LEE BOON CHEAN v. ALFRED KAO AND OTHERS

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HEADNOTE

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                In 1983 applicant companies instituted proceedings against M.C. Ltd for breach of contract and K for damages for fraud. On 16th August 1983 applicants obtained Mareva injunctions which covered inter alia a deposit of US$100,000 made by K with Liu Chong Hing Bank Ltd on 26th July 1983. In November 1984 L sued K for US$100,000 money lent relying upon an I.O.U. dated 25th July 1983 and obtained consent judgment.  L. applied for garnishee order absolute against deposit account. On applicant's attempt to question genuineness of alleged loan by L. to K. by an application for a stay in L.'s action and by separate originating summons held:-

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RULING

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1. This matter has raised procedural issues of some novelty and complexity. I pay tribute at the outset to the very considerable assistance I have received from counsel on both sides.

2. It arises in this way. In August 1983 the two applicants which are two Japanese companies, one registered in Hong Kong with control in Japan and the other a Japanese corporation, issued a writ against a company called Mutual Commercial & Shipping Co. Ltd. and a gentleman by the name of Alfred Kao.

3. The story as told in the Statement of Claim briefly is this: The plaintiffs say that they agreed to buy substantial quantities of aluminium ingots from the defendant company. They opened in favour of that company letters of credit in substantial sums, which they were then persuaded to make transferable. These letters of credit were then drawn upon in the sum of no less than US$4 million. Those letters of credit appear to have been drawn upon with the aid of Bills of Lading which purported to show that aluminium ingots had been loaded upon a vessel by the name of "The Golden Building" in Mainland China. In fact no such loading seems to have taken place. That is what is alleged.

4. The first claim that the plaintiffs make against the defendant company is for the return of their money upon a consideration that has wholly failed. They make an alternative claim in damages for fraud against Mr. Kao. That is based upon at assertion that from time to time during the summer of 1983 Mr. Kao was giving them reports on the progress of the ship, which were apparently favourable and consistent with due performance of the contract, whereas it is said that these reports are quite false by reference to the ship's log.

5. On the day before they issued their writ, in fact on the 16th August 1983, the plaintiffs applied for and obtained a Mareva injunction against both defendants. There were considerable proceedings in that action asking for variations and discharge of those injunctions. On the 21st February 1984, pursuant to an order of Mayo J. made in that action, Mr. Kao filed an affidavit of means in which he set out the assets which he said were possessed by both defendants as at that date. He included in his own personal assets a deposit of US$100,000 made at Liu Chong Hing Bank. He further said that that sum had been pledged to the Bank in support of the company borrowing. This is born out by the documents which have been produced before me. First I have seen a certificate of deposit issued by the Liu Chong Hing Bank in favour of Mr. Kao acknowledging that they hold US$100,000 dated the 26th July 1983. The Bank also say that either that day or the next, that sum was pledged to the Bank in support of the company borrowing.

6. Those two documents it is now said only tell part of this story. The first document to come into existence was an I.O.U. dated 25th July, which acknowledged a borrowing by Mr. Kao from a Mr. Lee of that self same sum of money. In enforcement of that indebtedness Mr. Lee, on the 29th November of last year, issued a writ against Mr. Kao asserting that he lent this sum of money on the 25th July. He pleads that the loan was evidenced by a memorandum in writing which is the I.O.U. before me and goes on to assert, "despite repeated demands by the plaintiff and by letter dated 14th November 1983 (I emphasize that date with a question mark) by the plaintiffs' solicitors addressed to the defendant, the defendant has still failed and/or refused to pay the said loan or any part thereof". I venture to doubt the accuracy of that date because the I.O.U. says that the loan was to be a loan for one year without interest.

7. What happened after that was this: The writ was issued on the 29th November. It was served on the 30th November. On the 1st December a consent summons was taken out returnable on the 18th December on an application on the part of the plaintiff from an order by consent for judgment for the Hong Kong dollar equivalent of the sum claimed with interest, and the plaintiffs' cost to be taxed. That was signed both by the solicitors for the plaintiffs and by Mr. Alfred Kao, the defendant in person, personally. So that within three days there was a writ, service and the signature of a consent summons.

8. Solicitors come on the scene, giving notice to act on behalf of Mr. Kao, on the 17th December. I am not quite sure why, because all they apparently did was to consent to a judgment in the terms on the consent summons on the following day, 18th December.

9. The next matter was that the successful plaintiff, Mr. Lee, then sought to garnishee the deposit account at the Liu Chong Hing Bank.  I have been concerned with the attempts being made by the plaintiffs in the original action to impede or interrupt that garnishee process. The first question which arose is what is the proper procedure to be adopted by a party seeking to take such step.

10. Three things have been canvassed. First, on 6th February, the day after the plaintiffs first heard about the action which Mr. Lee had taken against Mr. Kao, they took out a summons asking for leave to intervene in the garnishee proceedings. That was supported by an affidavit of Mr. Reynolds which set out the background history and says in substance that this was a matter which should be more fully and carefully investigated.

11. The next step that the plaintiffs took was to take out an originating summons on the 22nd April last asserting that the judgment had been obtained in collusion, that there was no genuine indebtedness from Kao to Lee at all, and asking for directions as to the future trial of an issue in relation to collusion, interrogatories and discovery.

12. The third thing which happened in the course of the hearing, by my leave, was that the original summons of 6th February was very substantially amended by substituting for the relief claimed in that summons, the relief claimed by the originating summons. That was the result of some observations which I made half way through the argument, having considered the procedural position.

13. The first problem is to find out exactly how the matter would now be dealt with in England. One's starting point in Hong Kong is section 12(2)(a) and sections 16 and 17 of the Supreme Court Ordinance. These, in effect, give this court the same original jurisdiction and authority as the High Court in England, and also say that where our rules are silent we should adopt the practice in England.

14. The practice in England was originally more fully spelt out in section 41 of the Judicature Act 1925. This (and I paraphrase) says in substance that no division of the High Court was to restrain any other division of the High Court: by injunction or prohibition.  But there was a proviso that this did not affect the right of:

"Any person whether a party or not to any cause or matter who would formerly have been entitled to apply to any court to restrain the prosecution thereof who may be entitled to enforce .... any order, in contravention of which all or any part of the proceedings in the cause or matter have been taken, may apply to the High Court ..... by motion in a summary way for a stay of proceedings in the cause or matter; either generally, or so far as may be necessary for the purposes of justice, and the court shall thereupon make such order as shall be just."

15. It was this form of relief which the plaintiffs were seeking by their originating summons. But it seems to me, and I so indicated, when looking at the authorities under section 41, that the proper procedure is to apply in the proceedings themselves, and not by separate action. That led to the application to amend today, That view was based upon the authorities which are collected in the notes to the White Book. They start with the decision of Sir George Jessel M.R. in Re Artistic, 14 Ch. D. 502. The same position was assumed by the Court of Appeal in England in a case called Gore v. Van Der Lann (1967) 2 O.B. 31. It seems to have been so decided by Ungoed-Thomas J.in Llewellyn v. Carrickford (1970) 2 All E.R. 24 in the context of garnishee proceedings.

16. It was also the view expressed by Kerr L.J. in a recent decision in Sanders Lead v. Entores (1984) 1 W.L.R. 452, at page 461. This was the decision in which he pointed out the limitations on the courts powers under 0.15. It was this decision which caused the plaintiffs to change direction and take out their originating summons.

17. I have no doubt that that, was the position under the old 41. That is still the position in England under the modern equivalent to s.41, which is s.49 of the Supreme Court Act 1981, particularly s.49(3).

18. One of the reasons why the plaintiffs had decided to take separate proceedings, was that they had taken the view that the interrogatories and discovery they were seeking could only be granted in favour of a "party". They would not be a party if they simply applied in the original action, and therefore could not bring themselves within the discovery or interrogatories rules. I think that point may well be right, but I do not think that the rules in this context are in fact relevant.

19. The same conundrum was presented to the English Court in the context of Mareva injunctions, and was finally settled by the Court of Appeal in A.J. Bekhor v. Bilton (1981) 2 All E.R. 565 in this way. The rules did not apply to an application for discovery or interrogatories in support of a Mareva injunction because neither relief was sought in respect of issues raised in the action. It was sought in respect of issues raised in the Mareva injunction, and therefore you could not bring yourself within either the discovery or the interrogatories rules. The court concluded that the power to order the interrogatories and discovery in support of the Mareva injunction was to be found in section 45 (as it then was) of Judicature Act 1925.

20. It seems to me that the position in respect of a claim under the old s.41 and the new s:49(3) is in this respect identical, and indeed even stronger. Because the court under s.41 was empowered expressly to make such order as shall be just. I believe that the court is given power now by s.49(3) in an appropriate case, to make provision for discovery or interrogatories, and that this jurisdiction stems from that section and not from the rules.

21. It is in those circumstances that really the effective application, as I see it before me now, is the application brought about by amendment today. I therefore turn to the merits of that. Really what the plaintiffs are saying here is this: These circumstances are so suspicious that the court should investigate the bona fides of the matter and particularly investigate the charge that they had made that this judgment was obtained in collusion and that there was no real indebtedness or borrowing by Mr. Kao from Mr. Lee at all. The whole thing was a put up job to provide a convenient escape route from the jurisdiction and the practice of court for assets at present covered by the existing Mareva injunction. They say that they had no evidence directly implicating Mr. Lee or Mr. Kao in any way at all. But they point to a number of matters, as they say, giving rise to suspicion and a case for enquiry.

22. The matters upon which they rely are these. First they say that Mr. Lee and Mr. Kao were very closely associated together in what they, the plaintiffs regard as the two instruments of fraud; - one the company, the first defendant in the action, and secondly the ship owning company which owned the ship in question. Both Mr. Lee and Mr. Kao were shareholders in the first defendant company and I think for a time directors also. They were also shareholders in the company which first acquired the ship, and then in the early summer of 1983 sold it. There is before me a transfer document dated 10th June 1983 whereby Mr. Lee and Mr. Kao and one other agreed to transfer the ship to its new owners for a consideration of US$200,000 of which US$150,000 was payable in about mid July, very shortly before this loan is alleged to have occurred. In fairness to the defendants, I should say that the villains of the piece, as appearing from the defence in the main action, are in fact those new owners and not themselves.

23. Following the failure to ship, there were investigations and discussions in Hong Kong, end a number of conferences appear to have taken place in, I think, early September, at which Mr. Kao was present and at which he was explaining, to the best of his ability, what he thought had happened. I have been referred to two notes of one of these conferences taken by two different people who attended it. What emerges from these is first that Mr. Kao was saying that in the preceding year, in June 1982, when he and Mr. Lee and the third person appeared to have acquired an interest in this ship, Mr. Lee was asserting impoverishment. The phrase used in one of notes is "declare bankruptcy", but I am not minded to read that in a technical sense, - and he was asking to borrow a US$100,000 from Mr. Kao. The plaintiffs point to the apparent reversal of roles twelve months later.

24. The second point which appears to emerge from these conference notes is that at the material date, at least up to the transfer in June, Mr. Lee was the person who was most actively concerned with the management of the ship. Thirdly, at one rather critical point, namely, the alleged pay-off visit of the ship to Hong Kong immediately before its transfer, and the entertainment of the captain before he was paid off when he retired to Taiwan, both Mr. Lee and Mr. Kao were alleged to have been present. The sting of that, if sting it be, is that this was at a time when, according to the ship's log, the ship was nowhere near Hong Kong. That is the closeness of the association which the plaintiffs rely upon as the grounds for their suspicion in relation to these two gentlement's conduct.

25. Next, they point to the fact that in the affirmation of 21st February 1984, this asset is mentioned without reference to any indebtedness to Mr. Lee in respect of it. But only a week later, it should be pointed out that Mr. Kao made a second affirmation in which he refers to pre-Mareva indebtedness to his friends of "approximately" this figure of $100,000, which may or may not relate to this particular sum.

26. Next, the plaintiffs point to the indecent haste with which this judgment was obtained by consent, and to the fact that Mr. Lee is now in Taiwan, so that if the monies are released to him they would be taken irretrievably out of the jurisdiction. This they say is a reasonable inference to draw. Finally they point to the fact that although they made this point first by their summons of 6th February, there has been no explanation of any sort offered by either Mr. Lee or Mr. Kao of this loan. No explanation as to why this uncommercial looking deal is made at the time when the proceeds of sale of the ship were due and must have been to the benefit of both of them in some unknown proportions. Why it is made for a period of one year without any interest, and what the explanation is of demands in contrast to the date in that pleading. They say that the court should require some explanation to be given by Mr. Lee of these circumstances.

27. The first problem here is to decide how the court should approach this sort of question. The best guidance can probably be obtained from the Mareva injunction cases where the court has been at pains to try and hold the line between two competing and sometimes conflicting interests.

28. First of all, the purpose of the Mareva type injunction is to prevent fraud or its equivalent being perpetrated by some quick-witted or light-footed defendant who whilst keeping the proceedings alive and holding off an apparently good claim by a plaintiff, - is busily getting his assets out of the jurisdiction. That is the main purpose of the Mareva. By contrast, the court is not in the least bit concerned with and should not stop the payment of bona fide debts or the conduct of a bona fide business. The Mareva does not operate as a charge. It does not give the plaintiff any sort of priority. It is solely intended to prevent a plaintiff in effect being defrauded.

29. This is a difficult line to draw, but it is a line most clearly laid down in the Mareva injunction cases. Here the courts had made it clear when application is made to them for modification or discharge of a Mareva, that they require to be satisfied that there is a proper debt to pay. The matter was put like this in A & Another v. C. &Others (No. 2) (1981) 2 All E.R. 127 by Goff J.-

"I have still to apply the basic principle i.e. I can only permit a qualification to the injunction if the defendant satisfies the court that the money is required for a purpose which does not conflict with the policy underlying the Mareva injunction."

30. The significance of this I think is two-fold. First, he emphasizes the policy underlying the Mareva injunction which is to protect, not secure or prefer; and, secondly, he plainly puts the onus upon the defendant to satisfy the court in this respect.

31. One finds similar observations in a decision of Parker J. A. v. B. (X. Intervening) (1983) 2 L1. L.R. at 532. This was an application to vary made by an intervener rather than by the original defendant, and the judge held that that made no difference. He said at p.533:-

"Even, however, if the debt were unenforceable it would not in my judgment matter, for a Mareva is not to be used to prevent a person meeting debts of honour, which this clearly was, so long as the Court is satisfied that the defendant's desire to use assets caught by the injunction is not merely to evade its underlying purpose."

And later he said this:

"In my judgment, however, whether the application is made by the defendant or his creditor the Court should, save in the cases already mentioned, be fully acquainted with the position, and be satisfied by evidence that in allowing the payment to be made out of the assets caught by the injunction it is sanctioning no more than a payment which would normally have been made out of such assets had there peen no injunction."

32. So Parker J. is adopting the same approach as applicable to an application by the defendant himself or by the intervener. One or the other has to satisfy the court that this is a proper payment to be made. He then goes on:

"In the present case I have no evidence upon which I could be so satisfied. If the defendant wants to make the payment he can make an application himself or possibly provide X. Ltd. with the necessary evidence. Alternatively X. Ltd. could proceed to judgment, in which case they would have no difficulty in executing upon any assets within the jurisdiction which they might find."

33. That observation about a judgment was obiter. I have to consider precisely that point in this case; as to whether the fact that a judgment has been obtained here makes a fundamental difference. Plainly, if this was an application being made in the action by Mr. Lee for modification of the Mareva so that Mr. Kao could voluntarily pay this debt of $100,000 to him out of a particular fund, the tests enumerated by Goff J. and Parker J. would be applicable. The problem I have to face is whether that position is fundamentally altered by the fact that a judgment had been obtained, and that the matter as far as Mr. Kao is concerned is no longer voluntary but is superseded by the compulsion of the judgment.

34. Very recently, a similar sort of point seems to have come before the Court of Appeal in England in S.C.F. Finance Co. Ltd. v. Masuri which is in the Lloyd's Maritime Law Newsletter, as recently as the 25th April of this year. It seems to me that the Court of Appeal were giving approval to the approach of both the earlier courts in the A. v. C and the A. v. B. cases. But they were emphasizing there that there are no fixed rules. The question in every Mareva case - is what was "just and convenient". In the case of the equivalent of s.41, which I am applying, it is what is "necessary for the purpose of justice".

35. My answer to that in this case is that the significance of the judgment must, I think, depend upon the nature of that judgment, and the nature of the enquiry which led to that judgment. Having regard to this history and the nature of this judgment, it seems to me that it would be absurd for the court to treat the judgment here as anything like decisive, because the simple fact remains that the judgment debts can be contrived as readily as any other debts. I believe that I should approach this case in a very similar way to which I would have approached an application to lift the Mareva injunction in respect of these funds, because I cannot myself attribute any great evidential value to a judgment obtained like this. I cannot see any real difference in substance between those two position, although I acknowledge that the roles of the parties and the form is quite different.

36. Therefore, I think that this is a matter which ought to be investigated and that it is proper to investigate since no sort of explanation has been put before the court by those persons who know the facts. Therefore, I think it is right to grant the applicants first the order for discovery they are now seeking by the amended form of paragraph 4 of their summons. Secondly, it seems to be right, at least to order some interrogatories because this may be the only convenient way of getting at the truth in the case like this. Mr. Lee is in Taiwan at the moment and when I enquired when he was returning, I was told that no one knew and no one had any instructions. It is before me in the notes of the conference, that he was spending a great deal of time in Taiwan in the years of 1982 and 1983. So he is plainly no stranger to Taiwan. He is not here in Hong Kong at the moment and readily available to be cross-examined upon any affirmation that he may put in. It, therefore, is a convenient way of obtaining his evidence in this type of case.

37. The questions which are sought to be put are relevant to the existence of collusion, the existence of the debt, and the circumstances in which this debt came into being. Prima facie, it seems to me appropriate in a case like this, that the questions should be comprehensive and all embracing, because time is important for another reason which I am coming to in a moment.

38. A number of objections had been taken to the interrogatories as drafted to which I have given careful consideration. For example, it is said that it is not necessary to ask the question about the origins of payment by way of cash drawing from the bank because that would be a duplication of discovery. I do not agree. It may be a duplication, in which case the answer can readily be given. But if it is not a duplication because no documents remain in the deponents power or possession, this is the only way one will get the answer.

39. The next group of questions which are objected to are the reasons for the lending first and the reason for the free of interest lending. I believe those questions are all relevant as to why this somewhat uncommercial transaction was entered into in the first place.

40. The final group of questions relate to demand, and again, particularly, having regard to the confusion and my doubt about the accuracy of the writ in this context, it seems to me that those are matters which fall to be answered as well. So I will grant leave to the applicants to serve these interrogatories upon Mr. Lee as they stand. The time is important. The summons asks for interrogatories and discovery to be given in fourteen days. That seems to me appropriate. I do not know at the moment whether this is going to provide a simple answer or a very complicated answer. If this is a very simple and elementary transaction, then it is likely that Mr. Lee is going to be able to produce copies of the relevant bank entries which are going to make it clear beyond a peradvanture that this is perfectly straightforward honest transaction and there is no problem about it at all. The applicants may have grounds for suspicion (as I think they have), but the suspicion would in fact be groundless. The sooner this matter is dealt with and comes back before the court the better. I can offer the parties the 17th May. I will therefore adjourn the consideration of the rest of the summons, and particularly, any questions arising under paragraphs 1 and 2 to that date.

41. In the meantime, the bank is most anxious to be relieved of the burden of carrying this fund. The bank's solicitor made that clear on the previous occasion. The bank is entitled to retain out of the fund $133,958.13. That is owing to it by way of set off. Secondly it is entitled to retain some sum pending the taxation of its costs sufficient to satisfy those reasonable costs. The bank is not here at the moment but I am very happy to hear the other parties as to what that sum should be, making a reasonable allowance for Mr. Poon's firms costs arising out of the garnishee proceeding. But the balance, after those two deductions, I am proposing to direct should be paid into a joint account to be opened in the joint names of the solicitors for the applicants and the solicitors for Mr. Lee. This relieves the present bankers of its burden.

42. So as far as the application is concerned I shall make the orders as asked under paragraphs 3 and 4: I shall adjourn the hearing until the 17th May; I shall give those directions in respect of the bank; and I shall reserve the costs until the 17th May.

43. The final question I have to face up to, which is one of most difficult at all, has been whether I should require an undertaking in damages from the applicants between now and the 17th May. This is calculated to take two or three days to obtain because one is in Japan and the other in controlled from Japan.

44. Now the risk to be guarded against in this case is this. It may be that between now and 17th May someone will take steps to make Mr. Kao bankrupt, with the result that his bankruptcy will intrude, and the trustee in bankruptcy may seek to assert that Mr. Lee has not completed his execution. He has not yet got an order absolute on his garnishee application, and the steps that I have just outlined to put the money in to the control of the solicitors to the parties may not constitute a perfected execution. I think there is a fair risk that a trustee would not challenge this. But I must not make that assumption. I must proceed upon the basis that he is a man of iron and would attack this particular proposition. In those circumstances Mr. Chan says, this sort of application is really akin to an interlocutory injunction and that almost as a matter of course, someone who asks for interlocutory relief is required to give an undertaking in damages.

45. To this the applicants made two replies. First, they say, look at the timing here. This application was made by us initially on 6th February. Two things follow. The first is that you took no steps to offer any explanation to the court, and if you had, and have got a simple explanation, that would probably have been the end of the matter. Secondly the risk between now and the 17th May is identical to the risk which you were happy to run between the 6th February and now for a much longer period and without doing anything about it.

46. Secondly they say, if we are right and this is a contrived judgment, it is certainly not beyond possibility that someone is going to contrive to put Mr. Kao into bankruptcy to our detriment under this undertaking in damages.

47. I have found this a matter which is very nicely balanced. I think that in many cases an undertaking in damages would be proper to be demanded before granting relief of his nature. But having regard to the time that passed, to the very limited risk between now and the 17th May, and the time it is going to take to get instructions on this undertaking, I believe the proper course is not to insist upon it now. But if in fact the position when the matter comes back to me on 17th May indicates that there is going to have to be some trial of some issue then the position may be totally different.