COMMODORE ELECTRONICS LTD. v. TAM HON WAH AND OTHERS

1992, No.2987

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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REASONS FOR JUDGMENT

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1. On 16th September 1992 I refused an application inter partes to discharge injunctions granted ex parte to the plaintiff by Deputy Judge Chan on 30th April 1992 and varied by Kaplan J. on 8th May 1992. I now give my reasons.

2. The plaintiff is the Hong Kong based subsidiary of the Commodore group of companies, which manufactures and markets personal computers worldwide. The Hong Kong factory is by far the largest of the group's factories. 5th and 6th defendants are directors of 2nd defendant, a Hong Kong trading company.

3. In early 1992 the plaintiff became aware that, despite the imposition of stringent controls on the distribution of its products, they were available in Europe other than through authorised outlets. Following enquiries one of the purchasers - referred to in these proceedings as "the informant" - agreed to assist the plaintiff in tracing the source of the supply.

4. In due course the plaintiff came into possession of correspondence and taped transcripts of telephone calls between the informant and the defendants. These indicated that the defendants, since at least September 1991, had been offering Commodore components for sale to the U.S.A. and Europe.

5. On 17th December 1991 the informant purchased a large quantity o these components. They were genuine Commodore computer chips, some of which bore date stamps showing that they were manufactured as recently as September 1991. Prior to the sale 5th and 6th defendants took a representative of the informant to the Kowloon warehouse of 2nd defendant, where Commodore components were stored.

6. In March 1992 the informant became interested in purchasing Commodore's most valuable computer chip, the 1.3 Kickstart Rom. In taped telephone conversations between the informant and 5th defendant it was revealed that the defendants had been obtaining 1.3 Kickstart Roms, and possibly other components, through an agent in the plaintiff's factory, which the defendants were selling in Europe and U.S.A.

7. On 2nd April 5th defendant sent the informant a further fax setting out details of available products.. These included a model keyboard which had only very recently been produced.

8. There is no authorised Commodore dealer in Hong Kong and the plaintiff does not supply its products to persons in Hong Kong. Only Commodore's Australia distributor is authorised to supply products to the region including Hong Kong.

9. The plaintiff exercises tight inventory control of its products and there is an annual check. That held in January/February 1992 did not reveal any unusual discrepancies. All Roms and other valuable parts are stored in a special secured area, a caged room which is kept locked at all times and to which only limited access by staff is permitted.

10. Commodore computer components are either manufactured in-house or made exclusively for the plaintiff by outside vendors. The Kickstart Rom is not manufactured by the plaintiff; it is sold exclusively by the vendor to Commodore. Over 90% of these Roms leave the plaintiff's factory in finalised production. A few are released as spare parts and sold by Commodore distributors to carefully selected maintenance workshops.

11. On this evidence Chan J. granted an ex parte Mareve injunction in respect of the defendants' assets and a further injunction restraining the defendants from dealing with the plaintiff's goods.

12. The plaintiff had already reported the defendants' suspicious behaviour to the ICAC. Upon the issue of the injunctions raids were carried out on the premises of 2nd defendant and of other persons, in which large quantities - more than 400 boxes were in the possession of 2nd defendant - were seized. According to the plaintiff many, but not all, of these 400 boxes contained "scrap", that is to say products which had been rejected during the manufacturing or assembly process. 5th defendant says that all were scrap and that these were the only goods in 2nd defendant's possession that bore the Commodore brand name.

13. The statement of claim alleges conversion, conspiracy to convert and passing-off. It is not disputed that the plaintiff has a good arguable case on each of the three causes of action. On the passing-off claim there would appear to be no defence. The defendants submit that the Mareva injunction should be discharged on the grounds of non-disclosure of a material fact.

14. The plaintiff addressed the question of scrap in an affidavit dated 7th May 1992.. Scrapped material is sent to the plaintiff's scrap warehouse in Tuen Mun, from where it is collected by various scrap dealers who purchase the material at scrap value. Since the beginning of 1990 only one dealer has bought scrap computer chips under an agreement whereby the dealer melts down the material and extracts the metal content on which payment is calculated. It would accordingly be contrary to the system if the scrap were offered for sale as a usable product. It would also be very damaging to the plaintiff's reputation.

15. The affidavit explains why the processing of scrap was not dealt with in the affidavit before Chan, J. This was because the goods purchased by the informant were emphatically not scrap. Moreover all the correspondence, and the tapes made it clear that the defendants were purporting to offer for sale high quality usable goods which had been obtained unlawfully. The plaintiff therefore had no reason to believe that the defendants were dealing in scrap and did not consider that a description of the plaintiff's scrapping procedure would be relevant.

16. The defendants say this is not good enough. According to 5th defendant he himself has seen the plaintiff's scrap printed circuit boards for sale by hawkers in Sham Shui Po. He claims that all the Plaintiff's goods seized on 2nd defendant's premises were scrap. These had been bought from a Mr Cheung So Lo, an employee of a sister company of 2nd defendant. It did not occur to the defendants that it was illegal. to deal in scrap products of the plaintiff.

17. 2nd defendant bought scrap Commodore computed parts from Mr Cheung on about 12 occasions. 5th defendant would look for a buyer and when the order was confirmed Mr Cheung would deliver the goods. Mr Cheung was 2nd defendant's only source of Commodore computer parts and they were always scrap.

18. 5th defendant says that the representations to the informant that he could obtain Kickstart Roms from the plaintiff's factory were a lie. He wished to make the informant believe that he had access to Kickstart Roms in order that the rest of the deal should go through. When he had been paid by the informant for the other components, he planned to buy the Roms from U.S.A. Although he would make a loss on the Roms, there would be an overall profit on the deal. 5th defendant described his representations to the informant as business tactics or puff.

19. The first question I had to decide was whether the question of scrap and its disposal by the plaintiff was a material fact in the context of the latter's application for an ex parte injunction. It is not an easy question to decide.

20. In Thermax v. Schott Industrial Glass [1981] FSR 289 Browne-Wilkinson, J. said at p.298 "All facts that are relevant to the weighing operation which the court has to make in deciding whether or not to grant the order" were to be regarded as material facts in this context. In Wardle Fabrics Ltd. v. G. Myristis Ltd. [1984] FSR 263 Goulding J. emphasized that the correct test is not simply whether, if the non-disclosure had not occurred, the ex parte judge would, nevertheless, have made the order, ... but whether the facts disclosed, being relevant, should have been in the scale.

21. Both the above authorities were approved by the Court of Appeal in Citibank N.A. v. Express Ship Management' Services Ltd. and Another [1987] HKLR 1184. In that case the plaintiffs had hopes of recovering some of the money ' from third parties, but these were not commercially realistic. As such they were not material and the failure to disclose them did not vitiate the injunction. Fuad J.A. (as he then was) said at P.1190:-

"While the courts must be vigilant and insist that full and frank disclosure be made in grounding affidavits for ex part applications for injunctions, Anton Piller orders etc., it is essential to bear in mind the true principle upon which this rule is based. Unless the courts use the sanctions which the practice gives them only when the non-disclosure is of facts which are relevant to the ex parte judge's "weighing operation", an impossible burden would be placed upon applicants and their advisers, and affidavits, ex abundanti, will tend to contain all sorts of facts and exhibits which are not really necessary for the proper exercise of the court's discretion when ex parte relief is sought."

22. Before the discovery of the scrap on 2nd defendant's premises the plaintiff had no reason to think scrap would play any meaningful part in the proceedings. They were blameless in this respect. Nor would it have made the slightest difference to the result of the ex parte application. But in Lloyds Bowmaker Ltd. v. Britannia Arrow Plc. [1988] 1 WLR 1337 Dillon L.J. said at P.1348 :-

"The judge seems to have thought that non-disclosure is only material as a basis for discharging the injunction if it affects some point which it is necessary for the applicant for the injunction to establish if he is to succeed in his claim. Therefore he said that the failure to disclose that the defendants knew about the company was not material, because it would have been no defence for the third party to say in answer to the charge of fraud: 'It was not I, it was my tame company who did it.'

With all respect, I do not agree with the judge that the duty of disclosure is so_. limited. The applicant owes a duty of fullest and frankest disclosure: if he puts in matters of prejudice he must put them in as fully as is necessary to be fair. He cannot pile on the prejudice and then when it is pointed out that he has told only half of the story and has left out matters which give a quite different complexion, say 'Oh, well, it is not material. It is only prejudice, and so, on a strict analysis of the pleadings, does not have to be regarded.'"

23. It seems to me however that in this case the issue of scrap falls on the other side of the line. If the judge had had the plaintiff's second affidavit before him it would have been superfluous to the weighing operation because it could not have assisted the defendants in the slightest. On the contrary it would have tended to exclude the possibility that the plaintiff's scrap was available on the market in Hong Kong.

24. Should I be wrong in my conclusion I would have had no hesitation in exercising my discretion to continue the injunction. Although I am aware that this should be done only with great caution, I am satisfied that it would be unjust not to do so in the circumstances of this case. As was stated by Slade L.J. in Brink's Mat Ltd. v. Elcombe [1988] 1 WLR 1350 at 1359, the punishment would be out of all proportion to the offence.

25. It is also submitted on behalf of the defendants that there is no evidence of the risk of dissipation of assets. As was stated by Lawton L.J. in Third Chandris Corpn. v. Unimarine S.A. [1979] 1 QB 645 at 671 :-

"There must be facts from which the Commercial Court, like a prudent, sensible commercial man, can properly infer a danger of default if assets are removed from the jurisdiction. For commercial men, when assessing risks, there is no commercial equivalent of the Criminal Records Office or Ruff's Guide to the Turf. What they have to do is to find out all they can about the party with whom they are dealing, including origins, business domicile, length of time in business, assets and the like; and they will probably be wary of the appearances of wealth which are not backed up by known assets. In my judgment the Commercial Court should approve applications for Mareva injunctions in the same way. Its judges have special experience of commercial cases and they can be expected to identify likely debt dodgers as well as, probably better than, most businessmen. They should not expect to be given proof of previous defaults or specific incidents of commercial malpractice. Further they should remember that affidavits asserting belief in, or the fear of, likely default have no probative value unless the sources and grounds thereof are set out: see R.S.C., Ord, 41, r.5(2). In my judgment an affidavit in support of a Mareva injunction should give enough particulars of the plaintiff's case to enable the court to assess its strength and should set out what inquiries have been made about the defendant's business and what information has been revealed, including that relating to its size, origins, business domicile, the location of its known assets and the circumstances in which the dispute has arisen. These facts should enable a commercial judge to infer whether there is likely to be any real risk of default."

26. It is submitted that no weight should be attached to a bare allegation unsupported by facts. The plaintiff says however that there is prime facie evidence that the defendants are guilty of fraud and that their conduct was clearly commercially unacceptable. In Guinness plc. v. Saunders and Another [1987] The Independent, April 15, Sir Nicholas Browne-Wilkinson said :-

"In my judgment dishonest behaviour is relevant to Mareva relief not by reference to what is pleaded but by reference to the possibility or likelihood of it existing. Whether or not pleaded, if there is dishonesty or suspicion of dishonesty, that will be an important ground on which Mareva relief can be obtained."

27. In Honsaico Trading Ltd. v. Hong Yiah Seng Co. Ltd. [1990] 1 HKLR 235 Godfrey J. continued a Mareva injunction against a defendant whose conduct he found to be "devious". He said at p.240 :-

''I am not here to punish the defendant because I disapprove of its conduct; that is not the purpose of a Mareva injunction. But, if I come to the view that its conduct, in relation to this transaction, leaves me so uneasy that I am driven to the conclusion that there is a real risk that a judgment in favour of the plaintiff might remain unsatisfied, then I conceive it to be my duty to grant the injunction."

28. He went to to say :-

"I have, however, come to the conclusion that the defendant has exhibited an unacceptably low standard of commercial morality in its dealings with the plaintiff; and this drives me to conclude that there is a danger that if the defendant thought it was in its best interests to do it, it would not shrink from attempting to defeat the interests of the plaintiff under any judgment the plaintiff might obtain here."

29. This decision was upheld in the Court of Appeal. That approach also covers the situation of the defendants. As a matter of common sense the risk cannot be ignored.

30. 6th defendant, the Managing Director of 2nd defendant, adopts and relies on the affirmation of 5th defendant. Both however submit that all transactions were in the name of 2nd defendant and there is no evidence that they were involved in their personal capacity as directors or that they received any Profits. They argue therefore that the injunctions against them personally should be discharged.

31. It is trite law that any director who is a party to a fraud or to the commission of any other tort is personally liable to the injured party. The company may also be liable but that does not exonerate the director. 5th defendant admits on the tapes that the items for sale were being procured unlawfully and that they were not being sold as scrap. There is also prima facie evidence of handling stolen property and conversion. If this is the case they cannot escape personal liability.

32. The injunction also restrains the defendants from "dealing with any goods, including computer components, belonging to the intended plaintiff and which have not been sold to the intended defendants (or any of them) by the intended plaintiff ..." The defendants submit that this injunction is no longer necessary following the seizure of the plaintiff's goods in 2nd defendant's premises. 5th defendant says he has no other goods belonging to the plaintiff and that this evidence remains uncontradicted.

33. I was here concerned only with the balance of convenience. Even if 5th defendant's assertion is correct, it is by no means certain that he is unable to lay his hands on similar products and he has not said that he intends to cease such operations. The plaintiff would accept an undertaking to this effect in lieu of the injunction but it has not been forthcoming.

34. No conceivable damage to the defendants can be caused by the continuation of the injunction and I was satisfied that it should continue.

35. For these reasons I refused the defendants' application with costs.