the defendants. It was discharged by Chu J on 7 December 2001 on the ground of material non-disclosure. But she granted a fresh Mareva injunction upon fortification of damages.

3. By a summons dated 5 February 2002, the plaintiff applied for discovery in aid of the Mareva injunction. The summons first came before me on 22 March 2002, whereupon I disposed of the 1st and 2nd paragraphs and adjourned the balance of the summons for substantive argument. That took place again before me on 3 July 2002. Having heard counsel, I allowed the plaintiff's various applications but extended the time for compliance. These are my reasons.

Background

4. The background leading to this application can be summarised as follows.

5. The plaintiff is a freight forwarder. The 1st defendant is its former managing director. The 2nd defendant is the 1st defendant's wife. She is the plaintiff's former services manager. The 3rd defendant is owned by the 1st and 2nd defendants who are also its directors. At the material times, it was a non-trading entity and functioned as the designated exporter for one of the plaintiff's major customers, Rustan Commercial Corporation in the Philippines ("Rustan").

6. In June 2001, the plaintiff discovered certain misdeeds committed by the 1st defendant in respect of payments concerning Rustan. The 1st and 2nd defendants were asked to resign. The 1st defendant was asked to, and he did, execute an undertaking dated 7 July 2001 in favour of and pay about HK$1 million to the plaintiff. The 1st and 2nd defendants left the plaintiff's employment thereafter.

7. In September 2001, the plaintiff moved office and discovered a box of documents relating to the 3rd defendant. Investigation into the documents revealed further misdeeds on the part of the defendants. On 1 December 2001, the plaintiff commenced the present action and moved ex parte for a Mareva injunction. The plaintiff complained, in essence, that the 1st defendant had caused the plaintiff to short-invoice Rustan and caused the 3rd defendant to invoice Rustan for the services not covered by the plaintiff's invoices; and that the 1st defendant had caused the 3rd defendant to invoice and obtain payments form the plaintiff for warehouse charges that had not been incurred. The plaintiff claims that all defendants are constructive trustees for the moneys misappropriated. It seeks, inter alia, an account and tracing remedies.

8. The Mareva injunction restrains the defendants from disposing of their properties up to a value of HK$8 million.

9. Pursuant to the discovery order made by Chu J when she re-granted the Mareva injunction, the defendants had filed affirmations regarding their assets. They had also filed a list of documents under the ordinary discovery procedure. The list contained only six documents. Dissatisfied with the discovery made so far by the defendants, the plaintiff took out the present summons.

Purpose of discovery order in aid of Mareva injunction

10. To make a Mareva injunction effective, the court has a discretion to order the defendant to make a statement of his assets and to give discovery of documents for the purpose of ascertaining the existence, nature and location of assets and in the case of a proprietary claim, the whereabouts of the missing trust funds : see A v. C [1981] 1 QB 956. The primary purpose of the discovery order is to preserve the assets or property which might otherwise be dissipated notwithstanding the injunction.

11. It is not uncommon that a plaintiff, like the plaintiff here, seeks to invoke section 21of the Evidence Ordinance, Cap.8 for an order that it may inspect and take copies of any entries in a banker's record. The bank may or may not be summonsed before the court when such an application is taken out : see subsection (2).

12. Though the court would not lightly use its powers to order disclosure of full information touching the confidential relationship of banker and customer, such an order is justified even at the early interlocutory stages of an action where the plaintiff sought to trace funds which, in equity, belonged to it and of which there was strong evidence that it had been fraudulently deprived and delay might result in the dissipation of the funds before trial : Bankers Trust Co. v. Shapira [1980] 1 WLR 1274. The plaintiff would normally be required to give an undertaking that such information would be used only for the purposes of the action to trace the funds and not for any other purposes.

13. In Arab Monetary Fund v. Hashim and others (No.5) [1992] 2 All ER 911, Hoffmann J (as he then was) imposed three limits on the Bankers Trust jurisdiction at pp.918e to 920a. First, the plaintiff must demonstrate a real prospect that the information may lead to the location or preservation of assets to which he is making a proprietary claim. For the jurisdiction rests upon the proposition that unless the assets in question can be located and secured, the ultimate determination of ownership of those assets may be frustrated by their removal or dissipation and there will be no point in calling on the third party at the trial to produce the required documents or give the requested information. Second, the jurisdiction is more restricted than a request to a party for general discovery on an issue. When documents are required to be disclosed, the third party should be entitled to the same specificity in the documents he is asked to produce as he would be served with a subpoena. Likewise, if he is asked for information, the questions should be directed with specificity to ascertaining the whereabouts of the assets in question. Third, even if the application is prima facie falling with the Bankers Trust principle, the court needs to balance the potential advantage against the detriment to the person against whom the order is sought, not merely in terms of costs (for which he is ordinarily compensated on an indemnity basis by the terms of the order) but by way of invasion of privacy and requiring breach of obligations of confidence to others.

The defendants' submissions

14. Resisting the application, Ms Cheung, counsel for the defendants, contended that the plaintiff must first establish a strong prima facie face. In this connection, she relied on Omar v. Omar [1995] 1 WLR 1428. There, Jacob J, granting the discovery order, did mention that if there had been no strong prima facie case to trace, the matter would have been different. Ms Cheung submitted that the test of a strong prima facie case in support of the ancillary relief of discovery is higher than that of a good arguable case for the grant of the Mareva injunction.

15. I must confess I have some reservation whether that is a correct proposition. Discovery is an ancillary order made to aid the principal Mareva injunction. It sounds odd if a plaintiff, having satisfied the court that it has a good arguable case and thereby having obtained a Mareva injunction, would have to surmount a higher hurdle in order to obtain the necessary information to ascertain the whereabouts of the defendant's assets in order to secure them from the risks of dissipation. I wonder if Jacob J's formulation of "strong prima facie case" is just synonymous with "a good arguable case". In any event, I do not consider it necessary for me to make a determination on this point. For in my view, even if the test advocated by Ms Cheung is to be applied, the plaintiff has satisfied me that it has indeed a strong prima facie case. I will explain why below.

16. The defendants admit that the funds identified by the plaintiff in its statement of claim, totalling almost HK$8 million, had been paid into the 3rd defendant's bank accounts. For the reasons given by Chu J in her judgment dated 15 January 2002, which I respectfully agree and adopt, the plaintiff no doubt has a strong prima facie case against all the defendants. The defendants so far have not applied to discharge the Mareva injunction. What they did was to raise a new point not previously placed before Chu J. The point was disclosed for the first time in these proceedings in paragraph 8 of the Defence and Counterclaim filed on 30 January 2002. There, the defendants alleged that in late 1993, the 1st defendant and the majority shareholder of the plaintiff, Mr Uria, had entered into a joint venture agreement whereby, among other things, all the invoices for charges against Rustan for the services provided by the plaintiff and the 3rd defendant would be spilt at the ratio of seven to three, and that the plaintiff would reimburse all the charges the 3rd defendant would pay on behalf of the plaintiff in carrying out the freight forward services including warehouse handling charges.

17. I do not wish to say more than what is necessary to dispose of the application before me. This joint venture point obviously needs to be tried. I would only make the following observations :

(1) This point is no doubt important to the defendants' defence here. It may also provide an answer to plaintiff's complaint back in June 2001. But it was not referred to in the deed of undertaking signed by the 1st defendant.

(2) The defendants did not mention this point in their affirmations to support the application to discharge before Chu J on 7 December 2001, when it is only reasonable to assume that they should have put forward this, which is supposedly the strongest point on merits.

(3) The alleged joint venture agreement was an oral one. Given its importance on the operations of the plaintiff and the 3rd defendant, it is odd to say the least that it was not reduced into writing. Ms Cheung pointed to the past dealings between Mr Uria and the 1st defendant and submitted that they had been working on oral agreements or understandings in the past. That may well be the case. But that cannot explain why there is simply no reference to the joint venture agreement at all in any documentary evidence since 1993.

(4) There is no documentary evidence showing the implementation of the terms of the joint venture agreement, including reconciliation of invoices or accounts to reflect the seven to three spilt.

(5) The defendants seek to rely on the affidavit evidence of a former executive director and a former secretary of the plaintiff. But even they did not expressly refer to the joint venture agreement, the best they could say is that they knew there was some kind of business arrangement between the parties.

(6) The plaintiff also seeks to rely on the evidence of some of its former and present employees, including financial controllers. They are not aware of the joint venture agreement or the seven to three spilt.

18. When the joint venture agreement defence is considered against the above observations, I come to the view that this is a rather suspicious point. It does not, as contended by Ms Cheung, dilute the plaintiff's case on merits. Accordingly, I hold that the plaintiff has a strong prima facie case on its claims against the defendants. In principle, it is entitled to the discovery orders sought.

19. This disposed of the primary contention of the defendants. I next consider the scope of the order.

Scope of discovery

20. Paragraph 3 of the summons is an application under section 21 of the Evidence Ordinance. It gives the plaintiffs liberty to inspect and take copies of the defendants' bank statements listed there. Ms Cheung did not have any objection if the four new accounts disclosed in the defendants' affirmations dated 2 April 2002 are to be included as well. But she submits that it is superfluous if paragraph 4 of the summons, which requires the defendants to state what had become of the monies listed in the schedules of the statement of claim, is allowed. Mr Law submitted that the bank statements are source documents. There might be some overlapping between the two paragraphs but the plaintiff is clearly entitled to the order. I agree.

21. Ms Cheung next submitted that the request is too wide in that it asked for bank statements back to July 1995. Given the long lapse of time, there is no real prospect that the information may lead to the location or preservation of the trust monies. It is common ground that money the plaintiff seeks to trace was first deposited in the 3rd defendant's accounts in July 1995. In order to render the tracing exercise effective, it is, in my view, necessary to begin at the starting point. If the point of enquiry starts at somewhere down the line, it is difficult, if not impossible, to perform the task. Following through the movements of funds from July 1995, there is a real prospect that the information so obtained may lead to the location or preservation of the trust monies or properties representing them.

22. As noted, paragraph 4 of the summons principally requires the defendants to disclose what they become of the monies. The requests are detail but not uncommon. The defendants are also asked to state if the monies or properties had been transferred to a third party, whether the third party had further disposed of the same. Ms Cheung complained that the requests must stop at the defendants and cannot go further. For the defendants would not be in a position to tell if any transfer had been made by a third party. Mr Law submitted that such requests should not impose any real difficulty to the defendants. If they do not know, just say so. Again, I agree with Mr Law.

23. Paragraphs 5 to 7 are consequential orders for list of documents, inspection of documents and verification by affirmations. They are not controversial. I found the time imposed to comply with the discovery orders too short and accordingly extended it to 21 days in paragraph 4 and 28 days in paragraph 6.

Costs

24. Having heard counsel, I ordered that costs of the summons including the costs that I reserved on 22 March 2002 be the plaintiff's costs in the cause, to be taxed if not agreed.