AKTIESELSKABET DANSK SKIBSFINANSIERING v. WHEELOCK MARDEN & CO. LTD. and Others

1997, Nos. 107, 109 & 113
(Civil)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

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JUDGMENTS

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Godfrey and Liu, JJ.A. :

Introduction

1. The plaintiff in the proceedings below, a Danish corporation ("ADS"), claims to have suffered serious financial losses as a result of its dealings with Wheelock Maritime International Limited ("WMI"), a Hong Kong company which has gone into liquidation. At the time of these dealings, WMI was a partly owned subsidiary of the first defendant Wheelock Marden & Co. Limited ("WM"). WM were general managers of WMI. WM conducted the business of WMI through the fifth defendant ("Mr. Brothers") under the supervision of WM's two managing directors, the third defendant ("Mr. Lees"), and the sixth defendant ("Mr. Leung") the latter of whom has died since the trial. All three were directors of both companies.

2. ADS, as a creditor of WMI, alleges that the business of WMI was at the material time carried on by those responsible for the conduct of that business with intent to defraud creditors, specifically, ADS. ADS also alleges that it was the victim of fraudulent misrepresentations made to it, by WM and Mr. Brothers, about the true financial position of WMI. In these circumstances, ADS looks to those who it says participated in WMI's alleged fraudulent trading, and to those who are alleged to have made such fraudulent misrepresentations to it, to make good its losses.

3. Barnett J., after a long trial, acquitted those defendants who had been charged with the alleged fraudulent trading; but he found guilty, of fraud, those defendants, WM and Mr. Brothers, who had been charged with making the alleged misrepresentations.

4. ADS now appeals against the judge's consequent dismissal of its fraudulent trading claim; and WM and Mr. Brothers appeal against the judge's orders against them for damages, interest and costs on ADS's claim for misrepresentation.

The facts

5. The facts are fully set out by the judge in his lengthy judgment. For the purpose of disposing of these appeals, it will be sufficient briefly to summarise the most important of them. We have borrowed freely from the judge's own summary of the facts (to which we are indebted) for the first part of this summary.

6. In 1979, WMI embarked on a plan to modernise its fleet. Through various one-ship-owning subsidiaries, it contracted to buy 21 new vessels, although some were disposed of before delivery. 7 vessels, all Panamax type, were ordered from the Burmeister & Wain yard in Denmark. Loans for these 7 vessels were provided by the Danish Ship Credit Fund or its subsidiary ADS. The financing arrangements were complex. WMI borrowed US dollars from commercial banks. These funds were placed on deposit in Danish kroner with Danish banks at interest rates of 17% to 18%. The interest rate payable on the loans, however, was only 8%, this cheap finance being available under a Danish scheme to aid Danish shipbuilding. The Danish Central Bank would buy bonds issued by ADS at par and absorb the loss. The interest differential enabled WMI to acquire the vessels for a sum significantly less than their contract price.

7. The kroner deposits formed security for the commercial banks pending delivery of the vessels. On delivery, there was to be a swap. The banks would take a first mortgage as their principal security, to be serviced out of the vessels' earnings; ADS would get the deposits as its security. The deposits were so structured that they would pay off each instalment of ADS's loans as it fell due. WMI provided its guarantee for any shortfall that might occur on default by any of its ship-owning subsidiaries.

8. In 1982, the shipping market, which had until then been at record levels, dropped. Earnings on Panamax vessels, which had risen to US$14,000 per day, dropped to as little as $3,000 to $4,000. Values fell commensurately. Available earnings were hardly sufficient to pay operating costs, let alone debt. WMI's directors realised its plight and began formulating plans to solve its problems. In November 1982 there was a meeting of senior directors of WM to consider its policy towards WMI. That meeting (as the judge found) did not result in any definite commitment by WM to support WMI (although WM and Mr. Brothers argued otherwise at the trial).

9. By the beginning of 1983 WMI was insolvent, being unable to pay its debts as they fell due. Its continued existence necessitated a re-financing of its obligations to its creditors, both present and contingent; and whether secured or unsecured. The agreement of WMI's creditors to this was, plainly, more likely to be forthcoming if WMI's parent company, WM, was itself prepared to support WMI, whether by the provision of a guarantee, or some other form of comfort, or by a cash injection from WM, either immediate or future. It was, equally plainly, less likely to be forthcoming if WM was unprepared to do so.

10. On 26 January 1983, at a board meeting of WM, it was "resolved that it remains the strict policy of this company not to assume liabilities of any of the subsidiaries or associates, either by way of guarantee or by assuming primary liability." (This did not of course preclude WMI from asking WM for financial assistance from WM; however Mr. Brothers, who was attempting on behalf of WMI to negotiate the necessary re-financing with WMI's creditors, including ADS as a prospective creditor in relation to facilities to be granted to WMI in the future, was under very strict instructions that it should not be considered part of any plan to re-finance WMI's liabilities that there would be support from WM.)

11. On 22 February 1983, Mr. Brothers, with the Danish yard about to deliver vessels ordered by WMI and needing help from ADS, met Mr. Edelmann of ADS in Copenhagen to discuss the position. On 25 February 1983, he informed Mr. Edelmann of ADS, by telex, that he was intending to send him unaudited accounts of WMI and a copy of a cash flow forecast that was to be discussed with WMI's bankers, to be prepared on the basis of a refinancing of existing debt whereby interest only would be payable until the market improved. The cash flow forecast would cover facilities in respect of delivered vessels only, not newbuildings. This moratorium would be the vital ingredient enabling WMI to draw down credit from ADS for the vessel, hull no. 910 (the Sealock) delivery of which by the Danish yard was due in March 1983. Mr. Brothers asked Mr. Edelmann to let him know what further information he might require. Mr. Brothers saw no chance of arranging finance for the Sealock (let alone being able to continue with the two further newbuildings on order from the Danish yard, hull no. 911 (the Annalock) and the unnamed hull no. 912, without co-operation from ADS.

12. On 28 February 1983, Mr. Brothers sent the promised accounts, and part of a cash flow forecast, to Mr. Edelmann. The latter consisted only of a graph, and it did not comprehend newbuildings. The covering letter stated :

"..... it is intended to deal with the newbuildings separately as we believe this will be required by our bankers and we will be forwarding to you a separate cash flow in respect of this probably on Wednesday if it can be ready by then. We are however confident that with your support the situation will be positive and that we will be successful in our loan negotiations regarding the financing of these newbuildings."

Mr. Brothers added in a postscript "the graph will illustrate difference between moratorium position on existing ships and that if no moratorium."

13. On 1 March 1983, Mr. Brothers wrote to Mr. Edelmann as follows :

"The cash flow supporting the graphical document I sent you yesterday will be coming through in about two hours as and when it is completed. The assumptions accompanying it will, I regret, not be ready until tomorrow. It has all taken a little longer than I had anticipated. The cash flow covers the existing vessels and is prepared on the basis that bankers to these vessels will agree a moratorium on principal from 36 months. We will be approaching our Bankers on their agreement to this Thursday or Friday next week. We will continue to pass to you additional information as it becomes available but please let me know if there is anything specific you require. (Home phone no. is 5-233737. With many thanks & appreciation."

14. On 2 March 1983, Mr. Brothers wrote again to Mr. Edelmann, to record the help WMI had requested. His letter dealt with the 4 Panamax vessels Danelock, Hydrolock, Marilock and Rangelock, built in Denmark, all of which had already been delivered, and hull no. 910 (the Sealock) which had not. It enclosed a cash flow forecast relating specifically to the Sealock. It mentioned also hull Nos. 911 (the Annalock) and 912. I set out the contents of this letter :

"I felt to avoid any possible misunderstanding, I should set down formally the assistance we have requested from you to enable us to overcome the present very difficult market conditions :-

'DANELOCK'	-	No change
'HYDROLOCK'	-	" "
'MARILOCK'	-	Moratorium in respect of principal repayments due 25/5/83 and 25/11/83.
'RANGELOCK'	-	Moratorium in respect of principal repayments due 25/11/83.
'HULL 910'	-	Postponement of first principal repayment from 25/11/83 to 25/5/84.

For your guidance we are offering our Bankers (we are dealing with both Marine Midland and Royal Bank of Canada in case we are faced with a refusal by one or other) an assignment of the principal payments on the 'Marilock' and '910' to support our loan application in respect of '910'. You will see from the attached cash flow for '910' that some identifiable source of outside income is essential and even with your Board's agreement, it will be necessary to convince the relevant bank that you will look sympathetically at any extension of the one year moratorium if trading conditions do not significantly improve. It will thus be very helpful if the moratorium could extend past the 25/3/84 date or if that is asking too much at least have some wording to the effect that DSKF will 'review the position early in 1984 in the light of conditions then prevailing'. The 'Rangelock' payment we will keep up aside [sic] although the Bank may ask for this also.

The first priority now seems to be to overcome the hurdle of taking '910' as this is so vital for Yard. We would then suggest that we, you, the Yard and our Bankers holding the Kroner deposits for 911 and 912 sit down together in Copenhagen to agree exactly the basis for their delivery so that we are not faced with any sudden changes such as has happened in this case. The Yard can then proceed with their construction confident in the ability of Owners being able to take delivery. We are told by the Yard that they are intending to postpone delivery of 911 to April '84 and 912 to July '84.

I am pressing ahead this end and of course any further information you may need can be made available immediately. Otherwise we will anxiously await good news from you.

With best personal regards"

15. On 3 March 1983, Mr. Brothers wrote to WMI's secured creditors proposing a 3-year moratorium on capital repayments. He wrote this :

"We have devised a proposal for debt re-financing which we consider is in the interest of the lenders as a whole, the success of which is not dependent on any sales of vessels. We are confident that with the support of our Bankers and on our conservative assumptions regarding future charter rates, we will be able to continue our business throughout this period of depressed market conditions and at the same time be able to retain the ability to benefit from the revival in the shipping market in the future.

In essence, our proposal is as follows :-

1. All loan capital repayments are deferred for an agreed period. We would suggest this period should be fixed for three years and during this period, lenders will not seek to enforce repayment unless a material event of default occurs. All other rights of the lenders will otherwise be preserved against their respective borrowers and guarantors.

2. All lenders receive interest in full throughout.

3. In respect of newbuilding commitments and unsecured creditors, it is intended that separate and specific financing arrangements will be made."

16. On 4 March 1983, a note about the whole matter was prepared by Mr. Edelmann for his board. He recorded (among other things) the following :

"The Ship Credit Fund has received from Wheelock Maritime International Ltd., Hong Kong (WMIHK) a request to establish a three-year moratorium. (WMIHK's banks (8) have received or will receive similar applications).

If an arrangement cannot be reached very soon, WMIHK is likely to be hit by a serious liquidity crisis in the very near future. Reference is made to Appendix 1 which is part of a bigger batch of documents sent to the banks.

The reason stated for the crisis is the very bad freight market which combines tightly with the ambitious newbuilding program launched by the Wheelock Marden Group in 1979-1980. .....

If such a moratorium scheme is made, Wheelock Marden & Co., Ltd., which is the parent company, will commit itself to inject new capital.

.....

With a view to having some liquidity made available, WMIHK has proposed that the instalments for May and November 1983 concerning m/s 'Rangelock' and m/s 'Marilock' - in all DKK32,750,000 - payable to the Ship Credit Fund out of the pledged cash deposits, be put at the disposal of Marine Midland Bank (MMB) to settle the first-year repayments of the loan given by this bank for B & W's newbuilding no. 910. This newbuilding shall be delivered according to schedule on the 17th of this month.

MMB's loan was used to purchase a cash deposit in Danish Crowns which constitutes at present MMB's security. If the probability is not established that the loan provided can be serviced during at least the first year, MMB is not willing to surrender the cash deposit as security for the Ship Credit fund in return for a first mortgage on newbuilding no. 910, seeing WMIHK's current situation.

As far as newbuilding no. 910 is concerned, WMIHK wishes the payment of the first instalment to be made in May 1984 instead of November 1983 as scheduled. This should further increase their liquidity with DKK12,580,000 - over this period.

The total liquidity increase will then become DKK45,330,000 - during the period up to May 1984. All interest will be paid punctually, and the company is resolved to pay the Fund's normal interest on overdue payments. No proposal has yet been made about the settlement of these arrears.

.....

Should the Board decide in favour of the Fund's cooperation, it is suggested to empower the management to start negotiating with the shipowner and the Export Credit Council in order to :

- help WMIHK overcome its liquidity crisis to an extent ensuring that

- Burmeister & Wain Shipyard, Ltd. can deliver no. 910 in particular, but also nos. 911 and 912, in such a way however that

- A global arrangement is reached with all the banks involved, and so that

- the security of the Fund's position is not impaired."

17. On 7 March 1983, Mr. Edelmann's board discussed WMI's proposals and the negotiation of a "package deal" was authorised. It was mentioned that "the Administration should try to obtain a guarantee from the parent company in the negotiations with the shipowners".

18. On 9 March 1983, Mr. Brothers wrote to Mr. Edelmann as follows :

"May I first again express my regrets for having involved you and your colleagues in so much additional work on our behalf. I can only plead in my own defence that the shipping industry is going through such difficult times at the moment that matters, which would normally never have been contemplated, have regrettably become necessary as the sole means of survival through the crisis until the inevitable market improvement and return to normality occurs. May I also express, on behalf of myself and my colleagues, our very sincere appreciation for the support the Fund is evidencing in trying to find a solution to our problems.

In setting out our position for you now, I earnestly hope that you will not consider that there is any element of ingratitude or inflexibility on our side. The reverse is in fact the case and my only aim is to find a workable solution acceptable to all sides.

Resolution of our problem revolves around the difficulties of cash flow and security. Realistically, income from the vessel for the first few years cannot be projected to reach levels substantially above those today, and daily earnings' rates of $6,000 in 1983 rising to $8,000 in 1984 and $10,000 in 1985 is probably the level of projection that a prudent Banker would today accept as being conservative. (One should nevertheless not forget that our first two B & W vessels were fixed at over $14,000 a day in 1980 and a return to this level and above must certainly occur one day.)

On the basis of our existing arrangements with Marine Midland Bank (MMB), we can project a cash flow deficit on 910 rising to almost $10 million before it peaks in year five. With our other commitments we simply do not have the ability to fund such an outflow and no matter how far we stretch out the loan, if the EKR insist on a Deposit arrangement whereby the loan is fully paid out by the end of the loan period, the improved contribution, although most welcome in itself, will just not go anywhere near meeting what is in reality necessary. Given the intentions of all the parties involved however, to find a solution, there seems to me to be two possible routes to achieve a workable scheme.

SOLUTION A

1) A three and a half year moratorium is given and the loan period stretched to twelve years.

2) The primary security for the loan is a new Deposit which is designed to cover interest payments during the whole period of the loan but ten principal repayments only from the fourth to the eighth year. The cash so released will be committed exclusively to repaying the MMB commitment presently standing at $22.8 million.

3) Security to DSKF from delivery until the eighth year will be :-

(a) The new Deposit.

(b) The Second Preferred Mortgage.

(c) The WMI Guarantee (which you do not have at present).

4) In the eighth year when the loan to MMB will have been substantially repaid, the Company will have the option of either :-

(a) Funding a new Deposit to cover principal repayments to DSKF for the balance of the loan, or

(b) Offering a First Preferred Mortgage on the vessel as additional security, or

(c) Providing other security to DSKF to cover 150% of the outstanding principal amount at that time.

The WMI Guarantee will continue for the whole period.

As the benefits from the moratorium flow directly through to the Mortgagee Bank to reduce his commitment, so the value of the Second Preferred Mortgage held by DSKF increases and I believe it can be successfully argued therefore that although the Deposit is not in itself 100% security for the loan, value must be given in the overall assessment to the Second Mortgage which will increase in value as the outstandings on the MMB loan fall. As for the argument that the MMB will not release the First Mortgage at the end of their loan, it should be appreciated that the ability of WMI to fulfil its obligations to MMB is a continuing one for the whole eight year period of the loan and if WMI has been able successfully to comply with the terms and conditions of the loan during all that period, then surely at the very end when the loan is at its lowest point and the relative security value of the vessel at its corresponding highest level, it is most unlikely that WMI will not be able to fulfil its commitment either to re-finance and provide a new Deposit or transfer the First Mortgage to the Fund.

SOLUTION B

As an ex-commercial Banker yourself, you will be aware of the realities of the present situation. MMB are holding a Kroner Deposit having a face value of approximately US$18 million against an outstanding loan of $22.8 million. If they continue to hold this Deposit and there is no change in the parity exchange rates between the US Dollar and Danish Kroner, their loan will eventually be fully repaid by early 1991 and the value of the Deposit and the loan will be equal in 1988.

I do not believe that MMB will agree to switch their deposit for the security of the First Preferred Mortgage on the ship until we have a charter that will demonstrate our ability to repay their loan from earnings. This also applies to Lloyds Bank on 911 and Midland Bank on 912 with both of whom we have discussed the position. You on the other hand have stated that the Fund will accept a Deposit which on its amended basis will have a face value of approximately $16 million against your outstanding loan of approximately $25 million. We have had the vessel independently valued at $18 million and of course she cost $31.5 million to build. The Deposit will gradually lose value whereas we can be certain that the vessel will hold its value over the period and at times will appreciate considerably.

We all realize the rules of the Fund and how they must be applied. Nevertheless, this is undoubtedly a time of crisis requiring unusual and unorthodox remedies which in normal circumstances would not have been considered. There seems to be a contradiction in that you are prepared to accept a $16 million deposit as security for your $25 million loan while at the same time saying that you will not accept a $18 million vessel as substitute security. If you as the Danish Ship Credit Fund, established to lend against the security of vessels, will not accept this vessel as sufficient security, how much more difficult is it for us to pursuade [sic] a commercial bank like Marine Midland to do so? We therefore propose :-

(a) A three and a half year moratorium is given and the loan is stretched to twelve years.

(b) MMB continue to hold the existing Danish Kroner Deposit but give you a second pledge over this deposit.

(c) You hold, in addition to the second pledge in the deposit, the First Preferred Mortgage in the vessel plus a WMI Guarantee. MMB will receive the Second Preferred Mortgage.

(d) All parties agree that when the prevailing market improves, the credit package will be re-arranged so that MMB will then hold the mortgage on the ship and the Fund will take-over the deposit which can then be re-designed to provide the Fund with the full pay-out profile that they are now seeking.

Even if this can be agreed, there is still a shortfall in earnings but it is within manageable proportions. Furthermore as an arrangement relating to the provision of a First Mortgage on the vessel can be agreed directly between ourselves and DSKF without involving our Bankers, it means we can act very quickly not only to agree on 910 but also 911 and 912. I understand this to be an essential ingredient to the overall solution. I attach cash flows to illustrate the effects of those proposals.

Finally, in concluding, I think it as well to make it clear that Wheelock Marden & Co. Ltd., cannot give any specific Guarantees or other support in respect of individual vessels. To do so would invite all our creditors to insist on the same treatment. You will appreciate that on the 'Marilock' and 'Rangelock' there are significant cash shortfalls that have to be funded. Furthermore, interest has to be paid on the loans raised to purchase the Kroner Deposits for 911 and 912. Support, if forthcoming, will have to be by way of a cash injection that will go towards improving the liquidity of the Group as a whole. I am sure you can understand the logic of this. As far as other assets of WMI are concerned, I have sent you a detailed list of all ships and existing loans. Although all our loans are covered, the disastrous effects of the market have considerably reduced all asset values and you will appreciate it will be difficult to find much in the way of additional security through second mortgages, etc., to cover our borrowings from you. We can however always explore this avenue if you so wish.

Please forgive this rather long letter but I want you and your colleagues to be absolutely clear over the position here and I also hope that my comments and suggestions will assist in overcoming these present difficulties."

19. On 10 March 1983, Mr. Brothers sent a fax to the yard now about to deliver the Sealock. Among other things, he wrote this :

"Whilst I understand the natural inclination by DSKF to words requesting a Wheelock Marden guarantee, this is completely impossible. Not only would giving such a guarantee make it difficult to refuse other creditors the same treatment (and no secured creditor has a WM guarantee) but it would preclude the possibility of WMI approaching its parent sometime in the future for cash support for its overall operations viz our existing losser [sic] on Marilock and Rangelock."

20. On, or by, 18 March 1983, Mr. Brothers obtained the cash flow forecast for newbuildings and unsecured creditors, which, if integrated with the cash flow forecast already prepared in relation to secured creditors, would show the estimated overall position of WMI as projected through to 1992. It painted a truly grim picture for WMI's unsecured creditors. Mr. Brothers sent this new cash flow forecast to the secured creditors, remarking that a still unresolved element was the additional support required from Denmark, and stating that he was "leaving for London this evening with a view to resolving this particular issue early next week ....."

21. On 19 March 1983, Mr. Brothers met Mr. Ortiz-Patino, a director of WM, in Geneva. He discussed the position of WMI with Mr. Ortiz-Patino and showed him the new cash flow forecast (of which Mr. Ortiz-Patino took a copy).

22. Between 22 and 25 March 1983, in London, at the offices of Norton Rose, WMI's legal advisers, Mr. Brothers discussed with representatives of ADS the financial implications of the arrangements proposed for the Sealock and, also, the financial position of WMI generally at a meeting with Mr. Edelmann. Mr. Brothers told the judge that in the course of that meeting he produced the new cash flow forecast to Mr. Edelmann. But the evidence was that it was not to be found in ADS's papers. The judge rejected the evidence of Mr. Brothers and concluded that he had deliberately suppressed it.

23. On 30 March 1983, Mr. Brothers reported to the Shipping Committee of WMI in the following terms :

"Since Chinese New Year, all concerned have put in a great deal of effort towards establishing a feasible plan that will minimize the amount of fresh capital required from the Parent for the next three years whilst at the same time attempting to preserve the integrity of WMI and the reputation of the Wheelock Marden Group as a whole.

The present position can be summarized as follows :-

(A) Existing Fleet : A proposal has been made to all Secured Creditors that they should agree to a rescheduling of existing debt for a period of up to three years. Our cash flows show that if this can be achieved, very little, if any, additional cash will be required during the proposed 36-month period. The Banks concerned have reacted to the proposals with varying degrees of enthusiasm. I believe they will accept the proposal but will need evidence of overall parent company support to the Group. They have made it very clear that they expect to see this support either in the form of a cash injection to support the 'Newbuilding' and 'Unsecured Creditor' side of the plan or in the form of a guarantee to cover the amount of Principal repayments they are being asked to defer. (Approx. Principal being deferred in 1983 - US$11 million.)

(B) Newbuildings & Unsecured Creditors : The cash flows show a cumulative deficit in the region of $10 million by 1984. To look further than this is, I believe, misleading. I have discussed the problem with the unsecured creditors who are so far relaxed and will probably remain so if parent company support can be seen coming into the Company in some form or other. It is wrong to view the most difficult aspect of survival as being on the newbuilding side. Special credit arrangements can be worked out, deliveries are already spread across a period of over two to three years and as we sell off our remaining 13 'old' vessels realizing considerable cash, these newer and more efficient vessels built in 1981 and later will represent the core of our fleet. We are taking in total 10 'new' ships compared with the original fleet of 16 'old' vessels. (There should be no misunderstanding that we will always opt to 'cancel' if such a course is cheaper than the threat of resultant legal action and if it is regarded as politically acceptable. e.g. China.)

It is essential that we resolve the loan restructuring as soon as possible and not later than by April 13th when an announcement will have to be made on the 1982 results. If we have to declare at that time that we are negotiating with our Bankers for a moratorium on debt, it will have a devastating effect on our credibility. We cannot afford to be regarded as in the same position as Carrian/Grand Marine, all trade credit will dry up, we will have difficulty in employing our vessels, our shares will be suspended and whatever else may happen after that, I have no doubt that there will be enormous and lasting damage to Wheelock Marden which will be felt right across the Group not to mention its Shareholders and Directors. We must therefore resolve without delay the extent and the means under which Parent Company support will be given. It is not possible to continue meaningful negotiations any further with our Bankers who whilst for the moment are positive but from now on will become increasingly sceptical and difficult to deal with. I personally also feel that I have gone as far as I can in putting forward our case and that from now onwards, I will increasingly lose my credibility with the Banks. This would be to the detriment of the Group quite apart from my personal need to retain some standing in the Business Community.

Having had our discussions with David Shaw and Schroeders yesterday, I believe that we should decide not to continue to press for a three years moratorium but instead agree with our Bankers to review the situation after 12 months. I believe the overall picture will have improved by then and this has the added advantage of enabling us to reduce the contribution from the Parent Company. WMI should now approach the Parent for assistance in arranging a 12-month credit line/loan of not less that US$5 million. This amount should include any contributions Wheelock Marden may be called upon in respect of its performance guarantee on the 'Rangelock'. To offer an amount less would be considered derisory by the Banks and even with this amount pledged, there will be some problems. However I believe these can be overcome and I will certainly do my best in this regard.

We really need to know the outcome of this request before the Easter Holidays as we really have very little time thereafter in which to conclude our arrangements."

24. On 8 April 1983, however, without first obtaining any commitment of support from WM, WMI took new credit, an advance in the form of bonds from ADS, against delivery of the Sealock on that date to Adleship Limited (a United Kingdom subsidiary of WMI).

25. On 16 May 1983, it was decided that it would not be possible for WMI to take new credit to enable WMI to defer delivery of 2 hulls it had ordered from a yard in China ("the Dalians").

26. On 20 May 1983, WMI's solicitors advised WMI by letter on its giving guarantees for certain loans, and added :

"There remains the question of whether, in current circumstances it is proper for WMI to enter into such guarantees. As previously advised, WMI may only continue trading if there is a reasonable prospect that it will at some future date be able to meet all its obligations. At present, proposals are under consideration, and discussions are taking place with bankers, designed to lead to a situation where WMI will be able to meet its immediate obligations and to put itself in a position where there is a reasonable prospect that it will be able to meet all obligations at some future date. It is our understanding that, based on the information available to the Directors of WMI, there is a reasonable prospect of agreement with bankers and others being reached on the above lines. On that basis, WMI may continue to trade and incur fresh credit. However, care must be taken in incurring fresh credit, not least because in the case of substantial new borrowings or other commitments it would be wrong to mislead any lender as to WMI Group's current financial position. In the case of Wayfoong Shipping Services Limited and Marine Midland Bank N.A. we understand that both banks are, as stated above, aware of the WMI group's present difficulties but are nevertheless prepared to extend loan facilities. Accordingly, we do not see how such banks could complain as to the propriety of WMI giving guarantees and generally we consider that it is proper for WMI to enter into such guarantees, provided that the Directors of WMI continue to take the view that there is a reasonable prospect that it will at some future date be able to meet all its obligations."

27. On 27 May 1983, the solicitors advised WMI about a guarantee it was proposing to give and an assignment it intended to make. That advice concluded as follows :

"A final caveat must however here be raised. This is that the directors of WMI must be satisfied that in entering into the guarantee or assigning the (WWW) dividend WMI is not carrying on business with intent to defrand its creditors or for any fraudulent purpose, otherwise they run the risk of being personally liable for the debts of WMI under Section 275 of the Companies Ordinance. If the directors genuinely believe that WMI will at some time be able to satisfy its creditors then the risk of a successful attack for fraudulent trading is unlikely."

28. On 28 May 1983, the board of WMI considered that advice and decided to proceed with the transactions proposed.

29. On 4 July 1983, after intensive but unconsummated negotiations between WMI and its secured creditors, WM's financial advisers NM Rothschilds & Sons (Hong Kong) Limited ("Rothschilds") expressed the following opinion to WM's directors :

"In our opinion, the only circumstances in which Wheelock Marden could reasonably withhold support for WMI would be where the Board were to take the view that the case against a significant recovery in charter rates and the value of the fleet vessels was overwhelming in terms of the financial impact on the group."

They added :

"We believe that Wheelock Marden should consider the provision of short-term support by way of a comfort letter which would in effect be a committed facility to WMI, but which would be limited both as to amount and as to duration. This is likely to be the minimum required to permit the rescheduling of WMI's debts under the S&C proposal and it would also enable any modest short-term financing requirements to be met. The short-term committed facility could take the form of an inter-company current account at a commercial rate of interest, possibly with some kind of equity sweetener. Such a commitment may be considered to be a small price to pay for Wheelock Marden protecting its investment in the short-term and might in fact not be a much greater concession than the performance guarantee given in respect of the Rangelock financing.

With a short-term committed facility in place, some breathing space could be gained to consider in greater depth and away from public scrutiny the long-term solutions to the liquidity problems of WMI. We do not consider a permanent refinancing solution, such as a rights issue of equity or loan stock by WMI, to be appropriate at the present time since substantial cash outflows are not expected within the next two years under the cash flow forecasts presented to us. It would be far better for Wheelock Marden to determine the form and size of a funding solution when the long-term financing requirements of WMI can be better ascertained. The minority shareholders of WMI would be expected to contribute their share. Failing this, they would of course see their equity interest diluted. The long-term solution could also be examined by the Board in the context of a possible fundamental restructuring of the Wheelock Marden group at that time."

30. In a discussion paper, after mentioning an attempt (ultimately unsuccessful) to get a company called Hong Kong Realty Limited ("HKR") to provide US$12m support for WMI, Rothschilds added this :

"Finally, it is as well to consider the justification for support of WMI by its parent company, Wheelock Marden. There may be no legal obligation on the part of the directors of a parent company to provide or arrange financial support for its subsidiary, the directors' only responsibility being to take whatever action is in the best interests of the parent company. But the ramifications of withholding support for a subsidiary could be far-reaching for a parent company with the damaging effects on its reputation possibly reflected in withdrawal of credit lines, loss of future contracts, not to mention the adverse publicity which such a move would attract.

The position of Wheelock Marden and WMI is further complicated by the fact that Wheelock Marden is not only the parent company but also the general manager of WMI, for which it receives an annual commission. The onus is therefore on the directors to consider carefully the benefits and drawbacks of withholding support.

In deciding whether to extend support to WMI the directors of Wheelock Marden are likely to also have regard to the prospects of recovery in the shipping market. It is always difficult to predict more than two or three years in advance but this is particularly so in the case of the dry bulk carrier shipping market where until the beginning of this year charter rates had fallen steeply over a two-year period, reflecting the considerable oversupply of vessels and the downturn in trade. Some comfort can be gained however by the economic upturn in the United States and the signs of an improvement (albeit slow) in freight rates. Perhaps the recent bids for P & O and Straits Steamship may be seen as another pointer to the start of a recovery.

It may be viewed by some that the principle of parent company support for its subsidiary may have been accepted already by Wheelock Marden because of the discussions which are taking place between HK Realty and WMI. Creditors of WMI are probably continuing to finance the company on the expectation that the discussions will give rise to a solution to the problems of WMI. If these discussions do not give rise to specific proposals acceptable to all the parties concerned, it would in our view be very damaging for Wheelock Marden then to withhold support for WMI."

31. On 7 July 1983, at a board meeting of WM, Mr. Brothers reported, in answer to a question why re-financing in relation to the Rangelock had not taken place, that this was due to the breakdown of negotiations to sell two of WMI's vessels and that :

"..... once it was obvious that that proposal could not be proceeded with WMI had been faced with insolvency with the result that it had been unable to take on new credit ....."

32. On 2 August 1983, Rothschilds produced a further paper for WM's board in which they recorded :

"It is our understanding that [WM] is seeking to strengthen the financial base of [WMI] by means of the provision of long term financial support ....."

33. Rothschilds continued to urge WM to consider giving support, at least short-term financial support, to WMI; but there was a manifest reluctance within the board of WM to do so. The negotiations with HKR came to nothing. WMI asked WM for similar support, but failed to obtain WM's commitment to this; all it obtained was a letter, dated 14 September 1983, stating as follows :

"This matter will have to be considered very carefully by our Board in conjunction with our financial advisers and therefore we are not able to provide you with a definitive answer immediately.

We can confirm that we are prepared to consider such support but before reaching a decision we need to obtain further advice from our financial and legal advisers.

We appreciate the urgency of this matter and it is our intention to let you have an answer following our Board Meeting on 23rd September, 1983.

For the avoidance of doubt, the foregoing is not, however, to be regarded as creating any legally binding obligation or commitment on our part."

34. On the same day, the board of WMI was advised by its solicitors that WMI could continue to carry on trading provided the directors were satisfied that there was a reasonable prospect of sorting something out which would enable WM's financial problems to be resolved. At one stage of that meeting Patrick Poon, one of the directors, stated as his personal view that there was "no reasonable prospect for anything to come out in favour of support at the present time for [WMI]." But eventually he accepted that WMI could wait for a week without risk of a subsequent accusation of fraudulent trading (and he was later a party to all relevant decisions of the WMI board).

35. After further advice from Rothschilds and after further legal advice from leading counsel in London had been taken by WMI, the WM board, on 23 September 1983, approved a US$4m stand-by facility for WMI. The board of WMI recorded its view that "this was an acceptable basis for continuing to trade" and on 12 October 1983 accepted WM's formal offer of this facility (which was interest-bearing, secured, and subject to determination in the event of enforcement action by any creditor against WMI).

36. The US$4m facility from WM went some way to alleviating WMI's financial problems. On 9 December 1983, Mr. Brothers reported to the board of WM that further negotiations with WMI's secured creditors were needed to retain WMI's liquidity and that "no new credits will be negotiated or newbuildings accepted if same would severely strain current liquidity". He noted as follows :

"It is imperative for the future well-being of the Group that this facility is retained to meet vital working capital requirements in the future and is not utilized to meet large loan principal repayments for down-payments on newbuildings which if this was to be the case, would in the absence of any other source of funds, quickly force the Group into another cash crisis and possible liquidation."

37. By March 1984, it became apparent that proposals under consideration for a sale and lease back of the Annalock could not proceed and that alternative financial arrangements would have to be made urgently. Delivery of this vessel was by then imminent, and Mr. Brothers asked the yard to delay delivery until 16 March 1984. In fact, the Annalock was delivered, on 22 March 1984, to a UK subsidiary of WMI, Mastship Limited. As in the case of the Sealock, this involved WMI in the assumption of a re-negotiated credit from ADS in this connection.

38. On 9 August 1984, WMI's solicitors advised the board that if WMI was insolvent, the directors would require to be extremely circumspect about incurring any new credit (whether trade or bank or otherwise) without a reasonable prospect of meeting such liabilities when they fell due and that it would be a matter for the full board to decide whether or not WMI should take delivery of the Dalians. It was noted that it would not be possible for the directors of WMI to incur any new credit if they knew that WMI had no means of meeting its debts when they fell due.

39. On 24 August 1984, Mr. Brothers, at a board meeting of WM, noted that it would not be possible to proceed with the financial arrangements proposed for the Dalians until the long term future of the Group was assured and that if WM declined to support WMI it would be extremely unlikely that WMI would be able to secure alternative outside support in the limited time available. He added :

"In the circumstances it would therefore be unable to take delivery of the two Dalian newbuildings and the Directors would have to give serious consideration to whether or not it would be possible for the Company to continue trading."

40. Thereafter, the board of WMI gave frequent consideration, with the benefit of legal and other advice, as to the propriety of continuing to trade and take new credit. The judge found that at the times of the delivery of the Sealock, and the Annalock, the WMI board "had an expectation that there would be a future" for WMI. But gradually WMI's position worsened. On 8 October 1984 WM made it clear to WMI that no further parental support would be forthcoming. In March 1985, control of WM fell into the hands of Sir Y.K. Pao's company, Wharf. On 2 August 1985 WMI, irredeemably insolvent, went into liquidation.

The appeals

41. We have already mentioned the judge's dismissal of ADS's case against those charged with fraudulent trading, and his acceptance of ADS's case against those charged with fraudulent misrepresentation, namely WM and Mr. Brothers. In this court, we heard first the appeal of WM and Mr. Brothers against their conviction on the charge of fraudulent misrepresentation, and we heard second ADS's appeal against the dismissal of its case against those charged with fraudulent trading. In these circumstances, it will be convenient for us, and we propose, to deal first with the appeal of WM and Mr. Brothers, and secondly, with ADS's appeal.

The appeal of WM and Mr. Brothers

42. ADS's case (in essence) was that Mr. Brothers, for himself and for WM, misrepresented to ADS that WM would, if necessary, support WMI, and that Mr. Brothers, having for himself and WM made representations to ADS as to the financial position of WMI, failed to correct those representations when (on receiving the 18 March 1983 cash flow forecast) he realised that they needed correction; in particular, that Mr. Brothers deliberately failed to apprise Mr. Edelmann of ADS of the contents of this cash flow forecast when he met representatives of ADS, in particular Mr. Edelmann, in London, in the third week of March 1983.

43. Mr. Brothers deposed, in answer to this latter allegation, that in fact he handed over this cash flow forecast to Mr. Edelmann at their meeting, and denied a suggestion made to him in cross-examination that he deliberately did not hand it over. Mr. Edelmann died before the trial of the action and so was unable to give evidence. Nevertheless, the judge, as we have already recorded, rejected Mr. Brothers' evidence. He found that Mr. Brothers had deliberately withheld this cash flow forecast from ADS. In this court, WM and Mr. Brothers challenge this finding of primary fact. If we uphold that challenge, that is the end of this part of the case of ADS against WM and Mr. Brothers.

44. Before we turn further to consider this finding, we remind ourselves of the guidance given by the authorities as to the approach which we in this court should adopt when faced with a challenge to a judge's finding of primary fact. Those authorities, as we read them, establish that although an appeal to this court is by way of rehearing, that does not mean that this court re-tries the case. It is in the first instance the function of the trial judge, not this court, to find the facts; and we ought not to substitute our own findings of fact for his merely as a result of our own appreciation of the case. In respect of a judge's finding of primary fact, particularly a finding based on the credibility of a witness, before we disturb such a finding, we must be satisfied that there was no evidence to support it; or that it ran counter to documentary or other incontrovertible evidence which the judge must have overlooked; or that it can only have been based on a misapprehension of the facts or some faulty process of reasoning. So the burden on a party who seeks to convince us that a trial judge's findings of primary fact were unjustified is a heavy one, especially in a case where the judge has refused to find fraud. Nevertheless, it is our duty to reconsider all the materials before the judge and to make up our own minds, not disregarding the judgment below, but carefully weighing and considering it, and not shrinking from overruling it, if on full consideration we find ourselves convinced that his finding was wrong. We cannot excuse ourselves from the task of drawing our own conclusions, but in doing so we must be careful to make due allowance for the disadvantage under which we labour in that we, unlike the judge, have neither seen nor heard the witnesses. In this connection, we would remark (as Lord Oliver of Aylmerton remarked in giving the advice of the Privy Council in Wharf Properties Limited v. Eric Cumine Associates, 14 January 1991, unreported :

"[The judge], over the protracted hearing which took place before him, had the twin advantages of hearing and seeing the witnesses examined and cross-examined (some of them at considerable length) and, equally important, of being able to consider and review the whole of the evidence together and thus to obtain the 'feel' of the case - advantages which, in the nature of things, are denied to an appellate tribunal."

45. That was the position here; and in those circumstances this court cannot in our judgment properly disturb the judge's findings of primary fact unless satisfied that he fell into error. Are we then satisfied here that the judge's finding, that Mr. Brothers deliberately withheld this cash flow forecast from Mr. Edelmann, was wrong? If we are, we must not shrink from reversing the judge; indeed, it will be our duty to do so.

46. We must first record the arguments for WM and Mr. Brothers in favour of their contention that the judge was wrong so to find.

47. The judge's "very carefully considered appraisal" of Mr. Brothers, whom he had the opportunity to observe in the witness box for over 4 weeks, was "that he was for the most part a sincere and honest witness." It is clear from the evidence that this cash flow forecast was not hidden from anyone else who would have been interested in it; certainly, it was supplied to WMI's secured creditors and to all the members of the Shipping Committee of WM. Mr. Brothers had promised to send it to Mr. Edelmann, who had been expecting it. As the judge remarked, that "is hardly a sound basis for suppression of a document." No-one on ADS's side subsequently made any or any documented request for this cash flow forecast; as the judge noted, that would be explicable if ADS had in fact received it. So, WM, and Mr. Brothers, ask: what evidence, if any, was there, to support the judge's finding (inconsistent with his general appraisal of Mr. Brothers) that Mr. Brothers had deliberately suppressed this case flow forecast?

48. It is said, for WM and Mr. Brothers, that there was no such evidence.

49. The judge's foundation for his finding that Mr. Brothers "suppressed" this cash flow forecast appears to be this; that, as the judge had thought, it was "disastrous"; "appalling"; and "much worse than anyone expected".

50. But, it is said, that is not so; and, anyway, that that was a most insecure foundation for such a finding; for there was in fact no evidence to justify the judge's use of these descriptions of the cash flow forecast. Everyone, including ADS, was well aware of the parlous financial state WMI was in; and that some solution to its cash flow problems would be needed if it were to survive. All this cash flow forecast did was to reflect that fact, as did the earlier cash flow forecast relating to secured creditors. The cash flow forecast relating to newbuildings and unsecured creditors demonstrated how bad WMI's position in this connection was; but there is no evidence to support the judge's view that it was some sort of revelation of a state of affairs "much worse than anyone had expected, including Mr. Brothers". Only if Mr. Brothers' own assessment of the significance of this cash flow forecast was that it was so unexpectedly bad that Mr. Edelmann's reaction to it, if it had been handed, or shown, to him, would have been "to pack his bags and go home" (the judge's words) would Mr. Brothers have had any motive for suppressing it.

51. The judge founded also on the reaction of Mr. Ortiz-Patino, after his meeting with Mr. Brothers, who, it will be recalled, showed Mr. Ortiz-Patino this cash flow forecast in Geneva, shortly before the meeting between Mr. Brothers and Mr. Edelmann in London in March 1983.

52. It is accepted that the evidence does demonstrate that Mr. Ortiz-Patino had not previously appreciated just how bad WMI's financial position was and that he was very concerned by what Mr. Brothers had had to tell him. But what had concerned Mr. Ortiz-Patino was not, it is said, this cash flow forecast in particular; what concerned Mr. Ortiz-Patino was WMI's position in general, and the failure (as he thought) of Mr. Brothers to take steps earlier to improve it.

53. Another matter on which the judge seems to have relied in ascribing to Mr. Brothers a motive for suppressing this cash flow forecast was that ADS had believed, and been led by Mr. Brothers to believe, that the newbuildings for which WMI had contracted would not themselves create liquidity problems for WMI but would be (in the shorthand phrase used to indicate this) "cash neutral", whereas this cash flow forecast demonstrated that in fact the newbuildings would be far from "cash neutral" and would indeed present WMI with very serious cash flow problems in the not too distant future. Yet the evidence indicated that ADS was aware in February 1983 of the source of WMI's problems : "the very bad freight market which combines tightly with the ambitious newbuilding programme launched by the [WM] group in 1979-80" (emphasis added) : see Mr. Edelmann's note of 4 March 1983 to the board of ADS. It is said that the evidence nowhere indicates that, if ADS believed that the newbuildings would be "cash neutral", that it was led so to believe by Mr. Brothers; indeed, the evidence of Mr. P. Gideon, of the Danish Export Credit Council, did not support any such suggestion. So far as one such new building, the Sealock, was concerned, Mr. Brothers expressly made it clear to Mr. Edelmann that this would face WMI with a cash flow deficit ("rising to almost $10 million before it peaks in year five") which WMI did not have the ability to fund : see the letter from Mr. Brothers to Mr. Edelmann of 9 March 1983.

54. It is of course, obvious that Mr. Edelmann might have asked Mr. Brothers at any time during their meeting in March 1983 for the cash flow forecast (which Mr. Brothers had in his briefcase) which he had promised Mr. Edelmann and that Mr. Brothers cannot but have appreciated that. In the absence of any evidence at all to warrant any finding of any motive on the part of Mr. Brothers for suppressing it, it is said that it is inconceivable that he did so.

55. It will be remembered that the meeting in London in March 1983 between Mr. Brothers and Mr. Edelmann took place in the offices of Norton Rose. Mr. Freeland of Norton Rose made a note at the meeting, recording some figures which can only have been taken from the cash flow forecast. This, it is said, conclusively demonstrates that Mr. Brothers did not suppress the cash flow forecast; it may be that he did not actually hand it over to Mr. Edelmann (which could account for its absence from ADS's files) but it cannot be the case that he "suppressed" it.

56. Finally, it is said, the judge misunderstood the thrust of Mr. Brothers' evidence in cross-examination on these matters, a long passage from which he set out in his judgment. Read in context, it is said that it is apparent that Mr. Brothers was not dealing in this passage with the point about "cash neutrality", as the judge mistakenly thought.

57. For ADS, it is said that, on the contrary, the judge was entirely justified in concluding on the evidence that Mr. Brothers did, deliberately, withhold this cash flow forecast from Mr. Edelmann.

58. ADS led evidence from a number of witnesses involved on its behalf in the consideration of WMI's proposals to the effect that they had never seen this cash flow forecast until long after the events in question, and to the effect that if they had seen it at the time it would have caused them great concern. The cash flow forecast was not mentioned in the note made by Mr. Edelmann recording his meeting with Mr. Brothers. ADS points to the uncertainty on this point exhibited by Mr. Brothers in his witness statement, which said merely "I believe that I left the latest available cash flow with Mr. Edelmann" (emphasis added) and to the lack of any mention of this cash flow forecast being handed over, or even produced, in Mr. Freeland's note of Mr. Brothers' meeting with Mr. Edelmann. ADS points out that Mr. Brothers would have had a good reason for "suppressing" this cash flow forecast : it showed, says ADS, an unsustainable deficit on WMI's newbuilding programme, even with remedial measures in place, such that there was no reasonable proposal of survival for WMI; and, that being so, ADS would obviously not have entered into the credit arrangements which Mr. Brothers was proposing.

59. Mr. Ribeiro S.C., for Mr. Brothers, submitted that, on a proper consideration of all these matters, only one conclusion was possible; that Mr. Brothers did hand this cash flow forecast to Mr. Edelmann at their meeting in London in March 1993, as he had deposed. Despite Mr. Ribeiro's skilful and attractive argument, we are unable to accept this submission. It was, in our judgment, clearly open to the judge on the material before him to conclude as he did that Mr. Brothers had not done so. Certainly, Mr. Ribeiro was able to demonstrate that the alternative conclusion would have been open to the judge and it may well be that would have been the conclusion which we would ourselves have reached. But that is not sufficient. We have to be satisfied the judge was wrong; and we are not satisfied that he was. It cannot be said that there was no evidence to support the judge's conclusion, or that it ran counter to any documentary or other incontrovertible evidence with the judge must have overlooked, or that his conclusion was based on a misapprehension of the facts or some faulty process of reasoning. In these circumstances, we are unpersuaded that we should upset the judge's finding on this issue of primary fact.

60. We turn to consider what the consequences are of the judge's finding on this issue.

61. It must first be observed, as ADS accepts, that our law does not recognise what was described in argument as a "free-standing" duty of disclosure. In a commercial negotiation, one party may be aware of some fact which would to his knowledge materially affect the course of the negotiation if disclosed to the other. But he is not, ipso facto, obliged to disclose it. As Bingham L.J. pointed out in Interfoto Library Ltd v. Stiletto Ltd [1989] QB 433, at p. 439 :

"In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as 'playing fair', 'coming clean' or 'putting one's cards face upwards on the table'.

.....

English law has, characteristically, committed itself to no such overriding principle ....."

62. In the present case, however, ADS claims that it was deceived by Mr. Brothers; and the judge agreed.

63. He did so although he found that by the time ADS agreed to the revised credit arrangements proposed by Mr. Brothers in relation to the Sealock, ADS had considerable information available to it. It knew of WMI's newbuildings. It had received WMI's draft accounts for 1982, schedules of book and market values of its existing vessels and a 10-year cash flow forecast relating to its liabilities to its secured creditors. ADS was aware of the limitation of that cash flow forecast. It had also received a cash flow forecast for the Sealock, which showed a deficit of US$10 m after 5 years if Marine Midland Bank declined to provide a moratorium and that, even with a moratorium, the Sealock would still not be self-financing (or "cash neutral"). It appreciated that any newbuildings cash flow forecast would have to be read cumulatively with the secured creditors cash flow forecast relating to existing vessels. It understood that any deficit projected for the Sealock was likely to be substantially similar for the Annalock and the unnamed hull no. 912 and that there would be further significant deficits for other newbuildings. It would therefore have been possible for ADS to calculate for itself, albeit in rough terms, the size of WMI's deficit; and the result would have been alarming. It knew that the 3-year moratorium, which was an important feature of WMI's plans, had not been arranged. Yet in spite of Mr. Brothers' promise of a cash flow forecast for newbuildings, and in spite of his repeated offers in March and April 1983 to provide further information, ADS did not ask for the cash flow forecast for newbuildings, nor for any further significant information. Nor did it complain about the quality or quantity of the information provided. The judge further found that by the time ADS agreed to the revised credit arrangements proposed by Mr. Brothers in relation to the Annalock, ADS was aware, in addition, of the secured US$4 m facility granted by WM to WMI and that the 3-year moratorium was no longer being pursued. Again, it requested no further information. (Indeed, further cash flow forecasts sent by WMI to ADS were not even presented to its board when that board met as it did on 9 August 1983 to consider the position.)

64. It appears from the evidence led on behalf of ADS to which the judge referred that ADS assumed that the newbuildings would, or would as far as possible, be self-financing, and that WM would anyway support its subsidiary.

65. So far as the latter point is concerned, the judge was persuaded that Mr. Brothers did give the impression to ADS that WM would support its subsidiary. But, since he was unpersuaded that Mr. Brothers had no honest belief in WM eventually supporting WM (the double negative is the judge's) he exonerated Mr. Brothers of deceit in this connection. There is no good ground on which, as it seems to us, this court could properly come to a different conclusion from the judge on this point and convict Mr. Brothers of fraud accordingly (even though, as Le Pichon J. notes in her judgment, the judge was wrong in directing himself that the standard of proof required was "no different from beyond reasonable doubt").

66. The judge further rejected, as "totally unsustainable", a suggestion that the cash flow forecast sent by Mr. Brothers to Mr. Edelmann on 1 March 1983 (read with the graph enclosed with Mr. Brothers' letter of 28 February 1983) was misleading because it implied the newbuildings would be "cash neutral" and because, without the cash flow forecast of 18 March 1983 for newbuildings, it gave the false impression that WMI would not have a deficit until 1986. As the judge noted, ADS knew exactly what the earlier cash flow forecast represented at the time when it was received and knew that a further cash flow forecast, for newbuildings, was being prepared. The judge concluded that it followed that the secured creditors cash flow forecast carried no implications about newbuildings and was not in itself misleading. We entirely agree with the judge.

67. Yet, as we have indicated, the judge agreed that ADS had been deceived by Mr. Brothers. He found that Mr. Brothers had deliberately withheld the cash flow forecast of 18 March 1983 from Mr. Edelmann, and that, notwithstanding his belief in support, he was dishonest in doing so.

68. The judge considered that the failure of Mr. Brothers to supply Mr. Edelmann with the cash flow forecast of 18 March 1983 "had the effect of falsifying the picture presented by the cash flow relating to secured creditors". This picture was, he said, "a picture portrayed by a combination of the secured creditors cash flow and the assumptions that newbuildings would be largely self-sustaining".

69. On this basis, he held that ADS had established a misrepresentation by omission, namely failure to correct the false impression about WMI's financial situation created by the 28 February 1983 graph and 3 March 1983 cash flow; and had also "established a misrepresentation by omission by reason of the failure to supply the newbuildings cash flow."

70. He found, therefore, that "there were two misrepresentations by omission, that they were intended to be and were relied on by ADS, and that they were fraudulent. For these, WM and Mr. Brothers are liable."

71. Mr. Scott, Q.C. for WM and Mr. Ribeiro, S.C. for Mr. Brothers complained that this was not ADS's pleaded case; but this does not matter, since we find ourselves unable anyway to agree with the judge about these "misrepresentations by omission".

72. The concept of misrepresentation by omission is, certainly, a recognised one. Where a representation has been made, but some essential qualification or modification has been omitted from it, without the inclusion of which the original statement is untrue, the maker of the representation is guilty of misrepresentation by omission. And where, during a negotiation, something comes to the knowledge of one of the negotiating parties, which having regard to some representation made by him earlier, requires him to speak in order to correct a mistaken belief on the part of the other party for the creation of which, by reason of his earlier statement, the first party is responsible, then, too, the maker of the representation is guilty of misrepresentation by omission. There are other instances, not relevant here; e.g., where one of the parties to a negotiation is asked a question by the other party in respect of any matter, the first party comes under a duty, if he answers the question at all, to answer it fairly and fully, and, if he does not, will be guilty of misrepresentation by omission. In our case, however, WM and Mr. Brothers can properly be held guilty of misrepresentation by omission only under the conditions indicated above. So we ask ourselves these two questions; (1) on the evidence, has ADS proved any representation by WM, or Mr. Brothers, with some essential qualification or modification omitted from it; and (2) on the evidence, has ADS proved the creation of some mistaken belief on its part for which belief, by reason of some earlier representation made to ADS by WM or Mr. Brothers, they are or either of them is responsible?

73. In our judgment, both these questions have to be answered in the negative. As to (1), the evidence, as it seems to us, comes nowhere near establishing that WM or Mr. Brothers made to ADS any positive statement, whether as to parental support, or as to WM's prospects of survival, or as to the "cash neutrality" of the newbuildings, which omitted some essential qualification or modification which ought to have been included. If WM and Mr. Brothers did do so, we are completely at a loss as to what exactly that statement was, when and how it was made, and what the evidence was which proved it. As to (2), the evidence, as it seems to us, not only comes nowhere near establishing any positive statement as to any of the above matters; it comes nowhere near establishing that the assumptions of ADS that WM would support its subsidiary, or that the newbuildings would be cash-neutral, were assumptions which WM or Mr. Brothers were responsible for inducing. No doubt if there had been any evidence that Mr. Brothers had represented to ADS that the newbuildings would be "cash-neutral", the failure of Mr. Brothers to disclose to ADS the cash flow forecast of 18 March 1983, which showed that the newbuildings would clearly not be "cash-neutral", would have amounted to a misrepresentation by omission. But the judge's finding that such a representation had been made by Mr. Brothers to ADS is, in our judgment, wholly unsupported by the evidence.

74. We would, therefore, allow the appeals of WM and Mr. Brothers on the ground that (contrary to the conclusion of the judge) ADS's case against them of misrepresentation by omission was not made out. (We should add that ADS made other allegations of misrepresentation against WM and Mr. Brothers; but the judge, in our opinion rightly, rejected these and we need not consider them further.)

75. But even if ADS is held (as the judge found) to have pleaded and proved the fraudulent misrepresentations by omission with which it charges WM and Mr. Brothers, that is not the end of the matter; for WM and Mr. Brothers rely, by way of defence against these charges, on the provisions of section 13 of the Law Amendment and Reform (Consolidation) Ordinance, Cap. 23. This reproduces section 6 of the Statute of Frauds Amendment Act 1828 (Lord Tenterden's Act) and reads as follows :

"13. Action not maintainable on representations of character etc. unless in writing

No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade or dealings of any person, to the intent or purpose that such other person may obtain credit, money or goods thereupon, unless such representation or assurance is made in writing, signed by the party to be charged therewith."

76. Although Mr. Purle, Q.C. for ADS bravely argued otherwise, we have no doubt that the representations (if there were any) made here fall to be treated as representations made by WM and Mr. Brothers as to the credit of WMI to the intent or purpose that WMI might obtain credit thereupon (cp. John Hudson & Co. Ltd. v. Oaten, 19 June 1980 (unreported) a decision of the English Court of Appeal applying section 6 of Lord Tenterden's Act to a representation made by a director as to the credit of his company). We are also in no doubt that, whatever representations were made, they were not made in writing so as to enable WM or Mr. Brothers to be charged upon them (and in this connection we cannot accept Mr. Purle's argument that these can be spelt out from the contents of a number of unrelated documents to which he referred). Further, we do not share the judge's view that any such representations were merely representations made by WMI about its own credit. If the representations are to be treated as having been made only by WMI, and only as to its own credit, neither WM, nor Mr. Brothers, could in our judgment be charged upon those representations anyway.

77. The judge found WM and Mr. Brothers guilty of fraudulent misrepresentation, but he went on to consider the possibility of innocent misrepresentation. In this connection, section 3(1) of the Misrepresentation Ordinance, Cap. 284 is relevant. Section 3(1) reads as follows :

"Damages for misrepresentation

3(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true."

78. The judge, refusing to follow the decision of Mustill J. in Resolute Maritime Inc. v. Nippon Kaiji Kyokai [1983] 1 WLR 857, held as we understand his judgment that under this section Mr. Brothers and WM were liable for misrepresentations made by them as agents for WMI. We prefer the view of Mustill J.; an agent who makes an innocent misrepresentation renders only his principal, not himself, liable under section 3(1).

79. So, even if the case based on misrepresentation had been pleaded and (contrary to our view) established by the evidence, it would have been defeated by the defences of WM and Mr. Brothers based on the provisions of Cap. 23 and Cap. 284 to which we have referred above.

80. For these reasons, we would allow the appeals of WM and Mr. Brothers.

The appeal of ADS

81. The case for ADS under the head of "fraudulent trading" is founded on s.275(1) of the Companies Ordinance, Cap. 32. Section 275(1) reads as follows :

"275. (1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any of the directors, whether past or present of the company who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all of the debts or other liabilities of the company as the court may direct."

82. The counterpart of s.275 is to be found in s.275 of the imperial Companies Act 1929. This was designed as an experiment to meet the case where the person in control of the company held a floating charge over its property, undertaking and assets, and, while knowing that the company was on the verge of liquidation, "filled up" his security by means of goods on credit and then appointed a receiver : see para. 92 of the Report of the Review Committee on Insolvency Law and Practice (1982) Cmnd. 8558 ("the Cork Report"). The Report of the Company Law Committee appointed by the Board of Trade (1962) Cmnd 1749 ("the Jenkins Report") recommended an expansion of s.275 to include directors who could be shown to have acted "recklessly or incompetently" in relation to the affairs of a company; but that proposal was not implemented in the United Kingdom until much later : see section 214 of the Insolvency Act 1986, creating a remedy against directors found to be guilty of "wrongful trading" falling short of fraudulent trading. In Hong Kong, the Report of the Law Reform Commission of Hong Kong on Corporate Rescue and Insolvent Trading (1996) has recommended the creation of a similar remedy against directors responsible for a company's continuing to trade when "there was no reasonable prospect of avoiding becoming insolvent" ("insolvent trading") : see para. 19.43. But it was not intended that the provision creating this remedy should be 'so harsh as to discourage responsible persons from taking the time to consider, and to seek advice, as to whether a company could be saved or go into liquidation ....." : see para. 19.6. The Report added "Responsible persons who paid attention to their business, and who took appropriate action when faced with insolvency, should never face an application in respect of fraudulent trading, whereas those who did not would be vulnerable" : see para. 19.7. It remains to be seen whether the recommendations of the Law Reform Commission on this issue of "insolvent trading" will be adopted here. Meanwhile, only proof of "fraudulent trading" will enable the court to fix directors with personal responsibility. What, then, is required by way of proof in that connection?

83. The authorities, in our judgment, establish the following propositions (which to some extent overlap) :

1. Before concluding that the business, or any business, of a company has been carried on for a fraudulent purpose, or to defraud creditors, the court must be "perfectly satisfied" that there is enough evidence to justify the charge : see In re Patrick and Lyon Limited [1933] Ch. 786, per Maugham J. at p. 792.

2. The words "defraud" and "fraudulent purpose", where they appear in s.275(1), are words which connote actual dishonesty, involving, according to current notions of fair trading among commercial men, real moral blame : see In re Patrick and Lyon Limited (above) at p.790.

3. If a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of these debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud : see In re William C. Leitch Brothers Ltd [1932] 2 Ch. 71, per Maugham J. at p.77. (We would for our part here substitute "may be" for "is, in general".)

4. The required intent to defraud is subjective, and not objective, and accordingly it is necessary to show that there was either an intent to defraud or a reckless indifference whether or not the creditors were defrauded : see In re Leyland DAF Limited [1995] 2 AC 394, per Lightman J. at p.408 (and see also R v. Smith & Palk [1997] 2 Crim. App. R. 167, per Potter L.J. at p. 170).

5. A trader can be held guilty of intending to defraud if he obtains credit when there is a substantial risk of the creditor not getting his money or the whole of his money and the defendant knows that that is the position and knows that he is stepping beyond the bounds of which ordinary decent people engaged in business would regard as honest; dishonesty is an essential ingredient of liability : see R v. Grantham [1984] 1 QB 675, per Lord Lane C.J. (giving the judgment of the court) at p. 682.

6. The question whether a director has carried on the company's business with intent to defraud creditors cannot be resolved merely by considering whether he knew of the weakness of the company's finances, of its lack of capital, of its inability to meet its debts as they became due and of the poorness of its future proposals; such matters are evidentiary only : see Hardie v. Hanson (1960) 1 CLR 451 per Dixon C.J. at p. 461.

7. Merely taking new credit for an insolvent company, even when the chance of repayment belongs to the realm of hope rather than belief, however blameworthy or irresponsible that may be, unless coupled with something else; e.g. misrepresentation of the position (see Hardie v. Hudson (above) per Kitto J. at pp. 462, 463 and per Menzies J. at pp. 466, 467) or reckless indifference (see the cases cited at 4 above), is not necessarily fraud.

8. For proof of fraudulent trading in a civil case the court must be satisfied that, on a preponderance of probability, those accused of it are guilty of the charge. Having regard to the seriousness of the charge, the more cogent will be the evidence required to overcome the unlikelihood of what is alleged and thus to prove it; but proof beyond reasonable doubt (in whatever form of words expressed) is not required : see In r. H. (Minors) [1996] AC 563, per Lord Nicholls of Birkenhead, at pp. 586, 587; followed in Smith New Court Securities Ltd. v. Citibank NA [1997] AC 254.

84. In the present case, the judge directed himself (in our opinion, correctly) as follows :

"It is quite clear that the thread running through all the cases is one of subjectivity. There is, in my view, no warrant for importing an objective threshold as the basis for establishing that the business of the company concerned was being carried on in fraud of creditors. Fraudulent intent must be established subjectively after a careful examination of all the evidence. Even in what appear to be water-tight cases, fraud may not be found - simply an unjustified albeit honest 'chasing of the rainbow'. If circumstances from which an inference of fraud might otherwise be drawn do not give rise to such a finding, it would be wrong to put a director in jeopardy as party to that 'fraud'."

85. After the "careful examination of all the evidence" to which he had referred, the judge acquitted of fraudulent trading, and so of actual dishonesty or reckless indifference, all those who had been charged with it. We in this court, with the benefit of full written submissions and extensive oral argument, have carefully examined the matter afresh. None of the matters raised by ADS at the trial was overlooked by the judge. He refused to accept that any of the individual defendants charged with fraudulent trading were dishonest; and in particular that it followed (as we agree) that neither was WM. We in this court, who have not seen or heard the witnesses, are asked to convict the defendants of fraud when the judge below has not found them guilty of it. That can only be done in a very strong case : see Glasier v. Rolls (1889) 42 Ch. D. 437, per Fry L.J., at p. 459. The principle is that where a defendant has been acquitted of fraud in a court of first instance the decision in his favour should not be displaced on appeal except on the clearest grounds : see Akerheilm v. De Mare [1959] AC 789 per Lord Jenkins at p. 806.

86. Mr. Purle, Q.C., to whose spirited argument we would pay respectful tribute, was unable to satisfy us that in this case there are "the clearest grounds" for displacing the judge's decision. We agree with Mr. Purle that those responsible cannot be allowed to shelter behind their legal and financial advisers to avoid a charge of fraud : as Edmund Burke once famously said (admittedly in a very different connection) : "It is not what a lawyer tells me I may do; but what humanity, reason and justice tell me I ought to do." It is however important to recall that we are not concerned here with wrongful trading; we are concerned with fraudulent trading. The judge was not persuaded that, at the material times, Mr. Brothers (the prime mover in the matter) had no honest belief in WM, the parent company, eventually supporting WMI, the issue which the parties had accepted was the crucial issue he had to resolve.

87. The judge indicated, that in coming to that conclusion, he had taken into account 7 factors, which may be summarised as follows : (1) until 8 October 1984 no clear and unequivocal signal was given by WM to WMI that there would be no more support; (2) the provision of what the judge termed "drip feed" from time to time rather indicated that WM remained committed to the principle of support; (3) the unlikelihood of Mr. Brothers or any other director of WMI embarking on a course of fraud with WMI's financial and legal advisers looking over their shoulders; (4) the expectation in WMI's boardroom (as the judge found) that there would be a future for WMI; (5) the axiom that a parent company should support a subsidiary; (6) that Mr. Brothers was not motivated by consideration of face and that the inference was that it was a genuine belief on his part in WMI's future, a future assured by WM, that fuelled Mr. Brothers' unstinting efforts to keep WMI afloat; and (7) that (in the judge's view) Mr. Brothers was for the most part a sincere and honest witness.

88. So, then, are there here "the clearest grounds" on which we can be satisfied on the balance of probability that the judge was wrong and the charge of fraud made out? In our judgment, there are not. Indeed, there were many indications (noted by the judge, as we have seen) pointing to a finding of innocence on the charge of fraud, apart from the open manner in which those charged with fraud took legal and professional advice about the position. The judge noted that there was "an underlying tension" between the major shareholders in WM (the defendant John Louis Marden, the chairman of the board and one John Cheung) on the matter of support for WMI but did not find that they or either of them at any material time lost hope in the survival of WMI. For our part, we believe the judge was quite right to refuse to convict any of those charged by ADS with fraud in this connection. Mr. Cheung was not charged with fraud at all in these proceedings, to which he is not a defendant.

89. For all these reasons, we would dismiss ADS's appeal.

Conclusion

90. In the result, we would allow the appeals of WM and Mr. Brothers, and dismiss the appeal of ADS.

Le Pichon, J. (dissenting in part) :

91. There are two appeals before this court. The first consists of appeals by Wheelock Marden & Co. Ltd. ("WM") and Robert John Francis Brothers ("Mr Brothers") against the judge's acceptance of the Plaintiff's claim that it acted upon fraudulent misrepresentations made by WM and Mr Brothers in connection with its dealings with Wheelock Maritime International Limited ("WMI"), a partly-owned subsidiary of WM. The second is an appeal by the Plaintiff ("ADS") as a creditor of WMI, against the judge's dismissal of a fraudulent trading claim under section 275 of the Companies Ordinance against those persons who had conduct of WMI's business.

The fraudulent misrepresentation appeal

92. I have had the advantage of reading the judgment of Godfrey and Liu, JJ.A. in draft. I too would allow the appeals of WM and Mr Brothers.

93. I agree with the judgment of Godfrey and Liu, JJ.A. on these appeals, subject to the caveat mentioned below which does not impinge on the conclusion reached. Other than that, by way of footnote, I have short observations to add on section 13 of the Law Amendment and Reform (Consolidation) Ordinance, Cap.23 ("LARCO") and the Misrepresentation Ordinance.

94. Inasmuch as the judge had found that Mr Brothers did give the impression to ADS that WM would support its subsidiary but exonerated Mr Brothers of a deceit in this connection because he was unpersuaded that Mr Brothers had no honest belief in WM eventually supporting WMI, and Godfrey and Liu, JJ.A. are of the view that there is no good ground on which this court could properly come to a different conclusion from the judge on this point, I do not share that view for reasons set out in the fraudulent trading appeal. However, this makes no difference to the result since I agree that the evidence goes nowhere near establishing that WM or Mr Brothers made to ADS any positive statement as to parental support or that the assumption of ADS that WM would support its subsidiary was an assumption which WM or Mr Brothers was responsible for inducing.

LARCO

95. Section 13 substantially reproduces section 6 of the Statute of Frauds Amendment Act 1828 (Lord Tenterden's Act). It provides as follows :

"13. Action not maintainable on representations of character etc. unless in writing

No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade or dealings of any person, to the intent or purpose that such other person may obtain credit, money or goods thereupon, unless such representation or assurance is made in writing, signed by the party to be charged therewith." (emphasis added)

96. The judge rejected the defence of WM and Mr Brothers based on section 13 on the ground that it had no application because the representations made by WMI were as to its own credit. One of the issues is whether the judge was right in concluding that section 13 has no application where the relevant misrepresentation is made by a director about his company's credit worthiness. On a plain reading of section 13, it has no application unless there are two persons, i.e. the person sought to be made liable, and "such other person" as to whose credit worthiness a representation had been made by the person sought to be charged. In the present case Mr Brothers was a director of both WMI and WM. The claim is brought against Mr Brothers and, on the basis of the principle of vicarious liability, against WM and not WMI. Whilst the judge's reasoning cannot be faulted if the claim had been against WMI, that is not the case here.

97. Prima facie, there is nothing in the wording of section 13 that would exclude the company of which the person sought to be charged is a director from qualifying as "such other person" within section 13. Support for this analysis is to be found in the English Court of Appeal's decision in John Hudson & Co. Ltd. v. Oaten (unreported) C.A. 19 June, 1980 which would not appear to have been cited to the judge. It is clear from the judgment of Sir David Cairns that for the purposes of section 6 of Lord Tenterden's Act, the defendant, and the company of which he was a director as to whose credit the representation related, were different persons. Stephenson LJ was of a similar view. I respectfully agree.

Misrepresentation Ordinance

98. On the question whether liability under section 3(1) of the Misrepresentation Ordinance, Cap.284 can attach to an agent who makes an innocent misrepresentation in addition to his principal, I agree with Godfrey and Liu, JJ.A. that the view of Mustill J in Resolute Maritime Inc. v. Nippon Kaijik Kyokai [1983] 1 WLR 857 that only the principal is liable is preferable and I see no valid reason to differ from that conclusion. The corresponding section under the Misrepresentation Act 1967, namely, section 2(1), is based on recommendations contained in the 10th Report of the Law Reform Committee (Cmnd. 1782). It is to be noted that Mustill J's decision is consistent with those recommendations which contemplate that the liability would only attach to a principal (see para.18 of the 10th Report).

The fraudulent trading appeal

99. ADS appeals against the dismissal of its claim that WMI's business was being carried on dishonestly by the 1st, 2nd, 3rd, 5th and 6th Respondents (collectively "the Respondents") by way of fraud upon ADS. ADS's complaint is directed at two transactions only, the drawing down by WMI from ADS of a loan of D.Kr.214,000,000 (US$25 million) on 8 April 1983 ("the Sealock loan") and a further loan of D.Kr.204,800,000 on 22 March 1984 ("the Annalock loan").

100. Under the original financing arrangements, ADS's loans which attracted interest at 8% would have been completely covered by the Danish Kroner deposits which were so structured that they would pay off each instalment of ADS's loans as it fell due. WMI had obtained US$ loans from Marine Midland Bank ("MMB") for Sealock and Lloyds Bank International ("LBI") for Annalock. These were placed on deposit in Danish Kroner with Danish banks at interest rates of 17-18%. Pending delivery of the vessel, the Kroner deposits constituted security for MMB and LBI. On delivery, the banks were to swap that security for a first mortgage on the vessel, releasing the Kroner deposits to ADS as its security, but such obligation to swap was subject to the fulfillment of an earnings covenant.

101. Because of the collapse of charter rates, the earnings covenant could not be satisfied. The banks would only proceed with the swaps if their loans were reduced. Hence the revised arrangements were negotiated under which, in the case of Sealock, ADS agreed to defer the repayment of first six instalments of the Sealock loan which were to be paid in one balloon payment at the end of the 8 1/2 year period of the ADS loan. The parts of the deposits supporting the first six instalments were released to MMB to reduce the amount of its loan to a value commensurate with the then value of Sealock. In the case of Annalock, the deferral was of the first four instalments. In each case, by reason of the releases from the deposits to the commercial banks, the deposits that remained did not cover the balloon payment which attracted interest at 13%. The additional interest of 5% payable on the balloon payment was rolled up and this amount together with the balloon payment itself became unsecured loans. As a result of WMI's liquidation in August 1985, the substantial part of the unsecured loans became irrecoverable as the distribution on the winding-up was de minimis.

102. The thrust of ADS's contentions is that, before this court, the fraudulent trading claim is at large because the judge had misdirected himself as to the law of fraudulent trading as well as the standard of proof applicable; and that on the evidence ADS has made out its case. Alternatively, if the judge had correctly applied the law and adopted the correct standard of proof, the only conclusion he could have come to was that the Respondents were knowingly parties to the carrying on the business of WMI with intent to defraud ADS.

Was there any misdirection?

103. It is common ground that R v. Grantham [1984] 1 QB 675 provides the correct test for fraudulent trading. It is also common ground that in his judgment dated 15 December 1989, in an application by the Respondents to strike out fraudulent trading, Jones J had correctly held that :

"Actual dishonesty is an essential element of fraudulent trading.

(1) It must be shown that the persons involved in carrying on the company's relevant business -

(a) actually intended to defraud creditors or to achieve a particular fraudulent purpose; or

(b) were reckless as to whether the carrying on of the business would result in the creditors being defrauded." (emphasis added)

Thus, reckless indifference, for example, by wilfully shutting one's eyes to the obvious, would constitute actual dishonesty.

104. ADS's case is that the learned judge misdirected himself as to the law because despite finding "the correct law ... to be that laid down in Grantham", when it came to the application of the law to the facts, the judge directed his mind to and applied the principles set out in Hardie v. Hanson (1960) 105 CLR 451 instead. Those principles, it was argued, are not consistent with Grantham.

105. The Respondents' answer is that in stating what the test was for fraudulent trading, the judge was not applying Hardie v. Hanson and that he had clearly focused on the right questions as is apparent from his citations of In re Leyland DAF Ltd. [1994] 4 All ER 300, Welham v. DPP [1961] AC 103, R. v. Allsop [1976] 64 CA Rep 29 and Wai Yu-tsang v. R. [1992] 1 AC 269.

106. In Grantham, the company had obtained supplies from a supplier on the basis that the supplier would be paid in 28 days or shortly thereafter when the person running the company knew at the time that there was no hope of the supplier being so paid. The Court of Appeal approved the summing-up (at 681 B-E) in the following terms :

"Members of the jury, my direction, as a matter of law, to you with regard to what is meant by intent to defraud is this. A man intends to defraud a creditor either if he intends that the creditor shall never be paid or alternatively if he intends to obtain credit or carry on obtaining credit when the rights and interests of the creditor are being prejudiced in a way which the defendant himself knows is generally regarded as dishonest... Some fraudulent traders intend from the outset never to pay or never to pay more than a fraction of the debt. If that is true in your view in this case then the intent to defraud would be made out but a trader can intend to defraud if he obtains credit when there is a substantial risk of the creditor not getting his money or not getting the whole of his money and the defendant knows that that is the position and knows he is stepping beyond the bounds of what ordinary decent people engaged in business would regard as honest."

"Members of the jury, if a man honestly believes when he obtains credit that although funds are not immediately available he will be able to pay them when the debt becomes due or within a short time thereafter, no doubt you would say that is not dishonest and there is no intent to defraud but if he obtains or helps to obtain credit or further credit when he knows there is no good reason for thinking funds will become available to pay the debt when it becomes due or shortly thereafter then, though it is entirely a matter for you this question of dishonesty, you might well think that is dishonest and there is an intent to defraud."

107. In his judgment, Lord Lane CJ referred to In re William C. Leitch Bros. Ltd. [1932] 2 Ch 71 where Maugham J stated (at 77) :

"In my opinion I must hold with regard to the meaning of the phrase carrying on business 'with intent to defraud creditors' that, if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud:.."

In upholding the direction given by the judge, the Court of Appeal upheld the approach in Leitch, namely, that dishonesty and fraud are proper inferences which may be drawn when at the time the debts were incurred the person realized that there was no reason for thinking that funds would become available to pay the debt when it became due. At the same time it disagreed with Buckley J in In re White & Osmond (Parkstone) Ltd.(unreported) 30 June 1960 in so far as he was saying that it is never dishonest or fraudulent for directors to incur credit at a time when, to their knowledge, the company is not able to meet all its liabilities as they fall due : (at 682 D and 682 H - 683 A).

108. Hardie v. Hanson is a decision of the High Court of Australia and concerned a company formed in May 1956. By February 1957, the trial judge found that the stage had been reached when an observance of proper standards of commercial morality would have led the appellant to take the normal steps to make what assets the company possessed available for the satisfaction of its debts. Nevertheless, he persisted in carrying on the business for another 15 months. The three members of the Court considered the dictum of Maugham J in Leitch. Dixon CJ (at 460) expressed grave doubts as to its validity as a rule of substantive law and thought it at most a proposition of evidence, such proposition only as one in general true. Kitto J (at 464) did not consider that the dictum of Maugham J ought to be sustained as providing a valid starting point for the consideration of the evidence in a case arising under the legislation concerning fraudulent trading. Menzies J in considering the case of a buyer of goods who intends to pay for the goods but in the event fails to do so, stated (at 466-7) :

"... In such a case the degree of fault depends upon the buyer's estimate of the probability or improbability of payment at the time when the goods were purchased, but even if the chances of payment of all creditors in full were so remote that it belonged to the realms of hope rather than belief, it seems to me that the fault, grievous though it may be, falls short of fraud unless it is coupled with something else, such as misrepresentation of the position or an intention to use goods purchased on credit for the purposes of dishonest gain, which gives it a fraudulent character." (emphasis added)

109. That same approach is reflected in the judgment of Kitto J. The appellant's explanation for carrying on the business for another 15 months was that he was always hoping for a reversal of fortune. Kitto J said (at p.463) :

"But the onus lay on the respondent to prove affirmatively that the carrying on of the company's business during the relevant fifteen months was characterized by an intent - which in the circumstances means an intent on the part of the appellant - to defraud creditors of the company. An actual purpose, consciously pursued, of swindling creditors out of their money had to be established against the appellant before a declaration under the section could be made. It was not enough for the respondent to prove that the appellant acted with blameworthy irresponsibility, knowing that he was gambling (in effect) with his creditors' money as well as his own, and with much more of their money than of his. ... The circumstance that he did draw out more than he paid in demonstrates the unfairness, not to say the utter wrongness, of the course he pursued; but with what intent he pursued it is the question; and in my opinion the only answer which can be given on the material adduced is that although he was clearly unjustified in his chasing of the rainbow, he is not shown to have had any more sinister intent than an intent to try, however despairingly, to carry the business through its difficulties to a success which, if it had been reached, would have benefited the creditors as well as himself. In whatever terms his conduct may be condemned, his intent is not, I think, to be described as an intent to defraud the creditors."

110. The passages from Hardie v. Hanson cited above do not sit happily with Maugham J's approach in Leitch upheld in Grantham. The difference in approach when it comes to proving an 'intent to defraud' is plainly one of substance, specifically, whether the dictum of Maugham J in Leitch is a valid starting point. Beyond that, the Menzies and Kitto test appears to require that there be 'something else' even when a 'chasing of the rainbow' is clearly unjustified. Further, Hardie v. Hanson appears to leave no scope for actual dishonesty to be established through 'reckless indifference' as to whether the carrying on of the business would result in the creditors being defrauded since for my part, I am unable to discern any difference of substance between 'blameworthy irresponsibility' referred to by Kitto J and 'reckless indifference' which as is accepted, is a means of proving actual dishonesty. The difference, if any, can only be semantic.

111. In reaching his conclusion as to whether the necessary fraudulent intent in the case of Mr Brothers had been made out, the judge cited the passage set out above from Kitto J's judgment in Hardie v. Hanson. The inference is therefore irresistible that he was applying the propositions in that passage to the facts of the case before him. As 'conscious swindling' has never been a feature of ADS's case, it is the 'unjustified chasing of the rainbow' proposition that was applied and which, in the court below, ultimately saved the day for Mr Brothers and the other directors of WMI.

112. I have considerable difficulty in accepting that Hardie v. Hanson is consistent with Grantham. It is evident that, more likely than not, they would lead to different results.

113. ADS also contended that the judge applied the wrong standard of proof. ADS does not quarrel with the proposition that in a civil case where the standard is on the balance of probabilities, the degree of probability must be commensurate with the occasion and proportionate to the subject matter : Hornal v. Neuberger Products Ltd. [1957] 1 QB 247. But the judge, after referring to an unreported decision of this Court in Lai King Shing v. Medical Council of Hong Kong CA 95/1995 held that the standard of proof applicable was no different from beyond reasonable doubt. The issue which now arises is whether the judge was correct in applying that standard in ordinary civil proceedings, it being accepted that the allegation here is a serious allegation, being one of fraud.

114. ADS prays in aid the House of Lords' decision in In re H (Minors) (Sexual Abuse : Standard of Proof) [1996] AC 563. The relevant passages from Lord Nicholls' speech (at p.586) is set out below :

" The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability.... Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation.

Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established. Ungoed-Thomas J. expressed this neatly in In re Dellow's Will Trusts [1964] 1 W.L.R.451, 455 : 'The more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it.'

This substantially accords with the approach adopted in authorities such as the well known judgment of Morris L.J. in Hornal v. Neuberger Products Ltd. [1957] 1 Q.B.247, 266. This approach also provides a means by which the balance of probability standard can accommodate one's instinctive feeling that even in civil proceedings a court should be more sure before finding serious allegations proved than when deciding less serious or trivial matters.

No doubt it is this feeling which prompts judicial comment from time to time that grave issues call for proof to a standard higher than the preponderance of probability.... The law looks for probability, not certainty. Certainty is seldom attainable. But probability is an unsatisfactorily vague criterion because there are degrees of probability. In establishing principles regarding the standard of proof, therefore, the law seeks to define the degree of probability appropriate for different types of proceedings. Proof beyond reasonable doubt, in whatever form of words expressed, is one standard. Proof on a preponderance of probability is another, lower standard having the in-built flexibility already mentioned. If the balance of probability standard were departed from, and a third standard were substituted in some civil cases, it would be necessary to identify what the standard is and when it applies. Herein lies a difficulty. If the standard were to be higher than the balance of probability but lower than the criminal standard of proof beyond reasonable doubt, what would it be? The only alternative which suggests itself is that the standard should be commensurate with the gravity of the allegation and the seriousness of the consequences. A formula to this effect has its attraction. But I doubt whether in practice it would add much to the present test in civil cases, and it would risk causing confusion and uncertainty. As at present advised I think it is better to stick to the existing, established law on this subject. I can see no compelling need for a change."

It is therefore clear beyond peradventure that proof beyond reasonable doubt is not the appropriate standard.

115. There is now also authority to the effect that the ordinary civil standard of balance of probability applies to allegations of fraud in civil cases : Smith New Court Securities Ltd. v. Citibank N.A. [1997] AC 254, 274C-D citing In re H (Minors).

116. In the light of those authorities, the standard of proof applied by the judge, being "no different from beyond reasonable doubt", is plainly not sustainable.

Effect

117. Absent any misdirection, the ruling of the judge acquitting someone of fraud ought not to be overturned unless this court were convinced that the only reasonable view formed from the evidence is that he was guilty of fraud. As Lord Steyn put it in Smith New Court Securities Ltd. v. Citibank N.A. (supra) at 274 H :

" The principle is well settled that where there has been no misdirection on an issue of fact by the trial judge the presumption is that his conclusion on issues of fact is correct. The Court of Appeal will only reverse the trial judge on an issue of fact when it is convinced that his view is wrong. In such a case, if the Court of Appeal is left in doubt as to the correctness of the conclusion, it will not disturb it."

118. The statement reflects the principle adopted by the courts for over a century. In Glasier v. Rolls [1889] 42 Ch D 436, 458, Cotton LJ said :

"... unless fraud is very clearly to be inferred from the documents and the facts proved, we ought not to find the defendant guilty of fraud if the judge below has not done so."

And at p.459, Fry LJ said :

"We who have not seen the witnesses are asked to convict the defendant of fraud when the judge below has not found him guilty of it. This could only be done in a very strong case."

That statement of principle was affirmed by the Privy Council in Akerhielm v. De Mare [1959] AC 789, 806 which cited Glasier v. Rolls for the proposition that where a defendant has been acquitted of fraud, that decision in his favour should not be displaced on appeal 'except on the clearest grounds'.

119. The appellate court's role is clearly stated by Lindley MR in Coghlan v. Cumberland [1898] 1 Ch 704 :

"Even where ... the appeal turns on a question of fact, the Court has to bear in mind that its duty is to rehear the case, and the Court must reconsider the materials before the judge, with such other materials as it may have decided to admit. The Court must then make up its own mind, not disregarding the judgment appealed from but carefully weighing and considering it, and not shrinking from overruling it if on full consideration it comes to the conclusion that it is wrong. When, as often happens, much turns on the relative credibility of witnesses who have been examined and cross-examined before the judge, the Court is sensible of the great advantage he has had in seeing and hearing them. It is often very difficult to estimate correctly the relative credibility of witnesses from written depositions; and when the question arises which witness is to be believed rather than another, and that question turns on manner and demeanour, the Court of Appeal always is, and must be, guided by the impression made on the judge who saw the witnesses. But there may obviously be other circumstances, quite apart from manner and demeanour, which may shew whether a statement is credible or not; and these circumstances may warrant the Court in differing from the judge, even on a question of fact turning on the credibility of witnesses whom the Court has not seen. ..."

120. It was argued by Mr Purle QC that if there was misdirection, then the court may be left in doubt as to what part the misdirection played in the judge's reasoning and may have to apply the judge's actual findings of the primary facts to the proper direction that should have been given. The matter is then at large. In his submission, the 'high test' is confined to those cases where there has been no misdirection.

121. In Smith New Court Securities Ltd. v. Citibank N.A. (supra), the judge found that the first representation had not been proved but in the light of the totality of the evidence before him, he found that the second and third representations had been made out. On appeal, the Court of Appeal overturned the judge's finding regarding the first representation, having found that he had misdirected himself. The House of Lords held that the Court of Appeal was entitled so to conclude :

"That meant that the Court of Appeal was at large to disregard the judge's findings of fact, even though based on credibility."

per Lord Steyn (at 277B).

122. Mr Scott QC, for the Respondents, submitted that the high standard is applicable even in cases where there has been a misdirection. He cited Henry Ansbacher & Co. Ltd. v. Binks Stern (a firm) [1998] Lloyd's Rep. Bank.1. In that case, having found that the trial judge had misdirected himself, the Court of Appeal nonetheless accepted that the high test was applicable. In the course of submissions, this has been referred to as the 'only conclusion' or 'no other option' test. Mr Scott submitted that this court ought not to interfere if it were to come to the conclusion that the judge should have found that the Respondents had no honest belief in parental support but that, on the material before him, he could reasonably have come to the opposite conclusion.

123. Smith New Court aside, where the misdirection is as to the standard of proof, there are inherent difficulties in applying the Ansbacher test.

124. The parties do not seek a re-trial. In these circumstances, in my judgment, the matter must be at large, the standard of proof applicable being the civil standard although having regard to the seriousness of the allegation, cogent evidence is required to overcome the unlikelihood of what is alleged.

The Issue

125. ADS's primary case is that the Respondents knew when the Sealock and Annalock loans were drawn down on 8 April 1983 and 22 March 1984 respectively that there was no reasonable prospect of such credit ever being repaid, whether by the ship owning companies or by WMI under its guarantees. The key to this issue was parental support and in the court below, the issue crystallized as whether each Respondent had an honest belief that WM would support WMI. The parties are agreed that this is the only issue that arises in this appeal.

The facts

126. Since, in my judgment, the fraudulent trading claim is at large and requires to be approached afresh, it is necessary to state the facts relevant to that issue. This summary is necessarily extracted from the very full account of the facts given by the judge for which I am indebted.

127. By way of background, I need only recapitulate that in 1979 WMI decided to modernize its fleet and contracted to buy twenty-one new vessels. Seven of them were ordered from the Burmeister & Wain ("BW") yard in Denmark. In 1982, the shipping market dropped significantly. Charter hire rates fell from a high of US$14,000 per day to as little as US$3,000 to 4,000. Earnings generated were insufficient to cover operating costs, much less to service existing debts. It also meant that the cost of new buildings far exceeded their value.

128. WM owned 51% of the shares in WMI but had voting control because of the way in which the A and B shares were structured. As from the 1960s, Mr John Marden (the 2nd Respondent) and Mr John Cheung were the two major shareholders. Mr Marden's interest lay in shipping whilst that of Mr Cheung was in property. WM was the general manager of WMI and this function was discharged through Mr Lees, Mr Leung and Mr Brothers (respectively the 3rd, 6th and 5th Respondents), all of whom were directors of both WM and WMI.

129. Until July 1983, the WM board was split 7-3 in favour of Mr Marden and after that date, 7-6 in his favour. However on the question of support for WMI, the only directors of WM who could vote were those who were not also on the board of WMI. At the time of the Sealock loan, there were four voting directors, two of whom were identified or associated with Mr Marden and the other two with Mr Cheung. At the time of the Annalock loan, it was 5-2 in Mr Cheung's favour. Mr Ortiz-Patino, a close friend of Mr Marden, was a director of WM. Mr P.J. Griffiths (now deceased) was Deputy Chairman of WM until 13 July 1983. He was apparently legal adviser both to WM and to Mr Cheung.

130. By November 1982, WMI's financial condition caused WM considerable concern. Following a board meeting of WM on 26 November 1982, there were informal meetings between Mr Marden, Mr Lees, Mr Leung, Mr Griffiths and Mr Ortiz-Patino to discuss what to do with WMI. On 29 November, Mr Brothers was told what consensus had been reached ("the November consensus") and was asked to reduce it to writing. This he did in a memo dated 8 December 1982 ("the December memorandum") addressed to the Managing Directors, WMI Finance. The WM view had four aspects which were described in the following terms :

"(i) That we must continue all our present efforts to minimize the WMI cash drain. This should be done by the sale and leaseback arrangements similar to that concluded for the 'Marilock' (and hopefully also now in Denmark), the sale of existing vessels to parties outside the group and the re-negotiation and re-financing of existing debts.

(ii) The sale and leaseback arrangements at inflated prices were not considered productive nor was the idea of inter-group sales to raise cash for WMI.

(iii) Our overall debt exposure should be reduced as far as possible particularly through the cancellation of newbuilding orders.

(iv) Wheelock Marden would provide support for its subsidiary and that this support would be in the form of a 'once-and-for-all' fund-raising exercise rather than through the giving of a series of guarantees on loans where there was otherwise insufficient security."

131. Mr Brothers' own perception of the time-table reflected in that memorandum was a cash injection by the parent into WMI to be followed by requests to WMI's various bankers for deferment of principal repayments for initially a 12-month period with the possibility of continuing for another 12 months, and continuing negotiations with both the Spanish and Chinese yards to reduce WMI's exposure and a continuation of WMI's efforts to sell out the older units in the fleet. The reason for this perception is apparent from the following passage in the same memorandum :

"Clearly an overall programme needs to be established as soon as possible and certainly before it is generally perceived by outside observers that WMI will need assistance if it is to survive a prolonged slump in the shipping industry. For example, to seek cancellations of orders now would spark off damaging rumours which would only tighten the credit position and make an orderly re-structuring more difficult. There would be similar chain reaction effects from an approach to our bankers for easier credit terms which also would almost certainly result in demands for support from the parent."

Thereafter there was no further reference to either the November consensus or the December memorandum.

132. On 23 December 1982, Mr Brothers sought to delay the delivery of Manila Faith by six months, offering compensation of US$100,000 per month as expenses. On 28 December, Orient Leasing (Asia) Limited ("Orient Leasing") made an offer for the sale and leaseback for Manila Faith at US$17 million but it required a letter of comfort from WM.

133. A problem then arose in early January 1983 over the delivery of the Rangelock. As with the Sealock and Annalock, the swap of security depended on the fulfilment of an earnings covenant. The lending bank, in this case Lloyds Bank International ("LBI") required a three-year charter in place at the rate of US$11,250 per day. By January 1983, the rate on the spot market was between US$5,000 to 6,000 per day. To overcome this difficulty, Rangelock was chartered to a wholly-owned subsidiary Aquaship Limited at US$11,250 a day, with WM providing LBI with a performance guarantee on behalf of Aquaship.

134. This precipitated a WM Board Meeting on 26 January 1983 at which these arrangements were approved including the signing of the guarantee to be given by WM. Nevertheless the minutes record that a resolution was passed unanimously to the effect that :

"It remains the strict policy of this Company not to assume liabilities of any of the subsidiaries or associates, either by way of guarantee or by assuming primary liability."

It was further resolved that all letters of comfort or letters of awareness must follow the form used on 24 December 1982 for Grindlays, which contained an express provision that the letter was not to be construed as a guarantee. Those resolutions had been brought about by Mr Cheung who was angry he had not been consulted about the Aquaship guarantee. Thereafter, he took much closer interest in WMI's affairs.

135. On 9 February 1983, a WMI board meeting took place at which it was resolved that :

i) Schroders & Chartered Limited ("S&C") be appointed financial advisers to WMI as the Group was facing serious cash flow difficulties;

ii) WMI's shareholding in Wheelock Marden and Stewart Limited ("WMS") be sold to a subsidiary of Hong Kong Realty Limited ("HKR") at a slight discount because of WMI's urgent cash needs;

iii) Fenlock and Inverlock be sold to an associated company which would produce eight to nine months additional liquidity;

iv) Manila Spirit be sold at a price that would virtually wipe out the outstanding loan, as its earnings were insufficient to cover debt repayments.

The meeting also considered and approved Mr Brothers' proposals to defer the delivery of the Dalians scheduled for May and September 1983 to January 1985 at a cost of US$55,000 per month by way of compensation pending delivery. It was also informed that the sale and leaseback of the Manila Faith had been concluded subject to a letter of comfort from WM.

136. A week or so later, between 16 and 18 February, a meeting or meetings took place between Mr Marden, Mr Griffiths, Mr Lees, Mr Leung, Mr Poon and Mr Brothers, Mr Shaw and Mr Nicholson of Norton Rose and Mr Banner of S&C. There is a note of the meeting prepared by Mr Nicholson who on 26 February sent to Mr Tipper a "memorandum setting out certain advice given" by JSM. It is apparent from the note that there was grave concern over issues such as trading while insolvent, fraudulent preference and liquidation. The advice was that the proposed sale of Inverlock and Fenlock could only go ahead if WMI's directors believed there was a reasonable chance that agreement could be reached with the banks and the long term future of the company secured. The note records, inter alia, that :

"10. ...Mr Shaw also advised that it was then essential that every transaction to be entered into by WMI be considered carefully. In particular, no new credit should be incurred unless it was absolutely essential to preserve the assets (and there was a reasonable prospect of such credit being met).

13. Mr Griffiths asked what WMI's response would be if the banks asked whether Wheelock Marden was prepared to give the Company any support. It was stated that Wheelock Marden's attitude was that it was not prepared to inject further funds into such a partly-owned company, and that it had always been made clear that WMI was an independent company."

It was at this meeting that Mr Griffiths squashed any idea of the sale of Inverlock and Fenlock to an associated company, Allied Investors Corporation Limited ("Allied"), and in any event prior to any proposed sale, WMI had to approach its bankers to agree a rescheduling of its loans which was to be done immediately.

137. On 18 February 1983, in two meetings with National Westminster Bank, Mr Brothers stated :

"that he was under very strict instructions that it should not be considered as part of any plan that there would be support from the parent company. They definitely, WMI had to survive on its own resources."

138. Sealock was scheduled for delivery on 15 March 1983. The proposed sale and lease back of Sealock with Orion Royal Pacific Limited ("Orion") was conditional on the provision of a letter of awareness from WM which was to contain a declaration that WMI would remain in the business of shipping for the foreseeable future and be able to meet its commitments and indemnities. Negotiations were abandoned on 25 February. The judge found that the Orion transaction fell through because WMI could not get support from WM.

139. Meanwhile, on 22 February 1983, Mr Brothers approached ADS for help over BW vessels to be delivered. A full and comprehensive account of events up to 10 March 1983, including the request for assistance made to ADS, the information provided, communications between Mr Brothers and Mr Edelmann as well as ADS's internal documentation, may be found in the judgment of Godfrey JA which I gratefully adopt. For present purposes, it need only be noted that in a note dated 4 March 1983 prepared by Mr Edelmann for his board, it is recorded that :

"If such a moratorium scheme is made, [WM] which is the parent company, will commit itself to inject new capital."

140. On 25 February 1983, Orient Leasing telexed a draft of the letter of comfort it required for Manila Faith to WM. Whilst specifically stating that the letter is not be construed as a guarantee, the letter required WM to state that "it is WM's intention that WMI should continue in existence". As will become apparent later, WM would not provide a letter of comfort in that form.

141. On 4 March 1983, WMI held meetings with its secured bankers to whom it had sent letters seeking a three-year moratorium. The banks were also sent the cash flow and graph dated 3 March 1983 for the ten-year period from 1983 to 1992. At the meeting, the banks enquired about parental support and Mr Brothers' note records that he stated that the intention was still to find a solution to the problems without the parent company's support. But by mid-March, it became clear that all banks were indicating a need for parent support if re-financing was to be available.

142. On 18 March 1983, the secured lenders were sent a graph and cash flow covering newbuildings and unsecured creditors for the period March 1983 to December 1992. This cash flow showed that even after taking all remedial measures, there would be a deficit of US$60 million for 1991. Unlike the graph of 28 February and 1 March 1983 sent to ADS illustrating the effect of a 3 year moratorium for the secured creditors which showed a U-curve, the 18 March graph showed WMI going into an even worsening deficit from mid 1983 for the rest of the 10 year period, reaching a high of US$60 million in 1991 and still showing a projected deficit of US$57 million for 1992. It was a truly depressing document. According to ADS, it was never given a copy of this cashflow.

143. On the same day Mr Brothers wrote to Mr Tipper regarding the loan documentation for Manila Faith which was to be financed by a temporary loan from Worldwide Wheelock Shipping Incorporated ("WWW") to be repaid on the conclusion of the sale and leaseback with Orient Leasing, stating :

"Generally, subject to what David Shaw may say, I see no reason why we should not enter into this agreement with WWW provided we have disclosed to them the fact that the Company is in negotiations with its bankers for a re-financing arrangement. I have disclosed this fact to them at my meeting in World-Wide Offices and I also make it very clear to all present that we would not be able to sign the agreement with Orient Leasing until the re-financing arrangements had been concluded. If they advise, as they have done, that they still wish to go ahead with the arrangements then we have surely fulfilled our duty."

WWW was a joint venture since 1972 between WMI and Sir Y.K. Pao's World-wide Shipping Group ("WWS") via their respective subsidiaries. The matter raised by Mr Brothers was followed up by Mr Tipper who, on 24 March 1983, asked Mr Shaw to advise if WMI could safely take the new credit.

144. Meanwhile Mr Brothers met with ADS, MMB and BW in London on 22 to 23 March 1983 to discuss the financial arrangements for Sealock. He also had a meeting with Mr Edelmann at the offices of Norton Rose on 24 March 1983 to discuss the financial position of WMI. The judge rejected Mr Brothers' evidence that he handed a copy of the 18 March 1983 cashflow to Mr Edelmann and concluded that he had deliberately suppressed it.

145. At about this time, Mr Brothers sought advice about the cancellation of the four Spanish and three BW hulls. By the end of March, it became clear that cancellation of the BW ships would be costly since BW would be entitled to compensation for all direct expenses.

146. On 30 March 1983, in his review of the current status of WMI to the shipping committee, Mr Brothers considered it urgent to resolve the loan restructuring prior to April 13 when the 1982 results would be announced. It was his view that WMI should approach the parent for assistance in arranging a 12-month credit line or loan of not less than US$5 million. The three-year moratorium with the secured bankers was to be replaced by a 12-month agreement.

147. On 31 March, Mr Ortiz-Patino sent a telex to Mr Lees and Mr Leung referring to WMI being on the verge of insolvency. Mr Ortiz-Patino went on to state that he did not consider it to be in the interests of either the principal shareholders or the minority shareholders of WM to give further financial support to WMI nor to consider such support until definitive steps had been taken by WMI to quantify and reduce its liabilities, including the rescheduling of its present bank commitments. He proceeded to state steps that had to be taken, namely :

"1. All newbuildings other than B and W 910 must be cancelled. This implies proof of acceptance by the yards of cancellation and details of the cost, if any, of such cancellation. These cancellations involve not only B & W 911 and 912, but also the four Spanish ships and the Chinese ships.

2. The rescheduling of present lines of credit in accordance with the memorandum basically requesting a moratorium on principle over the next three years.

3. Quantify the support then required which we would consider providing through issue of preference shares or subordinated loans to WMI or an increase in the capital of WMI, to carry over, not merely for the next 12, 24 or 36 months, but for the full period until such time as the loans have been repaid, taking into consideration for these projections conservative charter rates throughout the period."

Mr Ortiz-Patino's views had the full support of Mr Griffiths.

148. On the same day, S&C were asked to prepare a report for the WMI Board advising on alternative courses of action available to WMI. A draft was already available by 6 April 1983, the final report being submitted on 8 April. Its conclusions were :

"(i) WMI requires an immediate stand-by facility of, say, US$2 million which cannot be provided commercially and therefore will have to be provided by the parent company;

(ii) based on the cash flow projections contained in this report, WMI requires its lenders to support a rescheduling proposal such as the one already discussed with them;

(iii) We do not believe that support for such a rescheduling proposal from the lenders will be forthcoming without certain support from WMI's parent company; and

(iv) The most appropriate form of support would be a legally-binding comfort letter from Wheelock Marden whereby Wheelock Marden would undertake to inject sufficient funds into WMI to enable WMI to meet its loan obligations (after lenders have enforced such security as they hold for their loans). Based on the currently prevailing ship values, this would involve no payments in respect of loans owed to secured lenders and, so long as WMI continues to have a positive net worth, no payments to unsecured lenders. In any event any possible payments would not be required until 1986."

149. On 7 April 1983, the WMI directors were circulated with resolutions, inter alia, to approve arrangements for the Sealock. All directors except Mr Poon signed on or about 7 April and on 8 April Sealock was drawn down. As the judge rightly observed in his judgment on costs, ADS was treated shabbily by WMI. There was no board meeting convened to consider drawing down the loan. WMI did not so much as spare a thought in the direction of ADS.

150. On 12 April 1983, Mr Griffiths sent a telex to Mr Brothers responding to the latter's telex of 6 April to Mr Ortiz-Patino. It read :

"2 ...the question remains open in my view as to whether in the light of the then circumstances the extensive programme particularly in new buildings was justifiable and whether financing limits and controls were observed and policies laid down from time to time to ensure that WMI would not become over extended bearing in mind the unaltered policy throughout of the parent that WMI operations had to be conducted within its own resources and that parent cash injections in any form and guarantees and commitments including comfort arrangements of the parent would not be forthcoming.

..........

5. Your reference in paragraph 4 to a discussion with me concerning a need to broaden the WMI capital base was a suggestion that the shipping interests of Allied and its subsidiary should be brought into WMI. It was never discussed or contemplated that the parent company should inject further capital or enter into any form of financial commitment to extend the financial ability of WMI. The policy of the parent not to adopt any such measures has remained constant throughout and up to the present as you well know. The suggestion to incorporate all the shipping interests of the Group under WMI came from you but no plans or proposals as to whether or how this could be accomplished have ever to my knowledge been put forward or discussed since this informal conversation."

151. On 14 April 1983, Mr Tipper wrote to WWS regarding WWW's loan to finance the Manila Faith. He referred to the receipt of legal advice to the effect that WMI should not enter the proposed arrangements, at least not as borrower. In other words, it should not take new credit. But that was precisely what WMI had done only less than a week earlier, by drawing down the Sealock loan.

152. On 20 April 1983, the WMI directors met to consider the S&C report. The minutes record that :

"Mr Shaw went on to say that the ability of the Group to continue trading depended on there being a reasonable prospect of resolving the cash flow problems and being able to meet all its debts and obligations at some time in the future. The discussions to date had indicated that some form of agreement could be reached with lenders and accordingly there could be said to be such reasonable prospect. If however, he said, the company did not get support from whatever source and lenders refused to reschedule the company's loans then the Board would have to reconsider the overall position since if there ceased to be such a reasonable prospect the Company would not be able to incur new credit. ..."

Mr Lees then advised the meeting that the sale and lease back of Manila Faith could not proceed because Orient Leasing required a letter of comfort stating that WMI would be maintained in its present form, the implication being that WM would not provide such a letter.

153. On the same day, a formal request was made to WM enquiring whether WM was prepared to support WMI in the manner recommended by S&C.

154. At about this time, there was a suggestion that Mr Marden was contemplating the purchase of WMI shares from WM. This was soon replaced by a proposal that HKR would consider investing US$12 million in WMI.

155. At the WM board meeting held on 27 April, Mr Marden recognized that the position of WMI was "clearly critical" and that "a decision as to whether or not further support should be given was urgently needed". Mr Griffiths who was not present at the meeting had given instructions to his proxy to vote against any measure for giving assistance to WMI. Wardleys were appointed as WM's advisers in relation to proposals to be made by HKR.

156. On 29 April 1983, in connection with a revival of the idea of a sale and lease back with Orient Leasing when alternative financing from WWW proved unacceptable, Mr Nicholson of JSM wrote to Mr Cameron as follows :

"(1) Given the recent discussions concerning Wheelock Maritime International Limited ('WMI') and in particular the likely decision of the WM Board not to support WMI, I cannot see how WM can state that it intends to 'maintain the corporate existence of WMI ... whereby it can conduct its business substantially as now being conducted.

(2) Similarly the fact that there is now some prospect that WM may relinquish control of WMI almost certainly precludes it from stating that it intends 'to hold voting control of WMI during the period of the lease transaction'."

157. On 16 May 1983, the shipping committee decided that :

(a) it would not be possible to enter into revised terms (i.e. take new credit) for the Dalians which Mr Brothers had negotiated; and

(b) that the Manila Faith/Orient Leasing sale and lease back arrangements could not be finalized until loan re-scheduling was complete.

158. On 18 May 1983, alternative proposals were made to the Hudong yard to defer delivery of Manila Faith for up to three months with compensation.

159. On 19 May 1983, Mr Griffiths sent a letter to Mr Lees referring to the adjourned WM board meeting at which WMI's request for assistance was being considered. Mr Griffiths' view was that :

"any support by the parent must be referred to an EGM of its shareholders and the board cannot properly enter into any commitment in favour of WMI without the approval of the members' resolution."

Mr Lees was informed that Mr Griffiths' proxy who had been instructed to vote against assistance to WMI at the board meeting that had been adjourned would be instructed to refer the matter to an EGM.

160. On 20 May 1983, Mr Shaw gave written advice on the propriety of WMI giving guarantees for loans :

"There remains the question of whether, in current circumstances it is proper for WMI to enter into such guarantees. As previously advised, WMI may only continue trading if there is a reasonable prospect that it will at some future date be able to meet all its obligations. At present, proposals are under consideration, and discussions are taking place with bankers, designed to lead to a situation where WMI will be able to meet its immediate obligations and to put itself in a position where there is a reasonable prospect that it will be able to meet all obligations at some future date. It is our understanding that, based on the information available to the Directors of WMI, there is a reasonable prospect of agreement with bankers and other being reached on the above lines. On that basis, WMI may continue to trade and incur fresh credit. However, care must be taken in incurring fresh credit, not least because in the case of substantial new borrowings or other commitments it would be wrong to mislead any lender as to WMI Group's current financial position. In the case of Wayfoong Shipping Services Limited and Marine Midland Bank N.A. we understand that both banks are, as stated above, aware of the WMI group's present difficulties but are nevertheless prepared to extend loan facilities. Accordingly, we do not see how such banks could complain as to the propriety of WMI giving guarantees and generally we consider that it is proper for WMI to enter into such guarantees, provided that the Directors of WMI continue to take the view that there is a reasonable prospect that it will at some future date be able to meet all its obligations."

161. On 27 May 1983, WMI's solicitors advised in relation to a proposed guarantee to be given by WMI and an assignment of a dividend and concluded :

"A final caveat must however here be raised. This is that the directors of WMI must be satisfied that in entering into the guarantee or assigning the (WWW) dividend WMI is not carrying on business with intent to defraud its creditors or for any fraudulent purpose, otherwise they run the risk of being personally liable for the debts of WMI under Section 275 of the Companies Ordinance. If the directors genuinely believe that WMI will at some time be able to satisfy its creditors then the risk of a successful attack for fraudulent trading is unlikely."

162. On 21 June 1983, WMI was advised that it should not give a confirmation letter "that it is our intention to ensure payment by the borrower ..." until re-scheduling had been concluded. Meanwhile, it could only confirm that "it would be our intention in so far as we are able to assist to ensure that payment by the borrower ...".

163. N.M. Rothschild & Sons (Hong Kong) Limited ("Rothschilds") who were appointed financial advisers for WM on 24 May 1983 in connection with WMI's problems produced a discussion paper on 4 July 1983. The moratorium with the banks had still not been achieved, and although pending a decision by HKR, no action should be taken by WM, in their view,

"the consequences of Wheelock Marden not providing support for its financially troubled subsidiary could be very damaging commercially in terms of the withdrawal of credit lines, loss of future contracts and generally more onerous terms and conditions of trade. The adverse publicity which such move would attract should also not be forgotten ..."

They proceeded to express their opinion that

"The only circumstances in which Wheelock Marden could reasonably withhold support for WMI would be where the Board were to take the view that the case against a significant recovery in charter rates and the value of the fleet vessels was overwhelming in terms of the financial impact on the Group."

Rothschilds were concerned to find a short term solution with minimal financial commitment from the WM Group so as to provide a "breathing space" for WMI to find a long term solution. The discussion paper also considered such long term funding and the rationale for support.

164. On 7 July 1983, the WM board met. Mr Brothers advised that if the US$12 million were forthcoming, it should see WMI through its difficulties for at least three years. He also advised that that was an amount considered sufficient to satisfy WMI's secured creditors on the question of group support. When questioned by Mr Griffiths as to why the re-financing of Rangelock had not taken place, Mr Brothers explained that it was due to the inability to sell the Fenlock and the Inverlock as had originally been planned and as a result,

"WMI had been faced with insolvency with the result that it had become unable to take on new credit and had therefore had to cancel the re-financing of the 'Rangelock', the lease of the 'Sealock' and also the re-financing of Hudong Hull No.1126 ..."

165. On 20 July 1983, at a shipping committee meeting, Mr Brothers said that one of the two unsecured creditors had been told WMI :

"could not make even a token repayment at this time".

166. In a further paper produced for discussion on 2 August 1983, Rothschilds stated that it was their understanding that :

"WM is seeking to strengthen the financial base of WMI by means of the provision of long term funding support."

167. Shortly thereafter, Mr Shaw was asked to advise on whether the sale of Asia Heron to Allied could be open to attack as a fraudulent preference.

168. On 15 August 1983, Mr Brothers advised WMI directors that :

"The company is in urgent need of funds to enable it to meet its day-to-day financial commitments ..."

169. On 26 August 1983, at a meeting between Rothschilds and S&C took place. It is recorded in a note of the meeting that the WM board met on 25 August and :

"...they thought a short-term solution was better than any structured solution. The Wheelock Marden Board was basically considering a committed credit facility for a period of 3 years and of an amount to be determined based on the revised cash flow. Stuart said that Wheelock Marden would like to see commitment from the banks to the rescheduling scheme before agreeing to the granting of the facility."

170. On 7 September 1983, at a shipping committee meeting, concerning discussions with WWS about Manila Faith, when Mr Brothers suggested a possible solution that the Group's standard comfort letter be offered to Orient Leasing as an interim arrangement, both Mr Lees and Mr Leung expressed the view that :

"this arrangement would be unacceptable to WM."

It was further noted that WMI was in no position to take delivery of the Dalians.

171. Meanwhile, as HKR's decision was still not known, Rothschilds again rendered advice to the WM board in the event the decision was negative. They recommended short-term support by way of a standby facility which opinion was based on the cash flow of 1 September. Rothschilds noted that this was premised on the six sensitive assumptions including the cancellation of the Dalians at no cost and no call on the loan from Pacnorse.

172. On 14 September 1983, HKR indicated that it was unlikely to proceed to make a commitment. This caused the WMI directors to write to WM on the same day in the following terms :

"...the Board of WMI is obliged to ask its parent company, Wheelock Marden and Company Limited ('WM') whether it is prepared to extend financial support to WMI. The Board of WMI considers that, in the absence of financial support in an amount of the order of US$12 million limited to a period of three years, it is unlikely that the bankers to WMI will be prepared to agree to a rescheduling of existing commitments. Without such agreement for rescheduling WMI would not be able to meet its existing commitments as they fall due and therefore would have to cease trading."

The letter also emphasized the extreme urgency of the matter. This failed to elicit any commitment from WM : WM was only prepared to consider the request "very carefully" in conjunction with their financial advisers.

An announcement was released stating that WM was considering WMI's request and would respond after its next meeting on 23 September.

173. At a meeting of the WMI board on 15 September 1983, Mr Shaw again rendered advice as to the company's ability to carry on business pending WM's decision. He advised that it could carry on trading provided the directors were satisfied that there was a reasonable prospect of sorting something out which would enable the company's financial problems to be resolved. Mr Poon who was a director of both WM and WMI expressed his personal view that there was no reasonable prospect for anything to come out in favour of support at the present time for WMI. Nonetheless, Mr Poon accepted that WMI could wait for a week and could not be accused of fraudulent trading.

174. WMI took further legal advice from leading counsel in London on the question whether the directors could continue to trade and incur fresh credit while all possibilities were being explored. Counsel's advice was related to Mr Shaw on 22 September :

"1. From the facts in your instructions and in the Schroder report, he felt that although company technically insolvent (and Directors aware of this), whilst Directors of WMI are waiting for answer from WM there is no reason why Directors should not go on trading.

2. Position which seems to concern him is that while WMI (and its subsidiaries) continue trading they are inevitably incurring new credit e.g. bunkers and other day to day operating expenses. In order that they may continue to do so without incurring personal liability they must have reasonable grounds for believing that there is some prospect that the new creditor (and existing creditors) will be paid in full within a reasonable time. If shareholder support is not forthcoming then Directors must satisfy themselves that without such support new creditors will be paid."

175. Meanwhile on 16 September 1983, WMI received advice that if WMI failed to take delivery of the Dalians, the yard could sue WMI under the letter of intent. On the same day, WM received a letter from its directors posing questions on WMI's request for support and Rothschilds' report of 8 September which referred to the six sensitive assumptions. Rothschilds dealt with these queries by a further report on 21 September.

176. On 23 September 1983, the WM board approved a US$4 million standby facility for two years. When the formal offer was received on 12 October, it was not only interest bearing and subject to termination in the event of any enforcement action by a creditor, the facility was to be secured by a pledge of WWW shares. WMI accepted this offer.

177. On 28 November 1983, Mr Campbell, the finance manager of WM and a member of WMI's shipping committee at the time, produced a memo on short-term cash flow forecast for WMI and recommended that payments be confined in the short-term cash flow forecast to those classified as "critical payments" leaving "urgent overdue payments" to be paid only if there were sufficient funds to meet them.

178. On 9 December 1983, Mr Brothers wrote a position paper on WMI for the WM board. He stressed the importance of retaining liquidity, stating :

"No new credits will be negotiated or newbuildings accepted if the same would severely strain current liquidity. To the extent that this cannot be achieved, the Group is prepared to risk defaulting on existing newbuilding contracts."

In discussing the US$4 million facility, Mr Brothers said :

"It is imperative for the future well being of the Group that this facility is retained to meet vital working capital requirements in the future and is not utilized to meet large loan principal repayments or down-payments on newbuildings which if this was to be the case, would in the absence of any other source of funds, quickly force the Group into another cash crisis and possible liquidation."

179. On 19 December 1983, Wardley produced a report for, inter alia, Mr Marden regarding a possible purchase of WMI by a group of investors headed by Mr Marden for a nominal consideration. It referred to WM being "at best an unhelpful and at worse an obstructive parent company". Wardley recommended against the proposed acquisition in that they considered that "the risks seemingly inherent in the proposed acquisition outweigh the possible returns".

180. By 8 March 1984, the US$4 million facility had been wholly utilized. Further, the sale and lease back of Annalock by Cable & Wireless was on hold pending tax clearance. Mr Brothers requested that delivery be delayed till 16 March. In the event, the Annalock was delivered on 22 March 1984.

181. On 9 August 1984, at a shipping committee meeting at which legal advice was again sought from Mr Shaw on the directors' responsibilities if WMI continued to trade, Mr Brothers raised the problem relating to the immediate delivery of the Dalians. The advice was that the directors would be required to be extremely circumspect about incurring new credit without a reasonable prospect of meeting such liabilities when they fell due and it would be a matter for the full Board to decide whether or not to take delivery and by so doing incur new credit.

182. On 24 August 1984, at a WMI board meeting, Mr Brothers advised that if WM declined WMI's formal request for support, it would be extremely unlikely that alternative support could be secured in the limited time available so that WMI would be unable to take delivery of the Dalians and the directors would have to seriously consider whether or not it would be possible for WMI to continue trading.

183. On 8 October 1984, WM wrote to WMI as follows :

" .....

We would advise that you should seek with the utmost urgency a longer term solution of your working capital problems possibly by seeking a new equity investor and/or by renegotiating the terms of your borrowings.

We would also advise that we would in principle be prepared to sell our shareholding in WMI for a nominal consideration as part of any reconstruction or rescheduling scheme, although any proposal made should not require the provision of further finance by the Company."

This, the judge found, was a clear signal that WM had turned its back on WMI.

184. The Sealock and Annalock loans were defaulted on 29 July 1985 and WMI went into liquidation on 2 August 1985.

ADS's case

185. As noted above, the issue below was whether each Respondent had an honest belief that WM would support WMI. In other words, the necessary intent to defraud would be established by the absence of an honest belief.

186. At the heart of ADS's contentions is the proposition that no honest person in the position of the Respondents would have taken the Sealock and Annalock facilities without first obtaining a commitment to parental support, that being the key to its survival at the relevant dates. ADS also relied on the judge's alternative formulation which is whether the WMI directors could justifiably be confident that they would be able to go to WM with a package that WM would find palatable.

187. In the court below, the Respondents accepted that WMI depended for survival on WM's support. Their defence was simply that WM agreed to support WMI in the terms of the first page of the December memorandum. The Respondents contended that it amounted to a commitment to support by the shareholders. The judge found (at 5.7.5) :

"...there was no such commitment - only a plan under which support was conditional upon WMI being able to show that there was hope for it."

And at 5.4.25 :

"There was no commitment or agreement to support, unofficial or otherwise".

Such findings are not challenged.

188. The judge concluded that the November consensus was in substance an endorsement by the major shareholders of WM of the general strategy WMI had already adopted to try and retrieve its difficult position and an affirmation that WM's policy on support would apply to WMI. He found (at 5.4.21), WMI was effectively being told :

"...carry on along the lines you are already following, taking into account our own suggestions (as set out in the December memorandum). When you have done all you reasonably can and can tell us how much you need then, provided the figure is not outrageous and we are not throwing more money down the drain, we will help."

In reaching this conclusion, two glosses were added to the November consensus. First, the judge recognized that an essential component was missing from the December memorandum namely, the need to quantify the amount of support required which first surfaced in the telex from Mr Ortiz-Patino and was accepted as axiomatic by the directors. Second, the judge found it inconceivable that WM would provide the support ultimately found to be necessary if the amount required was out of proportion to WM's resources or indicative of an incurable malaise on the part of WMI. Thus, he found (at 5.4.19) that :

"WM would not support a subsidiary which could not be demonstrated to have the potential to return to profitability."

The latter gloss appears to stem from Mr John Marden's account of WM's policy vis-à-vis its subsidiaries set out in his witness statement which the judge accepted, namely :

"Group support could nevertheless only be given so long as there was a realistic prospect of survival in the longer term. Any such support could only be on a case-by-case basis and could not be an 'open ended' commitment. No one would have agreed to support a company which had no prospect of surviving even at that difficult time."

189. WM's policy as found by the judge came to this. A subsidiary had to take all necessary steps to put its own house in order. This included all efforts to minimize the cash drain by taking such steps as selling existing assets, renegotiating and refinancing existing debts as well as the cancellation of newbuilding orders. After that had been done, the amount still required had to be quantified. If it can then be shown that there was a realistic prospect of survival in the longer term, support would be forthcoming.

190. The judge's findings as to WM's policy are not challenged, whether as ADS would have it, it was a policy of non-support, or, as the Respondents would have it, a policy of support. In my view, a more accurate description would be WM's policy vis-à-vis its subsidiaries on the question of support. This would reflect what was essentially a neutral position with no bias for or against support : its availability could neither be assumed nor taken for granted. Rather, the Respondents knew there were conditions precedent or contingencies which had to be satisfied before such support would be available.

191. Since the issue is whether each Respondent had an honest belief that WM would support WMI, the relevant test is not whether WM might support WMI but that it would, the latter being the operative word and one which necessarily implies a degree of conviction. With the rejection by the judge of the defence put forward by the individual Respondents that there was a commitment to support, Mr Purle argued, correctly, in my view, that one has to inquire into and examine the basis of their alleged honest belief as at 8 April 1983 and 22 March 1984, the dates when the Sealock and Annalock loans were respectively drawn down.

192. The backdrop to this inquiry was the parlous condition in which WMI found itself at the material time, this being a matter of primary fact. It was described by the judge (at 5.15.20) in these terms :

"...living a hand to mouth existence from November 1982 until the end, and unable to pay debts as they fell due. If WMI was to survive in its existing form and pay its creditors, support from WM was the only hope."

At no stage throughout this period was there any real respite in WMI's continuing financial crisis and severe cash shortages. WMI was insolvent, parental support being its only hope of survival.

193. Plainly bald (and repeated) assertions of belief in parental support are insufficient to found a proper basis for that honest belief. The November consensus was not a commitment. The most that can be said is that support might be forthcoming. The availability of support was problematic, being contingent on factors that were then imponderables. Support was contingent on three matters : (a) WMI taking all necessary steps to put its own house in order; (b) quantification of the once and for all fund raising exercise; and (c) WMI being demonstrated that it remained viable : that there was a realistic prospect of survival in the longer term. Pending the fulfilment of those contingencies, support could not have been certain. Obviously, the closer WMI was to satisfying those contingencies, the greater the likelihood of support and thus the degree of conviction it could have that such support would be forthcoming.

194. What, then, does the evidence establish?

Sealock - 8 April 1983

195. The facts show that by the time the Sealock credit was drawn down, WMI had made little progress in implementing any of the measures contemplated in the December memorandum. What had been accomplished by then comprised the sale of one ship, the sale of WMS within the Group, the cancellation of one Spanish newbuilding and the deferral of the delivery of the Dalians (scheduled for March and September 1983) until January 1985. Existing vessels such as the Fenlock and Inverlock remained unsold because of Mr Griffiths' opposition and the refinancing of Rangelock. The sale and leaseback of Sealock and Manila Faith failed repeatedly because of WM's refusal to provide the necessary letters of comfort as to WMI's continued existence.

196. By then, WMI had received legal advice and therefore knew that the cancellation of any other newbuildings would lay itself open to large claims for damages which the judge found would undoubtedly be terminal for WMI.

197. The risk of liquidation was not theoretical but real : as early as mid February 1983, legal advice had been obtained as to WMI's ability to continue to trade. There were concerns regarding liquidation. The taking of new credit was a sensitive issue and became more so having regard to the legal advice obtained.

198. It is to be noted that whilst WMI obviously considered it appropriate to delay the delivery of the Dalians and Manila Faith (thereby delaying the taking of new credit), preferring to offer compensation pending the delay, Sealock and Annalock were treated differently. Further, it is a fact that WMI saw the need to seek legal advice in relation to proposed new credit from WWW in relation to the temporary financing of the Manila Faith. WMI also realized that it should not enter into any sale and leaseback transaction until "the refinancing arrangements had been concluded". Those facts demonstrate that WMI was very much alive to the need for prudence in the taking of new credit given its financial circumstances. Yet, that need was conspicuously absent when it came to taking new credit from ADS. This sharp contrast caused the judge to remark upon

"the cavalier conduct of WMI's directors towards drawing down [ADS's] loans and indeed towards ADS generally"

and concluded that it was

"plain beyond peradventure that ADS was shabbily treated by WMI and its directors"

when he gave judgment at the subsequent hearing on costs on 13 March 1998. No doubt these observations were prompted in part by the fact that the Sealock facility was taken without so much as a board meeting to consider it. Rather, as the judge found (at 5.5.8),

"it was handled in a relatively informal way by the working directors, leaving the Board formally to ratify later."

199. By 6 April 1983, S&C had produced the first draft of their report which confirmed their view which was that the existing creditors would not agree to a moratorium in the absence of parental support. S&C's recommendation was that support should take the form of a binding letter of comfort. The report itself was issued on 8 April 1983. Having regard to the strict policy laid down in the January 1983 resolution, WM's uncompromising attitude in relation to the sale and lease back transactions by refusing to provide even non-binding letters of comfort, Mr Brothers' own recognition in his discussions with the National Westminister Bank on 18 February 1983 that "WMI had to survive on its own resources" and parental support was not part of the plan, a stance he maintained on 4 March 1983 and given the conditions for support and the Ortiz-Patino telex of 31 March 1983 which had the full support of Mr Griffiths, realistically, what could the prospects have been as at 8 April 1983 of securing parental support as recommended by the S&C report? The only reasonable inference from those facts is that they were indeed remote.

200. Also by this time, the 10 year projection for both secured creditors and newbuildings and unsecured creditors had for the first time been prepared. The prospects for WMI even as depicted in the 6 April 1983 draft report (which took into account the improved Pacnorse situation) were grim : the combined cash flow for WMI as a whole with a moratorium and after taking all remedial measures showed a deficit of US$56 million in January 1990 and without a moratorium, a deficit of US$105 million in August 1989. At the end of the decade, it still showed deficits of US$26 million and US$41 million respectively. This would have put the long term viability of WMI into serious question, or, at a minimum, rendered the task of demonstrating its viability a difficult one.

Annalock - 22 March 1984

201. Between the dates of the Sealock and Annalock loans, the following events are noteworthy in the context of parental support :

- The 12 April 1983 telex from Mr Griffiths to Mr Brothers stated in forthright terms what Mr Griffiths believed to be the policy of the parent which was against the injection of further capital or financial commitment including comfort arrangements. Five weeks later, Mr Griffiths reiterated his view that any support by the parent must be referred to an EGM of its shareholders, having instructed his proxy to vote against the provision of any assistance, a view which Mr Brothers regarded as disastrous.

- WMI directors continued to receive legal advice throughout this period as to their ability to continue to trade or to give guarantees for loans : this occurred on 20 April, 20 May, 27 May, 14 September and 22 September 1983.

- WMI directors continued to be circumspect when it came to the question of incurring new credit for the Dalians and Manila Faith.

- A formal request was made to WM on 20 April enquiring if it would support WMI as recommended by S&C. Although this was overtaken by events and developed into consideration by HKR of investing US$12 million into WMI, a process which dragged on until 15 September when HKR decided it would not invest in WMI, WM would not even provide the US$2 million standby facility suggested by S&C.

- A formal request in the sum of US$12 million was made as a matter of urgency on 14 September anticipating the HKR rejection. The letter stated that without support of that order over three years rescheduling was unlikely and without rescheduling "WMI would not be able to meet its existing commitments as they fall due and therefore would have to cease trading". Yet, WM was only prepared to provide US$4 million available over a period of two years from 17 October 1983 and this being given against security. It caused WMI to abandon its moratorium negotiations with the banks. The judge described the US$4 million facility as 'niggardly' and 'parsimonious'.

- WM's uncompromising stance on providing comfort letters did not change.

- There was some progress in terms of measures taken in putting WMI's house in order. By the end of 1983, six older ships had been sold and agreement reached for the sale of the four Spanish newbuildings (though the latter has always featured as an assumption in WMI's cashflows for 1983), Manila Faith and another vessel. Discussions were initiated with a view to realising surplus equity in WWW.

- Refinancing of the World Rainbow remained incomplete.

- Due to unexpected calls, the US$4 million facility meant to be for two years from 17 October 1983 was exhausted by 8 March 1984, only five months of its being granted and two weeks before the Annalock draw down. Effectively, this propelled WMI into the crisis situation Mr Brothers alluded to on 9 December 1983 and which it was hoped the facility would avert.

202. The state of insolvency in which WMI found itself since late 1982 persisted throughout. WMI's financial condition was as precarious as ever. By 28 November 1983, it reached such a stage as to require a differentiation and prioritization between "critical payments" and "urgent overdue payments" : payments were confined to the former until such time as funds were available to meet the latter.

203. It is of significance that WMI made no further request to WM for support between the date of the letter of 14 September 1983 and the draw down of the Annalock loan some six months later despite the unanticipated calls on the US$4 million facility during those initial months which caused the facility to be exhausted a fortnight before the Annalock facility was drawn down.

204. On the facts, the main difference in terms of fulfilling the three contingencies for parental support between the draw downs of the Sealock and Annalock loans is that by the date of the Annalock draw down, WMI had made some progress in respect of the first contingency. Even so, the first contingency never progressed sufficiently to enable quantification to take place. In this connection, it is to be noted that the judge did not accept Mr Brothers' evidence that that stage was reached by late August 1984. So, several months after the Annalock draw down, WMI was still no closer to being able to quantify the support required, assuming that the November consensus survived the HKR rejection. The evidence of Mr Lees and Mr Leung is that, by then, any commitment (i.e. the November consensus) had as good as disappeared.

Section 275 of the Companies Ordinance

205. This reads as follows :

" (1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct."

Section 275(1) is concerned solely with directors although by reason of subsection (5), 'directors' is given an extended meaning to include any person in accordance with whose directions or instructions the directors of the company have been accustomed to act. Criminal penalties are provided for in subsection (3) and disqualification provisions are contained in subsection (4).

206. In considering the applicability or otherwise of section 275, two matters should be borne in mind. The first is that as a mental state, actual knowledge in law is a concept that embraces not only actual knowledge but also where a person is wilfully shutting his eyes to the obvious or is wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make : see Commission for New Towns v. Cooper [1995] 1 Ch 259, 281D. The second is that liability under the section may arise for a single transaction. The argument that it had to relate to the entirety of the business was rejected in In re Gerald Cooper Chemicals Ltd. (in Liquidation) [1978] 1 Ch 262, 267B-F. Templeman J held (at 268B) :

"It does not matter ... that only one creditor was defrauded, and by one transaction, provided that the transaction can properly be described as a fraud on a creditor perpetrated in the course of carrying on business."

207. Turning to the question that was before the judge, it was not whether the Respondents believed that parental support might, but whether it would, be available. Obviously had the contingencies been satisfied or substantially satisfied, the Respondents could properly have entertained that belief. But on the facts, they were never in that happy position or even remotely close to it.

208. Dishonesty and fraud may be inferred and are frequently inferred from the surrounding facts. Thus, as appears from Grantham, they are proper inferences which may be drawn when at the time the person incurring the debt realized or knew that there were no real or reasonable prospects of such debt being repaid.

209. WMI took new credit from ADS when it knew it had no means of repaying, absent parental support. The evidence establishes beyond peradventure that at the material time, whether parental support would be forthcoming was and could only have been speculative. So when new credit was taken from ADS, WMI knew there was no basis for being confident that funds would be available to pay the debt when it became due; that there was a substantial risk that ADS would not get paid was only too evident. Given that knowledge, were the Respondents stepping beyond the bounds of what ordinary decent people engaged in business would regard as honest? According to current notions of fair trading among commercial men, would gambling with a creditor's money be regarded as acceptable, involving no real moral blame? The answer to these questions posed would determine whether it is proper to draw the necessary inference of fraud and dishonesty.

210. I now turn to consider the position of each of the Respondents.

211. In that connection, it is to be noted that in his judgment on costs, the judge remarked :

"...fraudulent trading boiled down to the question of an honest belief in whether WM would, in the end, support WMI. On that question, because of the standard of proof which I found to be applicable, the Defendants just got home and they got home in spite, and not because of the November agreement upon which was placed a belated and wholly misconceived reliance."

Mr Brothers

212. The judge dealt with Mr Brothers' evidence in some detail. The more significant findings are summarized below :

- the judge rejected Mr Brothers' reliance on the November consensus as a commitment by the shareholders and concluded that "Mr Brothers was simply indulging in a futile effort to support what was plainly unsupportable";

- he rejected Mr Brothers' attempts to characterize Mr Shaw's advice on fraudulent trading given in February and April 1983 as "gratuitous" and found that Mr Brothers, like all other directors, was seriously concerned about insolvency and fraud issues arising in the conduct of WMI's business;

- he rejected Mr Brothers' evidence that the minutes of 7 July 1983 were inaccurate. Instead, he found the minutes which recorded that he had apparently said that "WMI had been faced with insolvency with the result that it had become unable to take on new credit and had therefore to cancel the refinancing of the Rangelock, the lease of the Sealock and also the refinancing of Hudong Hull No.1126" to be substantially correct;

- he found Mr Brothers' explanation of the reference in Mr Lees' letter of 14 September 1983 to WMI having to cease trading as "obvious back-tracking" and rejected it as unsatisfactory in explaining the extreme terms of that letter at a time when WMI was "on its beam ends";

- he found Mr Brothers' evidence concerning his statement at the 28 August 1984 WMI Board Meeting that if WM did not support "directors would have to give serious consideration to whether or not it would be possible for WMI to continue trading" unsatisfactory, inter alia, "being on the retreat from relatively clear and explicit wording". He also rejected Mr Brothers' evidence that by August 1984, WM "had now taken the steps that needed to be taken and now is the time to come up with the long term support";

- he described Mr Brothers' attempt to ascribe some other factor rather than the fact that WMI could not get support from WM as the cause for the sale and lease back of Sealock to fall through as "disingenuous";

- he found Mr Brothers' refusal to accept that support remained an open question when Rothchilds submitted their discussion paper on 5 July 1983 and subsequently their report of 21 September 1983 to be an example of his adjusting his evidence to meet problems as they arose.

The judge concluded that on the totality of the evidence that Mr Brothers' credibility was considerably damaged, but felt able to conclude that Mr Brothers had an honest belief by taking into account seven factors. These are examined below.

213. First, the judge appeared to treat the availability of support as the corollary of the absence of a clear signal by WM. But this is not consistent with his own findings. After determining the nature of the November consensus and rejecting the effect which Mr Brothers, Mr Lees and Mr Leung sought to put on it, the judge held (at 5.4.28) :

"It is my judgment that, unless and until WM gave a clear signal that it had turned its back on WMI, WMI's Directors were entitled to believe they would get support if they were able to go to WM with a request for a not unreasonable sum and at the same time demonstrate that this would probably lead to a return to profitability." (emphasis added)

In this passage the notion of availability of support is linked to the notion of the absence of a 'clear signal' but its availability is qualified and contingent on the happening of certain events. Leaving aside the question whether it was right to cast the onus on WM, to then proceed on the basis that so long as that question remained an open one, a degree of comfort was available is unwarranted. This would be so only if the contingencies to which the availability of support was subject were severed and discarded. For once freed from the constraints of those contingencies, the availability of support as a free-standing proposition would be the corollary to the absence of a clear signal. To the extent that the judge implicitly equated the absence of a clear signal with the availability of support (leaving by the wayside, as it were, the contingencies), it is contrary to his own findings. Until the question of support had been addressed (positively) by WM, WMI could not have been confident about support. Until such time as the contingencies were substantially fulfilled, there was nothing that could support the degree of confidence or conviction implicit in a belief that parental support would be forthcoming.

214. Second, WMI's policy is reflected in the November consensus. If that survived the HKR rejection which, as noted above, is contrary to the evidence of Mr Lees and Mr Leung, the provision of the drip feed would not have altered the conditions to which the availability of support was subject. In any event the provision of the facility afforded no assurance that the much larger sums (yet unquantified or unquantifiable) would be available.

215. Third, whilst fraudulent trading usually involves a course of conduct over a period of time, that is not necessarily the case. The judge's example of 'cooking the books' suggests that that was his focus, overlooking the possibility of a single transaction fraudulent trading as in In re Gerald Cooper Chemicals (supra). The judgment contained no reference to that decision as such. Rather, it surfaced in the judgment only as part of a passage cited from In re Augustus Barnett & Son Ltd. [1986] BCLC 170, where it was cited as authority for another proposition. It would therefore appear that the judge never considered the possibility of any of the ADS loans alone constituting fraudulent trading. As is plain from the evidence, the circumspection and prudence exercised by WMI and its directors in relation to incurring new credit when it came to the Dalians or Manila Faith inexplicably vanished when it came to taking new credit from ADS. The only reasonable inference is that WMI simply did not care or acted recklessly when it came to ADS.

216. Fourth, an 'expectation' that there would be a future does not take matters further since it is a manifestation of hope rather than belief.

217. Fifth, as to Mr Marden, he was not in a position to carry the WM Board at the material time however much he would have wanted to save WMI. Moreover, even Mr Marden (as part of a private group of investors) was not prepared to acquire WMI at the end of 1983 against the advice of Wardleys.

218. Sixth, personal gain is not a necessary ingredient for section 275 purposes. As Lord Radcliffe said in Welham v. DPP [1961] AC 103 at 123 :

"It is the effect upon the person who is the object of the fraud that ultimately determines its meaning."

219. Finally, whilst conscious of the disadvantage of having neither seen nor heard any of the witnesses, where, as here, it is a question of the proper inferences to be drawn from the findings of primary fact made by the judge, the disadvantage is more apparent than real. A witness's demeanour assumes less importance where it is not credibility that is at stake but whether, accepting the judge's finding of credibility, there was any proper basis upon which a belief that parental support would be available could be grounded. As noted above, bald assertions of such belief are insufficient.

220. The judge's considered appraisal of Mr Brothers is that he was "for the most part" a sincere and honest witness. But that appraisal does not automatically translate into a finding that Mr Brothers therefore had an honest belief that parental support would be available. They are different and separate issues. Moreover, the finding that "for the most part" Mr Brothers was honest and sincere needs to be examined in the context of the evidence that was actually rejected. It is to be noted that the evidence rejected was hardly peripheral to the issue whether Mr Brothers did have an honest belief that parental support would be available. Rather, it went to the very heart of that issue, undermining the foundations of such belief.

221. One asks rhetorically, what was it that could have formed a valid basis for sustaining Mr Brothers' belief that parental support would be forthcoming, a belief that could be expressed with a degree of confidence or conviction? The seven factors do not provide the answer which continues to elude me.

222. The judge considered Mr Brothers' conduct to amount to no more than "an unjustified albeit honest chasing of the rainbow". In this connection, I have some difficulty in understanding how a chasing that is unjustified can at the same time be honest if it amounts gambling with a creditor's money or putting it at substantial risk. In terms of moral turpitude, it is no different from enriching oneself at a creditor's expense. In any event, I reject the notion that "a chasing of the rainbow" is a convenient catchall to be invoked whenever it is desired to absolve conduct which, (echoing Maugham J in In re Patrick and Lyon Ltd. [1933] 1 Ch 786, 790) 'according to current notions of fair trading among commercial men, involves real moral blame'. Insofar as Kitto J in Hardie v. Hanson suggests otherwise, it should not be followed.

223. Reverting to the questions posed earlier and applying them to Mr Brothers, the issue which has to be squarely faced is whether real moral blame attached to the drawing down of the ADS loans when a proper basis for an honest belief in parental support was absent. Is it acceptable commercial conduct to take credit when at the time the person realizes that the prospect of repayment is remote? Is it acceptable commercial conduct to take a substantial risk, little different from gambling, with a creditor's money? In my judgment, it is not.

224. In the present case, applying Grantham, this is a proper case for dishonesty and fraud to be inferred, such inference of dishonesty being buttressed by the markedly different treatment given to the Dalians and Manila Faith when it came to incurring new credit.

225. If, contrary to my view, Hardie v. Hanson represents the correct law, in so far as there needs to be 'something else' (as per Menzies and Kitto JJ), in Mr Brothers' case there is plainly 'something else' namely, the suppression of the 18 March 1983 cashflow.

226. In my judgment, there is cogent evidence that Mr Brothers knew that unless there was parental support, there was a substantial risk that the ADS loans could not be repaid and at the dates the loans were drawn down, he did not honestly believe that parental support would be forthcoming because there was simply no basis upon which such belief could be founded. Applying the requisite civil standard of proof and having regard to the cogency of the evidence, I am satisfied that ADS has discharged the necessary burden of proof and made out its case on fraudulent trading.

Mr Lees and Mr Leung

227. After reviewing selected portions of Mr Lees' evidence, the judge concluded (at 5.8.31-32) that :

"Mr Lees therefore suffered from the same disadvantages as Mr Brothers. His credibility was damaged by his adherence to a wholly unsustainable interpretation of the November consensus and by his repeated refusal to accept contemporary documents at face value. On the other hand, he was prepared to acknowledge uncertainty from time to time about support and the need to persuade Mr Cheung.

The problem in effect was that WM could not make up its mind what to do. Put another way, Mr Marden and Mr Cheung could not agree about WMI. Mr Lees, however, said he remained confident throughout that the support would come. It is plain that that confidence had a somewhat shaky basis." (emphasis added)

228. Although he acknowledged that the uncertainty Mr Lees accepted militated against a genuine belief that WM would support, the judge nevertheless exonerated Mr Lees and found that he had not been proved to have been dishonest essentially for reasons similar to those relating to Mr Brothers, namely the seven factors.

229. As regards Mr Leung, the judge was of the view that Mr Leung's evidence "must be looked at with some reservation". Nevertheless, he concluded (at 5.9.20) that :

"... for much the same reasons as I advanced for Mr Brothers, that Mr Leung was ultimately honest in his belief that WM would support and save WMI notwithstanding the somewhat threadbare basis for that belief. I am not persuaded that he was dishonest or fraudulent." (emphasis added)

The judge accordingly dismissed the fraudulent trading claim against both Mr Lees and Mr Leung.

230. Mr Lees and Mr Leung were the managing directors of WMI. They together with Mr Brothers were the working directors. If, as I have found, the reasons for absolving Mr Brothers from dishonesty are untenable, Mr Lees and Mr Leung would be in the same position as Mr Brothers. The only difference is that in the case of Mr Lees and Mr Leung, the 'something else' is absent if, contrary to my view, that is essential following Hardie v. Hanson.

231. In my judgment, ADS has succeeded in demonstrating on the evidence that neither Mr Brothers, Mr Lees nor Mr Leung had an honest belief that parental support would be forthcoming.

WM

232. The judge's finding that WM was a de facto or shadow director is not challenged. The judge held, correctly, that WM's intentions can only be derived from the intentions of the directors forming its directing mind and will, and as far as WMI's business was concerned, Mr Lees, Mr Leung and Mr Brothers formed WM's directing mind and will. It follows therefore that their intentions are to be attributed to WM with the result that ADS has also made out a fraudulent trading case against WM.

Mr Marden

233. Mr Marden was at the material time the Chairman of the Wheelock Marden Group and of many of its subsidiaries including WMI. He was not involved in the day-to-day operations as were Mr Brothers, Mr Lees and Mr Leung, the working directors. Rather, he kept an overview of the Group's operations.

234. Due to ill-health, Mr Marden was unable to give evidence. All that was before the judge was his witness statement, admitted by way of hearsay. Mr Lees and Mr Leung apparently kept him informed about what was happening. Even at the time of preparing his statement, his recollection of events at WMI during the period in question was virtually non-existent due to ill-health, the passage of time and because

"While I was concerned about what was happening, I was more concerned with policy rather than detail."

235. Mr Marden's state of knowledge of relevant facts is thus not the same as that of the working directors. Since inferences of fraud and dishonesty are drawn from facts which depend on a certain state of knowledge, where the state of knowledge has not been established to the requisite standard, it follows that such inferences may not be drawn. In my judgment, the evidence is not sufficient in the case of Mr Marden to meet the requisite standard.

236. For all these reasons, I would allow ADS's appeal against Mr Brothers, Mr Lees, Mr Leung and WM and dismiss its appeal against Mr Marden.

Godfrey, J.A. :

237. Accordingly, the appeals of WM and Mr. Brothers are allowed and (by a majority) the appeal of ADS is dismissed. The orders we make on the appeals will have to provide for costs, both here and below, and the appeals will have to be restored to the list for mention (and, if necessary, argument) on the question of costs, at a date and time to be fixed through the usual channels. Any application to us for leave to appeal to the Court of Final Appeal can be mentioned at the same time.