NORTHWEST AIRLINES INC. v. SHOUSON CHEN AND OTHERS

Headnote

                Mareva injunction. Claim by Plaintiff that assets subject to the order are trust funds - application by another judgment creditor to vary the order to enable it to satisfy their judgment.

Held. No such variation would be ordered.

1988, No. A4973

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The Applicant is seeking to obtain an order to be made a party to these proceedings and for the mareva injunction which was granted by Mr. Justice Barnes on 13th July 1988 and varied by Mr. Justice Jones on 5th August 1988 to be further varied.

2. The variation they seek is to permit the lst Defendant to effect payment of the judgment debt in their favour in the sum of $611,613.25

3. It is necessary for me to give a very short summary of the background to this litigation.

4. The 3rd Defendant which is a Canadian Company carries on business as atravel agent. The 1st Defendant is a Director of the Company and the Plaintiffs have reason to suppose that the 2nd Defendant, who is the wife of the 1st Defendant has a shareholding therein.

5. In broad terms the Plaintiffs are making a claim against the Defendants for damages for breach of trust, breach of contract, fraud and conversion. It is their case that the Defendants have failed to account to them in respect of moneys they have received for the sale of airline tickets.

6. There is concurrent litigation in this matter in Canada and the Plaintiff's claim that the amount of moneys misappropriated is in excess of Canadian $8 million.

7. Mr. Fok for the Plaintiffs referred me to the Passenger Sales Agency Agreement dated 9th February 1982 made between his clients and the 3rd Defendant. Paragraph 15(b) provides:

"Except as otherwise provided in paragraph (a) of this Article, the Agent shall collect the amount payable for the transportation or other service sold by it on behalf of NORTHWEST. All money collected by the Agent for transportation and ancillary services sold under this Agreement including applicable commissions which the Agent is entitled to claim thereunder, shall be the property of NORTHWEST and shall be held by the Agent in trust for NORTHWEST or on behalf of NORTHWEST, until it has been satisfactorily accounted for to NORTHWEST and settlement made. In particular, the Agent shall not use such monies to engage, directly or indirectly, in any foreign exchange transactions which are intended to obtain for the Agent any monetary advantage in addition to its commission."

8. Mr.Fok contended that it was clear from this paragraph that the 3rd Defendant was holding the moneys they obtained from customers for the Plaintiffs. In other words it was the Plaintiff's money and the 3rd Defendant was holding it as trustee for them.

9. He then went on to argue that his clients had an equitable right to trace the monies. As authority for this he referred to the text on p. 297 and following pages of the 28th edition of Shell on Equity.

10. One consequence of the clear terms of paragraph 15(b) above was that the burden of proving that any moneys held by the 3rd Defendant did not belong to the Plaintiffs lay on them. That is it was incumbent upon the 3rd Defendant to prove that any moneys held belonged to them and not to the Plaintiff.

11. It would appear from the volumnious evidence which was filed in support of the application for the mareva injunction that the 1st Defendant transferred moneys to Hong Kong and that this was applied towards the purchase of a property known as 2902 Shun Tak Centre.

12. This property was sold as a result of the variation of the mareva injunction which was ordered on 5th August. The proceeds of sale are held in a deposit account held in escrow in the joint names of the Plaintiff's and the Defendants' solicitors. It is from these moneys that the Applicant is seeking to satisfy the judgment they obtained in respect of the Banking Facilities they granted to the 1st Defendant.

13. It is relevant to note that 2902 Shun Tak Centre was registered in the 1st Defendant's name and that a substantial part of the purchase moneys were obtained by way of mortgage.

14. Mr. Fok submitted that this did not adversely affect the arguments he was putting forward.

15. The 1st Defendant could be regarded as the alter ego of the 3rd Defendant and the fact that the lst Defendant had transferred the moneys to Hong Kong in no way prevented the Plaintiffs from asserting their rights to claim the moneys.

16. Two judges in Canada and two judges in Hong Kong had made orders on the basis that the Plaintiffs had demonstrated they had a good arguable case and as soon as they had learnt of the Applicant's attempts to enforce their judgment against the funds they had given them notice of their interest therein.

17. Mr. Leong for the Applicants submitted on the authority of The Angel Bell 1980 1 Lloyd's reports 632 that a mareva injunction was only intended to preserve assets. It was not intended to interfere with the property rights of third parties. He also argued that it was premature for the Plaintiffs to attempt to establish a propriety claim at this time. As authority for this he referred to a passage appearing on p. 293 of Carl Zeiss Stiftung v. Herbert Smith & Co. 1969 2 ch 276:

"Now let me apply these principles to the circumstances of the present case. In the first place, it is admitted by the plaintiffs that the defendant solicitors have acted honestly and with complete propriety in receiving these sums that were paid to them as solicitors by the West German foundation. Mr. Harman's contention was that the defendant solicitors knew where the moneys that they received came from and knew that the source was trust funds. In my view this contention fails at the outset. What the defendant solicitors knew was that the moneys came from the West German foundation and they knew of the allegations contained in the proceedings brought against that foundation by the plaintiffs in which they were instructed to act as solicitors for the West German foundation. They knew that claims were being made against the West German foundation that all their property and assets belonged to the plaintiffs or were held on trust for them. But claims are not the same thing as facts. Mr. Harman contended that for the purposes of the present issue all the allegations contained in the statements of claim in both the actions must be taken as true. That will not do.What we have to deal with is the state of the defendant solicitors' knowledge (actual or imputed) at the date when they received payments of their costs and disbursements. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. The claims depended upon most complicated facts still to be proved or disproved, and very difficult questions of German and English law. It is not a case where the West German foundation were holding property upon any express trust. They were denying the existence of any trust or any right of property in the assets claimed by the plaintiffs. Why should the solicitors of the West German foundation assume anything against their clients?

            Consequently, it seems to me that the plaintiffs' claim against the defendant solicitors must fail on the requisite condition of knowledge or notice."

18. I would observe that the circumstances of that case were very different to those which are before me for consideration.

19. I am satisfied that notwithstanding the fact that the Plaintiff's claim against the Defendants is still in its initial stages they have done everything they could to assert their rights to the moneys. They have at least established an arguable case on the basis that the moneys are trust moneys and that they belong to them.

20. I consider that the only realistic way of looking at mareva injunctions is that they are designed to protect the Plaintiffs from having assets which may be available to satisfy a judgment being dissipated by a Defendant. I would accept Mr. Leong's contention that a mareva injunction is not intended to affect the operation of rules relating to insolvency.

21. If I understand the Plaintiff's arguments correctly they are not seeking to obtain any form of priority in an insolvency. What they are trying to do is to assert their rights to money which is theirs. If the Applicant's succeed in this application, the Plaintiffs will effectively be prevented from pursuing their claim. I can see no reason why I should make an order which will have this effect.

22. I will accordingly dismiss this application.