WILSON INTERNATIONAL TRADING PRIVATE LTD v. RAJESH NAMBUDUMADA CARIAPPA AND OTHERS

HCA 1798/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1798 OF 2010

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D E C I S I O N

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Background

1.  The plaintiff, Wilson International Trading Private Ltd (“Wilson”) is a Singapore company which carries on business of trading in coal.  It purchases coal from suppliers in Indonesia and sells coal to customers in Asia. Wilson claims that by a contract in writing made on or about 4 May 2009 (“Employment Contract”), it employed the 1st defendant, Rajesh Nambudumada Cariappa (“Rajesh”), as its Manager to work on a full-time basis, to source coal for Wilson to buy, and to find purchasers with whom Wilson could contract for sale of the coal at a profit.  The 2nd to 6th defendants are companies beneficially owned and/or controlled by Rajesh.  The 7th defendant is Rajesh’s wife who, it is claimed, assists Rajesh in the operation of his companies. 

2.  Wilson claims that in breach of his fiduciary duties and the duties of fidelity which Rajesh owed to Wilson under his Employment Contract, Rajesh had diverted sales of coal from Wilson to the 2nd to 6th defendants, thus enabling his companies to make profits from the fluctuation in the market price of the coal diverted from Wilson and sold to buyers of the companies.  Wilson further claims that Rajesh had entered into unauthorized contracts in Wilson’s name, misappropriated Wilson’s funds, and made secret profits on the coal sold to Wilson.  In gist, Wilson claims from Rajesh and his companies damages in respect of contracts which were claimed to have been wrongfully diverted and assigned from Wilson, and profits received by Rajesh and the other defendants as a result of Rajesh’s wrongful acts. 

3.  The Writ was issued in this action on 9 December 2010.  On 7 December 2010, Wilson obtained an ex parte Mareva injunction, which restrained the defendants from disposing of their assets up to the value of US $7,500,000.  There were also ancillary disclosure orders concerning the defendants’ assets.  On 17 December 2010, the ex parte orders were continued by the court.  On 5 May 2011, after evidence was filed in compliance with the disclosure orders made on 7 December 2010, the defendants applied to discharge the ex parte orders on the ground of material non-disclosure.  They also claim that there was no evidence of dissipation of assets to justify the grant of the Mareva injunction. 

4.  Voluminous evidence has been filed by the parties as to the facts in dispute.  Allegations have been made by each side as to wrongdoing by the other. Whereas Wilson claims that Rajesh had acted dishonestly and fraudulently, Rajesh and the defendants claim in turn that Wilson had fabricated the evidence which it had relied upon to obtain the ex parte orders.  Although the defendants seek the discharge of the ex parte orders, counsel for the defendants concedes that for the Mareva injunction, there is a serious question to be tried. 

Material non-disclosure

5.  In support of the application for discharge of the ex parte orders, the defendants rely on 5 grounds which they say constitute material non-disclosure:

(1)  Wilson failed to disclose that Rajesh was never an employee, but a consultant and non-exclusive contractor of Wilson under a Consultancy Agreement; as such, it is claimed that there is no basis for Wilson to claim that Rajesh was a fiduciary or in breach of any duty of fidelity;

(2)  Wilson had claimed that Rajesh had entered into  unauthorized contracts for the purchase of coal, but in fact the contracts were either signed by Manish Nagpal (“Manish”), the Chief Executive Officer of Wilson who made the affirmation in support of the application for the ex parte orders, or were signed by Rajesh under authorization by Wilson;

(3)  Wilson had relied on Rajesh’s e-mails to a Ms Widjaja, and had claimed that she was related to Rajesh and the 5th defendant, when she is not;

(4)  Wilson had failed to disclose an e-mail dated 10 December 2009 from Rajesh to Manish, which shows that Manish had knowledge of the existence of a company known as “Eastern Energy Resources”, which was to sign a contract with Wilson’s coal supplier.  Rajesh claims that this e-mail is material, since Manish had claimed, in his application for the ex parte orders, that it was only on or after 25 October 2010 that Manish discovered that Rajesh had used his own companies to sign contracts with Wilson’s suppliers and purchasers, and that prior to 25 October 2010, Manish did not have knowledge that Rajesh had his own companies;

(5)  Wilson had relied upon documents which it claims had been retrieved from Rajesh’s laptop computer.  In reliance on reports from a handwriting expert and computer experts, Rajesh claims that the documents claimed by Wilson to have been signed by Rajesh were not in fact signed by him, and that the documents Wilson had produced for the ex parte application were not retrieved from his laptop but were fabricated.

Applicable legal principles

6.  The parties are not in serious dispute as to the legal principles applicable to an application for discharge of an ex parte order on the ground of material non-disclosure.  The test as to materiality is whether the facts not disclosed, being relevant, should have been put in the scales by the ex parte judge (Citibank NA v Express Ship Management Services Ltd [1987] 1HKLR 1184).  It is also clear that the court has a discretion whether or not to set aside the order for material non-disclosure, or to grant a fresh order in circumstances where the non-disclosure was innocent (Yau Xhiu Wah v Gold Chief Investment Ltd HCA 807/2001).

7.  Applying these principles, I will deal with each of the grounds of alleged material non-disclosure, to decide whether the fact alleged not to have been disclosed was material; whether there was non-disclosure; and if there was non-disclosure, whether it was innocent.  If there was any material non-disclosure, I will then consider whether, in the exercise of my discretion, the injunction should be discharged, or a new injunction should be granted. 

The fabrication of documents claim

8.  I will first deal with the claim made by Rajesh, that Wilson had fabricated the documents used to support its claims of Rajesh’s wrongful acts, as this has bearing on all the grounds of non-disclosure relied upon. 

9.  According to Manish, after a decline in Rajesh’s performance in procuring sale and purchase contracts of coal for Wilson, he had a meeting with Rajesh on 25 October 2010.  In the course of the meeting, Manish and Rajesh looked at files contained in Rajesh’s laptop computer which was used by him in the course of his employment.  According to Manish, he noticed that these files contained a number of documents which were unfamiliar to him.  Manish therefore surreptitiously copied some of the unfamiliar files on Rajesh’s laptop into his external hard disk.  It was from these copied files that Manish later discovered all the documents which show the transactions and contracts made by Rajesh, and of which Wilson now complains in these proceedings.  It is Wilson’s case that all the documents produced at the ex parte hearing were from the files which had been copied from Rajesh’s laptop.

10.  Rajesh procured an expert report from Hill & Associates (“Hill”), which conducted tests on Rajesh’s laptop, his external hard disk and the copy hard drive which had been produced by Wilson to the court.  In reliance on Hill’s findings, Rajesh denies Wilson’s claim that the documents produced at the ex parte hearing were copied from his laptop or hard disk. 

11.  Rajesh further relies on the report of a handwriting expert, on the signatures appearing in various documents produced and relied upon by Wilson.

12.  I have indicated at the hearing that, leaving aside the question of whether the purported expert reports are admissible without a court order granting leave to produce such evidence, the court cannot at the interlocutory stage make any conclusive finding on the issues of the authenticity of the documents and the signatures on the documents, without cross-examination of the experts as to (for example) the methodology they used in reaching their findings, and without cross-examination of the factual witnesses on the disputed facts which may be relevant to the experts’ findings.  The purported expert reports of Hill and of the handwriting expert are totally unhelpful and unnecessary at this stage of the proceedings.  They were not referred to at the hearing. 

13.  Apart from denying that the documents produced by Wilson had been copied from his laptop or hard disk, and disputing the authenticity of some of the documents which bear his signature, Rajesh’s case on the documents relied upon by Wilson is either that he had not seen the documents, or had not sent or received the e-mails, and that he had no knowledge as to how Wilson had come into possession of the documents.

14.  From the contents and the sheer volume of the documents produced by Wilson, the suggestion that they could have been falsified would appear to be highly unlikely.  However, it is neither appropriate nor possible to make a finding at this stage on the authenticity of the disputed documents.  Accordingly, it cannot be said that Wilson had failed to make disclosure of the fabrication of any of the documents relied upon by Wilson at the ex parte application.   

The Consultancy Agreement

15.  It is Rajesh’s case that he was not an employee, but an “independent consultant” of Wilson, who was to assist Wilson to source supplies of coal, to develop sales of coal, and to advise on Wilson’s contracts of sale and purchase. Rajesh claims that as consultant, he was free to continue trading with coal companies other than Wilson, and to enter into his own transactions for the sale and purchase of coal during the time of his engagement by Wilson.  Rajesh relies on a Consultancy Agreement in writing dated 8 September 2008, which was entered into prior to the Employment Contract dated 4 May 2009 relied upon by Wilson.  According to Rajesh’s evidence, the Employment Contract was a mere sham, brought into being and signed solely for the purpose of enabling Wilson to establish a representative office in Jakarta, which required Wilson to have a representative executive who would be a resident of Indonesia and who should not be engaged in other business in Indonesia. 

16.  Wilson denies that the Employment Contract was a sham, and claims that both Wilson and Rajesh had, by conduct, accepted that the earlier Consultancy Agreement was superseded by the Employment Contract.  Wilson points to documents which evidence the parties’ acceptance of the existence and binding effect of the Employment Contract.  Wilson further denies that it had ever agreed with Rajesh that he could continue to act as consultant to other companies, or trade in coal in competition with Wilson in his capacity as “consultant”.  Wilson claims that there was no commercial rationale for it to have agreed to engage Rajesh on a non-exclusive basis, and to allow him either to trade in direct competition with Wilson or to act as consultant to other coal trading companies, while at the same time providing Rajesh with access to all its supplier and customer lists and its confidential information and contract documents.

17.  In this regard, I would echo the remarks made in the judgment of Sir Nicholas Browne-Wilkinson VC in the case Dormeuil Freres SA v Nicolian International (Textiles) Ltd [1988] WLR 1362, as to the court’s impossible task at the inter partes stage to resolve disputed facts:

“To discover whether an ex parte order has been improperly obtained, the court first has to consider the evidence as it was at the time of the application for the ex parte order and then a mass of evidence designed to demonstrate that the evidence was misleading or failed to make full disclosure. The real question at the time of the inter partes hearing should not be what has happened in the past but what should happen in the future. On the hearing of the inter partes motion it is impossible to make any concluded findings of fact, yet the court is being asked to reach a conclusion on the issue of non-disclosure without full knowledge of the circumstances. This attempt involves a minute examination of detailed allegations and counter allegations, the exact materiality of which may not be clear to the judge in the interlocutory hearing, in circumstances when that is not necessary for the future conduct of the case.”

For these reasons, the Vice Chancellor concluded that applications for discharge of ex parte orders should, save in exceptional cases, be dealt with at trial.

18.  In this case, the fact of whether the Employment Contract was a sham, and whether Rajesh was authorized to continue to trade in coal with other companies are matters which are hotly disputed and which cannot be resolved at this stage.  The issue therefore is not whether there was non-disclosure of the fact of the Employment Contract being a sham (which Wilson says it was not), or non-disclosure of the fact that Rajesh was authorized to continue to trade with other companies (which Wilson says he was not), but whether Wilson should have disclosed to the ex parte judge the fact of the existence of the Consultancy Agreement, which was signed before the Employment Contract.

19.  Whereas the job responsibilities and the “objectives” defined in the Consultancy Agreement and the Employment Contract are the same, the key difference between the two contracts is that under the Employment Contract, Rajesh was expressly required to devote his full attention to the interests of Wilson.  The remuneration payable to Rajesh under the Consultancy Agreement was expressed as a monthly retainer fee and a 10% share of Wilson’s net profit as commission.  Under the Employment Contract, Rajesh’s remuneration was stated as a monthly salary and a quarterly bonus.  The Employment Contract provides expressly that Rajesh’s services were engaged on a “whole time basis”, that he was to devote himself exclusively to the business of Wilson, and that he should not take up any other work for remuneration, or work in an advisory capacity, or be interested directly or indirectly in any other trade or business, without Wilson’s written approval.  There are no such provisions in the Consultancy Agreement.

20.  It was argued on behalf of Rajesh that the failure to disclose the existence of the Consultancy Agreement is material, since Wilson’s claim against Rajesh and its ex parte application are premised upon the existence of a fiduciary or employment relationship between Wilson and Rajesh.  It is claimed that the Consultancy Agreement supports Rajesh’s claim that he was not an employee, and that this is a complete defence to Wilson’s claims for equitable relief against all defendants.

21.  The Consultancy Agreement was dated some 8 months prior to the Employment Contract.  Whilst it should have been disclosed to complete the history of the relationship between Wilson and Rajesh, I do not consider that the existence and making of the Consultancy Agreement prior to the Employment Contract is material to Wilson’s claims at the time of the ex parte application. Under the Consultancy Agreement, Rajesh as agent is subject to similar fiduciary duties in law not to make secret profits and not to put himself in a position which would create a conflict of interests.  The Consultancy Agreement neither adds to nor diminishes these duties imposed on Rajesh under the Employment Contract, and which Wilson claims to have been breached by Rajesh.

22.  In my judgment, the Consultancy Agreement would not have been put on the weighing scales by the ex parte judge when considering Wilson’s application.  Even if I am wrong on the question of the materiality of the Consultancy Agreement, I accept the explanation offered by Manish that his failure to disclose its existence was innocent, as he had naturally assumed that the earlier Consultancy Agreement had been superseded by the later Employment Contract, as evidenced by Rajesh’s conduct and acknowledgment.  Considering the terms of the Consultancy Agreement and the Employment Contract, and all the other evidence, I would not discharge the ex parte injunction, and would be prepared to grant a new one even if the ex parte injunction should be discharged.

The unauthorized contracts

23.  At the ex parte application, Manish claimed that Rajesh had entered into a series of contracts on Wilson’s behalf without Wilson’s knowledge or authorization.  These include Contract No P 9153N dated 17 November 2009 for Wilson’s purchase of 8,000,000 MT of coal from PT Matra Batubara Sakti (“MBS Contract”).  It was claimed that these contracts imposed huge risks on Wilson as the market for coal was fluid and Wilson would have to bear the heavy losses if the market price of coal was to fall. 

24.  Rajesh’s claim that he was in fact authorized to sign the contracts in question is a disputed matter, and cannot be resolved on the evidence filed at this stage.  Rajesh’s complaint of material non-disclosure is that copies of two of the “unauthorized contracts” produced to the ex parte judge was not signed by Rajesh, but only initialed by him.  The counterparty to these contracts had signed the contracts which were respectively dated 1 December 2009 and 21 December 2009.  I do not consider the difference between the documents having been initialed, or signed, by Rajesh to be material.

25.  Rajesh further claims that the MBS Contract was not signed by him, but was signed by Manish, as the copy of the signature page of the MBS Contract shows.

26.  Further evidence has been filed by Manish to clarify that the document which was signed by Rajesh without authority was the annexure to the MBS Contract (“Annexure”).  The Annexure was in fact exhibited to Manish’s affirmation in support of the ex parte application (“Manish’s 1st Affirmation”). It was signed by Rajesh, and its effect was to convert the purchase price of the coal sold to Wilson under the MBS Contract from a fixed price to a floating price, which exposed Wilson to huge risks in the fluid market in which the price of coal fluctuated.  Although Rajesh complained that the copy of the MBS Contract which bears Manish’s signature was not exhibited to Manish’s 1st Affirmation, Manish explained that the version of the MBS Contract as exhibited had been extracted from the hard drive of Rajesh’s laptop computer, and it did not contain the signing page.  The signature page was subsequently found at another file path on the hard drive.

27.  Having considered paragraphs 60 to 64 of Manish’s 1st Affirmation which deal with Wilson’s claim of unauthorized contracts allegedly made by Rajesh, I do not consider that Wilson had painted a misleading picture to the ex parte judge in relation to the MBS Contract.

Ms Widjaja

28.  One of Wilson’s claims against Rajesh is that he had misappropriated a sum of US $750,000 due to Wilson from one of its suppliers, by agreeing with the supplier that the sum can be used to set off sums due and payable by the 2nd defendant to the supplier.  In Manish’s 1st Affirmation, he had referred to e-mails exchanged between Rajesh and the supplier, including one Ms Widjaja, claiming that she “ought to be related to Rajesh’s fellow shareholder in the 5th defendant”.

29.  Rajesh claims that Ms Widjaja is not in fact related to the 5th defendant at all, and that if Manish had made reasonable and proper inquiries, he should have been aware of that.

30.  I do not consider that Manish’s statement of his belief concerning Ms Widjaja’s connection, or lack of connection, with the 5th defendant can be said to be material, in the light of all the matters placed before the court at the ex parte application.  Counsel for the defendants did not elaborate further to pursue this point raised in his skeleton argument.

The e-mail dated 10 December 2009 and Eastern Energy Resources

31.  Rajesh’s case is that a chain of e-mails dated 10 December 2009 show that by that date, Manish had known that Rajesh was operating other companies, and should have known that Rajesh was trading in coal through these companies. The e-mail correspondence in question consists of an e-mail from Tricia of Lafarge (a purchaser of coal from Wilson), in which complaint was made by Tricia to Manish regarding Rajesh’s request to Tricia that an agreement for Wilson’s sale of coal to Lafarge be signed not by Wilson, but by “Eastern Energy Resources” instead.  Eastern Energy Resources was stated to Tricia to be a “fully owned subsidiary” of Wilson, which is not in fact true.  The e-mail was copied to Rajesh.

32.  According to Manish, on receiving Tricia’s complaint, he had been alarmed and had suspected then that Rajesh was trying to divert Wilson’s sale of coal to a Thai company called “Eastern Energy”.  He confronted Rajesh, who denied that he had used “Eastern Energy”, and claimed instead to Manish that he had made up a story to Tricia, of using a fictional name “Eastern Energy Resources” for a company that did not exist, to sign the contract with Lafarge when the latter proposed to use a smaller but related company of theirs to make the purchase.  Hence, Rajesh had sent an e-mail to Manish on 10 December 2009 to explain this, saying:

“I did not use Eastern Energy, but Eastern Energy Resources.”

33.  In reply to this, Manish had sent an e-mail to Rajesh, saying :

“I can understand your concerns but don’t confuse the things by throwing unrelated company names. I will talk to you tomorrow.”

34.  The witnesses will obviously have to be cross-examined at trial on the background to these e-mails, before the court can decide whose evidence should be believed.  It suffices to say that, at this stage, I do not accept that the chain of e-mails of 10 December 2009 can, on their face, show that Manish knew, or ought to have known, that Rajesh was using his company, “Eastern Energy Resources”, in December 2009 to trade in coal in competition with Wilson.  I do not agree that the injunctive relief sought by Wilson should have been or should now be refused as a result of the alleged delay from December 2009, when (it is claimed) Manish or Wilson ought to have known of Rajesh’s activities through his companies. 

Conclusion on material non-disclosure

35.  I am not satisfied that there had been non-disclosure of any material fact at the time of the ex parte application.  Even if I am wrong, and there were facts which were material, as alleged by Rajesh, and were not disclosed by Wilson, I consider that Wilson’s failure to disclose such facts was innocent, and that if the facts in question had been put before the ex parte judge, they would not have caused the judge to decline the ex parte relief sought. 

36.  Having regard to the entirety of the evidence, including the apparent strength of Wilson’s case and the prejudice which may be sustained by Wilson on the one hand and the defendants on the other, I consider that it is just and convenient to continue the Mareva injunction and not to discharge it.

Risk of dissipation

37.  Wilson has shown a good arguable case for alleging that Rajesh and the other defendants have been involved in fraudulent and dishonest acts against Wilson.  There is and was before the ex parte judge sufficient evidence for the court to infer a real risk of dissipation of the defendants’ assets which would otherwise be available for execution of judgment that may be obtained against them.  I am not satisfied from the evidence that Wilson knew or ought to have known by December 2009 that Rajesh was operating his companies including the 2nd defendant in conducting trade in coal in competition with Wilson.

The scope of the Mareva injunction

38.  According to Manish’s 1st Affirmation, Rajesh and the defendants have been unjustly enriched to the extent of at least US$2,030,878.54.  This sum is said to represent Rajesh’s secret commissions, profits from the contracts diverted from Wilson, and the amount fraudulently set-off from sums due to Wilson.

39.  Counsel for Wilson explained that the Mareva injunction granted on 7 December 2010 was for the sum of US$7,500,000, after taking into account the profits which Wilson calculated it would have earned on the contracts diverted by Rajesh to his companies.  Counsel explained that the lost profits were calculated by reference to the difference between the tonnage of coal shipments procured by Rajesh for Wilson in 2009 and the tonnage of coal shipments procured by him for Wilson in 2010, multiplied by the average profit per metric ton of coal, using the cost sheets prepared by Rajesh and retrieved from Rajesh’s laptop. 

40.  I accept the submissions made by counsel for the defendants, that even on Wilson’s own evidence of its sales of coal from 2001 to 2010 (exhibit “MN-8”), there are huge fluctuations in the quantity of coal sold and the sales value generated from year to year.  The drop in the tonnage of coal shipped by Wilson in 2010 and the decline in profits may not be entirely attributable to the alleged diversion of trades, as Wilson contends.  Further, there is no evidence from Manish or anyone from Wilson as to the profits of US$7,500,000 which they could have earned but for the alleged diversion of trades.  I will accordingly reduce the cap on the Mareva injunction to the sum of US $2,030,878.54 as verified by Manish. 

41.  It was and remains Wilson’s case that the 2nd to 6th defendants were set up by Rajesh for the purpose of the diversion of Wilson’s business to Rajesh and to receive monies from the business so diverted.  In the absence of any evidence from the defendants to show that the companies had legitimate operations and business unrelated to Rajesh’s wrongful acts, I see no good reason or justification for further variation of the terms of the Mareva injunction, as sought by the defendants.  Wilson’s counsel indicated at the hearing that Wilson would be prepared to consider reasonable variation of the Mareva injunction to permit legitimate legal costs, upon proper evidence being submitted by the defendants, and I will leave it to the good sense of the parties to deal with such variation by consent. 

Orders

42.  The application for the discharge of the ex parte orders is dismissed.  I have made an order to vary and significantly reduce the amount covered by the Mareva injunction, but the defendant’s application was made and the time of the hearing was spent essentially on discharge of the orders for material non-disclosure. In view of the orders made, I consider that a fair order for costs should be that the defendants should pay 75% of Wilson’s costs of the application for discharge with certificate for counsel, and will make an order nisi to such effect. 

43.  The defendants’ summons for leave to file the affirmations of Giles and Zhang is dismissed, with costs to Wilson.