CROWN AIM LTD v. UCO BANK

HCA 2531/2018

[2020] HKCFI 212

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2531 OF 2018

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J U D G M E N T

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1.  This is the application of Crown Aim Limited by summons of 15 July 2019 for summary judgment against UCO Bank, the defendant. The defendant is an Indian bank which has a Hong Kong branch.

2.  The relief sought in the summons is relatively wide.  The plaintiff seeks a mandatory injunction to require the bank to comply with its instructions in relation to its accounts.  It also seeks a mandatory injunction to require the bank to release a sum of US$313,312.90 together with damages, interest and costs.  However, it was made clear at the outset of the hearing by Ms Margaret K M Chan who appears for the plaintiff that the summary judgment application was restricted to the release of the US$313,000 plus interest.

3.  For present purposes, the facts can be stated relatively briefly.  The plaintiff’s relationship with the bank goes back to July 2014.  Two accounts were opened at that point in time and the third account in 2015.  In 2018, in the month of February, the bank suspended operations on all three of the accounts.  In effect, these three accounts were frozen.  The plaintiff’s case is that it did not discover about this until March of 2018 when its director, a Mr Wong, tried to deposit a cheque into one of the plaintiff’s accounts.  However, despite the fact that the accounts were frozen, there was in fact very little in them, just a few hundred dollars at that stage.

4.  There is considerable evidence before the court as to the reasons why the bank took the step which it did.  In short, there took place in India what has been described as the largest fraud that India has known.  This court has no means of assessing whether that is accurate or not, but broadly, various letters of undertaking were issued by Punjab National Bank, and the allegation is that the sums paid consequent to those letters of undertaking were sent to various banks in various different parts of the world and dealt with fraudulently. 

5.  The important point for present purposes is that the subject matter of the investigation in India is a company called Gitanjali Gems Limited.  Its connection with the plaintiff company is as follows: the sole shareholder of the plaintiff company is a company called Aston Luxury Group Limited.  The sole shareholder of Aston is Gitanjali.  The two directors of Aston, it is relevant to point out given the material before the court, are Mr Mehul Chinubhai Choksi and Mr Nareshkumar Bhikhurao Jadav.

6.  The allegation that has been made by those investigating this matter in India, is that Mr Choksi together with Gitanjali Gems Limited are the main parties behind the fraud.  Again this court has no knowledge or understanding of the truth or otherwise of any of these matters.  However, the reason that this case has occurred is that the authorities in India in February 2018 effectively put a considerable number of banks, including the defendant bank, on notice of the suspected fraud.  That led the head office of the bank in Kolkata, on 16 February 2018, to issue instructions to its branches, warning them of potential criminal misconduct.  

7.  Specifically, on 20 February 2018, the general manager of the credit monitoring department of the bank issued to all its branches and offices a letter to the effect that investigating agencies were probing suspected fraud and:

“In pursuance of communications received from investigating agencies, the top management of our Bank advised to restrict operations in the accounts of the companies of the above groups and promotors directors of the said companies.”

8.  Among the other actions that was required was a “freeze of debit transactions totally for accounts.”  There was a list attached to that letter and that list included both Crown Aim Limited, that is the plaintiff, and Aston Luxury Group Limited, that is the owner of the plaintiff.

9.  In practical terms, very little happened over the following months.  What did, however, happen was that on 24 September 2018, the Hong Kong branch of the bank received a SWIFT payment of the sum that I mentioned earlier, that is HK$313,312.  That payment was directed to, and went into, one of the three accounts.  It, in effect, constitutes the only amounts of any value in the accounts and it is frozen there.  This prompted the plaintiff to issue these proceedings which it did on 29 October 2018, seeking the relief that I have mentioned earlier.  The plaintiff pressed, in particular, for details from the bank as to why the action had been taken.  It did eventually get such details but only after applying to the court.  Following that application, five documents were produced, one of which I have referred to already, that is the instructions sent round in February 2018. 

10.  The plaintiff’s case is a straightforward one.  The bank, it submits, has wrongfully frozen its accounts and refused to release the funds in those accounts without justification.  It points out that the relationship between the plaintiff and the defendant is one of banker and customer.  It submits that the explanation or justification given for the suspension of the accounts was extremely vague. The fact that the accounts are now in credit constitutes the plaintiff the creditor and the defendant the debtor under ordinary principles of banking law. There is no evidence of any investigation against the plaintiff or of its accounts by the Hong Kong Police or other Hong Kong authority, and that I mention in parentheses that this is correct.   The plaintiff provided information, it is said, voluntarily to the bank as to the source of the remittance in September 2018, yet the defendant has refused to release it.

11.  Issues were raised as to the question of authorized signatories of the plaintiff company but those were not explored during the hearing in front of me and I leave them on one side.  The plaintiff’s case, in short, is that this is a straightforward matter; there are no issues of fact or law which arise which require to go to trial.  Therefore, the plaintiff submits this is a case where under ordinary principles the court should give summary judgment.

12.  The defendant bank’s case is that, there was an implied term in the banking relationship that entitled it to suspend the operation of the accounts in present circumstances.  That implied term is pleaded by the defendant in its defence as follows:

“A right on the part of the defendant (in order to enable it to comply with its legal and regulatory obligations to combat financial crime and protect against fraud), in the event that the defendant is put on notice that the plaintiff’s accounts or any one of them was being used or may be used in furtherance of fraudulent or other criminal activity, to suspend the operation of the plaintiff’s accounts by the plaintiff pending the completion of all necessary inquiries into the activity concerned.”

13.  The bank’s case is that particularly in the light of the growing incidents of banking fraud, this term is one which can necessarily be implied into the banking contract in accordance with the rules implication in Hong Kong, the leading authority being Kensland Realty Ltd v Whale View Investment [2001] 4 HKCFAR 381. I should add a reference to a recent case, Lo Yuk Sui v Fubon Bank (Hong Kong) [2019] HKCA 261. It submits that the case is one which is unsuitable for summary judgment and that the matter should properly go forward to trial. 

14.  The factual matter which the bank relies on primarily, apart from the underlying accusations of fraud, relates to the precise circumstances in which the US$313,312 came into the account on 24 September 2018.  The reason this is important is that it is in effect the only transaction in relation to this matter that is before the court.  This is dealt with in the affirmation of Mr Wong Wai-ho, who I mentioned earlier, and who is now the sole director of the plaintiff. 

15.  He explains a little of the background.  Noting that the plaintiff is in the diamond trading business, he explains how he came to be told about the suspension of the accounts in March of 2018.  He says that in August 2018, he was informed by one of the plaintiffs, buyers in Belgium, that a sum of US$313,312.90 had been remitted to the plaintiff’s accounts, being payment for goods sold by the plaintiff.  He made inquiries with the bank but was told that the accounts had been suspended.  However, he was able to check himself the balance in the accounts because he continued to have telephone access to them, albeit they were frozen. 

16.  He also exhibits a service order form in relation to this transaction which is dated, at least as regards pickup date, 24 November 2017.  This gives some details as to the transaction, the name of the shipper, the name of the consignee, the nature of the goods, which were polished diamonds, and the declared value which was the sum that I have already mentioned.  The other document is a sale invoice dated 19 December 2017 which lists particulars of the diamonds concerned.  As has been emphasised to me, it states the payment terms as 120 days. 

17.  In my view, the bank’s criticism of this evidence is justified given that it is the only relevant transaction and given that the plaintiff is seeking release of that sum.  Against the background of the fraud being investigated by the Indian authorities, one would have expected a very full explanation of this particular transaction.  Furthermore, although not unreasonably, the plaintiff states that because of the suspension of the accounts, it has not been able to utilise its own funds, there is very little detail given as to how that has affected the plaintiff’s business on a continuing basis, if indeed at all.   In my view, the bank is justified in saying that this factual aspect of the case is one which properly should go to trial.

18.  However, the bank cannot justify withholding repayment of the monies in the account unless it can make out a good, or at least at this point, arguable legal ground.  Here, the plaintiff’s case, which has been well argued by Ms Margaret K M Chan, is straightforward.  She submits that, firstly, there is no legal basis upon which to imply the term relied upon by the bank; secondly, if that is wrong, the information that has been provided in support of the freezing of the accounts is inadequate; and thirdly, that it is unreasonable to maintain that freeze after, as she puts it, almost two years.  What she has in mind is the period from February 2018 until now, January 2020. 

19.  The question of implication of terms into a banking contract in relation to fraudulent activity involving the bank’s customers is a difficult one which has arisen in many cases.  It arises typically where the authorities are investigating alleged money laundering or receipt of the proceeds of crime in circumstances in which customers find that, without explanation, their accounts are suddenly frozen, and the attempt to obtain the reasons maybe met with an objection that to do so would be unlawful because of prospective tipping off. There is in fact one case in this jurisdiction to which my attention was drawn, Pa Sam Nang v HSBC, a decision of Deputy High Court Judge Paul Lam, SC, on 7 March 2016 (HCA1020/2015) where he considered some of these issues.  In that case, however, there was an express term in HSBC’s standard terms and the issue was as to the breadth of that term.

20.  In the English jurisdiction, there is another relatively recent authority Shah v HSBC Private Bank (UK) Limited [2013] 1 All ER (Comm) where similar issues arose in that case in relation, specifically, to money laundering.  This case is different because the Hong Kong authorities are, and I am told and it has not been disputed, not investigating these matters.  However, that does not mean that a bank’s risks and liabilities in relation to fraud alleged on the part of its customer in its home jurisdiction may not be substantial.  Once a bank is on notice of alleged fraud on the part of its customer, wherever it happens, it can be faced with difficult decisions as to how to proceed.

21.  In this case, although the matter is not under investigation by the Hong Kong authorities, the evidence is of a very substantial investigation by the Indian authorities in circumstances where the bank is an Indian bank, and the Gitanjali Group, which appears to be the object of the investigation, is an Indian group as well.  The criticisms which were made by Ms Chan in relation to what she  called “stage 2” of the inquiry, namely, whether the implied term came into effect, related largely to the five documents which were produced by the bank following the court order.  These are, it is fair to say in quite general terms, and there is little by way of specific detail in relation to the investigation of the alleged fraud.  There have also been produced by the bank a number of reports on the Internet which give or purport to give considerably more detail. 

22.  There is also force in the point that was made by Ms Chan that there appears to be no term date on the bank’s freeze on these accounts.  I asked counsel appearing for the bank, Mr Pierrepont, what the position in that respect is and he told me that matters appeared to be progressing somewhat slowly in India but that the investigation was wide-ranging, covering a number of countries including the Hong Kong SAR and Mainland China.  He mentioned that of the two alleged principals, one is in prison in London, and one is in Antigua where he apparently has become a citizen.

23.  This court knows nothing of any of these matters, but the question is whether the plaintiff’s claim for release of the money is sufficiently made out to entitle it to summary judgment or whether this is a case in which, applying the very well-known principles relating to summary judgment, the case is one to allow to go to trial.  In my view, there is a legal issue as to whether there can be the implication of the term contended for by the bank into the banking contract, and if so whether that term applies on these facts or not.  There is also a factual issue relating to the position as regards the credit to the account on 24 September 2018.  In those circumstances, the defendant bank is entitled to unconditional leave to defend and that is the court’s order on the summons.

24.  The plaintiff must pay the costs of the Order 14 summons only, not the costs of the action of course, to be taxed if not agreed.